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On Mar 12, we upgraded our recommendation on MetLife Inc. (MET - Analyst Report) to Neutral based on its modest operating performance in 2012 and successful divestiture of the banking operations. However, a faltering guidance for 2013 amid challenging interest rates and competition raise caution.

Why the Upgrade?

MetLife’s fourth-quarter 2012 operating earnings per share of $1.25 modestly beat both the Zacks Consensus Estimate of $1.18 and the year-ago quarter’s earnings of $1.17. The company has outperformed estimates in all of the last four quarters, leading to an average surprise of 5.0%.  

Total operating revenue also increased 12% year over year to $18.36 billion and also topped the Zacks Consensus Estimate of $17.22 billion. Strong results were driven by higher net investment income, premiums and fees.

However, following the fourth quarter release on Feb 13, the estimates for MetLife did not witness any movement. Over the last 30 days,the Zacks Consensus Estimate for 2013 and 2014 remained consistent at $5.24 per share and $5.64 a share, respectively. With the Zacks Consensus Estimates for both 2013 and 2014 showing no clear directional pressure on the stock in the near term, the company now has a Zacks Rank #3 (Hold).

MetLife’s capital position remains one of the sturdiest in the industry, cushioned by a diversified portfolio mix and a leading brand, as reflected by its strong book value growth and healthy ratings. Moreover, consistent focus on international growth and the complete exit from the banking business should enhance operating leverage.

Nevertheless, the extended low interest rate environment, intense competition, currency fluctuations and inflationary pressure are likely to affect financials in the upcoming quarters. These factors have also impelled management to estimate earnings growth of (-3%) to 4% over 2012 in 2013 after posting 22% growth in 2012, thereby creating difficult comps going ahead. 

Other Stocks to Consider

While MetLife is expected to be steady in the near term, other stocks in the insurance sector that are outperforming include CNO Financial Group Inc. (CNO - Analyst Report), XL Group Plc (XL - Analyst Report) and Aegon NV (AEG - Snapshot Report). All of these carry a Zacks Rank #1 (Strong Buy).

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