Advisers shouldn’t sweat MetLife’s U.S. retail split

Insurer says the spinoff would be financially strong, and insurance contracts would remain with their original carriers.

Advisers shouldn’t make too much of MetLife’s plan to divest a portion of its U.S. retail operations, including large blocks of its variable annuity and life insurance business.
Clients’ in-force insurance policies would remain under the subsidiary that originally wrote the contract, and the financials of the new entity formed by the separation would be strong, according to industry experts.
“There’s no information I’ve heard or read that would make me concerned about this transaction for my clients,” said Gregory Olsen, partner at Lenox Advisors.
MetLife Inc., which is the largest U.S. life insurer, said that MetLife Insurance Co. USA, General American Life Insurance Co., Metropolitan Tower Life Insurance Co. and several subsidiaries that have reinsured risks underwritten by MetLife Insurance Co. USA would be part of the transaction.
Sixty percent of MetLife’s current U.S. variable annuity account values, which includes 75% of VAs with living benefit guarantees, are in entities that would be part of the newly formed company. The plans would also include 85% of the U.S. universal life with secondary guarantee business, according to MetLife.
“This transaction is a transaction involving entities. Business isn’t being moved around, so if your policy was written by MetLife Insurance Co. USA, that’s where it stays,” said Steven Schwartz, an insurance analyst at Raymond James & Associates. “If it was written by Metropolitan Life Insurance Co., that’s where it stays. So there’s really no change at the granular level.”
The life insurance closed block, property-casualty insurance, and the annuity and life insurance business sold through Metropolitan Life Insurance Co. would remain within MetLife. MLIC wouldn’t write new retail life and annuity business after the separation.
Under MetLife’s current structure, the company theoretically could free up cash from anywhere in the organization to prop up an underperforming business line and help pay out insurance guarantees, if need be. That flexibility diminishes somewhat with the new plans, according to Mr. Schwartz.
“If you’re a financial adviser and you sold someone an annuity, you don’t have this theoretical support from the other entities if something was to go wrong with the entity the annuity was written by,” he said.
However, the subsidiaries are all “very adequately capitalized” already, so that’s pretty much a non-issue, Mr. Schwartz added.
Plus, advisers can look at that point from the flip side — a life and annuity business that’s separate from a larger organization wouldn’t have to help support or run other areas of the parent company, Mr. Olsen said.
WHY THE SPLIT?
MetLife decided to pursue a split-up of its domestic retail business due to pressures created by the firm’s designation by the U.S. government as a non-bank systemically important financial institution.
The Financial Stability Oversight Council (FSOC) handed down a SIFI designation to MetLife in December 2014, a label the company is currently appealing in court.
A SIFI designation can lead to stricter limits on the company’s balance sheet because of stringent capital requirements. “An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden,” according to a statement from MetLife chairman, president and chief executive Steven Kandarian.
The separation was certainly a potential outcome under SIFI, according to Mr. Schwartz. “The timing is surprising, to the extent we don’t know what the SIFI rules are going to be,” he said. “But maybe they just got tired of waiting.”
SALE, IPO OR SPIN-OFF?
MetLife hasn’t yet determined if the separation will take the form of an initial public offering, spin-off or sale.
A spin-off would be the most likely outcome, because it’d be the “cleanest” arrangement, according to Mr. Schwartz.
The new company “is still awfully big,” he said, adding that he doesn’t see a lot of companies “with both the appetite and wherewithal” to pony up the money for a sale.
The new company would have approximately $240 billion in total assets and would represent approximately 50% of the operating earnings of MetLife’s U.S. retail segment, MetLife said.
Further, it might be difficult to do an IPO for 100% of the new entity as a result of its size, in which case it could occur in bits and pieces, Mr. Schwartz said. But doing an IPO in bits may not make sense if the whole reason is to avoid SIFI status, because SIFI rules could come into play depending on the timing.