MetLife CEO: Company Has De-Risked US Retail Business; Federal Reserve Is Now One of Its Regulators
February 17, 2015 by Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
NEW YORK – As MetLife Inc.’s fourth-quarter and year-end 2014 profits increased, its chief executive officer said the company has de-risked its U.S. retail business while the Federal Reserve is now one of its regulators.
Fourth-quarter net income increased to nearly $1.5 billion from $877 million. Net income included $120 million in derivative gains, after-tax, reflecting falling interest rates and the weakening of foreign currencies against the dollar.
Full-year net income jumped to $6.2 billion from $3.2 billion. Operating earnings rose 5% to $6.6 billion, reflecting growth of 7% in the Americas; 4% in Asia and 10% in EMEA.
During the earnings call, Steven A. Kandarian, MetLife’s chairman, president and CEO, pointed out a 12% operating return on equity during the past three years “are noteworthy accomplishments” given that the 10-year Treasury yield has averaged 2.2% since the summer of 2011, and “our capital management actions have been conservative due to regulatory uncertainty.”
The retail business “has undergone a transformation during the past few years as we have worked to reduce risk, create a more efficient operation and improve the productivity of our distribution force,” Kandarian said, noting the de-risking was a key element of a strategy MetLife announced in May 2012.
However, derisking and pulling back from variable annuities and exiting the market for universal life with a lifetime secondary guarantee have “had a material negative impact on sales,” Kandarian said. “We believe that 2014 will prove to be an inflection point for annuity sales and anticipate profitable growth in 2015 and beyond.”
Sales of variable annuities dropped to $6.3 billion in 2014, down dramatically from $28.4 billion in 2011, Kandarian said, noting MetLife estimates retail annuities will account for a smaller percentage of enterprise capital over time.
Meanwhile, while MeLife continues to believe it is well-capitalized, “uncertainties surrounding potential capital rules makes us cautious about share repurchases in excess of $1 billion in 2015.”
The Dodd-Frank Act “is clear that size alone does not make a company systemic,” and MetLife believes the Financial Stability Oversight Council erred in designating MetLife a systemically important financial institution, Kandarian said. “We believe we have a strong legal case to present to the court and look forward to its eventual decision.”
In the meantime, the Federal Reserve is now one of MetLfe’s regulators, he said, noting the company is cooperating with representatives from the New York Fed. At the same time, MetLife continues to discuss with regulators and lawmakers in Washington the need for capital rules that reflect the business of insurance, Kandarian said. With the enactment of the Insurance Capital Standards Clarification Act in December, the Federal Reserve now has the flexibility it needs to appropriately tailor capital rules for life insurers, he said.
If additional regulation is necessary, the government should “approach the focuses on potentially systemic activities regardless of the size of the firm,” Kandarian said. The FSOC “has already embraced this activities based approach for the asset-management industry.”
Total 2014 operating revenues rose 3% to $71.1 billion.
Fourth-quarter operating earnings included a previously announced increase in asbestos legal reserves, which reduced these earnings by $117 million. They also included tax adjustments in Latin America and EMEA, which increased operating earnings by $27 million.
With the 10-year Treasury yield now at about 2%, low interest rates “remains a challenge” for the life insurance business, Kandarian said. Over the long term, MetLife believes the 10-year Treasury yield should be 4% to 4.5%, based on the Federal Reserve’s 2% inflation target and expectations for long-term economic growth.
However, if interest rates remain low indefinitely, there would likely be “a downward reset” in return expectations across asset classes, Kandarian said, noting the spread between MetLife’s operating return on equity and the 10-year Treasury yield “is a key metric.” From 2012 to 2014, the spread between ROE and the 10-year Treasury yield has averaged 9.6%, he said, noting this compares favorably to an average spread of 6.9% from 2000 — the year of MetLife’s initial public offering to 2011.
Kandarian also said that on Feb. 17, MetLife will launch a new variable annuity product with a guaranteed lifetime minimum withdrawal benefit. As MetLife communicated on its December outlook call, the company anticipates more than a 50% increase in total annuity sales in 2015. “The projected sales increase is from a low base.” He cautioned a projected rebound in annuity sales “does not mean we are changing our overall strategy, which is to emphasize growth in less capital intensive, protection oriented product lines.”
In the fourth quarter, MetLife repurchased $557 million in stock, completing the $1 billion share repurchase program it announced in June, Kandarian said. Year to date, MetLife has “taken advantage of share price weakness,” and repurchased $693 million of the $1 billion program we announced in December. “Given where the stock is trading today, it is likely that we will complete this $1 billion program soon.”
Midday Feb. 12, MetLife Inc.’s ( NYSE: MET) stock was trading at $50.08 a share, down 0.65% from the previous close.
Metropolitan Life Insurance Co. currently has a Best’s Financial Strength Rating of A+ (Superior).
