MetLife: A Capital Return Story

Summary

• MetLife's stock has significantly underperformed the broader market in 2020.
• The company's recent operating results (and management commentary) prove that the investment thesis remains intact. Moreover, MetLife has a real capital return story to tell.
• MetLife is well-positioned for 2021 and beyond. As such, we plan to stay long the stock.

MetLife's (NYSE:MET) stock price has recovered lately but shares are still significantly underperforming the broader market on a YTD basis.

Data by YCharts

I believe the pullback in MET shares should be viewed as a great long-term investment opportunity because, in my opinion, this global insurer is well-positioned for the years ahead. And the recent earnings results and announced buyback program helps the bull case for MetLife as we look into 2021.

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The Latest, Some Positive Takeaways

MetLife recently reported Q3 2020 results that beat the consensus top- and bottom-line estimates. The company reported adjusted EPS of $1.73 (beat by $0.15) on revenue of $16.5 billion (beat by $500 million), which were solid results in this challenging environment.

Source: Q3 2020 Earnings Slides

The highlights:

• Premium, fees, and other revenue were down 6% YoY, mainly driven by broader market headwinds (i.e., COVID environment)
• Net interest income rose 2% (to $4.7 billion) largely driven by higher private equity returns
• Adjusted book value per share came in at $53.10 (compared to $52.27 at Q2 2020)

The strong operating performance was mainly due to two factors: better-than-expected variable investment income ("VII") results and solid expense management.

Source: Q3 2020 Earnings Slides

As shown, MetLife's private equity positions were the real growth drivers but hedge funds also had a positive impact. And more importantly, management expects for VII to remain strong through the end of the year, although at levels consistent with the three quarters before Q2 2020 (~$300 million level).

From an expense management standpoint, MetLife continues to show progress toward management's long-term goal of eliminating unnecessary costs.

Source: Q3 2020 Earnings Slides

The direct expense ratio is trending in one direction, i.e., down. The impressive Q3 2020 ratio is well-below expectations and I believe shows just how impactful expense management can be to MetLife's earnings growth prospects. For example, MetLife was able to reduce expenses by ~$800 million (or 5%) when compared to the year-ago quarter ($15.1 billion vs $15.9 billion). That type of savings is significant, especially in this environment. Management is guiding for the ratio to tick higher in Q4 2020 due to seasonality but they still expect for the full-year 2020 direct expense ratio to be below guidance (12.3%).

Additionally, outside of the Latin America, MetLife's foreign operations reported strong results when compared to the year-ago quarter.

Source: Q3 2020 Earnings Slides

I view these international businesses as key growth drivers as MetLife tries to navigate through a post-COVID world, especially after the Zurich news (discussed below).

Overall, there was a lot to like about MetLife's Q3 2020 results but I believe the future looks even brighter.

Looking Ahead, A Capital Return Story

On December 11, 2020, MetLife announced that its board authorized a new $3 billion share repurchase program. But let's remember that this company has a long track record of returning capital to shareholders, as shown by the shrinking share count over the last three years.

Data by YCharts

MetLife's significant buyback program will partly be fueled by the announced deal to sell its U.S. P&C business to Zurich Insurance for ~$4 billion. However, reducing the share count is not the only way that management has been rewarding shareholders. For example, MetLife has an above-average dividend and it has enough wiggle room to grow the payout in 2021.

Source: Fidelity

Most importantly, investors should expect for this capital return story to continue well-past 2021.

Make no mistake about it, MetLife's near-term business prospects will largely depend on management's ability to squeeze out alternative investment returns and properly manage the company's expense base but, in my opinion, returning capital is (and will be) a significant component of the long-term investment thesis.

Valuation

MetLife stock is trading at attractive levels when compared to its own historical metrics.

Source: Morningstar

Additionally, MET shares are attractively valued when compared to the company's peer group.

Data by YCharts

MetLife stock has been under pressure throughout 2020, which makes sense given the challenging operating environment, but I believe that the risk is currently to the upside.

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 the stock price.

And lastly, the Federal Reserve and rates are a concern right now, but investors need to also consider the macro environment. A deteriorating economy would eventually negatively impact the financial sector. The COVID-19-related impacts should be closely monitored in the months ahead. If the economy is "shut down" again before the vaccine reaches the broader public, MetLife's stock will likely be under pressure.

Bottom Line

2020 has been a challenging year for MetLife, and the other large insurance companies, but I believe that this global insurer is well-positioned for 2021 and beyond. The company's Q3 2020 results were nothing to write home about but, in my opinion, they showed that the long-term investment thesis remains intact. To this point, MetLife should be viewed as a capital return story over at least the next 18-24 months.

Simply put, the start of 2021 will be a challenging environment but MetLife's management team has the company properly positioned from both an operational and financial standpoint. The stock may remain under pressure over the next few quarters due to the COVID and interest rate-related headwinds but, in my opinion, investors with a long-term perspective should consider adding MET shares on any significant pullbacks.

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.