MetLife: Steady As She Goes For A Very Well-Run Insurance Titan

 

Writing about MetLife (MET) in March of this year, I was concerned that the strong run in the shares and a weak rate environment had left the stock vulnerable to a period of “blah” performance, and so it has been, with the shares basically flat since then despite some continuing positive developments in the business, including the sale of operations in Poland and Greece and strong variable investment income.

I consider MetLife a “what you see is what you get” sort of company; management has long been straightforward about its strategy and has been executing very well (and very consistently) on that plan. Other than a possible sale of MetLife Holdings (unlikely) and acquisitions in the group benefits and/or asset management space, I think what you see today is largely what you’re going to keep getting – a well-run insurance company that prizes consistent performance in high-return businesses (relative to risk/cost of capital) and that will return large amounts of capital to its shareholders.

 

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MetLife: Steady As She Goes For A Very Well-Run Insurance Titan

MetLife Executing Well On An Attractive KISS Strategy

For those not familiar with the KISS concept, and no I’m not talking about the hard rock band, KISS stands for “Keep It Simple, Stupid”, and it can be surprisingly good advice for companies in all sorts of industries.

In the case of MetLife (MET), business simplification and prioritization of profitable group benefit, pension risk transfer, and savings and protection plans has allowed MetLife to outperform many other players in life insurance and generate decent returns for investors over the past five years.

MetLife shares are up more than 50% from my last article. That’s a great return in a little over six months, but then again picking undervalued financials in August wasn’t so tough. At today’s price, I still think MetLife has some near-term upside and some decent long-term potential, but that return is likely to be much closer to the long-term historical returns in the mid-single digits.

 

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MetLife Executing Well On An Attractive KISS Strategy

MetLife Continues To Languish In An Out-Of-Favor Sector

Maybe the nicest thing I can say about MetLife (MET) is that it has suffered no worse than its sector, with the shares down 4% over the past year and more or less in line with Lincoln (LNC) and Prudential (PRU), while Unum (UNM) has fallen more than 20%. The issues for investors remain more or less the same – worries about spread pressure, worries about credit quality risk in fixed income, worries about the growth potential of mature markets, and probably most importantly, worries about the status of reserves in long-term care insurance books.

I continue to believe MetLife is undervalued, but it’s hard to identify a catalyst for a turnaround in sentiment. A successful/benign completion of its actuarial review of its LTC business would certainly help, but I think investors are firmly in the “we’ll believe it when we see it” camp when it comes to the potential of the LTC business, as well as the company’s cost-cutting targets and growth initiatives. I continue to see fair value in the low-to-mid $50s, which when combined with the dividend, suggests a pretty good return for this unpopular name.

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MetLife Continues To Languish In An Out-Of-Favor Sector

Prudential PLC Continuing To Build A More Profitable Business

Like their American cousins, European insurance companies have started to get a little more love lately as investors have gone bargain-shopping in the value bin. Although Prudential PLC (PUK) has chopped its way a little higher over the last month, I still don't believe the shares reflect the value that management is creating. With a fast-growing Asian business and efforts well underway to increase the cash flow of the U.S. business, I believe Prudential PLC is well placed for above-average growth and undervalued today.

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Prudential PLC Continuing To Build A More Profitable Business

MetLife Moving Past Some Self-Inflicted Challenges And Toward Unlocking Value

MetLife's (MET) performance over the past year hasn't been all that good, but it has at least been better than that of many of its peers. Although MetLife has done a lot to clean up and improve its business, the company still has a track record of inconsistent results (often punctuated by large charges) and headwinds like lower returns on equity from its run-off business and spread compression in its U.S. retirement business.

I think expectations for MetLife are low and that the shares could be positioned to outperform as a result. The company's earnings growth outlook is rather modest, and that is a concern, but I do believe book value growth should improve from here and exceed core earnings growth. If and as that happens, the multiple should expand and MetLife should get more of its due, but investors should appreciate that this name is highly likely to be more tortoise than hare.

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MetLife Moving Past Some Self-Inflicted Challenges And Toward Unlocking Value

Newly Slimmed Down, MetLife Worth A Look

MetLife (NYSE:MET) has had more than a few challenges over the past years, with the company battling government regulators over its status as a Systemically Important Financial Institution and battling the markets as weak rates and tough competition have made growth more challenging. Although I do not believe that spinning off Brighthouse Financial (NASDAQ:BHF) meaningfully improves upon a low single-digit growth rate, I believe the shares are undervalued on the potential for increased distributable cash flow and the quality of a more focused, more profitable business.

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Newly Slimmed Down, MetLife Worth A Look

Seeking Alpha: Allianz Less Robust On Growth, But Loaded On Quality

A year ago, I thought the shares of German insurance giant Allianz (OTCQX:AZSEY) (ALV.XE) were about 10% undervalued. The local shares have risen about 13% since that piece, but the stronger dollar has pushed that local return to a nearly 10% loss for the ADRs, and AXA (OTCQX:AXAHY), Aviva (NYSE:AV), and MetLife (NYSE:MET) have all done better for U.S. investors.

Absent a possible reversal in exchange rates, I'm not as bullish on Allianz at this point. Persistent low interest rates have hurt the profitability of the life insurance business and the P&C business may be challenged by the question of how to surpass already excellent results. I still like this company, and I've actually increased my fair value estimate on a constant currency basis, but it's harder to make a call that this is a must own until/unless rates turn up.

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Allianz Less Robust On Growth, But Loaded On Quality

Seeking Alpha: MetLife Muddling Through For Now

For all of the positives I can name about MetLife (NYSE:MET), only the pathetically low rate of return on money market funds keeps me from arguing that investors would have done better putting their cash there than in the shares of this leading life insurance company. I mentioned the risk of regulatory uncertainties weighing on the stock a year ago, but I underestimated the extent to which that would impact sentiment. Likewise, I had expected more action in interest rates by now, and MetLife sits with Prudential (NYSE:PRU), Lincoln National (NYSE:LNC), and AXA (OTCQX:AXAHY) in the part of the room that really needs to see higher rates to start performing better.

At the risk of making an "I wasn't wrong … just early!" call, I still do believe that MetLife shares are meaningfully undervalued today. I believe the company has done well in shifting its mix towards higher return products with lower capital requirements and I believe the shift toward more protection-oriented products has been a smart one. Additionally, I believe the company can do well both in emerging markets and with new annuity products that reduce the risk to the issuer. I've stretched out the timeline to MetLife achieving 12% ROE and have maintained a high discount rate to account for the regulatory uncertainty, but still believe fair value is in the mid-$60's today.

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MetLife Muddling Through For Now

Seeking Alpha: AXA On The Right Track

When can a call be both right and wrong? When a significant move in foreign currency saps the strong performance of a company's shares on its home exchange and the ADR goes more or less nowhere. That is what has happened with AXA (OTCQX:AXAHY), as the shares of this global insurance giant have done quite well on the local market (up more than 25% since my last article) and better than peers/rivals like Allianz (OTCQX:AZSEY), Generali (OTCPK:ARZGY), Prudential Plc (NYSE:PUK), and Aviva (NYSE:AV), but the ADRs are basically flat after the significant move in the U.S. dollar-Euro exchange rate.

AXA is executing to plan and there is a lot to like about the company's operations. The company is successfully replacing risky (for them), capital-intensive products with profitable, less capital-intensive products and the company's P&C operations are doing well. The company's significant exposure to Asia is also helping, as these operations are contributing significant growth.

At current exchanges rates these shares look like an okay holding. The ADRs do look undervalued and the company pays a good dividend that is likely to increase in the coming years. If the dollar were to weaken, investors could recapture some of that "lost" performance but that is an inherently unpredictable call.

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AXA On The Right Track

Seeking Alpha: A Few Flickers From Torchmark

Until September began, my March call that Torchmark (NYSE:TMK) still offered some upside was looking okay, as the stock was doing a little better than other insurance names like Prudential (NYSE:PRU), MetLife (NYSE:MET), and Lincoln National (NYSE:LNC). After the S&P revised its outlook lower, though, the shares have shed a few percentage points on worries that management may have to pull back a bit on buybacks.

I suspect that the S&P action was less relevant from a fundamental perspective and more likely a good excuse for managers to take some gains on an insurance stock that had risen close to 60% over the past two years. What's more, there are a few suggestions in recent earnings reports that growth may be a little harder to come by in the short-to-medium term. While I still like the fundamentals here, and the shares haven't exactly shot through my prior target, this may be a case where investors want to shop around a bit.

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A Few Flickers From Torchmark

Seeking Alpha: AXA's Progress Not Fully Reflected In The Shares

French multinational, multiline insurance company AXA SA (OTCQX:AXAHY) was badly dented during the credit crisis, particularly as the cost of hedging its large variable annuity exposure got so expensive. Not unlike MetLife (MET), AXA has pursued a plan designed to increase the cash flow generated per dollar of revenue and underlying profit while shifting business toward more protection-oriented and less capital-intensive products. While AXA still has a lot of leverage, the shares appear undervalued on a long-term basis.

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AXA's Progress Not Fully Reflected In The Shares

Seeking Alpha: Uncertainties Weighing A Little Too Heavily On MetLife

For a company that has been either a group leader or solidly above peer averages for quite some time, MetLife (MET) doesn't get a lot of benefit of the doubt these days. Some of that can be tied to the weak rate environment as well as uncertainties as to how large insurance companies like MetLife will be regulated in the future. I believe investors are too worried about the negatives on this name and are underrating the growth potential of the company's overseas businesses and the value of its strategic shift toward more protection-oriented and less capital-intensive business. These shares could be as much as 25% undervalued today, making it a very worthwhile name to consider at these levels.

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Uncertainties Weighing A Little Too Heavily On MetLife

Seeking Alpha: Isn't Torchmark Supposed To Be Defensive?

Life and supplemental health insurance company Torchmark (TMK) is unusual in a lot of ways. Not only does the company have a pretty exceptional history of returns on equity, those returns have been remarkably consistent. The company's underwriting risk is low and not many companies can compete in its core life insurance markets. What's perhaps even stranger is that this supposedly defensive insurance stock is doing quite well in a market where conditions are seen as improving for the sector.

Even though Torchmark would normally have less to gain from the improving economy and rising rates, these shares may yet be undervalued. Torchmark's different model makes P/TBV valuation almost useless, but the shares look surprisingly cheap on the basis of an excess return model. I don't normally think to look at the 52-week high list for bargains, but Torchmark could still offer some meaningful upside from today's level.

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Isn't Torchmark Supposed To Be Defensive?

Seeking Alpha: Can Investors Leverage Leftover Skepticism On Genworth To Their Advantage?

A few years ago investors were spoiled for choice when it came to insurance companies. Many of these companies have since repaired their balance sheets and returned to posting decent if not good returns. The markets have responded, leaving investors considering names like MetLife (MET) and Arch Capital (ACGL) in a position where they are looking at longer timelines for meaningful market-beating returns.

Genworth (GNW) is a different story. The stock has given investors a wild ride, but the last couple of years have been pretty solid. Even with new management and clear progress in improving its businesses, there's still some lingering skepticism regarding Genworth and the company's ability to return to high single-digit ROEs. Genworth has chosen to stay in businesses that many other insurance companies have left behind, but if Genworth's long-term ROE hits 8% or 9%, there's still upside for a stock at its highest point in four years.

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Can Investors Leverage Leftover Skepticism On Genworth To Their Advantage?

Investopedia: Genworth Looking At A Lot Of Heavy Lifting

A year ago, I thought that Genworth (NYSE:GNW) was a high-risk insurance story that was trading at a substantial discount to its long-term value. With the stock up almost 130% since then, I feel pretty good about that call. Looking at the company again today, though, I'm not nearly as optimistic about the stock. While the stock is still undervalued on a long-range ROE model, the growing challenges in mortgage insurance and long-term care insurance bode poorly for nearer-term value creation.

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Investopedia: Even Near A 52-Week High, MetLife Seems Undervalued

MetLife (NYSE:MET) has been one of my favorite financial companies that I don't actually own, and nothing has happened to dim my enthusiasm for the company. Not only has the company been fairly proactive in adapting to the new regulatory realities of the U.S. financial system, but it has also looked to improve its international growth prospects while reducing risk in its business. Even though the shares are up 50% over the past year, I'd still consider adding these shares to a portfolio (and would do so in my own portfolio if I didn't already have sizable exposure to the financials).

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Investopedia: Steady Progress And Underapperciated Value At MetLife

With low rates and an uncertain regulatory environment still troubling investors, MetLife (NYSE:MET) shares have been on a slow boat to nowhere over the past year. Operating performance continues to improve faster than analysts expect, though, and MetLife's strong international operations should help build value in the coming years. While the risk of a MetLife position is asymmetrical (there's a higher likelihood of something going much worse than much better), I do believe these shares are undervalued and priced to deliver good returns over the long term.

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Investopedia: MetLife's Guidance Reflects A Wider Problem

For readers who think that the United States government bends over backwards to accommodate the financial industry, MetLife's (NYSE:MET) discussion of guidance for the remainder of 2012 and 2013 is a must-read. While the troubled asset relief program and a variety of other government programs clearly allowed financial companies to shore up their capital, the reality is that the zero interest rate policy and "QE infinity" are taking a toll on companies that earn their living on interest rate spreads.

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http://www.investopedia.com/stock-analysis/2012/MetLifes-Guidance-Reflects-A-Wider-Problem-MET-USB-PRU-ZION1214.aspx

Investopedia: MetLife Keeps On Keeping On

It's too much of a stretch to say that the financial sector is healthy again, but banks and P&C insurers have largely recovered a lot of lost value. Conditions are not so strong in the life insurance industry, though, where low rates and volatile markets have done a number on many aspects of the business. Tough times tend to highlight the best operators, though, and I believe MetLife (NYSE:MET) continues to demonstrate why it is a top-notch company that is meaningfully undervalued.

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http://stocks.investopedia.com/stock-analysis/2012/MetLife-Keeps-On-Keeping-On-MET-PRU-PUK-LNC0803.aspx

Investopedia: Allianz In Relatively Good Shape

Investors are understandably reluctant to put money into companies tied to the health of the European financial system. As one of the biggest, but also one of the best, insurance companies in Allianz (OTC:AZSEY) might be a company worth an exception. While low rates do compromise the company's ability to grow, quality underwriting and a healthy balance sheet make Allianz a value-priced name worth considering.

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