(MET - Analyst Report
) has filed with the SEC to spin off its U.S. life insurance unit into a new holding company named Brighthouse Financial Inc. This strategic business restructuring was primarily aimed at detaching itself from the business that posed significant earnings as well as capital risk.
Behind the Spinoff
In the beginning of the year, the company announced its intention to separate the U.S. retail unit which sold capital intensive and volatile retail product lines, such as variable annuities with guaranteed living benefits and universal life with secondary guarantees, which exposed it to severe earnings volatility.
Also, the nature of these products required the company to maintain a huge capital reserve at the unit that placed it at a significant competitive disadvantage. Since the company already had to abide by stringent capital regulation because of its SIFI status at that time, a separation of this unit was a means to relieve itself of the regulation.
Though, in April, a court ruling overturned the government’s designation of MetLife as SIFI and brought huge relief, but again in June, the Financial Stability Oversight Council appealed the court's decision and sought to reinstate its SIFI designation. The company is thus not clear of its SIFI designation, which it had been fighting against since a long time. Other players carrying the SIFI tag are Prudential Financial Inc. (PRU - Analyst Report
) and American International Group Inc. (AIG - Analyst Report
The company was evaluating all possible ways of doing so via a sale, an IPO or a spinoff. Given the current economic environment, the company felt that a spinoff would be a better option to expedite the process of separation than an IPO or a sale.
Benefits of Spinoff
The spinoff process will involve distribution of at least 80.1% in the unit, Brighthouse Financial Inc., to MetLife investors.
Apart from seeking capital relief through this spinoff, the company also wants to detach itself from its non-core and riskier operation. It would rather focus on growing its group business in the U.S., as well as its international operations.
As a separate company, Brighthouse Financial will be a major U.S. life insurance and annuity company, with $240 billion of total assets and approximately 2.6 million insurance policies and annuity contracts in-force as of Jun 30, 2016. It will sell a simplified set of accumulation and protection products, through a diverse network of independent distributors.
MetLife sans Brighhouse Financial will continue to be a niche provider of employee benefits in the U.S. market, as well as a leading global insurer. The company will continue to hold leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East.
Moody’s Reaction to Spinoff
Following this development from the company, rating agency Moody’s Investors Service jumped into action and affirmed long-term credit ratings senior debt at A3 and the Aa3 insurance financial strength (IFS) ratings of its units – Metropolitan Life Insurance Company, General American Life Insurance Company and Metropolitan Tower Life Insurance Company. The rationale behind this action was that though the separation of the U.S. retail business will reduce earnings diversification for MetLife, it will also save it from exposure to interest rate and equity market volatility associated with that business.
It also downgraded the IFS ratings of MetLife Insurance Company USA and New England Life Insurance Company to A3 from Aa3. These two units will separate from MetLife and will be part of Brighthouse Financial. Moody’s seems more pessimistic here because of a weaker business profile of the new company and its units.
Zacks Rank & Stock to Consider
MGIC Investment saw a 2.5% rise in its 2016 Zacks Consensus Estimate to 83 cents earnings per share over the past 60 days. On average, the company delivered a positive earnings surprise of 12.11% in the trailing four quarters.
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