Despite the Fed's announcement of extending low interest rates at least until 2014, insurers have been on a roll. Over the last three months, Lincoln National (LNC) and MetLife (MET) have gained 42.9% and 35.6%, respectively. According to T1 Banker, the former is rated a "buy", while the latter is rated nearer to a "strong buy". Based on my review of the fundamentals and multiples analysis, I find stronger upside for Lincoln, due to its higher risks.
From a multiples perspective, both firms are attractive. MetLife trades at a respective 6.1x and 6.8x past and forward earnings, while Lincoln trades at 5.8x forward earnings. Although both firms are volatile, Lincoln is particularly so with its beta of 2.6. This will help the company drive higher-risk adjusted returns as the economy improves.
At its fourth-quarter earnings call, MetLife's management noted a solid finish to the year:
"Capping a solid 2011 was a strong fourth quarter. MetLife delivered operating earnings per share of $1.31, up 11% year-over-year. In our U.S. Businesses, underwriting discipline continue to produce favorable results in Group Life, with a loss ratio of 85.2%, as well as in Dental. In addition, core spreads held relatively stable despite the low interest rate environment, largely as a result of our disciplined asset liability management, our hedging strategies and our private asset origination capabilities.
Outside the United States, we continue to be pleased with our financial results and our progress in integrating Alico. Compared to the fourth quarter of 2010, sales increased by 12% on a combined basis while premiums, fees and other revenue rose by 1%. We generated $570 million in operating earnings on $3.8 billion of premiums, fees and other revenues".
MetLife recently announced that it would stop operating its retail mortgage loan origination business. This was a smart strategic decision, since it reduces the change that the company will be label "systemically important" by regulators. At the same time, I am also attracted to how the firm is hedging against domestic stagnation by gaining scale abroad with Alico.
Consensus estimates for MetLife's EPS forecast that it will grow by 1.4% to $5.09 in 2012, and then by 9.8% and 11.6% in the following two years. Assuming a multiple of 7.5x and a conservative 2013 EPS of $5.51, the rough intrinsic value of the stock is $41.33, implying 8.2% upside.
During Lincoln's most recent quarter, the company posted a large goodwill charge of $747M. Investors should note that this was a non-cash charge, and thus does not impede capital plans, which continue to be highly flexible. Excluding this item, Lincoln was in-line with estimates at an adjusted EPS of $1.
On the other hand, the company has exposed its greater vulnerability to low interest rates compared to competitors. Uncertainty in the equity markets will further hamper confidence in retirement and annuities. Still, management repurchased $200M worth of stock, beating expectations and showcasing confidence in cash flow. Investors should expect a $400M repurchasing program in 2012 if net flows remain solid. In the longer term, ROE is estimated to expand by around 100 bps over the next few years.
Consensus estimates for Lincoln's EPS forecast that it will decline by 4.6% to $3.98 in 2012, and then turnaround to grow by 9.5% and 14.5% in the following two years. Assuming a multiple of 7.5x and a conservative 2013 EPS of $4.32, the rough intrinsic value of the stock is $32.40, implying 28.7% upside.