Eye on the MetLife spinoff: Will it live up to billing?

MetLife Inc.’s months-long transformation advanced a step forward this month, when a soon-to-be spun-off business unit unveiled several products under its own brand. The question for industry-watchers is whether MetLife’s over-arching strategy will yield the desired results — more agile, focused and growing companies serving separate markets — or something akin to “divestiture remorse.”

The question isn’t an idle one. For hundreds of millions of dollars in sales of individual life insurance and annuity products are riding on the outcome. The success of the strategy could significantly sway the product orientation of thousands of insurance and financial service professionals long affiliated with the 149-year-old insurer.

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Swapping brands

On March 6, MetLife’s operating segment, Brighthouse Financial, disclosed that it would begin marketing several life insurance and annuities under the Brighthouse Financial brand. The products include Brighthouse Shield Level Selector Annuities, Brighthouse Variable Annuities with FlexChoice and Premier Accumulator Universal Life.

A company press statement says that Brighthouse Financial will continue to as an operating business of MetLife “for the time being.” MetLife initiated the separation in January 2016 and anticipates completing the transaction in the first of 2017.

The Brighthouse divestiture represents a significant move in MetLife’s efforts to shed businesses outside of its target U.S. markets: group, voluntary and worksite benefits (GVWB), as well as corporate benefit funding. Internationally, MetLife — which since its founding in March 1868 has become a $70 billion behemoth with over 58,000 employees and 90 million customers in some 60 countries — will continue to operate through units serving Asia, Latin American, Europe, the Middle East and Africa.

Related: MetLife profit falls 52% on costs of retail unit’s spinoff

By narrowly focusing on core competencies, MetLife’s leadership is betting, the two companies can strengthen their competitive positioning in their respective markets. MetLife Chairman, President and CEO Steven Kandarian repeatedly stressed this point in recent months.

“As a separate entity, Brighthouse will benefit from greater focus and more flexibility in products and operations,” he said in a July 2016 press statement announcing the rebranding of MetLife’s U.S. retail business. “At the same time, this separation will also bring significant benefits to MetLife, as we focus even more intently on our group business in the U.S., where we have long been the market leader, as well as on our international operations.”

For now, analysts who closely track the insurer are giving MetLife a two-thumbs’ up. The consensus recommendation of 7 stock analysts as of March 14 remains a “strong buy,” but some question whether the Brighthouse spin-off will have much upside for MetLife’s earnings. Among the skeptics is Sanford Bernstein Senior Research Analyst Suneet Kamath. Citing “negative EPS revisions,” he noted in January that MetLife has “consistently unperformed [industry] peers over the last 7 years.”

Related: Eye on sale of a crown jewel: MetLife’s Premier Client Group

The sale of MetLife’s Premier Client Group called for the insurer to develop annuities for MassMutual, a task that may now fall to Brighthouse Financial (Photo: Thinkstock)

Keeping the Feds at bay

Financial performance and competitive dynamics weren’t the only factors underpinning MetLife’s decision to spin off Brighthouse. Also weighing on the insurer was a September 2014 decision of the Financial Stability Oversight Council (FSOC) tagging MetLife as a systematically important financial institution. That designation entailed stiffer regulatory requirements, including annual “stress tests” by the Federal Reserve and increased capital reserve requirements that can crimp profitability and limit the company’s ability to borrow.

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To be sure, the SIFI designation didn’t impact MetLife to the extent it did three other companies the FSOC initially determined to be non-bank SIFIs: AIG, Prudential Financial and GE Capital (General Electric Co.’s lending arm, which shed the SIFI designation in June 2016 by selling off businesses). As a New York-based insurer, MetLife has to meet steeper minimum capital and surplus requirements than do insurers domiciled in other states.

Nonetheless, The SIFI label didn’t sit well with MetLife. Kandarian noted during a January 2016 press briefing unveiling the planned separation of its U.S. retail business that complying with the capital reserve requirements risked putting the carrier at a “significant competitive disadvantage.”

MetLife thus opted to take the FSOC to court over the too-big-to-fail label. In March 2016, a U.S. District judge for the District of Columbia sided with MetLife, characterizing the FSOC determination as “fatally flawed.”

Related: MetLife fights ‘too big to fail’ label in D.C. circuit

The Obama Administration thereafter appealed the decision to the U.S. Appeals Court for the District of Columbia Circuit. But MetLife’s continuing designation as a SIFI is now in doubt because:

• • • • • The Trump Administration may abandon the appeal;

        • The Financial Choice Act, which cleared a U.S. House Committee last September in effort to roll back key provisions of the Dodd-Frank of 2010, would remove SIFI designation for non-bank financial institutions like insurers; and

        • MetLife’s corporate streamlining could, on further regulatory review, make the SIFI designation a moot issue.

In respect to the last, regulators would also have to weigh MetLife’s plans, unveiled in February 2016, to sell off its Premier Client Group — a retail distribution channel comprising more than 40 local sales and advisory operations and approximately 4,000 advisors nationwide — to MassMutual. That $300 million deal, MassMutual Chairman, President and CEO Roger Crandall said at the time, would transform the mutual insurer into a “distribution powerhouse.”