Investment thesis

We believe that MetLife Inc. (MEET) has one of the best records in terms of quality underwriting and prudent investment in the industry. Since the shares are trading at a book value lower than the tangible book value, while paying a 4% dividend yield, we think this is a good time to start buying MetLife shares. We have just initiated a new position in MetLife that we plan to hold for the long term. We think Metlife will be a stock of $ 50-60 in the next 2-3 years. We are confident that MetLife will increase dividend distributions and redeem many more shares from here.

MetLife is a financial fortress

After the global financial crisis, we began a period of intense surveillance for financial services companies, which hurt profitability and forced investors to completely avoid the sector in some cases. For those who have underweighted financials, this is the right choice for the last decade; However, we believe the value style will outperform in the next year or more after momentum and growth have stolen the limelight from 2016 to early 2018. Financial services meet the criteria of value according to our vision with ratios low PE and incredibly strong balance sheets in all areas. . All companies do not buy in the sector and, for those who are not interested in finance with an ETF, investors should look to choose from the best of the group. We believe MetLife is a unique choice, as they are part of the growing list of financial services companies trading below book value while achieving a return on equity of around 10%. When a company is trading below its book value, it is often because its business is in decline but Metlife has continued to increase its profitability without sacrificing its underwriting quality.

A solid history of abundant stock repurchases and dividend payments

MetLife has reduced the number of shares outstanding over the past three years from about 10%, rising from a record high of 1.12 billion to 0.986 billion as of October 31, 2018 Share repurchases are our preferred capital repayment to shareholders because they are taxable. – free whereas a special dividend is taxable for shareholders. Some investors want all dividends or redemptions of shares, while we favor a reasonable dividend and large redemptions when the cash flow is available. We do not want MetLife to reiterate its obligation to reduce its dividend at the first sign of trouble and that using a cash surplus for discretionary redemptions is an excellent strategy to maintain the consistency of their dividend distribution. MetLife meets our criteria for a strong capital return program, as they financed their return on capital through cash flow and not debt, while allowing themselves to reinvest in the business.

Keep an eye on the expense ratio and the loss ratio

In the insurance industry, prudent underwriting and operational excellence are what makes or breaks a business. We believe that MetLife still has a long way to go to improve its expense ratio and generate new earnings for its shareholders. First, there is the benefit ratio, which compares MetLife products generated by contracts to underwriting expenses. These expenses include items such as selling, general and administrative expenses, salaries, legal costs and certain marketing expenses. Second, there is the loss ratio, which represents the percentage of losses relative to earnings. For example, if Metlife collected $ 100 in premiums for every $ 50 of claims, the loss rate would be 50%. Finally, the combination of the pension expense and the loss ratio is shown in what is known as the combined ratio. The combined ratio is used to evaluate the operational performance of insurance industry peers. MetLife focuses on their direct expense ratio, which is their summary of the fixed expenses shown below. Metlife is committed to reducing its expenses by 200 basis points over the next two years, which will be an impressive accomplishment and will make MetLife a significantly more profitable business in the next two years once the company is in business. operation completed. Investors should monitor all of the above ratios to ensure that MetLife effectively manages their risk and business over time.

Source: MetLife

Climate risk is a real concern

Climate change is a major challenge for insurance companies that issue life insurance, property and casualty insurance and offer reinsurance. If weather conditions continue to worsen, underwriting will be extremely difficult and actuarial models will need to be updated to reflect the new normal. According to a recent report of the Intergovernmental Panel on Climate Change (IPCC), it is very likely that humans will be responsible for the vast majority of climate change and will have to significantly reduce their carbon emissions to avoid serious climate impacts long-term. The impacts of climate change on the severity of weather conditions will increase the loss of life and property damage, which will be very detrimental for unprepared insurance companies. Through prudent underwriting and constant evaluation of their actuarial methodology, we believe that MetLife can effectively manage climate risk as one of the highest quality underwriters in the industry.

Conclusion

In our opinion, MetLife has one of the most qualitative underwriting processes in the industry. The shares are trading at a book value lower than the tangible book value, with a 4% dividend yield, we think the time is right to start buying MetLife shares. We have just started a new position during the recent market turmoil, and we expect MetLife to trade around $ 50-60 per share in 2 or 3 years. We are confident that the company will increase dividend distributions and redeem many more shares by then.

Disclosure: I am / we have been for a long time MET. I have written this article myself and it expresses my own opinions. I do not receive compensation for this (other than Seeking Alpha). I do not have any business relationship with a company whose actions are mentioned in this article.