MetLife

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

MetLife is a global financial services company, providing insurance, annuities, employee benefits, and asset management services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

MetLife, Inc. (MET) is a leading global provider of insurance, annuities, and employee benefits. Its operations are diverse, spanning across various geographic regions and business segments.

MetLife’s geographic diversification, with a strong presence in the US, Asia, Latin America, Europe, the Middle East, and Africa (EMEA), offers both opportunities and risks. The company’s business segments can be categorized into:

  1. U.S. The U.S. segment is further broken down into:
    • Group Benefits: This includes products such as life, dental, disability, and accidental death and dismemberment insurance sold to employers for their employees.
    • Retirement & Income Solutions (RIS): This segment includes products and services designed to help individuals and organizations save for retirement and generate income during retirement. These include annuities, structured settlements, and other income-generating investments.
    • Individual: This segment consists of retail life insurance and property insurance, and is primarily sold to the mass affluent market.
    • Asia Provides insurance, retirement, and savings solutions across various Asian markets.
    • Latin America Focuses on growth opportunities in Latin American markets.
    • EMEA Offers various product lines tailored to specific markets in Europe, the Middle East, and Africa.
    • MetLife Holdings This segment includes businesses that are no longer core to the company’s long-term strategic focus, including run-off variable annuity contracts, and a closed block of U.S. term life insurance.
    • Corporate and Other: Includes corporate activities and other holdings.

Revenue Distribution

MetLife’s revenue streams are highly diversified:

  • Premiums: A significant portion of revenue comes from insurance premiums across its various segments.
  • Net Investment Income: This includes earnings from the company’s vast investment portfolio, and is sensitive to prevailing market interest rates.
  • Fee and Other Income: This includes fees earned from managing assets and providing various administrative services.

Understanding MetLife’s revenue requires considering its geographical diversity and its many different business segments.

The insurance industry is facing a number of significant shifts:

  • Technological Disruption: Technology has transformed industries across the economy, and insurance is not immune. Competitors and new entrants that are able to capitalize on new channels are gaining ground.
  • Increased Regulation: Governments are increasingly regulating insurance products, and this is affecting profit margins and business practices.
  • Changing Consumer Behavior: As consumer expectations continue to evolve, the demands for flexible and customizable products will increase.
  • Ageing population With most of the population now aging, this trend has increased demands for retiree products.

The insurance industry will likely consolidate and become more competitive as older competitors sell off their businesses.

Financial Analysis

Here’s an in-depth look at MetLife’s financial position, combining latest info, along with general metrics to fully understand the company’s financial standing:

Earnings and Profitability

  • Declining ROE: In their latest quarterly report, MetLife’s return on equity (ROE) fell to 8.2% in March of 2024, from 11.3% in March of 2023. It can be improved in the future with better management of risk, expenses, and capital management. This trend raises some concerns about long-term value creation for their shareholders.
    • While management has stated that this will improve over time, the current ROE is below its historical returns.
  • Positive adjusted earnings: Although ROE has seen a dip, the latest quarterly report has shown an increase in adjusted earnings. For the quarter ended March 2024, MetLife reported adjusted earnings of $1.2 billion. This is up from $975 million a year earlier.

Investment Portfolio

  • Fixed-Income Dominance: MetLife maintains a substantial fixed-income portfolio, which makes it highly dependent on market interest rates. In 2023, these investments were valued around $527 billion. The value of these assets will be directly influenced by the direction that interest rates go in.
  • Alternative investments: The company has expanded its investments into alternatives, which now represents 4% of the company’s overall investment portfolio. As their scale in investment continues to grow, the company’s management believes the returns of these assets will increase over time.
  • Loan Investments: The Company has a large loan investment portfolio across different property types. These loans are managed to reduce risk and increase yield.

Balance Sheet Analysis

  • Solid Financial Position: MetLife’s most recent balance sheet shows a healthy capital position, with total assets valued at $730 billion, and shareholder equity at around $45 billion. This helps make sure that their operations are not as greatly affected by economic turmoil.
  • Debt-to-equity ratio: While the company’s shareholder equity is substantial, there are significant liability and debts that should be carefully monitored. The Debt-to-equity ratio for Home Depot was 1.6 times in 2023, which is still high. Although their debt-to-equity has stayed relatively stable and decreased from the beginning of 2023, their current level is not low enough to be a clear sign of stability.
  • Good Quality Assets: The company continues to report low defaults in its mortgage holdings, with well-underwritten assets and high reserves. These strong metrics have historically been a strength for the company that it must continue to prioritize and maintain.

Cash Flow

  • Stable Operating Cash Flow: Operating cash flow remains a positive driver for the business. The company has had a net cash inflow from operations for the first quarter of 2024. Positive cash flows indicate that the business is able to bring cash in regularly through its normal operations. This allows the business to invest and grow.
  • Strong liquidity: In a time of economic instability, it is important that companies have access to cash readily. Based on their financials, Metlife has good access to liquidity, and has significant cash holdings. The recent strong growth of these assets also allows them to keep their credit ratings.

MetLife’s recent quarterly statements still reveal a company that could have a challenging time ahead if economic conditions were to worsen significantly.

Moat Analysis

Based on the information at hand, I am assigning a moat rating of 2 out of 5 to MetLife due to the following reasons:

  • Intangible Assets (Narrow): MetLife has a well-known brand. The name is recognized both in the US and abroad. A well-established brand can help with customer retention, and it does create a degree of pricing power. The brand is also fairly old, which suggests brand stability and long history. However, the financial services landscape is still quite competitive, and new entrants with aggressive branding campaigns can compete.
  • Switching Costs (Narrow): Many customers have considerable switching costs with their banking and insurance contracts. However, many of the financial products offered by these companies are largely similar, and customers will change when presented with opportunities that are deemed better for them. They have not cultivated true “brand loyalty”, which means a high reliance on external factors like interest rates to retain clients. So the loyalty created is more superficial than anything else.
  • Network Effect (Limited): Because their scale is less than other financial institutions, the network is more limited, and not as strong as their more dominant competitors.
  • Cost Advantages (Weak): Some scale advantages, primarily due to volume, could exist, it’s not strong enough to have any wide moat protection.

Although the company has some recognizable elements of a moat, such as its brand and switching costs, the competitive advantages are not as defensible as other companies that I have reviewed.

Risks to the Moat

There are a few very large risks that could erode MetLife’s moat, and the company has to diligently make sure that these aspects don’t end up undermining the business:

  1. Interest Rate Risk: MetLife’s earnings are closely tied to interest rates, as they own a large portfolio of debt assets. Major fluctuations in interest rates could impact their investment income and reduce their profitability.
  2. Competitive Risk: The financial services industry is exceptionally competitive. MetLife faces stiff competition from banks, insurance companies, and investment firms, all trying to gain more clients and take more market share.
  3. Regulatory Risk: Changes in regulations governing insurance and financial services may affect MetLife’s profitability. For instance, there has been a greater regulatory oversight over insurance products.
  4. Operational Risk: Any breakdown in internal controls or data security could cause catastrophic results for financial companies, and is a significant risk that companies like Metlife have to manage properly.

While there are some clear indicators of a moat for Metlife, they are relatively weak, and are susceptible to being eroded by financial, regulatory, and competitive pressures.

Business Resilience

Despite the risks, MetLife displays notable signs of resilience:

  • Diversified Business Model: The Company’s diversification in business segments and geography does protect against downturns in any one particular area. They also help the company adapt to new market opportunities.
  • Experienced Management: MetLife has been around for 150 years, which indicates the experience in their management team. The company’s long history shows that their executive team is competent at navigating a very difficult sector for long periods of time.
  • Strong Balance Sheet: MetLife has built a strong balance sheet that allows them to withstand some financial risk. The company is in a good position for both long-term and short term stability.

Understandability Rating: 4 / 5

MetLife has a complex business model, including several different lines of business across many different geographies. Understanding their operations requires an in-depth understanding of financial regulations and accounting nuances. Here’s why it’s a 4 out of 5:

  1. While the core concept of insurance and retirement products is readily understandable, delving into financial statements can be difficult for anyone who is not acquainted with accounting.
  2. The diverse array of revenue streams across different segments, including insurance premiums, investments, and fees makes understanding their business difficult.
  3. Having many products that are spread across different geographies adds another layer of complexity to the company and its financials.
  4. The intricacies and specific nuances of financial regulations and various global policies are hard to understand even for the most seasoned analysts.

Therefore, while the basic business model is relatively understandable, the complexities involved makes the understanding of the business difficult for the average investor.

Balance Sheet Health: 4 / 5

MetLife displays strong balance sheet health, but is not perfect due to some potential liability concerns:

  1. Significant Asset Base: MetLife has total assets of approximately $730 billion, indicating a substantial reserve that allows them to weather any potential storms.
  2. Reasonable Equity: While substantial liabilities should be monitored, the company’s shareholder equity at approximately $45 billion provides a decent buffer.
  3. Stable Debt-to-Equity Ratio: The company’s debt-to-equity ratio has remained relatively stable, and has decreased slightly since 2022. While the level is still not too low, the fact that management is attempting to decrease it is a good sign for the company’s financials.
  4. Moderate Loan Quality: Although mortgages have been under stress for the past couple of years, MetLife’s mortgage portfolio is of high-quality and has shown low defaults, suggesting that their loan holdings are not as risky as their peers’.

Despite a generally positive financial outlook, and a healthy and diversified balance sheet, a few points, such as the high debt-to-equity level, and the potential for fluctuating earnings and interest rates, indicate that it cannot be assigned the highest health score of 5/5.

Recent Controversies

There are no major controversies or scandals for MetLife in their latest quarterly report or earnings call. However, the company continues to be affected by volatility in the market, and continues to strive to have strong financial statements and maintain high performance.