Insurance companies typically trade at PEs in the single digits, due to their volatility of earnings. The limited predictability of earnings is often a result of claims, investment gains or losses, and investment income.
Volatile earnings can make insurance companies difficult to value, and that is why investors often look at tangible book value when coming up with a calculation of intrinsic value. Volatility makes investors nervous, but it also creates opportunities to buy insurance companies at very attractive prices. MetLife (MET) is currently selling at a very attractive price.
MetLife is the largest life insurance company in the U.S. with total assets of $785 billion and $4.2 trillion of life insurance in force. In the past 12 months MetLife has earned $5.6 billion and tangible book value per share is $48 billion. If MetLife sold at tangible book value, the p/e would be 8.5, which is not unreasonable considering MetLife is profitable and tangible book value will likely grow.
With 1 billion shares outstanding, if MetLife sells at tangible book value in the future, it will sell at $48 a share. MetLife’s shares have fallen from $46 to $32 since the beginning of the year. Investors can get a 50% return in MetLife if it simply goes back up to its tangible book value.
In terms of operations, MetLife has struggled the past few years and is now seeing improved results. In addition to a more favorable operating and investing environment, in 2010 they acquired American Life Insurance Company (Alico) from AIG for $16.4 billion. MetLife currently has a market cap of $34 billion; therefore, Alico makes up roughly half the value of MetLife. Alico operates in more than 50 countries and should contribute significantly to MetLife’s bottom line going forward.
The one area of concern is the high level of long-term debt. The substantial increase in long-term debt was largely a result of the Alico acquisition and management will likely use free cash flow to reduce the debt over the next two years. In other words, I wouldn’t expect a sizable dividend increase or share repurchase plan until long-term debt is reduced. However, earnings and tangible book value will both be positively impacted by a reduction in long-term debt.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MET over the next 72 hours.
Additional disclosure: Some of my clients have stock in MetLife.