On Jan 9, we issued an updated research report on MetLife Inc. (MET). While tepid growth guidance, challenging interest rates and regulations are persistent concerns, the company’s strong capital position and diversified portfolio mix have aided efficient capital deployment.
The ongoing regulatory challenges and the acknowledgement of being a non-banking systemically important financial institution (SIFI) on Dec 18, 2014, will likely put MetLife under stringent capital rules that will restrict the company’s operational and financial flexibility. The risk also overshadows the resumption of share buybacks that will be hindered by SIFI compliance.
Moreover, the low interest rate environment continues to moderate investment income and yields. Net investment income also fell 4.2% year over year to $15.7 billion in the first nine months 2014. Additionally, unfavorable impact of mortality morbidity and claims experience reduced operating earnings by $194 million in the first nine months 2014. Alongside, regulatory reforms in Chile, Mexico and Poland have been weighing on MetLife’s financials.
Amid all challenges, MetLife has maintained a solid capital position and operating leverage. An improved financial leverage, book value and expense control also prompted additional share repurchase authorization worth $1 billion in Dec 2014.
Despite $277 million of cash outflows resulting from acquisitions, operating cash flow improved about 10% in the first nine months of 2014. Stable earnings from international operations, divestment of redundant non-core operations and the Provida acquisition also raise optimism.
Earnings Review
This Zacks Rank #3 (Hold) stock has delivered positive earnings surprises in two of the last four quarters, with an average beat of 4.4%. The company’s third-quarter 2014 earnings beat the Zacks Consensus Estimate by about 15.9% and the year-ago quarter figure by 19.4%, primarily driven by higher derivative gains.
However, an unfavorable risk-reward profile in the near term prompted downward estimate revisions for 2014 and 2015 in the past 30 days. The Zacks Consensus Estimate for 2014 and 2015 have moved south by 0.5% and 2.1% to $5.72 and $5.92 per share, respectively. On a year-over-year basis though, earnings are expected to rise by 1.6% and 3.6% in 2014 and 2015, respectively.
Furthermore, the Most Accurate estimate for Allstate’s 2014 and 2015 earnings currently stand at $5.71 and $5.87 a share, translating into Earnings ESP of -0.2% and -0.9%, respectively. This indicates earnings miss possibilities for both years.
Key Picks in the Sector
Some better-ranked stocks in the insurance sector include Navigators Group Inc. (NAVG), The Allstate Corp. (ALL) and Selective Insurance Group Inc. (SIGI). All these stocks sport a Zacks Rank #1 (Strong Buy).
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