Gloom Could Lift for MetLife After Brighthouse Split
October 7, 2016 by Aaron Black
It is a gift that few shareholders probably want, but probably one for which they should be thankful. MetLife is preparing to spin off its consumer business to shareholders, giving them a company weighed down by low interest rates and a lousy market for variable annuities.
Overall, the deal probably makes sense. When MetLife said in January it would separate the business, to be called Brighthouse Financial, from its core operations, it said it could do a public offering, an outright sale, or a spinoff to existing shareholders.
MetLife still says all these options are on the table. But given tough market conditions, the first two options look hard to achieve. The decision announced Wednesday to move ahead with the spinoff will still provide a cash boost for MetLife while separating the parent company from Brighthouse’s troubles.
The risks around this business were underscored last quarter, when MetLife took a $2 billion charge after finding that more holders of a particular kind of variable annuity are opting to withdraw funds rather than convert into a fixed annuity after 10 years.
When plans were unveiled in January, MetLife stressed that the spun-off entity would gain relief from regulatory and capital burdens. But just how much relief is entirely unclear, because it depends on as-yet unwritten rules for systemically important insurers.
The plan will leave core MetLife, which sells life and other insurance coverage to employers, in a stronger financial position. Brighthouse will make dividend payments of $3.3 billion to $3.8 billion to MetLife. This, along with improved cash flows following the separation, could be used to fund stock buybacks.
That helps explain why MetLife shares rose on Thursday. Buybacks have been on hold pending the separation plans. Investors had actually feared the reverse scenario, that Brighthouse would need a capital infusion from MetLife, says Larry Greenberg, analyst at Janney Montgomery Scott.
Still, and despite its name, Brighthouse’s prospects don’t look that bright, especially if low interest rates persist. Barclays analyst Jay Gelb figures the closest comparable company isLincoln National, which trades at around seven times estimated 2017 earnings, less than MetLife’s current multiple of eight times.
Following the spin, investors who don’t want exposure to Brighthouse will at least have the option of selling out, while still holding on to core MetLife, whose multiple could improve. And investors who want to make an aggressive bet on higher interest rates or improvement in the variable annuity business could hold on to Brighthouse. It isn’t an ideal outcome, but it is probably the best that MetLife shareholders could have hoped for.
