MetLife CEO: Adviser Network Sale, Possible US Retail Spinoff Still on Despite SIFI Victory
April 28, 2016 by Frank KIimko
NEW YORK – MetLife Inc. will still sell its adviser network and either spinoff, sell or seek a public offering of its U.S. retail unit as part of a strategy to increase profitability, despite earning a victory in its fight to shed its systemically important financial institution designation, Chief Executive Officer Steve Kandarian said in his annual shareholders letter.
“When we announced our decision to seek judicial review of FSOC’s (Financial Stability Oversight Council) decision, there were many who said we had little chance of winning,” said Kandarian. “But we believed strongly that FSOC’s designation was ‘arbitrary and capricious’.”
Kandarian was referring to a federal court decision unsealed earlier this month. A judge rescinded the systemically important financial institution designation for the largest U.S. insurer, agreeing with MetLife’s arguments it was arbitrarily singled out for enhanced prudential supervision (Best’s News Service, April 19, 2016).
Although the legal victory was significant, Kandarian said the company intended to follow through on two important downsizing moves — announced before the ruling — that will allow it to focus on profit making for investors. MetLife agreed in February to sell a distribution network of about 4,000 advisers to Massachusetts Mutual Life Insurance Co. and will continue to seek a spinoff, sale or public offering of a U.S. retail unit (Best’s News Service, Feb. 25, 2016).
“The prospect of U.S. retail being part of a SIFI was a significant factor in the planned separation given that higher capital requirements would have made it difficult to price our products competitively,” Kandarian said. “While we are pleased that the (federal) district court has removed the SIFI designation from the entire company, the reasons for pursuing the U.S. retail separation have not changed.”
An independent new company would have greater focus, enjoy more flexibility in products and operations, and avoid the potential for increased regulatory burdens, he said. And, the separation should also bring significant benefits to MetLife as the company shifts toward businesses with lower capital requirements and greater cash generation potential.
“While the separated business would be largely a pure-play retail life and annuity manufacturer,” Kandarian said, “we believe MetLife would appeal to those who favor more predictable and rising free cash flow.”
Generating more free cash flow is an overarching company mission, Kandarian said.
“We are willing to part with a business that represents approximately 20% of operating earnings because, as part of MetLife, it could not generate the level and predictability of free cash flow that we demand,” Kandarian said. “We cannot yet provide a specific target for MetLife’s free-cash-flow ratio post-separation, but we have said it should be better than the 55%-to-65% target we provided to investors in December 2015.”
On the lawsuit, the U.S. Treasury Department has said it will appeal the ruling and Treasury Secretary Jacob “Jack” Lew recently penned an opinion article in the Wall Street Journal defending the work of FSOC.
“Opponents of financial reform are cheering a court decision to rescind the Financial Stability Oversight Council’s designation of MetLife for heightened regulatory supervision,” Lew wrote. “Leaving aside whether the decision will be overruled on appeal, efforts to depict the court’s decision as a positive for our financial system are mistaken and dangerously ignore the lessons of the financial crisis.”
It is the only SIFI designee to bring such a legal challenge. The other insurance companies so designated are American International Group Inc. and Prudential Financial Inc.
Operating units of MetLife have current Best’s Financial Strength Ratings of either A (Excellent) or A+ (Superior).
Midday April 26, shares of MetLife Inc. (NYSE: MET) were trading at $46.80, up 1.21% from the previous close.
(By Frank Klimko, Washington correspondent, BestWeek: Frank.Klimko@ambest.com)
BN-NJ-4-26-2016 1154 ET #
