Why You Should Consider This Insurer

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I love MetLife's (NYSE: MET) slogan: Get Met.  It Pays.  After looking at MetLife's current valuation, I tweaked this one and came up with a new slogan: Buy Met.  It Will Pay Off in the Long Run.  Although the near-term outlook for insurers is unclear, MetLife offers a decent potential upside for patient value investors. 

A Little Background

For those of you who didn’t know, MetLife is the world's largest life insurer.  MetLife provides insurance and financial services products, including life, dental, disability, auto and homeowner insurance, guaranteed interest and stable value products, and annuities through independent retail distribution channels. 

MetLife competes with the likes of Allstate (NYSE: ALL) and Prudential (NYSE: PRU).  These three insurance companies are facing several catalysts that could affect their share price over both the short and long-term.  Of the three, MetLife is in the best position to benefit from these catalysts. 

What are the Catalysts?

In the near term, the costs and subsequent claims associated with Hurricane Sandy are uncertain.  At first the economic cost of the hurricane was estimated at $15 - $25 billion.  Now costs are estimated at more than double the upper end of that estimate: over $50 billion.  To the best of my knowledge, MetLife has not released an estimate of its liability. 

On the positive side, MetLife is very diversified and this disaster will more than likely have a greater impact on MetLife’s competitors than on MetLife.  In fact, MetLife could conceivably even leverage this disaster to raise prices on a number of its products.    

MetLife also plans to sell its bank – a small online operation – to General Electric Capital.  This transaction, however, still needs FDIC’s blessing.  It is my understanding that it should be complete before the end of the month, or worst case the end of next month.  That event has the potential to impact MetLife’s bottom line.

In the not-so-distant future, MetLife may increase its dividend or institute share buybacks.  Although the Federal Reserve rejected MetLife’s capital plan, which included share buybacks and nearly a 50% increase in the dividend, it appears as though regulators evaluated the plan using conservative banking metrics rather than by using metrics that are established and accepted by the insurance industry.  If regulators had used “standard insurance industry metrics,” then they might have approved the plan. 

In general, a company like MetLife is well correlated to the overall economy.  Over the past few years, low long-term interest rates have stressed MetLife’s net interest margins and a weak economy has made it difficult for MetLife to grow revenues and improve profitability.  

MetLife has a Beta of around 2, which is very high for a company in the S&P 100, but on par with other insurers--such as Allstate and Prudential.  That means that, on average, every time the market goes up by 1%, MetLife goes up by 2%.  But it also means that when the market goes down by 1%, MetLife, on average, goes down by 2%.  The stock is volatile – so be careful! 

3 Reasons to Buy MetLife

  1. Potential to Grow Earnings.  According to MSN Money, Analysts estimate that MetLife will deliver earnings of around $5.25 per share in 2012.  Management appears to be committed to delivering against ROE and analysts' earnings estimates.  Management has, for example, established a goal of reaching a return on equity of around 14% by 2016.  Earnings growth should also translate into a dividend hike in 2013. 
  2. A low Book Value and Solid Balance Sheet.  MetLife has a book value of over $60 a share, which is well below MetLife’s current share price.  MetLife also has a very solid balance sheet with plenty of cash on hand and a leverage ratio that is below the industry average.          
  3. International Growth.  MetLife appears to be developing and executing an international growth plan.  If the U.S. economy and then the emerging economies get back on track, MetLife is well-positioned to gain market share from weaker competitors that don’t have the same scale.  I would not be surprised if MetLife were to acquire a company or two in either Europe or Asia or South America.   

My Foolish Take

There are several catalysts that could send MetLife’s stock price up: (1) a hike in MetLife’s dividend; (2) higher bond yields improving returns from MetLife's fixed-maturity portfolio; (3) a positive outlook regarding insurance claims resulting from Hurricane Sandy (which should not be terrible); (4) signs of a continued global economic recovery; and most importantly (5) simply delivering against analysts’ estimates of $5.25 per share in 2013.     

Overall, MetLife’s share price is very sensitive to both the U.S. economy and the global economy, particularly what is happening in Europe (even though the magnitude of that crisis is overstated).  For that reason, looking for an attractive entry point is critical.  That is why for the time being I have adopted a “wait and see outlook."  If the share price pulls back to around $30 per share, then MetLife has a very compelling valuation and I am probably a buyer.

RyanPeckyno is long 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!

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