This Stock Is Systemically Important
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MetLife (NYSE: MET) intends to challenge its designation as a "systemically important financial institution" (SIFI) by the Financial Stability Oversight Council. MetLife believes that the capital standards, which are designed for banks, are inappropriate for life insurers. The SIFI designation would lead to higher prices and limits on capital usage.
However, the impacts of a SIFI designation is likely already priced into the stock price, thus, an easing of standards would be a near-term catalyst for a boost in the stock price. As a result, I believe MetLife is indeed systematically important for your portfolio.
MetLife has a solid revenue mix, getting about 55% of revenue from premiums, 30% from net investment income, and 15% from universal life and investment-related projects. Meanwhile, MetLife has tons of room for international growth, with 75% of revenue derived from the Americas, and only 20% from Asia and 5% from Europe, the Middle East and Africa. Going forward, MetLife hopes to generate some 20% of earnings from emerging markets by 2016, compared to the 14% it contributed in 2012.
One of the big positives supporting the reversing of MetLife's SIFI designation is that the insurer got the nod to de-register as a bank holding company from the Fed back in February after a number of divestitures. These include selling off its bank deposit business to GE Capital, selling off its warehouse finance business to Everbank, and selling off its mortgage portfolio business to JPMorgan Chase.
It's SIFI peer
Prudential Financial (NYSE: PRU) was also designated as a systematically important financial institution. Which means that the company could see a move upward if it's successful in refuting the SIFI designation.
Like MetLife, Prudential is also looking to expand internationally, specifically with a target on Japan. Developing markets generated double-digit earnings growth in 2013 for the company.
Big news of late for Prudential includes its early 2013 acquisition of Hartford's individual life insurance business. Prudential has noted that it remains committed to generating return on equity that's in excess of 13%. Helping Prudential to do this will be its aim to tap the U.S. retirement and investment management markets.
Life insurance giant
Manulife Financial (NYSE: MFC) merged with John Hancock in 2004, and is now one of the world's largest life insurers. The company has mutual fund, banking, group benefits and retirement solutions, but its life insurance business should see some of the best interim performance thanks to recent price hikes.
Manulife does, however, have the highest exposure to equities, which makes it more susceptible to the broader economy. But the rebounding economy is leading to strength in the equity markets. Manulife is also developing its business in Asia, where it has had a presence for over 100 years.
The income play
Sun Life Financial (NYSE: SLF) is one of the best-yielding insurance companies around, with a dividend yield in excess of 4.5%. Revenue is expected to be up 10% in 2013, after a 10% decline in 2012, and assets under management were up 7% sequentially during 1Q.
As all the major insurers appear to be doing, SunLife is looking to increase its presence in Asia. Its Asia operations have only made up around 3% of earnings in the past, but the company has a target to generate over 12% of earnings from Asia by 2015.
Where Manulife might have too much equity exposure, Sun Life is downsizing its equity and interest rate exposure. The insurer is looking to exit the U.S. individual insurance business by selling off its variable annuities and individual life insurance businesses in the U.S.
However, the company isn't abandoning the U.S. altogether; Sun Life will turn its focus to less capital-intensive businesses, such as mutual funds and group insurance in the U.S.
What do hedge funds think?
At the end of 1Q, there were a total of only 12 hedge funds long Manulife, a 33% increase from the previous quarter. Meanwhile, MetLife had a whopping 56 hedge funds long the stock and Prudential had 34 hedgies long the stock at the end of 1Q, with Rob Citrone's Discovery Capital Management having the largest position among major hedge funds, making up 2.9% of its 13F portfolio.
On a price-to-book ratio, MetLife still trades on the cheap.
I think this insurer has plenty of room to move higher, especially in the near term if its SIFI designation is lifted. Don't forget that MetLife also pays a 2.3% dividend yield.
And while many of the comps appear to be flooding the Asian market, I think this will leave MetLife positioned nicely to capture market share in the U.S. retirement and savings market -- in part driven by the number of "baby boomers" that will be retiring in the coming years.
Meanwhile, Prudential, which could also see a pop if it is able to shake the SIFI designation, has recovered the most over the past five years, up over 20%, versus MetLife -- down over 10%. Thus, I'd hold off on Prudential for now. Manulife has too much exposure to equities, but Sun Life is offering investors an impressive dividend and the insurer could be worth checking out.
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Marshall Hargrave owns shares of MetLife. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!