The insurance business has been a tough place for investors to earn consistent profits in the past few years, but that may be about to change.
At the heart of the problem is low interest rates, which have been dragging down insurers' profits since the Federal Reserve kicked off its zero-rate policy following the financial crisis. That is because insurers invest their floats or premiums paid by customers, before claims paid out and operating expenses, and thanks to the Fed, these investments are generating precious little interest.
That is showing up in insurers' quarterly earnings. For example, Prudential Financial, the nation's second-largest life insurer, missed earning estimates for four straight quarters before releasing forecast-topping third-quarter results on Thursday.
It is the same story at MetLife (MET) , the biggest life insurer, whose shares are down slightly this year, compared with a 4% gain for the S&P 500. Over the past five years, the benchmark index has gained 66%, compared with just a 34% rise for MetLife.
MetLife shares rose a healthy 2.46% in Monday trading.
The stock's trailing 12-month price-earnings ratio stands at 12.6, compared with 23.9 for the S&P 500.
MetLife shares also trade at just 65% of book value, which is far too cheap for a firm with strong long-term prospects. And the company's turnaround could get a big lift from three catalysts that will all likely play out in the next 12 months.
The first is higher rates, and the first increase since December seems like a slam-dunk at next month's Fed meeting, following last Friday's strong employment report. Largely lost in the hysteria of the presidential election, the data showed healthy job growth in October, as well as a 2.8% year-over-year rise in wages, the strongest gain in eight years.
The second is MetLife Chief Executive Steve Kandarian's top-down rebuild of the company, and top down is no exaggeration. In the past year, his changes have ranged from firing Snoopy and the rest of the Peanuts gang as MetLife's mascots to spinning off the company's U.S. business, which sells life insurance and variable annuities.
MetLife shareholders will likely receive stock in the new firm, to be called Brighthouse Financial, early next year. The move should also help steady the parent company's earnings, because it removes a part of the business whose profits have been volatile.
The spinoff could also bring another benefit for MetLife shareholders: a resumption in share buybacks; the company suspended them when it announced its plan to divest Brighthouse in February.
But the breakup is about more than just unloading an underperforming business. Over the past few years, MetLife has been squaring off with the Financial Stability Oversight Council (FSOC) in court over its status as a systemically important financial institution (SIFI) under the 2010 Dodd-Frank Act.