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MetLife Suffers From Declining Revenues, Spinoff Charges

Zacks

On Aug 9, we issued an updated research report on multi-line insurer MetLife Inc. MET.

The company’s revenues have been declining for the last two years and the first half of this year was no exception. A mix of factors ranging from a decline in premiums, low investment income, decline in fees collected from Universal Life and investment type product and lower other revenues contributed to the downfall.

Though some of these revenue drivers are seeing a reversal (such as net investment income which increased in the first half of 2017 and is expected to increase going forward due growth in investment portfolio), we expect pressure on other components such as premium (from currency volatility, competitive market conditions, exit of certain businesses) and Universal Life fees to continue. This will likely thwart top-line growth in the coming quarters.

In order to return to top-line growth, the company has been divesting non-core high risk and unprofitable operations. One of the most significant steps taken in this direction was the separation of its U.S. Retail business named BrightHouse Financial, completed recently. The move freed MetLife from a capital-intensive business. It also saved the company from exposure to interest rate and equity market volatility related to the exited business. However, the company expects to incur charges of nearly $1.1 billion in the third quarter of 2017, relating to this exit which will drain earnings.


MetLife has also decided to close its UK Wealth Management business which was suffering from low interest rates. Though these steps will transform MetLife into a company with less volatility and more free cash flow, which should lead higher return on equity, the top line will suffer to some extent from premium and fees lost on the exited businesses.

Year to date, MetLife’s shares have declined 9.5% compared with a gain of 6.42% logged by the industry. Given the headwinds faced by the company, we believe the stock will continue to remain under pressure in the coming quarters.

Though MetLife’s second-quarter earnings beat the Zacks Consensus Estimate by 1.56%, disclosure of spin off charges and lower yield on investment spread pessimism.

The stock has witnessed a downward revision in the Zacks Consensus Estimate for 2017 by 0.5% over the past seven days.

MetLife carries a Zacks Rank #4 (Sell). Some better-ranked players in the space are CNO Financial Group Inc. CNO, FBL Financial Group, Inc. FFG and Amerisafe Inc. AMSF. Each of these stocks carries a Zacks Rank # 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CNO Financial beat estimates in three of the last four quarters with an average positive surprise of 6.7%.

FBL Financial surpassed estimates in three of the last four quarters with an average positive surprise of 6.2%.

Amerisafe’s second-quarter earnings beat the Zacks Consensus Estimate by 13.9%.

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