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Metlife: ROE Improvement Happening Albeit Slowly

 February 27, 2013 10:09 AM

(By Mani) MetLife, Inc. (NYSE: MET) may by its own choice be hamstrung in its efforts to remove excess capital from its balance sheet – a development critical to its achieving its target of a 14 percent return on equity (ROE) by 2016.

Return on equity measures how much profit a company generates with the shareholders money and the metric shows how well a company uses investment funds to generate earnings growth. The higher the ROE, the higher returns to shareholders. ROEs of insurance companies between 10 and 20 percent are generally considered good.

MetLife's ROE, on a trailing twelve-month basis, stands at about 2.7 percent, versus American International Group's (NYSE: AIG) 7 percent and industry's 8 percent.

[Related -American International Group Inc (AIG): Current Weakness Offers A Buying Opportunity]

MetLife is slowly progressing toward achieving its goal of lessening its exposure to capital-intensive products and increasing its involvement on a highly profitable basis with higher-growth, higher-return markets such as group insurance and the Emerging Markets.

"This transition may happen in the future, but it's not apparent to us that it is happening just yet," RBC Capital Markets analyst Eric Berg wrote in a note to clients.

However, when one tries to address the larger question of whether MetLife is executing its strategy to improve ROE by getting out of capital-intensive businesses and focusing on better prospects-- the answer is it's happening – but slowly and more on a piecemeal basis than anything else.

[Related -American International Group Inc (AIG): Buy This 'Hated' Company While It's Still An Incredible Bargain]

Certainly, MetLife's variable annuity sales dropped 50 percent in the fourth quarter to $3.6 billion from $7.2 billion – a purposeful move by the company to lessen its exposure to a business that, given the proliferation of rich and potentially loss-making guarantees, is capital intensive.

The company continues to have on-and-off problems in its large dental business. In the latest quarter, Met wrote off an intangible related to a dental acquisition.

Meanwhile, the loss ratio in MetLife's group non-medical health business – the largest portion of the division that it calls Group, Voluntary and Worksite Benefits – rose nearly 2 percentage points year over year to 91.6 percent from 89.7 percent a year earlier.

"Our hunch as to what's going on: Fresh problems in Met's large block of disability policies or rising claims expense in Met's large long-term-care block, a business that Met shut some time ago but on which Met still faces risk," Berg said.

MetLife is getting out of the capital-intensive and capital-markets-intensive variable annuity business, and it is getting bigger in the less-capital-intensive group business; although, profitability in this less-capital-intensive business seems to be spotty.

In addition, revenues from Latin America and EMEA (an acronym for Europe, the Middle East and Africa) rose 4 percent excluding the effect of currency.

Here, in other words, the issue would be the opposite of what is happening domestically: Strong profits growth that is exceeding handily the revenue growth.

In Latin America, for instance, normalized earnings excluded the effect of currency rose 20 percent versus the 4 percent revenue growth in the region. Some of this "disconnect" could be traced to a tax benefit the company booked in Latin America. In EMEA, on a constant-currency normalized basis – earnings rose 26 percent in the face of the 1 percent revenue decline.

"That sort of earnings growth obviously isn't sustainable when revenues aren't growing rapidly," Berg noted.

Summing up the December-quarter report, MetLife is showing progress. Its profile in the variable annuity segment is shrinking fast, the result of the company's conscious decision to "de-risk" its contracts. The group business at MetLife, which presumably has better profitability characteristics to it than the variable annuity business, is a bigger business today than it was a year ago.

It's not just about being bigger in the group business; it's about growing the profits – something that seems to be happening with limits given the issues in dental and either long-term-care and disability.

"We're just hoping that the very modest top-line growth reported out of Latin America, and EMEA does not mark the beginning of a return to the nonexistent top-line growth that Met saw for several quarters after it purchased the AIG business," Berg added.



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