(By Mani) Insurer MetLife, Inc. (NYSE:MET
) offers a good investment opportunity due to its global franchise, diverse geographic and product mix, and robust capital position.
MetLife is one of the largest US life insurance companies with $820 billion in assets and is a leading provider of individual life and annuity products in the US and the dominant insurer in the US group insurance market. In November 2010, MetLife acquired AIG's (NYSE:AIG) Alico operation, which expanded the global scale and geographical reach of its international operations.
The company's fundamentals are very attractive. With the acquisition of Alico, MetLife became a global insurer with operations in 47 countries and serving 90 million customers. In addition to sizable exposure to mature markets, about 14 percent of its earnings come from the fast growing emerging markets.
"With greater concentration of high return businesses and assuming an eventual resumption of capital redeployment, MET should see higher ROE prospects," UBS analyst Suneet Kamath said in a client note.
Moreover, the acquisition of Alico was transformational for MetLife, as it more than doubled its earnings contribution from the fast growing and high return international business.
"We expect MET's international earnings to be a larger contributor over time," Kamath said.
MetLife plans to expand its footprint in emerging markets and increase their earnings contribution to 20 percent plus by 2016, up from the 14 percent in 2012.
The company expects to leverage its expertise in group insurance and accident & health—acquired through Alico to drive global organic growth opportunities.
Similar to the accident & health products, the group insurance opportunities should also improve the company's overall risk profile by focusing on protection risk, while offering high return on equities. MetLife expects its group insurance expansion initiatives to generate an incremental $250 million in operating earnings by 2016.
However, investors' focus has been primarily on MetLife's lack of capital management due to regulatory uncertainty. The company has more than $3 billion of deployable capital, but has not been able to increase its capital return to shareholders due to its bank holding company status. Moreover, investors appear concerned that a possible nonbank systemically important financial institution (SIFI) designation could constrain share buybacks down the road.
"While this regulatory overhang exists, we argue that it is already reflected in current valuation. And, we believe MET's eventual exit of the Bank Holding Company status should be a near-term positive catalyst," Kamath added.
By 2016, the company plans to increase its return on equity to between 12 percent and 14 percent, up from 10.3 percent for 2011, with the increase driven by higher operating earnings. The company would shift its product mix toward protection products and away from more capital-intensive products, in order to generate more predictable operating earnings and cash flows.
An expected mix shift towards protection business should improve the company's beta and reduce its cost of equity. This dynamic compounded with expected return on equity expansion should boost the company's valuation.
MetLife is expected to report its second-quarter results on Aug.1. Wall Street expects the insurer to earn $1.25 a share on revenue of $16.98 billion, according to analysts polled by Thomson Reuters.