3 Reasons Why This Insurer Is Set To Soar
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The health of the insurance industry relies on the amount of liquidity flowing through an economy. Whenever there has been a credit crunch (1929 and 2008 come to mind), mounting claims exceed the cash inflows, which have eventually taken insurance agencies to the brink of bankruptcy. And the opposite holds true for excessive liquidity.
So in order to revive growth, the Federal Reserve Bank has been injecting $85 billion worth of monthly liquidity in the US economy. This has not only lowered the unemployment rate to 7.5%, but also increased the personal disposable income by $1.15 trillion over the last year. As a result, US-based insurance agencies like MetLife (NYSE: MET) offer plenty of upside.
Favourable revenue mix
MetLife is one of the world’s largest financial services company, and provides services to 90 million customers in over 60 countries. Back in 2011, the insurer had acquired AIG's (NYSE: AIG) American Life Insurance Company for $16.2 billion in 2011, following which MetLife became the global powerhouse of life insurance and employee benefit programs.
But compared to AIG and Prudential Financial (NYSE: PRU), MetLife has the most saturated revenue mix. General insurer AIG generates 51% of its revenues from the Americas and 30% from the Asia-Pacific region. Prudential Financial generates 40% of its revenues from USA, while Asia, Europe and Latin America altogether account to 50% of its revenues.
But MetLife generates around 75% of its revenues from Americas, while the Asia-Pacific region accounts to just 19% of its top line. Since MetLife is mostly dependent on the North American market, the rebounding US economy should serve as a short-medium term catalyst for the insurer. And its low exposure to Asian countries presents a tremendous international growth potential over the long-term period.
But its geographical saturation doesn’t mean that MetLife is stagnant and hasn’t been expanding. It already owns a 27.8% stake in China-based MetLife Insurance Company, along with a 26% stake in Indian-based 26% PNB MetLife. Its management recently stated that MetLife could buy another 30% stake in PNB MetLife, once the insurance bill in India is passed.
Its long-term goals include that emerging markets contribute 20% to its overall earnings by 2016. And to do that, MetLife has recently entered into an agreement with BBVA to buy its pension business in Chile for around $2 billion.Taking its FY12 EPS of $2.12 as the base, the acquisition is estimated to boost MetLife’s earnings by 2.3% in FY13 and by 7.07% in FY14. I think that’s a great deal.
Prudential Financial may be based in the financially troubled Europe, but it generates most of its revenues from Asia and North America. This reduces its credit default risks as compared to other European insurers. But its low net profit margin of 0.8% is quite low by industry standards, which is why analysts estimate its annual EPS to grow by just 6.7% over the next year.
On the other hand, AIG provides general insurance in over 130 countries and operates with a healthy net profit margin of 3.8%. Although the insurer doesn’t directly compete MetLife and Prudential Financial, its low ROE ratio of 2.4% is lower than most of its indirect and direct competitors including Allstate and Chubb.
With that criteria, MetLife’s net profit margin of 3.3% and higher-than-average ROE of 3.7% seem quite attractive.
In my opinion, most of the insurance agencies with a significant exposure to the U.S, stand to benefit over the short-medium term. But MetLife comes out ahead with better margins, higher ROEs and a modest dividend yield of 2.44%. Besides that, MetLife has a lot of international growth potential, which, coupled with its Chilean acquisition, could bring about a significant upside.
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Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and has the following options: Long Jan 2014 $25 Calls on American International Group. 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!