MetLife

MetLife reported solid second-quarter results, as adjusted earnings per share came in at $2.43, up 20% year over year. This translated into an adjusted return on equity of 17%, at the top end of the company's target range of 15%-17%.

Why it matters: MetLife made meaningful progress toward its medium-term financial targets. However, we think the market largely anticipated this strength, as reflected in the muted share price reaction in after-hours trading on Aug. 5. While the firm has made progress in shifting its earnings mix toward capital-light investment management, its investment management segment represented only around 4% of group adjusted earnings in the quarter, and its scale trails that of peer Prudential Financial's PGIM as well as large asset managers like Vanguard and Fidelity. Variable investment income was a headwind in the quarter, declining sequentially by 55% to $231 million, mostly driven by lower private equity returns. We had previously flagged this line item as volatile from quarter to quarter, following its strong performance in the first quarter.

The bottom line: As we incorporate the latest earnings results, we expect to raise our $75 fair value estimate for no-moat-rated MetLife by around a low-teens percentage. We view shares as modestly overvalued. The increase in our valuation is mostly driven by a 60-basis-point reduction in our cost of equity assumption to 10.4%, as we have taken a more granular view of MetLife's business mix and cyclicality. While the Asia segment's growth has exceeded 20% year over year in two consecutive quarters, our long-term expectation for this segment remains low- to mid-single-digit growth, given the mature profile of the Japan market.

Key stats: The group benefits segment benefited from favorable underwriting margin and volume growth and saw adjusted earnings growth of 25% year over year. The retirement and income solutions segment, on the other hand, saw earnings growth of just 2%.

Muted transaction volume in the US jumbo pension risk transfer market was a headwind to premium growth in MetLife's retirement and income solutions segment during the quarter. Prudential Financial expects a rebound in jumbo PRT transaction volume in the second half, though not to the strong levels of the past few years, consistent with our previous expectation. We expect only 3% growth for MetLife's combined premiums of the retirement and income solutions and group benefits businesses, a normalization from 2025's 13% growth.

We are increasing our fair value estimate for MetLife to $84 from $75. The increase is mostly driven by a 60-basis point reduction in our cost of equity assumption to 10.4%, as we calibrate our cost of capital assumptions across our coverage universe. Our fair value estimate equates to 1.2 times adjusted book value excluding AOCI as of June 2026.

In our base case, we expect the firm to generate 3.6% average annual growth in its premium and policy fees over the next five years, which aligns with the mature profile of the US and Japan life insurance industries. We forecast a total combined ratio (total expenses over premiums and policy fee income) of 133% on average between 2026-30, mostly in line with the average combined ratio of 131% from 2011-25. We expect around a 30% increase in its investment management fee income in 2026, and we forecast around 5% growth thereafter, mostly in line with the firm's guidance.

We forecast an investment yield of 4.52% on the company's portfolio in the terminal year of our forecast. We project that the adjusted return to equity excluding AOCI will be around 11.4% in the terminal year of our projection, reflecting our midcycle forecast for the company. We believe the firm’s adjusted ROE target of 15%-17% is too ambitious from a normalized earnings profitability level.

Due to the highly competitive nature of the life insurance industry, where most products are undifferentiated and easily replicable, we believe MetLife does not have a defensible economic moat. On a normalized basis, we project MetLife to earn around 11.4% adjusted return on equity (excluding AOCI and realized gains or losses), above the firm’s 10.4% cost of equity, but the spread is too thin. We calculate adjusted return on equity by excluding realized investment and derivative gains/losses from net income and adjusting the equity to exclude accumulated other comprehensive income.

There are two major sources of earnings for life insurers: underwriting profit (earned premiums minus claims and operating costs) and investment income (yield on the investment portfolio). We view underwriting profit as the ultimate source of any economic moat since investment income tends to reflect higher risk-taking or luck rather than durable advantage, and investment losses can erode underwriting earnings. Most life insurance policies are long-duration and are backed by long-duration assets, making life insurers more exposed to the capital markets than property and casualty insurers.

We see little sign of brand-driven intangible assets in the life insurance industry, with consumers largely buying on price. Scale advantages are limited too, since variable commissions make up a material portion of operating costs. Additionally, underwriting advantages are hard to maintain, as morbidity rates, mortality rates, and lapse rates are highly predictable. Technology-driven data analysis offers only marginal claims improvements before being competed away or passed to consumers through lower pricing.

Poorly structured life insurance policies (products with generous guarantees) can expose life insurers to heavy losses in a severe market downturn, and poor underwriting can pressure companies for many years and even result in bankruptcy. Because insurers do not know their cost of goods sold for many years, they can underprice policies unknowingly, and managers chasing growth over profitability can force competitors to match low prices or lose business.

Within its US market, MetLife offers two major lines: group benefits and retirement and income solutions. We’re not convinced that the firm has carved out an economic moat in either, despite solid market share, as bidding remains competitive and predominantly price driven. The US life/health insurance and annuities market is very fragmented, with a number of public companies competing with mutual insurance companies and private insurers. That said, the US group benefits market is more consolidated than the overall life insurance industry, and MetLife ranked first in this business with 22.5% market share in 2024 based on NAIC data. We think group insurance’s risk profile is better than individual life insurance, as the duration is much shorter, and life insurers can reprice the product annually, but competition on pricing is also fierce. Around 26% of MetLife’s 2025 adjusted earnings were derived from its group benefits business. The firm has a leading position in the national accounts segment (corporations with over 5000 employees). Pivoting to its RIS business, MetLife offers pension risk transfer (the firm uses annuities to take on the liabilities of a defined-benefit plan), international longevity reinsurance (mostly in the UK), structured settlements, stable value products, and so on MetLife has been growing its US pension risk transfer (PRT) business very quickly in the past several years and has a leading position in the jumbo market (over $1 billion in pension liabilities). We think that life insurers compete aggressively on pricing when bidding for PRT deals. While the average number of bidders is smaller in the jumbo PRT market (less than 3 compared with 5 insurers in smaller deals), MetLife, Prudential, and other life insurers compete head-to-head, and we don’t assess that business as moat-worthy as a result. MetLife divested a material portion of its US individual life insurance and variable annuities via the spinoff and divestiture of Brighthouse Financial in 2018. MetLife also reduced its risk exposure via reinsurance transactions, but still has some individual products in a run-off status that are reported in the firm’s corporate segment. We expect MetLife to continue to see these products run off its balance sheet, and episodic reinsurance deals remain possible.

Apart from its domestic market, MetLife derived around 45% of its adjusted earnings in 2025 from its international business from Asia (25%), Latin America (14%) and EMEA (6%). The firm has a large presence in Japan, Mexico, and Chile, with a smaller footprint in markets like Brazil, China, India, and select other countries. We think the Japanese life insurance market is highly mature, and the growth potential is quite limited. The firm competes with Japanese life insurers like Nippon Life, Japan Post, Dai-Ichi Life, as well as foreign life insurers like Prudential Financial and Aflac. MetLife is the largest life insurer in Mexico and has a leading position in the worksite government business. We think life insurance in emerging markets has higher growth potential than in mature markets. However, we also believe competition is intense and don’t assess MetLife’s international life insurance businesses as moaty. Consistent with our view of the firm’s US life insurance operations, we view intense price competition and limited product differentiation as precluding economic moat development in MetLife’s international markets.

Lastly, MetLife's investment management business contributed to around 3% of its 2025 adjusted earnings. While we like management's effort in building up this capital-light fee income business, the earnings contribution is too small for us to consider it a material part of our overall assessment of the firm's moat.

MetLife’s leading market positions in various international markets (particularly Latin America) could provide opportunities for higher growth.

MetLife's strategy has reduced exposure to riskier products like variable annuities with minimum guarantees and has increased investments in segments with steadier cash flows like the group benefits business, could allow the firm to consistently generate excessive returns.

MetLife is increasing its investment in its asset management business, which is capital-light and can significantly increase the overall return profile of the company.

MetLife's group benefits business could face earnings headwinds if artificial intelligence advancements lead to a large increase in the unemployment rate.

The advancement of AI in healthcare might significantly increase people’s life expectancy, leading to underpricing and destruction of shareholder value.

MetLife could suffer from higher credit costs in the current private credit cycle, which would decrease the firm's profitability.