MetLife (NYSE:MET) recently received a favorable verdict from a federal judge that ruled that the insurer should not have been designated a Systemically Important Financial Institution, or SIFI, and therefore should not be subjected to the stricter regulations that comes with the designation (full disclosure: the U.S. government has already appealed the court decision, so this may or may not change at some point in the future).
Another SA author, Kurt Dew, has already published an excellent article providing valuable insight on the merit of the ruling and further thoughts for and against it, so my intent in this article is to not discuss the ruling in great detail. Instead, I will highlight why I believe that the ruling is a long-term catalyst (see this article for the mention of the favorable ruling being a catalyst) and I will then explain why this non-SIFI insurer is a long-term buy based on the current valuation.
The Overhang, Released?
MetLife being designated as a SIFI by the Financial Stability Oversight Council, or FSOC, in 2014 has been an overhang that management has had to contend with, so the recent verdict was indeed great news for the insurer (and other SIFI designated companies). To start, the costs associated with being a SIFI are hard to quantify from a long-term investors perspective because there are a lot of moving pieces to factor in. Not only did MetLife have to comply with stricter regulations and capital requirements, but the insurer also had to properly staff its regulatory compliance team in order to establish/maintain a control structure. The direct result is higher expenses.
At the end of the day, not being a SIFI will save the insurer millions of dollars over the next few years and it will also open the door for the Board and management to have the opportunity to return more capital to shareholders.
It should come as no surprise that MET shares shot up over 5% on the day that the verdict was made public, but shares have subsequently gave up some of that gain. MetLife's stock still has some catching up to do when you compare the stock's performance to the broader market (S&P 500) and another insurer that was designated as a SIFI [American International Group (NYSE:AIG)].
As shown, MET shares have greatly underperformed the broader market, and its counterpart AIG, since late 2014. However, in my opinion, when looking out two-to-three years there is a lot to like about MetLife's future prospects and the recent ruling is simply a bonus.
A Challenging Environment
There is no denying the fact that the current operating environment for financial institutions, including insurers, is a challenging environment to operate in. This has resulted in MetLife, and other insurers, to report lackluster earnings in the last quarter of 2015. In early February, MetLife reported Q4 2015 EPS of $1.23, which was significantly lower than the consensus EPS estimate of $1.36. Additionally, the Q4 2015 EPS declined ~11% when compared to the Q4 2014 EPS of $1.38.
The top-line did not fare much better, as MetLife posted Q4 2015 revenue of $17.11b versus the $18.24b reported for the same quarter in the prior year.
So, where do we go from here? MetLife's Q1 2016 results, expected to be released on Thursday, May 5, 2016, will likely not be much better than the poor Q4 2015 results due to the fact that the headwinds (as described in the article linked in the introduction) are still in full force. However, the lackluster earnings expected in the next few quarters are already baked into the stock price.
From a valuation standpoint, MET shares are currently attractively valued based on both earnings and the insurer's adjusted book value. I created the two tables below to further analysis MetLife's current valuation, and I included AIG as a reference point.
The first table shows MET's and AIG's P/E ratio based on estimated 2016 and 2017 earnings.
|2016E Earnings||P/E Ratio*||2017E Earnings||P/E Ratio**|
MET shares are trading at ~8x 2016E earnings, which is well-below where AIG shares are trading and also well-below MET's historical valuation.
The next table shows the valuation for MET and AIG shares in relations to the respective companies' adjusted book value.
|Adjusted book value at Q4 '15 (^, ^^)||$51.15||$58.94|
|Price to adjusted BV||0.87||0.94|
^MetLife's adjusted book value is book value per share, excluding AOCI other FCTA
^^AIG's adjusted book value is book value per share, excluding AOCI and DTA
Both insurers are trading below the adjusted book value, but MetLife is again more attractively valued. For full disclosure, I believe that both of these insurers are long-term buys at today's prices (see this article for further thoughts on AIG). This type of valuation for MetLife, both from an earnings and book value perspective, will allow for the insurer to lower the earnings bar in 2016 and still be attractively valued.
There is still a lot of uncertainty related to whether or not MetLife will be designated as a SIFI, but regardless of the final ruling MET shares are still a great long-term value play at today's price. The insurer not being designated as a SIFI is a fluid situation, so it would be wise for investors to stay up-to-date on the topic.
MetLife's operating results have not been stellar in the most recent quarters, and this will likely continue into mid-2016. But, MET shares are attractively valued and the recent ruling should help propel the stock price higher over the next 12 months.
In light of the recent ruling, it will be interesting to hear more about the announced separation of the U.S. Retail segment, and more specifically, whether or not this transaction will proceed as originally planned. This is a topic that management will likely discuss during the upcoming conference call, so I will provide my thoughts once more information is available.
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Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.
Disclosure: I am/we are long MET, AIG.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.