Expect a Soggy 2013 From This Financial

It's a good news/bad news situation, with the accent on the latter. MetLife (NYSE: MET  ) cheered the market with its news that fiscal 2012 would come in better than expected. Well, cheered for a second, anyway. Because immediately following this happy news was the firm's 2013 guidance, which came in well below market expectations. Why the sudden wet blanket?

No guarantee
The big picture on display here is interest rates. Like many other financials, MetLife has been struggling with record lows in those crucial numbers. It's hard to make a buck if the percentages remain as thin as they are now -- and they're likely to stay that way for some time.

So the company's making an effort to pull back from products that could potentially smack it in the face financially. One big example is the guarantees of lifetime income it once eagerly tacked on as options for its variable annuities.Those skinny interest rates (from investment instruments like bonds, etc.) make it hard to support the funding needed to pump out those guaranteed minimums.

The lifetime income guarantee is a common feature of annuities, but apparently in MetLife's case, it was a little too common. Once an aggressive pusher of these add-ons, the company's been dialing them down considerably. 2012 will see a reduction of around 37% year over year in its sales of these goods, while that number will deepen to 40% next year.

2011 was the high water mark for these "enhanced" annuities for the company, with sales topping $28 million. The firm should ring up only $10 billion-$11 billion next year if all goes according to plan. Still, there are an awful lot of them out there, and doubtless they're going to eat into profit if the markets underlying the company's annuity payouts go the wrong way.

Rival insurers, such as smaller Hartford Financial Services (NYSE: HIG  ) have foregone selling such guarantees entirely. MetLife seems in a big hurry to catch up.

Take my bank... please
Banks are, naturally, the ultimate interest rate-dependent businesses. Not only that, for companies not specifically geared toward lending money, they can be burdensome to operate, given the many stringent requirements involved in doing so.

Luckily, MetLife is about to wiggle out of this hole. In the days before the words "financial" and "crisis" became routinely stitched together (i.e., the early 2000s), MetLife jumped into banking. It bought Grand Bank and rebranded it under its own name. The idea was that the resulting MetLife Bank would help offset the roughly $25 billion paid out by the core insurance business every year.

Cut to a decade or so later. These days, the bank's only a few months past failing a stress test imposed by the government; 19 financials were tested, and it was one of only four -- along with Citigroup (NYSE: C  ) , Ally Financial, and SunTrust (NYSE: STI  ) -- to flunk. Meanwhile, its position as a MetLife subsidiary makes the parent firm a bank holding company. This means more stringent requirements and heavier Fed oversight.

It's this oversight that has prevented MetLife from launching any stock repurchase programs. The Feds are nervous that the more capital the firm's stress-test failing bank sacrifices for buybacks, the less able it'll be to handle a fiscal emergency. So it's nixed the company's ambitions in this area.

That deprives the company of one of the levers it can pull to boost its share price. Rivals have given this a tug, and MetLife wants to as well. Prudential (NYSE: PRU  ) , for example, instituted a sizable ($1 billion or so) repurchase effort this past summer.

Electrifying sale
Even before that stressful stress test, MetLife had made efforts to unload its banking assets. These are finally starting to bear juicy fruit; GE's (NYSE: GE  ) GE Capital just won conditional approval from the Treasury Department's comptroller of the currency to buy a big chunk of the bank -- to the tune of $6.5 billion in deposits.

This is the key requirement for the company to shed that burdensome bank holding company designation. It's going even further, reaching agreement last month with JPMorgan Chase to buy MetLife Bank's mortgage servicing portfolio.

MetLife is now on the verge of becoming a normal insurance company again, but given that damp bed cover of guidance it just threw over investors it probably won't be rewarded for the effort. After all, those investors had been expecting a little under $5.50 per share in operating profit for 2013; MetLife is now saying it'll come in at $4.95-$5.35. And, oh yeah, it intimated that it won't be trying any share buybacks.

But at least the company is making the right moves -- hiving off banking operations that had become too heavy and problematic, and moving away from risky products like those annuity guarantees. Now it just needs to find a way to lift that profitability.

Speaking of profitability in the insurance sector, AIG has done an impressive job lifting its results since getting bailed out by the government a few short years ago. Get the latest on the company's present state and its future prospects by reading our premium analyst report on the company. Just click here now for instant access.


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  • Report this Comment On December 14, 2012, at 4:49 PM, TEBuddy wrote:

    You are a bit overstating the stress test results.

    They were not flunks necessarily, but perhaps Bs instead of As. When seeing how the tests were administered, it no wonder some did not get the A+ rating.

  • Report this Comment On December 14, 2012, at 4:58 PM, TMFVolkman wrote:

    TEBuddy, I'd have to respectfully disagree. If we continue with the school analogy, the tests were basically pass/fail -- either the banks had what it took to withstand a big economic shock, or they didn't. MetLife and the three others mentioned unequivocally failed.

    I don't take issue with your implication that the Feds used rather stringent criteria in the tests. But that's the idea -- how well equipped is a bank to deal with a worst-case scenario?

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