MetLife Valuation: How High Can It Go?

Metlife Valuation: Metropolitan Life Insurance Company (MLIC), better known as MetLife, Inc [NYSE: MET] together with its affiliates provides individual insurance, employee benefits, annuities, and financial services to individual and institutional customers in the United States and across the globe. 

It operates through five segments:

• U.S., Asia,
• Latin America,
• Europe,
• EMEA and
• MetLife Holdings and Corporate & Other.

The Company’s products and services include life insurance products; accident and health products; personal lines of property and casualty insurance; accident and health coverages, homeowners’ insurance, retail banking services; fixed and variable annuities; credit insurance products; and protection against long-term health care services among others.

MetLife serves more than 90 million customers in more than 60 countries. It spun off its U.S. retail business, including individual life insurance and annuities for the retail market, in a separate company called Brighthouse Financial, in 2017.

The company was founded in 1863 and is headquartered in New York City, New York.

The Bull Case for MetLife

Founded in 1868, New York-based MetLife operates in the United States, Japan, Latin America, Asia, Europe, the Middle East and Africa.

MetLife is the biggest U.S. life insurer, and insurance premiums generate the maximum revenue for this financial services company.

It is a leading global provider of insurance, annuities and employee benefit programs. The company provides life insurance, annuities, employee benefits, retail banking services and asset management among other products and services to its individual and institutional customers.

MET had a strong Q3, and it is expected that the insurance company is going to finish 2021 on a solid note. MetLife’s core business remained more or less unchanged during 2021 even with all the disruptions caused by the pandemic, and the management does not expect any upheavals in the next few years as well.

This higher level of stability along with a striking 3.08% dividend yield makes MET a tempting value proposition, especially for income investors. The stock is attractively priced and all signs point towards the company expected to grow at a nice pace over the next years.

Financials & Earnings

MetLife’s Q3 results were pretty impressive, primarily aided by solid contributions from EMEA, Asia, and MetLife Holdings. The financial services provider reported $2.39 EPS for the quarter, trumping the consensus estimate of $1.66 by 44%.

During the same period in 2020, MET posted $1.73 EPS. The company’s net income jumped more than 100% to $1.5 billion, as compared to a net income of $633 million that the company generated in the same quarter last year. 

Its book value of $77.24 per share climbed 1 per cent year over year. The operating revenues, aided by a rise in net investment income, increased 3.5% year over year to $17 billion.

Adjusted net investment income of $5.7 billion rose 21% year over year, whereas total expenses edged lower 1.5%, year over year to $14.8 billion.

The company bought back shares worth $1 billion in the mentioned quarter. MetLife President and CEO claimed that strong variable investment income more than compensated for heightened Covid claims.

MetLife is also known for being a socially conscious organization. It finds mention in the list of “100 Best Companies” for working parents and is also has a well-known reputation of being a military-friendly employer.

As far as valuation goes, MetLife has a non-GAAP forward P/E ratio of around 7.30, which means it is a fairly valued stock. The company’s stability and significant organic growth potential, along with good dividend yield make it an attractive stock for both income and growth investors.

MetLife’s Dividend Policy

MetLife enjoys a solid reputation of being a top-notch dividend payer, paying dividends for the last two decades. Additionally, the company has been increasing its dividend for the past nine consecutive years. In fact, MET’s dividend growth rate for the past five years has been over 6%.

Also, the company has given subtle hints about its dividend policy, demonstrating its intentions to continue paying dividends. The payout ratio is between 20-32%, which means the company can comfortably take care of its debt obligations even in case of earnings miss in the next few quarters.

All these factors make MET an attractive proposition for income investors.  Additionally, investors can reasonably expect a dividend hike in the second quarter of 2022, as it has been the company’s tradition to announce dividend raise in the second quarter for the last nine years.

Based on past data and trends, it is expected that the new dividend could be $0.5 from Q2 2022.

Stable Business Model + Future Growth

MET is a major player in the industry it operates in. The company has strong fundamentals and a significant market share.

The company, despite the chaos unleashed by the pandemic, performed well in 2021, and the management is pretty sanguine about the future growth prospects of the company.  MET’s business model is stable and proven, and the stock is fairly valued.

All in all, MET with a sustainable dividend, solid stability, strong market presence and good future growth prospects, could be an ideal choice for income investors.

The Bear Case for MetLife

MetLife faces some risks worth noting:

The first risk, of course, is related to the resurgence of Covid cases because of the new omicron variant. The rising threat could compel reinsurers to augment MET’s reinsurance costs or may refuse to offer them reinsurance, owing to policy changes brought about by the pandemic and related health concerns.

This in turn could impact the company’s capability to write future business, or for that matter may force the company to take on added risks with respect to the policies the company issue.

MET may have to bear additional costs and risks as a reinsurer may become insolvent.

Added risks the company will have to keep in mind are the inability or reluctance to make payments, or incapability or disinclination to maintain collateral.

Also, if the pandemic turns severe, it could adversely impact the further growth of the company. Vaccines now are widely available, but there’s still no concrete study about how effective they are against the new variant.

All this is likely to dent consumers’ confidence and pose a problem for the insurance sector. The economic recovery has been underway, but the company expects the overall recovery to be moderate against the consensus forecast of a sharper V-shaped recovery. The overall economic and stock market volatility can have a visible impact on the insurance industry.

With the threat of the omicron variant looming large, a rapid deterioration of the overall situation could increase claims, blight assets in or otherwise impair MET’s investment portfolio. This in turn could financially weaken MET reinsurers, thereby augmenting the possibility of reinsurance defaults. Amidst all the uncertainty over the human and economic cost the Omicron variant could extract, it is important to remember that record U.S. inflation could subdue the Fed’s desire to come running with the water should market inferno re-emerge.

Additionally, the Omicron variant has spread to about one-third of U.S. states. Rising inflation, which means rising property values, and rapid spread of the COVID-19 Omicron variant means the severity of claims could cost the company more. 

Inflation is going to be a primary cause of concern because the U.S. is now seeing a record price increase in more than three decades.

There’s also a possibility that MetLife’s product distributors may suspend, modify, decrease or end their distribution relationships with MET in case their own business model undergoes changes, or for that matter the firm’s performance witnesses a decline.

All the factors mentioned are a purveyor of a certain amount of risk, and could significantly diminish the stock value. However, none of these risks is new, and MET has done a commendable job of efficiently dealing with higher benefit payouts due to the deaths caused by the pandemic, and post-opening normalization. The company continues to perform well with the latest quarter’s performance serving as validating signals for investors.

MetLife Stock Price Forecast

The 12-month price forecasts for MetLife Inc range from a high of $77.00 to a low estimate of $70.

On an average, it is anticipated that MetLife’s share price could reach $68 in the next twelve months. This suggests a possible upside of around 13% from the stock’s current price.

Is MetLife Stock a Buy?

MetLife is one of the largest insurance companies in the world. A leading provider of annuities and employee benefits, MetLife is also the largest life insurer in America.

The company, in spite of higher benefit payouts it had to hand out, still managed to deliver solid Q3 results. The life insurer’s stock has gained over 35% this year.

Avery important thing to note here is the role played by the variable investment income, which helped the insurance titan deliver expectations-beating results irrespective of the elevated claims related to Covid-19.  MetLife Inc., in fact, is joining an array of investors who are hugely benefitting from private equity.

Metlife Management Pivoting Portfolio

MetLife’s management has made their intentions pretty clear about shifting the company’s focus to pension risk management, protection and savings products. The company is also planning on jettisoning businesses with higher capital requirements. This could be the reason for the company selling its otherwise profitable P&C insurance business to Zurich.

The company also made an announcement earlier in the year about its decision to dispose of its operations in Poland and Greece and later sold it to NN Group for EUR 584 million.

The management also wants to sell off its Holdings business, but it looks unlikely that it will find a buyer willing to purchase it at the price desired by MET, given that the returns on capital from the business are low. MET also has shown interest in augmenting capabilities in its asset management operations. This again looks like a tough knot to untie though as there are a lot of potential buyers, and sellers are unwilling to sell cheap.

MetLife has recently been winning big with private equity, and other alternative investment strategies. The company reports it as part of Variable Investment Income (or VII). VII pretax income has been ahead of estimates for five straight quarters. For Q3, adjusted net investment income jumped over 20% to $5.7 billion, as compared to the previous year, driven primarily by strong private equity returns.

Institutional investors have been a prime beneficiary of largesse handed out by buyout firms who have solidly capitalized on a vigorous merger and initial public offering market. To put it in perspective, four big U.S. private equity firms including Apollo Global Management Inc. and Blackstone Inc. (BX) handed back $45 billion to investors in the last quarter.

Total net income came in at $1.5 billion, compared to $633 million a year earlier. Adjusted EPS was $2.39 a share, well ahead of the $1.71 average estimate of analysts.

Adjusted premiums, fees and other revenues excluding pension risk transfers edged up 1% to $11.4 billion, while the benefits business witnessed a steep decline of 72% to $111 million, with Covid-19 claims hurting group life underwriting.

Focus on Private Equity A Boon

MetLife has been successful in navigating the choppy waters generated by higher Covid-19 mortality and post-opening normalization, thanks to its efficient growth and solid liquidity position.

The company’s shifting focus towards private equity has been paying rich dividends as variable investment income has been a strong revenue generator for the company.

VII pretax has been steadily rising for many quarters, helping MET generate sustained ROE uplift from its investment portfolios.

The company is also keen on acquiring more scale and capabilities in asset management, and the decision to sell its Polish and Greek operations has been described as a prudent thing to do. Investors looking to diversify their portfolio by including an insurance stock should have a closer look at MetLife.

MetLife Valuation: How High Can MET Go?

After years of stagnancy, MET’s stock price took off in a big way over the past year.

Making a stellar comeback from the pandemic lows, the stock is up close to 35%, much ahead of the sector it operates in as well as the broader U.S. equity market. 

There are different ways for an insurance company to make money.

1. The most basic one is to make more in premiums than pay out in claims.
2. The second one is to invest the money gathered through premiums in some other ventures, and earn a return before until claims need to be paid out.
3. On top of that, insurers like MetLife also generate revenue as a provider of annuities and employee benefits.

And as far as profitability is concerned, MetLife uses certain metrics like combined ratio and return on equity (ROE) to gauge how profitable it is. The combined ratio is calculated by dividing total expenses by premiums.

A key metric that MetLife uses to gauge its profitability is the combined ratio, which is calculated by dividing incurred losses and expenses by the earned premium.

A ratio below 100 per cent indicates that the company is making more in premiums than it is paying as claims, while a ratio above 100 per cent means that the company is incurring losses. MetLife’s combined ratio is in the early 90s, which is better than some of its peers. 

Another key metric is the return on equity (ROE), which is calculated by dividing Net Profit by shareholder equity. MetLife’s ROE for the quarter was 8.81%., a good indicator of how the company uses its assets to earn profits.

The company keeps benefitting from a fruitful mix of sound strategy, expense discipline, a superior asset mix and impeccable execution believes MetLife President and CEO Michel Khalaf.

MetLife delivered stellar results in the third quarter, with both revenue and EPS coming comfortably ahead of estimates.

One of the world’s largest life insurers said its adjusted net investment jumped over 20%, chiefly aided by higher variable investment income emanating from sturdy private equity returns. The New York-based company’s adjusted earnings rose 31% year-over-year to $2.1 billion.

On a per-share basis, adjusted earnings rocketed 38% to $2.39 in comparison to the same quarter last year. The consensus estimate was for an EPS of $1.74. 

Net income came at $1.5 billion, against a net income of $633 million in the third quarter of 2020. Robust variable investment income more than took care of the higher Covid payouts the company had to shell out.

Is MetLife Stock Undervalued?

MetLife is one of the largest insurance companies in the world and the largest life insurer in America, taking in premiums running into billions of dollars, and generating billions off of investments. MetLife is a well-run insurance company that lays a premium on consistent performance in high-return businesses. The firm’s high ROE means the company can keep returning excess cash to shareholders through dividend augmentation and share buybacks. 

With a forward P/E of 10.0 and a forward dividend yield of 2.93%, the stock looks undervalued, which means it could be the right time for investors to dive in who are interested in insurance stocks.

Also, insurance stocks can flourish as rates rise, which means rising pressure and subsequent hike in interest rates could serve as a tailwind for insurance companies like MetLife.

On the flip side, there is significant dispersion in stock price forecast for MET over the next 12 months, with estimated price returns ranging from +14.5% to -14.1%. The consensus 1-year price target for MET is $65.30, while the lowest price target is $48.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.