MetLife CEO: Regulatory Uncertainty, Capital Management Are Challenges While Share Buybacks Will Be Substantially Lower
May 12, 2015 by Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com
NEW YORK – Low interest rates, regulatory uncertainty and capital management are challenges for MetLife Inc.’s return on equity going forward, and it’s likely share buybacks will be “substantially lower” than MetLife assumed in its strategic plan, its chief executive officer said.
First-quarter 2015 net income for MetLife jumped 64% to $2.12 billion on gains on derivatives (Best’s News Service, May 6, 2015). Operating earnings rose, but less, up 5% to $1.6 billion.
MetLife had “a good quarter, especially considering the pressure from low rates and a strong dollar,” said Steven A. Kandarian, chairman, president and CEO of MetLife, during the earnings call, noting growth in the quarter “was dampened by broad-based weakness in foreign currencies.”
Net income included $534 million in derivative gains, after tax, reflecting the weakening of foreign currencies against the dollar and lower interest rates (Best’s News Service, May 6, 2015).
John Hele, chief financial officer, said net income was $490 million above operating earnings, noting three things explained the difference: Derivative gains, reflecting changes in foreign currencies and gains from lower interest rates; investment portfolio gains of $113 million after tax; both of which were partially offset by charges of $35 million after-tax associated with insurance contracts and other market value adjustments. Of that $490 million difference, MetLife attributes $455 million to “asymmetrical accounting and non-economic adjustments.”
MetLife’s operating ROE was 11.7% in the quarter, Kandarian said, noting MetLife introduced its strategic plan in May 2012, with a 2016 operating ROE goal of 12% to 14%. MetLife has said persistent low interest rates would bring down its 2016 operating ROE to the low end of that range, he said.
Unfortunately, the 10-year Treasury yield has averaged 2.2% since May 2012, and MetLife’s current plan assumes rates rising “less than we initially assumed,” Kandarian said. “We have been cautious on share repurchases because capital requirements remain unknown for non-bank systemically important financial institutions,” he said, noting MetLife hasn’t yet seen draft capital rules and there’s no clarity on when the rules will be issued. It is unlikely M&A will contribute to as much as earnings as the company had hoped, Kandarian added.
To date, the Financial Stability Oversight Council has designated three insurers as systemically important financial institutions — MetLife, as well Prudential Financial Inc., and American International Group Inc. — and the companies face tighter regulations and capital standards as a result. MetLife is challenging the designation in court (Best’s News Service, April 30, 2015).
MetLife’s operating ROE will be about 11% next year, Kandarian said, noting this would mean a return that’s about 9 percentage points above the current 10-year Treasury yield. A 9% point spread over the 10-year would be close to the pre-financial crisis levels, while the quality of MetLife’s has improved, largely due to lower leverage on derisking in the U.S. business, he pointed out.
In the first quarter, MetLife completed the $1 billion buyback program announced in December 2014, Kandarian said, noting MetLife “took advantage of price weakness” to aggressively repurchase shares at an average price of 49.56 per share. Given regulatory uncertainty, the overall approach to share repurchases remains conservative. Since May 2012, buybacks have totaled $2 billion, or 1/4 of the total contemplated in its 2016 ROE target, he said.
MetLife has not yet made a decision on whether or not it would do more share repurchases this calendar year, Kandarian said. “We’re going to take a pause for a while and reassess things further on in the year.”
Kandarian said MetLife was pleased when the Federal Reserve recently made clear it will develop a single capital standard for all the insurance companies it supervises through a formal rule-making process. If the Fed had elected to establish prudential standards for insurers by order rather than by rule, the result could have been different orders for different companies with potential harmful effects on competition, he said.
Developing capital standards through a rule-making process will address one threat to competition by holding all federally regulated insurance companies to the same standard, he said. “However, there’s still a risk that these additional capital rules for federally regulated insurers will put them at a competitive disadvantage to companies regulated exclusively at the state level.”
Metropolitan Life Insurance Co. currently has a Best’s Financial Strength Rating of A+ (Superior).
On the afternoon of May 7, MetLife Inc.’s (NYSE: MET) stock was trading at $52.23 a share, up 1.60% from the previous close.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
