• MetLife Inc (NYSE:MET) is fighting the SIFI designation, and the resultant litigation is sure to provide ample commentary and some factual information on the risks involved in the company’s operations. I anticipate increased volatility and some downward pressure on share prices.

    Valuation here can be dealt with by looking at book value: the question is, which one? MET publishes GAAP, tangible ex AOCI, and ex AOCI, together with operating returns on each. It’s in the Quarterly Financial Supplement.

    For Q1 2015, tangible BV ex AOCI is $41.32, with operating return of 14.4% on that amount. Average for the past 5 quarters is 15.02%. I would like to earn 11% on tangible BV ex AOCI, and accordingly I value the shares at $41.32/11% X 15%, or $56.

    That is, I think a P/B of 1.36 on tangible BV ex AOCI is about right.

    MET made it through the 2008/2009 financial crisis unscathed, and without TARP assistance. I expect the company to respond equally well to the next one. I’ve seen some negative articles on the company lately, and would not be surprised if the battle over the SIFI designation leads to more of the same, together with some vocal short-selling. If so, volatility and lower prices will present opportunities.

    I bought a vertical call spread today, long the Sep 48 and short the Sep 52.5, for which I paid $3.20. There will be a nice profit if shares stay above $52.50, and a good opening gambit to trade from if the price declines. I’m looking to get an entry point below today’s price, and the position taken is effectively the same as selling a put, but easier to manage if the going gets tough.