By Ryan Barnes. Edited By Douglas A. McIntyre
Metlife is the largest life insurance company operating in the United States, and also conducts business in home & auto insurance, reinsurance, group insurance, and various retirement & annuity products in the U.S. and abroad. MetLife is still in the process of integrating its $12b purchase of the Travelers Insurance Company from Citigroup in 2005, which brought the company’s total asset base to over $500b and gave them access to a broad distribution channel for its products.
$500 billion is a lot of assets to manage by any account and MetLife, like all the big float managers, have seen their investment income hurt by near all-time low credit spreads in the fixed income market, which is where they hold the majority of their float, along with a few real estate properties and limited partnership holdings. They recently committed to sell two of their biggest real estate properties for $5.4 b, which will soon hit the books and presumably reach the bottom line quickly in the form of cash or stock buybacks. They also hold a majority stake in the Reinsurance Group of America (RGA) that is worth nearly $2b that can be added to our assessment.
At this point it’s too difficult to tell how much profit MET will be able to generate of their asset base, especially considering the $100b in assets still being integrated from Travelers. Everything the company is doing has been geared towards establishing a well-greased distribution network of sales agents and partnerships with wirehouse firms to sell their retirement products, with annuities being their real leadership product. We’ll have to give them a year or two to show how well they can execute – so far the “get massive” strategy hasn’t worked well for Citigroup in terms of shareholder value, but the demographics of the U.S. put MetLife in a real spot when you consider the aging population, under-funded pensions, and their international exposure. They’ve already gobbled up over 50% market shares in many Asian countries as well as in South America.
The one laggard group in the company is the Home & Auto insurance segment, with projected flat top-line growth but solid operating margins. It could be divested for 13-14x operating earnings and sell for about $4.2b. With this segment removed, the rest of the company is projected to grow revenues beyond 10% per year, which should help the multiple rise from the current 1x level to about 1.3, in line with peers such as AIG and Prudential, bringing the total breakup value to just shy of $79/share.
Ryan Barnes
Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others. Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.
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