In another example of how new federal regulations are reshaping the financial sector, MetLife Inc. announced on Wednesday that it planned to sell or spin off much of its retail life insurance unit. The American insurance icon noted in its statement that it was making the substantial divestment in order to come into compliance with the new capital regulations for systematically important institutions.
Of note, all of the firm’s other segments – Group, Voluntary and Worksite Benefits, Corporate Benefit Funding, Asia, Latin America, and Europe, the Middle East and Africa – are to remain part of the original corporate entity. The following holding companies are expected to join the new company: MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company and other enterprises with reinsured risks underwritten by MetLife Insurance Company USA.
The new firm will represent close to 20% of the current operating earnings of MetLife and around 50% of the operating earnings of the U.S. Retail division. It will have more than $240 billion in total assets, including $45 billion in the Corporate Benefit Funding and Corporate and Other units.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
MetLife Executive Vice President Eric Steigerwalt will be in charge of the new enterprise.
Shares of the insurance firm rallied more than 6% in after-hours trading following the announcement of the plan to divest.
MetLife chairman, president and CEO Steven A. Kandarian commented; “At MetLife our goal is to create long-term value for our shareholders and deliver exceptional customer experiences. As a result of our Accelerating Value strategic initiative, MetLife has been evaluating opportunities to increase sustainable cash generation and is directing capital to businesses where we can achieve a clear competitive advantage and deliver a differentiated value proposition for customers. This analysis considers the regulatory and economic environment in each market where we do business. We have concluded that an independent new company would be able to compete more effectively and generate stronger returns for shareholders. Currently, U.S. Retail is part of a Systemically Important Financial Institution (SIFI) and risks higher capital requirements that could put it at a significant competitive disadvantage. Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation of the business.
He continued to note: “An independent company would benefit from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden. This separation would also bring significant benefits to MetLife as we continue to execute our strategy to focus on businesses that have lower capital requirements and greater cash generation potential. In the U.S…”
RBC Capital opines:
But, for all the drama and excitement that we suspect will surround the news today and in coming months, Met was very transparent about what was driving its decision, and we think investors in this instance should accept Met’s explanation at face value. In essence, what the company is saying is that it remains concerned—very concerned—that new capital rules expected to emerge later this year from the Federal Reserve for Systemically Important Financial Institutions including Met could saddle the company’s individual life insurance and individual annuity businesses with onerous new capital requirements and in such fashion cut into the ROE of these businesses. By severing these businesses from the larger Met organization, therefore, Met at a minimum places these businesses in a position where they will not likely be part of a SIFI—and therefore won’t face higher capital requirements.