MetLife is up nearly 90% since its IPO in April. John Hancock Financial Services is also up big since its IPO earlier this year. Strong segment earnings in life insurance products and annuities are fueling the growth, but do these century- old insurers deserve all the credit? Prior lackluster performance may be inflating current growth rates.
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What is up with MetLife (NYSE: MET)? Has Snoopy been hiding an engraving press in his doghouse? Maybe Woodstock has been eavesdropping on some of Wall Street's brightest. On Monday, insurer MetLife reported a 26% increase in diluted EPS for the third quarter based on $0.49 vs. $0.39 pro-forma for the same period prior year. Nine month EPS growth was even better at 84% based on pro-forma numbers of $1.45 vs. $0.79. Earlier this year, MetLife completed a process called demutualization. Basically, it converted from a mutual insurance company owned by policy holders (one of which was me) to a stock company owned by shareholders (one of which is still me). MetLife raised $2.9 billion in an April IPO placing it in the top ten largest IPOs of all time. Where's the news here? The stock of this 137-year-old insurance company is up 89% since offering up its shares to the public earlier this year. The third quarter numbers were solid. Individual Business operating earnings were up 41%, first year premiums and deposits for variable and universal life were up 46% and annuity deposits were up 14%. Institutional Business operating earnings were up 31%, yet the home and auto earnings were flat and asset management operating results were down. Excitement over future annuity sales is helping to fuel investor sentiment. Annuity sales were also strong for a competitor of MetLife, John Hancock Financial Services (NYSE: JHF). John Hancock, another holding in my portfolio, also completed a demutualization earlier this year and its stock is up 76% since going public. If you are a regular reader of the Fool, you know that we are not big fans of annuities for the very reason insurance companies love them -- fees. For the basics on annuities, see the Fool's retirement section. On the other hand, investors in financial institutions that sell annuities are salivating over the prospects of higher-than-average combined asset management fees, up-front mortality and expense charges and possible surrender fees from those customers who need access to their annuity principal prior to the contract end date. All this looks good in a vacuum but in the case of MetLife, investors are looking at an oasis of financial performance. Prior year numbers, the base from which MetLife is calculating these strong growth rates, were a disaster. Just looking at the press release and 12-month growth rates is deceiving. It only shows 1999 comparables and fools (small f) who do not do their homework see only a banner 2000 compared to the lackluster 1999. They are missing the fact that from 1998 to 1999 MetLife's total revenues shrank 6% and almost all other financial measures were below 1998 levels. Demutualization costs and one-time charges are thrown in the mix making it even harder to make an apples-to-apples comparison. Missing financial comparables also add to the confusion. Without the nine months ended September 30, 1998 (not 1999), investors cannot see how much improvement MetLife has actually made. A brief look at the Hancock financials does not reveal the same downtrodden 1999 relative to 1998. It appears that the founding father's insurance company was a couple of years early to the party. Hancock posted a 10% decline in total revenues from 1996 to 1997. Historical financials also reveal that total revenues did not grow much over the prior five years. Total revenues were $7.1 billion in 1995 and $7.9 billion in 1999. That's a mere 11% (simple return not annual) increase in revenue in four years. But maybe the pop in stock price is justified after all. Both companies are comfortable with low-teen earnings growth for 2001 and that is reflected in the stock prices. Both stocks are currently trading, even after the big run up in price, at reasonable P/Es relative to earnings growth estimates. The market is doing its job. The error in this case was committed by the investment bankers and management. It appears they left billions on the table -- billions that could have been used for the one thing that inspired these insurers to go public in the first place: acquisitions.
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