"Insured" Duo for Value Investors

08/17/2016 7:00 am EST

Focus: STOCKS

Chris Quigley

Contributing Editor, The Prudent Speculator

Jason Clark and Chris Quigley — contributing editors to John Buckingham's The Prudent Speculator — remain fans of two leading life and health insurance outfits. Here's the latest from these leading value investors.

Life and health insurer Prudential Financial (PRU) posted earnings per share of $1.84, versus the $2.50 estimate in fiscal Q2 2016.

Despite having solid operating results, including good sales and flows in the U.S. and abroad, non-cash adjustments to actuarial assumptions in the Individual Life business pulled earnings down by more than $0.60 per share.

Japan grew at a 7% rate on a constant-currency basis, even though the ultra-low interest rate environment continues to wear on PRU, necessitating “aggressive product and pricing actions.”

We remain fans of Prudential and its diversified revenue mix. While operating headwinds aren’t going away, we still believe PRU will be a long-term winner, helped by management’s careful navigation of this challenging operating environment.

Prudential Finance shares trade at less than 8 times forward earnings estimates and currently yield 3.7%.

MetLife (MET) saw its shares tumbled some 10% after the life and health insurer said it earned $0.83 per share in fiscal Q2 2016 (vs. $1.35 est.). MET took a $2 billion non-cash charge related to a review of its variable annuity business.

The company plans to sell, spin-off or IPO its US Retail segment, which MET will refer to as Brighthouse Financial going forward. We continue to be supportive of the decision to separate a “substantial portion” of the domestic retail operations.

While share buybacks are legally required to be put on hold until the details of the corporate action are ironed out, we believe that the long-term upside from the reorganization is significant.

Management expects MET's battle in the U.S. District Court for the District of Colombia over the non-bank SiFi (Systematically Important Financial Institution) designation to trudge on for a while longer, forcing the company to operate at a competitive disadvantage until a decision is reached.

Of course, even absent any financial engineering, we think MET is significantly undervalued as the shares change hands at 7.3 times earnings and 60% of book value, while the stock yields a generous 3.9%.

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By Chris Quigley, Contributing Editor to The Prudent Speculator

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