The insurer disclosed Monday that it was “strengthening” reserves, or setting aside more money to back policies for annuity and pension clients. MetLife’s review of the businesses has drawn a Securities and Exchange Commission inquiry and questions from state regulators including in New York.
Years ago, Buffett called reserve strengthening the “ugly twin” of another piece of insurance jargon: loss development. He said executives use the terms to obscure their own mistakes.
“We recommend scrapping the term loss development and its equally ugly twin, reserve strengthening,” Buffett, whose Berkshire Hathaway Inc. owns insurers, wrote in 2002 in his annual letter to shareholders. “Reserve strengthening implies that adequate amounts have been further buttressed. The truth, however, is that management made an error.”
MetLife said it would boost reserves by as much as $575 million before taxes and announced a “material weakness” of internal controls for financial reporting. That followed a disclosure in December that it had lost track of some annuity and pension clients that had moved jobs or relocated, and was tweaking its processes to find them.
MetLife shares tumbled 8.4% to $49.86 at 9:32 a.m. in New York, erasing its gain for the year. The insurer said that 2017 net income was cut by as much as $195 million, and postponed the release of earnings from this week to Feb. 13.
“Material weakness in financial controls is not something you want to see anywhere — let alone at an insurance company that sells financial promises and prides itself on balance-sheet strength,” David Havens, an analyst at Imperial Capital, said Monday in a note to clients. “The ‘unresponsive’ client matter is also a concern as it does raise the question (a question facing the overall industry) of whether MET is being proactive enough in ensuring that its clients receive the insurance benefits they are entitled to.”