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WIKI ANALYSIS
MetLife (NYSE: MET) is one of the largest insurance and financial services companies in the U.S; the company collected $27.8 billion in premiums for FY2007. It has a very diverse range of products and services, including many different kinds of insurance, savings plans, and retirement plans.
MetLife's main source of revenue comes from insurance premiums. The company takes the money paid by those who buy insurance policies and invests it in a number of different ways. If the return on investment (the "spread") plus the premiums is greater than the payout to policy holders, the company profits. This business model while common in the insurance industry is especially vulnerable to natural disasters and swings in the equity markets. The former in form of hurricanes, earthquakes and forest fires, can result in hundreds of millions to billions of dollars in losses in a single year. The company paid out $333MM in homeowners insurance in 2006 related to Hurricane Katrina. A poorly preforming market on the other hand can result in a loss of investment income which is often a crucial component of profitability.
Over the past several years, MetLife has focused on organic growth and cost reduction. While it has experienced some success in this area its expenses still continue to be high compared to those of the insurance industry.
Corporate Overview
The Metropolitan Life Insurance Company, MetLife, began in 1863 to insure "life and limb" with only $100,000. It has since expanded to a multi-billion dollar diverse financial institution. MetLife provides insurance and financial services for individuals and institutions throughout the US, and is currently pursuing international opportunities. Services include life, auto and home insurance, annuities, and retirement and savings planning.
Products and Services
MetLife is both an insurance and a financial services company. It offers a wide range of products including insurance (personal, life, group, etc.) as well as investment services and retirement planning. Last year (FY 2007) the company had sales of about $54.0 billion, spread over multiple sectors. These include:
Institutional Insurance
Insurance sold to businesses as group plans makes up about half of MetLife's revenue. This category includes group life insurance, retirement plans, and savings services sold to third parties, rather than directly to the customer. Insurance in this category generates less revenue per unit than individual insurance, but each plan has multiple units leading to greater overall revenue. This portion of MetLife's business has remained relatively stable over the past few years.
Individual Insurance
This is MetLife's retail department. The company sells individual life insurance plans and annuities directly to the end consumer. Although second in terms of revenue generated, this business is number one in terms of net income. It is MetLife's most profitable business. For more discussion of what might effect sales of individual policies, see the Trends and Forces section.
Auto and Home Insurance
Although this is a smaller portion of MetLife's business, auto and home insurance are still significant to the company's profits. Plans are bought by the individual consumer, like individual insurance, but for homes and cars. A booming economy with higher sales of new cars and homes, as well as state laws mandating auto or home insurance increase revenues in this category.
International Services
MetLife has a large operation in Mexico and several businesses in Korea and Japan selling financial services. MetLife also recently acquired Travelers Life & Annuity (mid-2005) which helped to open up channels for sales in Europe. As part of its plan for further international expansion the company is targeting developing economies such as China. Typically it will "seed" these countries by offering a few services on a small scale. Based on the outcome MetLife will than make a decision to expand its service offering or shut down its operations in that country.
Trends and Forces
Diversification & Scale Economies
Due to shifting demand and inherent risk in insuring and investment, diversification is essential to provide a "buffer" for market shocks. If each business area accounts for only a small portion of a company's revenue, the effects of fluctuations will be minimized.
MetLife has a very diversified mix of businesses that are spread-based, protection-based, and fee-based. This means that it is collecting revenues through different types of plans. MetLife's subsidiaries focus on institutional businesses, retail customers, as well as global interests.
In addition to diversification of products, economies of scale are essential to success in the insurance industry by providing a large number of services companies like MetLife can spread the fixed costs of running a business, such as technology, advertising, compliance, over multiple streams of revenue.MetLife is similar in theory to a conglomerate of many small businesses which have merged in order to share an office. Each additional customer or business is less of a proportional risk, and thus expansion of MetLife's business incurs little incremental cost.
In addition to cutting costs, MetLife's size and diversification means it has an immense database of consumer behavior. Using its accumulated data, MetLife can better make insurance decisions and can better predict likely outcomes. Finally, MetLife's enormous size allows it to use capital to acquire other companies and grow even larger, something which would be impossible without vast resources.
Recognition and Brand Loyalty
Insurance and financial companies can easily be perceived as cold and uncompassionate; Over the years, movies and news stories, about insurance companies' attempts to defraud their customers have only strengthened this portrayal. MetLife has tried to combat this image with an innovative marketing campaign involving Snoopy and the MetLife Blimp. MetLife uses characters from the Peanuts cartoon strip in many of its advertisements, creating brand recognition that is associated with warmth. In addition, the company leases two blimps, Snoopy One and Two, which fly around the country to different events throughout the year. This combination of tactics creates name recognition and urges consumers to consider managing uncertainties today rather than waiting until problems arise. Brand recognition is very important, as there can often be little else to distinguish financial service companies, and so MetLife's friendly advertising campaign is definitely an innovative way to build recognition and then loyalty.
Market Pressures
- Aging US Population: Over the next decade, aging baby boomers are expected to create robust demand for various insurance and wealth accumulation products. Increased longevity means that that this group will need to generate enough wealth to last decades into retirement. As a top insurance company with strong brand recognition and a diversified portfolio of products, MetLife is very well positioned to take advantage of this demographic shift.
- Hurricanes: Natural disasters such as hurricanes can severely impact the profitability of insurance companies. One of the basic premises of insurance is that in most cases an insurance company will not have to pay out most of its policies at once. For instance if an insurance company insures 100,000 people in New Jersey, the expectation is that while there may be some claims each year, the company most people will be fine. This means that insurance companies are able to not only continue receiving premiums over time, but are able to invest these premiums. Hurricane Katrina resulted in over $333MM and $335MM in home insurance policy payouts in 2006 and 2005 respectively. There were also smaller but still significant payouts on auto insurance policies.
- U.S. Housing Market The number of new homes built can have a significant impact on the home insurance market. In a weak market fewer homes are built, resulting in substantially lower incremental demand for home insurance. Beginning in 2001/2002, low interest rates led to a housing boom. Conversely, increased interest rates typically results in lower housing demand. Given MetLife's diversification, fluctuations in the housing market have limited impact on the company's earnings.
Exchange Rates
One of MetLife's strategies has been international expansion of its businesses. It has a large operation in Mexico as well as growing subsidiaries in Korea and Japan. While foreign operations open up new markets and vast sums of money and investment potential, they also carry new risks. Foreign investment is heavily influenced by currency exchange rates. Even fluctuations of a few percentage points could have very significant effects when the sums are in the billions, numbers MetLife is accustomed to dealing with.
Exchange rates fluctuate based on a number of factors, including economic strength of a nation, governmental deficit spending, trade imbalances, etc. If the value of the currency changes in any country in which MetLife offers products and services, the revenues of the company could fluctuate.
Ongoing Litigation
One final major force in the insurance and financial services industry is litigation. Lawsuits are fairly common against insurance firms, and long-lasting payouts can also occur. MetLife is currently facing a string of asbestos-related litigation from clients who claim that even though they were not covered by casualty insurance, MetLife knew about the effects of asbestos and did not publicize them sufficiently. MetLife has been paying around $75 million a year in settlements, but the frequency of cases has been steadily decreasing, from 58,750 four years ago to only 18,500 in 2005.
The asbestos cases are only an example, however. There are other pending lawsuits and regulatory investigations against MetLife. Questions about life insurance sales practices, the use of used equipment manufacturer parts, broker compensation, mutual fund late trading, etc. face the company. There are many possibilities for damages to be sought from the company, and these could result in losses.
Comparison to Competitors
In the insurance industry there are three main determinants of profitability: premiums collected, investment performance, and losses incurred. Increasing the amount of premiums collected equals higher revenue. This revenue can then be invested, hopefully at a profit. Each year the company has to pay claims against the premiums that it has collected. The fewer payouts a firm has in a given year, the more money remains for investment. Ironically, in some years the payouts are greater than premiums received, and the firm has to rely on its investments for profitability.
Some of MetLife's top competitors are Allstate, Progressive, and Liberty Mutual.
References
| $Billions | ' | MetLife | Allstate | Progressive | *Liberty Mutual |
| Premiums Sold | $27.90 | $29.10 | $13.80 | -- | |
| Claims Paid | $27.80 | $27.20 | $9.93 | -- | |
| Combined Ratio | 86.3% | 89.8% | 92.6% | -- | |
| Investment Income | $19.00 | $6.43 | $0.68 | -- | |
| Net Income | $4.30 | $0.43 | $1.18 | -- | |
- Liberty Mutual is not a publically traded company and has yet to release it's 2007 Annual Report.
- All figures are for FY 2007.
Source: Company Data
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