MetLife Keeps On Keeping On

By Stephen D. Simpson, CFA | August 01, 2012 AAA

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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Second Quarter Results - not Exactly Strong, but not Bad Either
MetLife did not blow the doors off with second quarter results, but the company's performance suggests that the discount on the stock has a lot to do with sentiment towards the industry and the regulatory overburden, as opposed to actual performance.

Operating revenue rose 1% and while reported operating earnings rose 18%, core earnings were up 4%. Individual life was quite solid, while variable annuity sales dropped 34%. The company's group results were pretty sound - by and large, underwriting results were solid, though there was a higher loss experience in property and casualty. Group life also saw a return to positive premium growth.

International continues to be a relative growth driver, not just for MetLife, but for the industry as a whole. Sales growth in Latin America was modest (about 4%), but the company saw low teens growth in EMEA and Asia.

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Trying to Stand out in an Increasingly Commoditized Industry
Part of the problem for companies like MetLife, Prudential (NYSE:PRU), Prudential PLC (NYSE:PUK) and Lincoln National (NYSE:LNC) is that life insurance is increasingly a commodity business. Policy terms aren't that much different from company and underwriting models really aren't that dramatically different from company to company. That makes it especially tough in times like these where rates are so low.

The variable annuity business is also a difficult one. Companies like AXA (OTC:AXAHY) have had significant issues with their VA businesses, and MetLife is seeing its share falling relative to Prudential and Jackson National (part of Prudential PLC).

All of that aside, MetLife has done a good job of coping with, and to some extent insulating itself from, the low-rate environment and market volatility. While neither helps the business, it increasingly looks as though the company will be able to continue to post improved return on equity even in a low-rate environment. Elsewhere, MetLife can offset some of the competition in life and VA in developed economies with the higher growth offered by emerging insurance markets.

Regulatory Clean-up Dragging on
MetLife's regulatory situation has not improved as quickly as the operations. The company is actively trying to undo its legal/regulatory status as a bank, but ongoing delays in FDIC approval for the sale of MetLife Bank to General Electric's (NYSE:GE) GE Capital are slowing the process. With a new capital analysis and review plan due to the Fed soon, there should be some clarity before year-end, but investors need to brace for ongoing delay and disappointment as the Fed seems curiously concerned about MetLife.

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The Bottom Line
If there's good news in MetLife's regulatory uncertainties, it's that it's leaving open a window of opportunity for investors. Even if MetLife only hits the low-end of its 12 to 14% target ROE range for 2016, the company's shares are meaningfully undervalued today. With strong share in multiple markets, including lucrative and faster-growing emerging markets, MetLife looks like a quality play that is still undervalued in the market.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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