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MetLife Still Has Legs, Says Deutsche Bank (Update 1)

Among eight large-cap life insurers covered by Deutsche Bank, Kinar expects MetLife (MET) "to offer the most upside," under his expected scenario for long-term interest rates, even though the shares have returned 60% this year.

Shares of MetLife closed at $51.39 Thursday. The shares trade for 1.1 times their reported adjusted Sept. 30 book value of $47.99, and for 8.9 times the consensus 2014 earnings estimate of $5.75, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $6.16.

MetLife's adjusted book value excludes accumulated and other comprehensive income (AOCI).

Kinar on Thursday maintained his "buy" rating and raised his price target for MetLife to $59 from $57.00. His price target is based on an expected valuation of 1.15 times adjusted book value 12 months from now.

MetLife is under review by the Financial Stability Oversight Council, which may designate the company as a "non-bank systemically important financial institution." That means the company could come under Federal Reserve oversight and be required to submit annual plans for capital deployment, as large banks subject to the regulator's stress tests are already doing.

MetLife has been holding off on share repurchases, pending further clarity on its possible SIFI status. But Kinar continues "to expect $800 million in buybacks" during the second half of 2014.

During her testimony on Thursday before the Senate Banking Committee, which is considering her nomination by President Obama to succeed Ben Bernanke as Federal Reserve chair, current Fed vice chair Janet Yellen said non-bank SIFIs shouldn't be regulated the same bay large bank holding companies are regulated.

"Insurance certainly has some very unique features that make them very different from banks and we are taking the time to try to study what the best way is to craft regulations that would be appropriate for those organizations. There certainly are critical differences in terms of their business models that we want to understand and respond to."

Sterne Agee analyst John Nadel in a client note on Friday wrote that "the momentum clearly is building toward the creation of a distinct framework for measuring risk for the insurance company SIFI's, as opposed to simply applying the bank framework. In our view, this is clearly a positive development that should begin to lift some of the overhang discounted in [American International Group (AIG), Metlife and Prudential Financial (PRU)] shares relative to the rest of the peer group."

Kinar on Thursday downgraded Prudential Financial to a "hold" rating from a "buy" rating, while keeping his price target for the shares at $96.00. Prudential's stock closed at $89.05 Thursday, returning 70% this year. The shares trade for 10.5 times the consensus 2014 EPS estimate of $9.18. The consensus 2015 EPS estimate is $9.97.

Kinar indicated the downgrade was driven "purely by valuation." Kinar's price target "values the company at 1.5x 12-month forward BVPS (ex. AOCI and adjusted for f/x) and at 9.5x our above-consensus 2015E EPS," the analyst wrote.

Shares of MetLife were up 0.7% in afternoon trading to $51.78, while AIG was up 0.5% to $49.54 and was down 1% to $88.18.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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