As usual, all of the executives were excited about the upcoming opportunities. MetLife’s Chairman, President & CEO Steven Kandarian said that ‘we believe MetLife and Brighthouse Financial offer investors unique value propositions…The spin-off is the centerpiece of MetLife’s continuing transformation into a less capital intensive company with stronger free cash flow. MetLife’s core businesses – employee benefits, protection and fee-based retail products outside of the United States, and our growing asset management arm – position the company well for profitable growth.’ At least that is the hope, but it remains to be seen if the market will rerate the company after shedding some of its slower growing and interest rate sensitive businesses.
Brighthouse is a different story. In addition to MetLife’s life insurance and annuity business, the company also holds a portfolio of certain ‘runoff’ businesses that the company no longer writes contracts for. The company has stumbled out of the gate and the long term outlook is…muddled to say the least. As the WSJ notes, it’s a tough time to be in the life insurance business:
Low interest rates depress the income insurers earn by investing customers’ premiums until claims are paid. They also drive up the cost of hedging annuities’ lifetime-income guarantees, and they make it tough to turn profits on products that guarantee specified annual interest.
Additionally, US life insurance sales have been flat for ‘nearly a decade’ and MetLife sold off its agent business prior to the spinoff making it more difficult for Brighthouse to distribute its products. Gee, is that all? Brighthouse’s CEO Eric Steigerwalt isn’t concerned though and thinks the company ‘is in a good position to make sales’. Going further, Mr. Steigerwalt said that ‘as a financially strong, independent company, we believe Brighthouse Financial is well positioned to deliver simpler, more transparent annuity and life insurance solutions that are valuable to our distribution partners, the clients they serve, and our shareholders.’
Maybe. The WSJ notes that the company has a lot of upside assuming interest rates climb back to ‘normal’ levels and that owning the stock could be a way of owning a leveraged directional bet on rates. Of course, the annuity business needs the market to do ok too at the same time. The WSJ highlights a section in the Form 10 which ran through several interest rate scenarios – the company’s ‘base case’ scenario assumed the company could achieve a 9% ROE assuming that the 10 year rises to 4.25% over the next decade and that variable annuity policyholders achieve an overall annual return of 6.5%. Sheesh.
The lack of index change likely suppressed forced selling, but the odd exchange ratio and Brighthouse’s lack of dividend may be creating some selling pressure. MetLife still retains a 20% stake in the company, but they will dispose of the shares within 5 years. I would expect a further distribution or more likely, an exchange offer at a future date.
Some are hailing this as a turning point in the insurance industry and a sign that perennially low interest rates are causing real problems for these companies. Wells Fargo’s Sean Dargan called the spinoff part of a ‘great restructuring of the global life-insurance industry’ and he expects other companies selling these products to explore divestitures as well. We will be there for you if they do!
Disclosure: Author holds no position in any stock mentioned.
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