Policyholders to be stung by MetLife split

The move to hive off its U.S. retail business is likely to sting the company’s bondholders and policyholders leaving it potentially in a worse position says one rating agency

MetLife Inc.’s debt is perceived as more risky in the derivatives market after Chief Executive Officer Steve Kandarian announced a plan to split off much of the insurer’s U.S. retail business.
The cost of protecting the insurer’s bonds climbed for a third straight day Thursday, even as the stock advanced. While Kandarian’s plan could boost profit by reducing regulation on variable annuities in the retail operation, a separation may hurt bondholders who are protected by tighter capital rules, Moody’s Investors Service said late Wednesday in New York.
“While the planned reorganization is far from final, we believe splitting MetLife into two separate companies is negative for holding-company creditors and policyholders,” Scott Robinson, Moody’s senior vice president, said in a statement as the ratings firm placed the company’s credit score on review for a downgrade. “MetLife will have a weaker business profile and a lower level of earnings diversification.”
MetLife, the largest U.S. life insurer, said after stock markets closed Tuesday that it was weighing a possible public offering, spinoff or sale of much of its domestic retail unit. The New York-based insurer has been designated a systemically important financial institution because of its size, which could subject the company to tighter Federal Reserve oversight. The retail business, as part of a SIFI, would be at a competitive disadvantage, Kandarian said.
The new company, which would have about $240 billion of assets, would be similar in size to Lincoln National Corp., Hartford Financial Services Group Inc. and Voya Financial Inc. and probably would not be designated a SIFI, according to Sean Dargan, an analyst at Macquarie Group Ltd. That could help returns on retail life and annuities, he said.
Stock Jump
MetLife’s stock posted the largest gain in the 88-company Standard & Poor’s 500 Financials Index Wednesday and added another 1.4 percent as of 10:40 a.m. in New York Thursday.
Still, the cost of protecting MetLife debt from default over five years increased to 119 basis points. That compares with 116 basis points Wednesday and 99.5 on Monday, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.
Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. Swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
MetLife, American International Group Inc., Prudential Financial Inc., and General Electric Co.’s finance arm are the four non-bank SIFIs. GE has been divesting units and plans to apply to drop that designation, while Prudential opted against filing a lawsuit in 2013 to overturn its SIFI status. AIG has been facing pressure from activist investor Carl Icahn, who has called the SIFI tag a tax on size and urged the insurer to break up.

Katherine Chiglinsky
with assistance from Sridhar Natarajan and Lily Katz
Bloomberg News