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MetLife (MET) Q2 Earnings Miss Despite Derivative Gains

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MetLife Inc. (MET - Free Report) posted second-quarter 2014 operating earnings per share (EPS) of $1.39, which lagged the Zacks Consensus Estimate of $1.41, thereby leading to another earnings miss for the company in 2014. The reported figure was also lower than the year-ago quarter EPS of $1.43. Operating earnings came in flat year over year at $1.59 billion.

However, including extraordinary items, GAAP net income soared to $1.34 billion or $1.17 per share from $471 million or 43 cents per share in the prior-year quarter. The significant upside primarily resulted from derivative gains of $311 million in the reported quarter against a loss of $1.69 billion in the year-ago quarter.

Results reflected growth across the Americas and EMEA along with higher derivative gains, leading to improved book value per share, resumption of share buybacks and dividend hike. These were partially offset by higher expenses, reduced growth in Asia and lower return on equity (ROE).

During the reported quarter, MetLife’s total operating expenses increased 5.4% year over year to $15.56 billion, while total expenses rose 7.6% to $16.32 billion.

Total operating revenue rose 5% year over year to $17.80 billion and beat the Zacks Consensus Estimate of $17.22 billion. Total revenue jumped 16.2% year over year to $18.27 billion, primarily due to higher investment gains.

MetLife’s premiums grew 7.6% year over year to $9.85 billion, while fee revenue improved 3.5% to $2.36 billion and net investment income inched up 0.8% to $5.1 billion. However, other revenues dipped 1.4% year over year to $493 million.

Segment Details

The Americas’ operating earnings climbed 4.8% year over year to $1.39 billion. Premiums, fees and other revenues rose 9.7% to $9.58 billion. Operating revenues grew 7% to $13.77 billion.

The segment witnessed core improvements in Corporate Benefit Funding, Retail and Latin America sub-segments. The Provida acquisition improved underwriting results in Latin America, partially offset by unfavorable underwriting results in non-medical health.

Operating earnings from Asia dipped 3.3% year over year to $319 million. Premiums, fees and other revenues fell 2% on a constant currency basis and 4.6% on a reported basis to $2.34 billion. Operating revenues sank 3.8% to $3.05 billion. Total sales declined 12% due to product actions undertaken in Japan, partially offset by growth in China and Korea.

Operating earnings from EMEA escalated 36.8% year over year to $93 million. Premiums, fees and other revenues in this segment increased 3.5% (1% on constant currency basis) to $712 million. Operating revenues climbed 4.7% to $846 million. Moreover, total sales rose 3%, reflecting 10% growth from the emerging markets of Turkey and Poland.

Separately, Corporate & Other operating loss was recorded at $213 million, narrower than the loss of $140 million incurred in the prior-year quarter due to higher costs on legal compliances and operational initiatives. Total revenue stood at $127 million, down 8.6% from the prior-year quarter.

Investment & Financial Update

At the end of the reported quarter, MetLife’s net investment income stood flat year over year at $5.1 billion, while net investment portfolio gain was $55 million compared with $145 million in the year-ago quarter. In addition, post-tax derivative gains improved to $71 million from a loss of $1.1 billion in the year-ago quarter. Decline in interest rate and changes in foreign exchange led to the gains.

Meanwhile, under the company’s variable annuity hedging program, pre-tax variable investment income was $342 million in the reported quarter against $312 million in the year-ago period.

As of Jun 30, 2014, MetLife’s book value per share, excluding AOCI, climbed 6.2% year over year at $50.14. However, reported book value (including AOCI) per share jumped 13.5% to $59.96. Operating ROE stood at 9.7% at Jun 2014-end, down from 12.0% at 2013-end.

At the end of Jun 2014, MetLife had total investments of $505.31 billion, up from $488.8 billion at 2013-end. Total assets increased to $911.12 billion while long-term debt decreased to $16.78 billion. Cash and cash equivalents decreased to $7.39 billion and total equity increased to $70.17 billion, from 2013-end.

Share Repurchase Update

On Jun 10, 2014, the board of MetLife announced its intention to buy back shares worth $1.0 billion by 2014-end. Previously, in Jan 2008, the company had sanctioned a $1.0 billion share repurchase program, of which shares worth $261 million are yet to be bought. This was followed by another buyback approval of $1.0 billion in Apr 2008. Including these authorizations, MetLife currently has about $1.26 billion worth of shares available for buybacks at Mar 2014-end.

Dividend Update

On Jul 7, 2014, the board of MetLife announced a regular dividend of 35 cents a share, payable on Sep 12, 2014, to shareholders of record as on Aug 8.

On Apr 22, 2014, MetLife hiked its regular dividend payout by 27% to 35 cents per share from the prior payout of 27.5 cents. The raised dividend was paid on Jun 13, 2014 to the shareholders of record as on May 9.

MetLife has a Zacks Rank #2 (Buy).

Other Stocks to Consider

Insurers like Symetra Financial Corp. , Lincoln National Corp. (LNC - Free Report) and Prudential Financial Inc. (PRU - Free Report) , all carrying a Zacks Rank #2, are worth consideration.

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