MetLife's $1.6 Billion Annuity Charge Linked to Regulatory Concern
November 5, 2012 by Leslie Scism
11/01/2012| 10:37am US/Eastern
By Leslie Scism
MetLife Inc. (>> Metlife Inc) said its $1.6 billion “impairment” charge to reduce the value of annuity operations recorded on its balance sheet stems partly from probes by New York and other state regulators into whether insurers are potentially masking their financial health through dealings with related companies.
It is the first indication that regulators’ concerns, which have been previously reported, may be having an effect on how the industry operates.
MetLife, which is one of the biggest sellers of annuities, has been trying to reduce sales of certain types of the products, which are tax-advantaged retirement-savings vehicles, while aiming to ramp up sales of more-basic life-insurance policies. Those life-insurance efforts include a pilot project to sell small term-life policies through Wal-Mart Stores Inc. (>> Wal-Mart Stores, Inc.) in a couple of states.
MetLife said its fourth-quarter sales of “variable” annuities are running “meaningfully below” the third quarter, which themselves represented a 46% decline from the same period a year earlier. Variable annuities allow buyers to invest in stock and bond funds and typically include a guarantee of lifetime income, even if the funds tank.
A MetLife executive said in an earnings conference call with analysts and investors Thursday that the company’s use of related entities as part of its claims-reserving structure for various products is proper and “conservatively” run.
But the company said the regulatory investigations play into how insurers’ businesses are valued in the marketplace, and such valuations are taken into account when assessing how businesses are valued on a company’s balance sheet.
MetLife, the nation’s biggest life insurer by assets, swung to a third-quarter loss as it recorded a hefty impairment charge tied to certain annuity businesses it acquired in past years. The New York insurer posted a loss of $954 million, compared with year-earlier quarterly profit of $3.46 billion.
A big factor in the impairment is the ultralow interest-rate environment, which cuts into the profitability of annuities in various ways, analysts said.
MetLife Chief Financial Officer John Hele said MetLife runs its offshore captive “conservatively,” but the company believes the investigations help damp the valuation of businesses by making potential buyers “more cautious” about continued use of the structures in their current form.
New York’s Department of Financial Services in July sent letters to insurers, including MetLife, seeking details about their financial arrangements with affiliated entities, known as captives, as previously reported. In addition, a group of state regulators at the National Association of Insurance Commissioners, an organization that sets solvency standards for adoption by states, is examining the structures.
Many of the entities are incorporated in Vermont or other states that have encouraged their use. They are set up specifically to take on responsibility for certain types of policyholder claims from their parent companies. Regulators are looking for potential risks in these “reinsurance” transactions, they have said.
Under many of the arrangements, including one at MetLife since 2008, the related entity has obtained a letter of credit from a major bank, which is committed to providing money if needed for paying future claims.
Meanwhile, William Wheeler, president of MetLife’s Americas division, said the company would hit its target of limiting variable-annuity sales to $18 billion for the year. Through the first three quarters, sales were about $14 billion.
Mr. Wheeler said the variable annuities MetLife is selling now represent a “pretty attractive business” for the company, with a 14% return on investment.
“Today’s sales are profitable,” he said. But the company wants to restrain sales because “we can’t let it get too big relative to MetLife.”
Separately, company executives highlighted an initiative to sell term-life policies at Wal-Mart stores. Chief Executive Steven Kandarian said the effort is in its “early days,” citing it as one of the ways MetLife “is going to innovate” to sell products to consumers who may not buy through life-insurance agents.
“Perhaps we as an industry haven’t made it easy enough for people” to buy insurance, he said.
Under the initiative, consumers can pay for a small policy at the check-out counter. The consumer then calls MetLife to answer health questions, at which point the policy would be activated or denied. If denied, the purchaser would be refunded his or her purchase price.
MetLife also has been promoting Internet-based sales of basic life insurance.
-Erik Holm contributed to this article
Write to Leslie Scism at leslie.scism@wsj.com
