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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


October 21st 2011 Metlife
NYSE Symbol: MET
Industry: Insurance
Price as of 10/21:$33.51

Earnings season is underway and so far so good. The earnings are coming in better than expected which we knew, however, the fourth quarter guidance which was the big concern seems to be encouraging. The credit crisis in Europe still weighs on the markets, but hopefully we'll get better news on that front this weekend. In the meantime, the earnings look great. Last week, Google blew out numbers. This week, Intel made a new 52 week high after reporting strong earnings and adding an additional $10 billion to its' share buyback. Travelers jumped 5% on Wednesday thanks to better than expected earnings which brings me to the insurance space. It has not been a good year to be an insurance company with all the natural disasters around the country and the world for that matter. However natural disasters typically provide a buying opportunity for the sector. This week we'll feature one of the blue chips in the insurance space, MetLife. Hopefully a lot of bad news has been priced into MetLife's stock with it trading for 0.5 times sales and a fraction of its' book value of $51 a share. Another plus is the fame investor Leon Cooperman recommending the stock this week on CNBC as one of his favorite picks. This time of year is also a good time to take a look at the stock, not only because natural disasters usually subside in the fourth quarter, but the company also provides a one-time dividend the first week of November. MetLife yields 2.3%. MetLife will report earnings at the end of next week, so conservative investors may want to wait to see the report, but longer term the stock provides an attractive valuation well below book value.

In the second quarter, the nation's largest life insurer, reported earnings of $1.21 billion, or $1.13 per share, compared with $1.53 billion, or $1.84 per share last year. Total revenue rose 21 percent to $17.2 billion, from $14.1 billion a year ago. On an operating basis, the company said it earned $1.3 billion, or $1.24 per share easily beating estimates. Analysts, on average, were expecting profit of $1.13 per share, on revenue of $16.2 billion. Expenses rose 31 percent to $15.4 billion, reflecting higher claims and increased costs due to its recent acquisition of life insurer Alico. The company reported storm-related catastrophe losses of $174 million for the quarter, largely due to tornadoes in the U.S. Claims and higher operating expenses in Japan due to the March 11 earthquake and tsunami further reduced earnings by $44 million, or 4 cents per share. Operating earnings in its U.S. business rose 12 percent to $908 million. The company said it sold $7.3 billion in variable annuities, up from $4.8 billion last year. Premiums and other revenue rose 6 percent to $7.6 billion. Its auto and home unit had an operating loss due to the high level of storm-related claims. MetLife's international unit's operating earnings more than tripled to $507 million, reflecting a 25 percent jump in international sales, particularly in Japan and Latin America. The gains were largely due to its Nov. 1 acquisition of Alico, the international life insurance company bought from bailed-out rival American International Group Inc. Net investment income rose 24 percent to $5.1 billion.

For the third quarter, MetLife warned of a $275 million charge for disaster losses in its home and auto business and reserve increases in its life business. The company is also looking to sell its mortgage business to focus more on insurance and employee benefits. This, combined with a previous announcement that MetLife will try to sell its depository division, is evidence that the company is trying to avoid the notorious bank holding company classification. Once the sales are complete, MetLife would presumably be free from the regulatory pressures that many banks are now quite worried about. Which brings us to another problem, the insurance stocks are being priced like bank stocks. Now it's true the insurance companies have large investment positions due to their large reserves, however the fundamentals for the insurance stocks are much better than the other financials. As contrasted to the banks, earnings and ROEs are going to continue to expand, as the demand for structured, guaranteed financial products (as retail investors remain risk-averse and avoid the equity markets) continues the strong growth experience of second quarter 2011 in the quarters ahead. A popular Wall Street Investor, Doug Kass said the life insurance stocks are trading at a 30% discount to book value and at under 7x projected 2012 profits. In other words, the life insurance sector is, "Stupid cheap."

Currently, MetLife trades for 6 times earnings, 5.5 times next years' earnings, 0.5 times sales, and 0.6 times book value of $51 a share and sports a dividend yield of 2.3% which is better than a 10 year Treasury. Everything is not rosy for insurance stocks. A recent increase in reserves for asbestos problems, which the MetLife was supposed to have put behind it a long time ago, have not gone away and may be getting worse. But with the stock trading at a fraction of its' historic valuation, MetLife looks like a great value for long term investors.