MetLife Is Properly Positioned For 2019

Summary

• MetLife recently held its annual outlook meeting and, in my opinion, the main takeaway from the presentation was that the bull case for this insurer remains intact.
• Specifically, MetLife appears to be properly positioned for 2019 and beyond.
• I am long MetLife, and I plan to stay long the stock.
• This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Start your free trial today »

MetLife's (NYSE:MET) stock has fallen out of favor over the last few quarters, which is shown by the fact that its shares are underperforming the broader market by approximately 24 percentage points on a YTD basis.

MET data by YCharts

However, the important thing to remember is that the stock has performed pretty much in line with the other insurers (and in a broader context, the financials in general), as this sector has faced significant downward pressure due to industry concerns.

MET data by YCharts

However, as I recently described here, I believe that MetLife's stock is trading at attractive levels and is worthy of investment dollars, of course, if you are willing (and able) to hold onto shares for the next two to three years.

Properly Positioned for 2019

Management recently held its annual outlook meeting and, in my opinion, there were some great takeaways from the presentation. Most importantly, management believes that this global insurer is properly positioned for 2019 and beyond. To start, MetLife has a large diversified asset portfolio that puts the insurer in a great position to be successful in most economic environments.

Source: MetLife's Outlook Call Presentation

MetLife's asset base gives management the opportunity to pull several different levers in 2019, which will be especially important if the market remains volatile over the next 12-18 months. To this point, management's strategy is to now focus on less capital-intensive products that also have shorter payback periods, which improves the company's overall earnings profile. As a direct result, the return on equity, or ROE, target was increased to a range of 12-14%. Furthermore, management still stands by its goal of reducing expenses by $800M by 2020.

And management expects to achieve its previously communicated free cash flow ratio target of 65% to 75% of adjusted earnings not only through 2018 and 2019 but now also through 2020.

The company's strong earnings profile and improving cash flow prospects support management's goal to allocate capital in a manner that has a real potential to create significant value, even if the market takes a turn for the worst. To this point, management is predicting for a mixed macro environment as the company enters 2019.

Source: MetLife's Outlook Call Presentation

The market volatility will likely be with us for at least the next few quarters but that should also allow management to do what it does best - i.e., return capital to shareholders. By the end of 2018, it is projected that MetLife will have returned $12B to shareholders through dividends and buybacks over the last 3 fiscal years (the company bought back $700M of its shares since November 1, 2018) and, in my opinion, investors should expect for more of the same in 2019 (i.e., the board recently authorized a new $2B repurchase plan).

The main takeaway from MetLife's investor outlook call, in my mind, was that this large, diversified global insurer appears to be well positioned for the next 12 months. Not every division is performing well in today's environment, but the insurer's main growth drivers appear to be intact. Yes, management has a lot to prove in 2019, but I believe that the stock will perform extremely well if the insurer is able to achieve the financial targets that were provided during the call.

However, there is one area of concern that investors should keep front of mind, at least for the next few quarters - that is, the long-term care ("LTC") business.

The Concern

The LTC business has been the focus of MetLife's shareholders for a while now, and rightfully so, as pundits have painted a depressing picture for the prospects of LTC business for the years ahead. For example, many large insurance companies may face reserve adjustments as LTC policyholders outlive assumptions that were made years ago, as reported by Reuters.

MetLife, on the other hand, would have you believe that all is well with the company's reserves associated with the LTC closed block (i.e., MetLife is no longer selling LTC policies).

Source: Q3 2018 Supplemental Slides

In its remarks, management disclosed that it is actively engaging in activities that are a direct attempt to enhance the value of this legacy business. Given the disaster that is occurring in the overall LTC industry (i.e., this is not a MetLife specific risk factor), with General Electric (GE) being the biggest example, I would closely monitor management's commentary related to reserve adequacy through the next few quarters. Personally, I would not be surprised if the business turned out to a headwind at some point over the next year or so. However, I believe that the LTC concerns are already baked into the stock price.

Valuation

MET shares are attractively valued when compared to its peer group.

MET Price to Book Value data by YCharts

Let's also remember that MetLife has been buying back shares hand-over-fist and steadily increasing the dividend so while the macro environment may not be ideal for the insurers, this company's capital return story has the potential to be a catalyst for the stock.

Risks

The biggest risk for any insurer, including MetLife, is the sufficiency of the company's reserves. The company will likely have immaterial one-off reserve charges on a somewhat consistent basis, but any material adjustment could negatively impact MetLife's stock price.

Any additional internal control issues will likely have a material impact on sentiment for this large insurer (remember, MetLife previously disclosed a material weakness in its internal controls). So, if anymore shoes drop as it pertains to internal controls, I may jump ship and not look back.

Additionally, the LTC business could turn out to be a significant headwind, in my opinion, so investors should pay close attention to these reserves through at least 2020.

Bottom Line

There was a lot to like about what management had to say during MetLife's 2019 investor outlook call, but in my opinion, it is too early to get really excited about this insurer. The control issues are still a concern, and I believe that the LTC business could eventually turn out to be a headwind, so investors should closely monitor these risk factors over the next 12-18 months.

However, this insurance company should benefit from rising rates (even if interest rate hike projects have toned down in the last week), a stable economy, and lower taxes over the next year. MetLife's stock has significantly underperformed the broader market so far in 2018, but I believe that shares are a great, long-term buying opportunity at today's price.

Author's Note: I have a MetLife position in the R.I.P. Portfolio and I have no plans to sell shares in the near future.

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. 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.