Metlife (MET +2.16%) has quickly transformed itself into one of the most promising insurance companies in the marketplace with an attractive risk/reward ratio. Strong underlying earnings growth, a sharpening focus on emerging markets, rigorous cost saving initiatives and a recently announced share buyback program add to the attractiveness of a Metlife investment.
Despite a solid record in increasing earnings and achieving a healthy level of profitability, Metlife continues to trade at a discount to book value.
Large-cap insurance companies in general are still cheap. Whereas Prudential Financial (PRU 0.15%) trades at a slight premium to book value, Metlife and American International Group (AIG 1.56%) are both still trading at discounts to book value. Currently, Metlife can be bought for a 7% discount and American International Group for a 23% discount to book value.
Take advantage of the opportunity
A persistent discount to book value was also the reason why American International Group recently increased its share repurchase authorization by a whopping $2 billion which was made possible by an unexpected windfall from the sale of its aircraft leasing unit ILFC to AerCap Holdings N.V. at the end of last year.
Insurance companies have been eager to use proceeds from non-core asset sales and cash flow from their insurance operations to buy back their own stock. Since Metlife's and American International Group's share prices are still below their respective book values, share buybacks are book value accretive and produce a great return on equity.
Metlife is just the latest company where share repurchases play an increasingly important role to drive shareholder value. Metlife has already formulated an ambitious plan to drive future earnings growth by stipulating its intent to increase the share of emerging market operating earnings to 20% by 2016, deliver $1 billion in cost savings and shift away from the undesirable and risky variable annuities business.
Other areas for growth
Metlife can also present meaningful successes in increasing its emerging market operating earnings over the last three years and a focus on emerging markets in EMEA and Latin America should enable the insurance company to continue to achieve double-digit operating earnings growth rates-just like it did in the past.
Source: Metlife Investor Day June 2014 Presentation
Over the last three years, Metlife has proven that it has the technology, products and people in place to strongly increase operating earnings from $4.7 billion in 2011 to $6.3 billion in 2013 reflecting a compound annual growth rate of 16%. The underlying operating return on equity has also consistently grown from 10% in 2011 to 11.9% in 2013, a respectable increase of 190bps.
Source: Metlife Investor Day June 2014 Presentation
In addition to a record of earnings growth and an ambitious plan to deliver expense savings, Metlife recently announced a share repurchase program with a volume of $1.0 billion. The program is basically intended to offset dilution from the conversion of equity units later this year.
In any case, Metlife deploys substantial amounts of capital to the benefit of shareholders and the company should have the potential to add to its existing share repurchase authorization in 2015 as its cost savings program delivers results.
Final assessment
Metlife clearly is on the right path to deliver value for shareholders. Its ongoing cost savings program, the focus on emerging markets to deliver earnings growth and the $1.0 billion share repurchase program certainly should support Metlife's share price over the next couple of years.
