WASHINGTON — The U.S. government is likely to file its brief seeking reversal of a lower court ruling that throws out the designation of MetLife as a systemically important institution (SIFI) by June 6, and a final decision by the U.S. Court of Appeals for the D.C. Circuit is likely by mid-2017, MetLife chairman, president and CEO Steven Kandarian said today.
In response to MetLife’s so-far successful challenge to its delegation as a SIFI, John R. Strangfeld, Prudential Financial chairman, president & CEO, seemed to indicate that his company would await final Appeals Court action before deciding whether to challenge its designation as a SIFI.
Strangefeld said that the D.C. Circuit decision March 30 regarding MetLife “is a significant development” with respect to group supervision and capital standards [for insurers].
“We will determine an appropriate path for Prudential, as this issue develops, considering other aspects of the group’s regulation,” Strangefeld said. He added that, with respect to designation, Prudential has “multiple options,” including its ability to challenge its SIFI status through the annual redesignation process.
Kandarian and Strangefeld’s comments were made during the quarterly earnings conference call with analysts, which touched on a number of topics.
For example, Kandarian said that despite the victory over the government on designation, MetLife will pursue its decision to spin off its retail operations. He said MetLife will disclose what form the spinoff will take in a registration statement to be filed with the Securities and Exchange Commission this summer.
Both MetLife and Prudential officials also noted that the two companies are still digesting the potential impact of the Department of Labor’s new fiduciary standard rule on their companies going forward.
MetLife, Prudential and Lincoln Financial all joined American International Group, which reported earlier in the week, in disclosing weak results compared to a year ago, with all citing poor investment results and low interests as primary reasons for the decline.
MetLife said operating income declined to $1.33 billion, or $1.20 a share, from $1.64 billion, or $1.44 a share, a year earlier, a 19 percent decline. Analysts expected $1.38 a share. Revenue, meanwhile, slipped 2.5 percent to $16.61 billion. MetLife is the largest U.S. life insurer by assets.
Prudential said operating earnings declined to $997 million, or $2.18 a share, as compared to the $2.37 a share expected by analysts. Revenue at Prudential fell 4.4% to $11.29 billion.
Lincoln Financial reported that operating income fell to $314 million, or $1.25 a share declined 11 percent. Analysts had called for $1.49 a share.
Both in its earnings statement and in comments to analysts today, MetLife cited poor results from investments in hedge funds as a primary cause. Investment income declined by 5.5 percent to $4.71 billion, MetLife said.
Steven Goulart, MetLife chief investment officer and executive vice president, said today that as a result of those results, MetLife hopes to redeem $1.2 billion of the $1.8 billion it has invested in hedge funds. The insurer’s total investment portfolio foots to more than $520B.
“It’s had up-and-down years and really it’s just too inconsistent, we think, in actual performance,” he said. “What we’ll be left with is a small portfolio of really our most consistently performing managers in hedge funds.”
Goulart called the first quarter “challenging” for variable investment income.
“If you look at our miss, it was heavily because of hedge fund returns which actually were negative for the quarter,” Goulart said. “If we look at the market environment that exists today, we can talk about a number of factors … I think it’ll be continue to be challenging for hedge funds.”
He also noted that MetLife did reduce its hedge fund investments by $600 million last year.
As for the plans to spin off its retail operations, Kandarian said that, “stragically, the imperative of cash generation is stronger than ever, especially in light of a lower for longer interest rate environment.”
From a regulatory perspective, he said that, “while we are pleased that our SIFI status has been rescinded, FSOC could attempt to re-designate MetLife at a later date.”
He said MetLife is “keeping open our options with regard to what form a separation could take,” including an initial public offering, a spinoff or a sale.
To prepare for the possibility of a separation in the form of a public offering, we expect to file a registration statement with the SEC sometime this summer.
Kandarian added that regardless of the form, “the separated business will be leaner and more focused.”
“By exiting proprietary retail distribution in the U.S., we anticipate run rate expense savings of approximately $250 million per year after tax, which would be split about evenly between the separated business and the rest of MetLife,” Kandarian said.
John Calagna, a MetLife spokesman, said the company would have “nothing to add” beyond Kandarian’s comments.
Eric Thomas Steigerwalt, chairman, president & CEO of MetLife Insurance Company of Connecticut, said MetLife expects to complete the sale of the advisor operation to MassMutual by July. The DOL rule and how it will effect both MetLife as an issuer of annuities and the Premier Group as a seller of these products is still being discussed, Steigerwalt said.