MetLife CEO: Separating US Retail Unit Keeps ‘Onerous’ Federal SIFI Rules Away From Variable Annuities
NEW YORK //BestWire// - MetLife executives raised the curtain just a bit on plans to separate the main company from its U.S. retail operations during a fourth-quarter earnings call to discuss financial results.
The proposed separation would bolster shareholder value while protecting its U.S. division from “onerous” federal rules, said Steven Kandarian, chairman, president and chief executive officer. MetLife first disclosed its plans last month (Best’s News Service, Jan. 12, 2016).
The U.S. division handles the company’s variable annuities business, among other lines, and is currently subject to MetLife’s designation as a SIFI — a Systemically Important Financial Institution, under the auspices of the Dodd-Frank Act. Separation would remove VAs from SIFI oversight, the company believes.
“We’re concerned that the Fed could view variable annuities as nontraditional (investments), which is how this product is currently categorized by international regulators,” he said.
MetLife posted a 47% drop in fourth-quarter net income from a year ago, which the company earnings statement said was partly due to hedging losses involving derivatives. The company said it posted $785 million in net income for the quarter, versus $1.49 billion a year ago. It said it took $231 million, after tax, in net derivative losses, “reflecting changes in interest rates, equity markets and foreign currencies” (Best’s News Service, Feb. 3, 2016).
MetLife believes a stand-alone U.S. operation housing VA products would not be a SIFI; therefore, “separation mitigates the risk of onerous capital rules on the VA business,” Kandarian said. Although MetLife is fighting the SIFI designation in court, he said the prospect of a protracted legal battle, especially if either side appeals the district court’s decision, would put MetLife’s VA business “at a competitive disadvantage.”
The federal district court in Washington, D.C., will hear arguments in the case Feb. 10 (Best’s News Service, Jan. 14, 2016). Kandarian said MetLife will pursue its SIFI-based litigation in spite of the proposed break-off of the U.S. division. “A significant regulatory burden would be placed on the remaining company that would put us potentially on an unlevel playing field with our competitors who are not SIFIs.” He added the suit couldn’t wait: “You get one chance to file a legal challenge with a district court, within 30 days of being designated, which is what we did.”
He also said removing the inherent volatility of variable annuity returns would help the remaining company offer more consistent and dependable cash flow.
Kandarian said it’s too early to know what form the separation will take — spin-off, sale or initial public offering. John Hele, chief financial officer, added the company “is comfortable with our capital buffers, but there’s a lot to calculate out, depending on the transaction and the form of separation.”
Fourth-quarter results were weak all across the company’s global operations, according to the earnings statement. Total operating earnings for the Americas segment fell 16% to $1.2 billion, due to lower investment and underwriting margins. Premium, fees and other revenue fell 5% to $9.6 billion.
Latin America’s operating earnings came in at $150 million, down 1%. Asia earnings dropped to $290 million, off 15%, and the Europe, Middle East and Africa segment’s operating earnings fell to $54 million, a 16% drop.
Operating revenue fell 6% to $17.11 billion, and premiums fell to $9.6 billion from $10.2 billion.
For the full year, MetLife reported a 17% drop in net income, to $5.2 billion.
“We were disappointed in the performance of the alternative portfolio,” said Steven Goulart, executive vice president and chief investment officer. “Both private equity and hedge funds materially underperformed our plan, which was somewhat unusual.”
Goulart added MetLife didn’t plan to change the portfolio mix, even though “the market got out of the gate on the wrong foot” in January, leading to further drops in values. “We’re sticking to the plan for now,” he said, although the company did reposition its alternative holdings in the fourth quarter by about $1 billion “to concentrate on the longer term, stronger performers.”
Kandarian defended the use of alternatives, saying they have provided “strong returns to shareholders over time.” He also said the strong U.S. dollar “remained an earnings headwind,” hurting international results.
Net investment income declined to $4.8 billion, off 7%, and variable investment income hit $109 million in the quarter. Hele said catastrophe losses and less favorable underwriting contributed to the drop in net income.
MetLife repurchased $822 million in shares in fourth quarter and, with several added transactions, the company has completed its current $1 billion share repurchase program, Kandarian said. No additional repurchases will be made in the near future, due to MetLife’s work on separating its U.S. retail operations, he added.
During questions, one equity analyst questioned if independent agents would continue selling MetLife products, such as VAs, if the DOL’s proposed fiduciary rule “best interest” clause was burdensome.
“We’re thinking of every angle, based on what was previously put out by the DOL,” to offset such concerns, said MetLife Executive Vice President Eric Steigerwalt. He foresees a final rule coming out in 40 to 70 days. “More to come, and we’ll have more to add when we see it, some time in the March-April time frame.”
Operating insurance units of Metropolitan Life Insurance Co. have a current Best’s Financial Strength Rating of A+ (Superior).
In afternoon trading Feb. 4, shares of MetLife (NYSE: MET) were $39.48, down 5.89% from their previous close.
(By Dennis Gorski, managing editor-online, BestWeek: Dennis.Gorski@ambest.com)