CEO Defends MetLife Activities as Not Risky to US Economy

As MetLife Inc. swung to a first-quarter net loss of $174 million on much higher derivatives losses, the chief executive officer of the largest U.S. life insurer said the company has received several questions about whether it will be designated by the Financial Stability Oversight Council as a non-bank systemically important financial institution.

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"We do not believe traditional regulated insurance activities generate or amplify systemic risk to the U.S. economy," said Steven A. Kandarian, MetLife's chairman, president and CEO, during the company's April 27 conference call. However, if the FSOC names MetLife and other large insurers as SIFIs, "it will be essential to tailor the new prudential rules to the insurance industry."

MetLife is discussing the appropriate regulatory framework for non-bank SIFIs with policymakers, and is "urging that the new rules reflect the unique asset and liability characteristics of insurers," Kandarian said.

Once the company has de-banked to return capital to shareholders, MetLife will examine several factors, including the state of the global economy, MetLife's earnings and capital position and the regulatory outlook in the United States. This includes the potential shape of the Federal Reserves "prudential regulations" for non-bank SIFIs, Kandarian said.

"Based on these considerations, we will bring a recommendation on capital deployment to our board of directors," he said.

MetLife's first-quarter net loss was driven by derivative losses of $1.3 billion, after tax, mostly due to higher interest rates and the impact of the narrowing of its own credit spreads. A credit spread is the difference between the rate for a Treasury instrument and a corporate bond of equivalent maturity.

MetLife uses derivatives to hedge several risks in its investment portfolio, including changes in interest rates and foreign currency fluctuations

In last year's first quarter, MetLife posted net income of $701 million, when it recorded much lower derivative losses of $253 million.

On April 20, the company accidentally reported first-quarter earnings about two weeks ahead of schedule. According to its preliminary results, it swung to a net loss of $94 million based on net income available to its common shareholder as net derivative losses widened to $1.97 billion, compared with net derivative losses of $315 million in last year's first quarter.

Its first-quarter 2012 results also included a $26 million charge, after tax, representing the multistate examination payment related to unclaimed property and its use of the Social Security Death Master File.

Nevertheless, Kandarian said MetLife delivered strong financial results as operating earnings—at $1.5 billion—were up 11% year over year. As to MetLife's capital position, the company is "financially strong."

In early March, MetLife was one of four bank holding companies that failed the Federal Reserve's stress test. But MetLife fired back at the central bank, arguing the capital standards laid out by the stress test are inappropriate for insurance companies (Best's News Service, March 14, 2012).

MetLife is selling the depository business of its MetLife Bank to GE Capital Financial, a "critical step" in the company stopping being a bank-holding company, Kandarian said. "This action will put us on a level playing field with our insurance company peers."

Once the transaction closes, "our de-registration as a bank holding company is expected to follow shortly thereafter," Kandarian said, noting the timing could vary based on the regulatory review process.

On April 26, MetLife also announced it's exiting the reverse-mortgage business, and earlier, it announced the sale of its "warehouse finance" business and the discontinuation of its traditional mortgage-origination business, Kandarian said. "Together, these actions will allow MetLife to maintain its strategic focus as a global insurance, employee benefits leader."

MetLife is "well positioned for profitable growth—today, and into the future," he said.

In last year's first quarter, MetLife's derivative losses after tax were due to higher interest rates and a weaker U.S. dollar (Best's News Service, May 5, 2011). But in the fourth quarter of last year, its net income skyrocketed on huge gains on derivatives that were helped by lower interest rates (Best's News Service, Feb. 15, 2012).

Metropolitan Life Insurance Co. currently has a Best's Financial Strength Rating of A+ (Superior).

On the morning of April 27, MetLife Inc.'s (NYSE: MET) stock was trading at $35.56 a share, down 2.48% from the previous close.

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)