The bull market has lifted all boats, but life insurers have outperformed dramatically. The Dow Jones U.S. Life Insurance Index has risen 57% this year, compared to a 24% increase for the S&P 500
MetLife's shares closed at $51.19 Thursday, returning 59% this year. The shares trade for 1.1 times their reported Sept. 30 book value of $47.99, excluding other comprehensive income. The share trade for 9.0 times the consensus 2014 earnings estimate of $5.71 a share, among analysts polled by Thomson Reuters, and for 8.3 times the consensus 2015 EPS estimate of $6.15. Out of 23 sell-side analysts polled, 19 rate MetLife a "buy," while the remaining four analysts all have neutral ratings on the shares.
The company reported earnings available to common shareholders for the first three quarters of $2.369 billion, or $2.14 a share, increasing from $1.106 billion, or $1.03 share, during the first three quarters of 2012. The earnings improvement reflected a $1.868 billion goodwill impairment on its U.S. annuities business. Operating earnings before taxes, investment and derivative gains and losses and various accounting adjustments for the first three quarters totaled $6.637 billion, increasing from $6.162 billion a year earlier, mainly reflecting an increase in fee income from universal life and investment products.
MetLife reported an operating return on common equity of 10.4% for the third quarter. As part of its year-end investor presentation on Thursday, the company said it had made no major change in strategy, but that its operating return on equity was expected to improve to a range of 12% to 14% in 2016.
During a conference call with analysts on Thursday, MetLife resident William Wheeler said "We expect to build on this very strong year and are projecting solid growth in both revenue and earnings for 2014."
A very important market development for the company during 2014 will be the tapering of the Federal Reserve's "QE3" purchases of long-term U.S. Treasury bonds and agency mortgage-backed securities. These purchases have been running at a net monthly pace of $85 billion since September 2012, and have been meant to hold long-term interest rates down. In anticipation of the central bank's announcement of a gradual lowering of the bond purchases -- which could happen as early as next Wednesday following the Federal Open Market Committee's policy meeting -- investors have sent the yield for 10-year U.S. Treasury bonds to 2.87% from 1.70% at the end of April.
All insurers rely heavily on investment income, so the historically low interest-rate environment has been very difficult for life insurers. MetLife's own assumptions are factoring in an increase in the yield on the 10-year bond to 3.36% at the end of 2014 and 4.50% "by the end of 2016."
Deutsche Bank analyst Yaron Kinar in a report on Nov. 14 wrote that U.S. life insurers since 1997 had traded at current valuation averages "when 12-
month forward yields [for 10-year U.S. Treasury Bonds] were in the 3.0-3.5% range." Kinar added that "Current valuations imply a ~3% 10Y 12 months ahead, whereas the introduction of tapering by March '14 would likely mean that yields move into 3.5% territory or above, and expectations of further increases would rise."
On that basis, Kinar wrote that MetLife offered "the most upside" among life insurance stocks under his coverage.