MetLife Earnings: Strong Underlying Results and Higher Interest Income Mark Good Quarter

No-moat-rated MetLife MET reported a decent set of numbers for the third quarter. Adjusted earnings came in at $1.47 billion, or $1.95 per share, up 35% from $1.08 billion, or $1.36 per share, in the year-ago quarter. The company reported an annualized adjusted return on equity of 14.9%. The quarter was marked by strong underwriting results and materially higher interest income. MetLife paid a quarterly dividend of $0.52 per share, which represents a 3.5% dividend yield at the current stock price. Adjusted book value per share, which removes the impact of accumulated other comprehensive income, was reported at $53.00, up 2% from $52.40 in the third quarter last year. We are maintaining our $63 fair value estimate after incorporating third-quarter results.

The impact of higher interest rates can be clearly seen in recurring investment income, which was reported at $4.9 billion compared with $4.1 billion in the year-ago quarter. The annualized rate of recurring investment income is approximately 22% higher than the average in the past three years. MetLife’s maturing fixed-income assets were yielding 4.7% as of the third quarter and are being rolled at a significantly higher new-money yield of approximately 6.3%. The difference between maturing yield and new-money yield should further increase recurring investment income in the coming quarters.

The company reported variable investment income of $141 million compared with negative $42 million in the third quarter of the previous year, primarily driven by higher returns on private equity, which were more than offset by lower returns on real estate equity funds. MetLife’s current variable investment income is materially below its normalized guidance of $500 million quarterly. We expect the weakness in variable investment income to persist in the coming quarters, given higher interest rates and pressure on market valuations.