Finance

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Prudential Financial can learn something from its other too-big-to-fail peers.

MetLife announced late Tuesday that it plans to separate out much of its U.S. retail operations. It's hoping the move will help relieve that business from the burden of being designated a "systemically important financial institution," or SIFI, with the higher capital requirements that go along with it. The decision follows a similarly motivated breakup by General Electric and is part of the rationale behind Carl Icahn's push for a split of insurance giant AIG. 

That leaves Prudential as the only U.S. non-bank SIFI organization without plans -- or a push -- for actions that could help it shake off the label. Better late than never.  

Falling Behind?
Shares of the three big insurers have taken a similar path over the last year, but after MetLife's pop on Wednesday, Prudential has a slightly worse return.
Source: Bloomberg

Prudential has thus far been content to remain on the sidelines. When MetLife launched a lawsuit against the U.S. government over its SIFI label last year, Prudential -- which had previously considered similar legal action  -- considered reviving its own efforts to break free of the designation, the Wall Street Journal reported in June. Any move would be dictated by the MetLife proceedings, though. Because the two companies are similar, Prudential could use a MetLife victory to contest its own SIFI label when it came up for review with regulators.

The SIFI Club
Prudential Financial is the smallest of the U.S. non-bank SIFIs.
Source: Bloomberg
General Electric's GE Capital recevied the SIFI designation. Market values are rounded.

That was a smart call at the time: Let MetLife fight the pricey legal battle, and you can reap all the potential benefits. And because Prudential has been returning cash to shareholders and is on track to report a higher 2015 return on equity than most U.S. peers (in particular MetLife and AIG), it didn't run as much risk of attracting an activist. But with MetLife seemingly turning to Plan B in its efforts to convince regulators it won't imperil the broader economy in a crisis, Prudential should be coming up with its own alternatives.

MetLife is considering a sale, spinoff or IPO of a business that includes some life insurance assets and as well as a U.S. provider of variable annuities -- retirement products which draw more attention from regulators because of the volatility in their results and the higher capital charges they can rack up. While those operations account for some of MetLife's riskier endeavors, regulators probably won't label them a danger to the financial system on their own. With about $240 billion in assets, the size of the new company would be similar to that of other insurers that have escaped the SIFI label. The remaining company, meanwhile, would give regulators fewer reasons for the tougher oversight that comes with the designation.

Prudential could explore a similar breakup. It, too, is saddled with a large annuity business and other risky long-dated liabilities. In fact, Prudential has been growing its retirement operations through multi-billion-dollar deals to absorb the pension assets and liabilities of companies such as Motorola Solutions and Bristol-Myers Squibb. 

Prudential said Wednesday that the company is "continuously evaluating opportunities" for enhancing value and and  is comfortable with its business mix. 

To its credit, Prudential has shed assets over the last few years including its commodities group and real estate brokerage to better refine its focus on life insurance and retirement products. But the divestitures haven't been enough to remove the insurer's conglomerate discount.  

Prudential's Japan and asset-management businesses would trade at much higher multiples if they were separated out, according to Thomas Gallagher of Credit Suisse. Those divisions are less-volatile and better-performing. Prudential may have to do some work internally to get itself in shape to execute on the kind of big split MetLife is proposing, Gallagher added. The spurt in MetLife's shares on Wednesday has got to have the company at least thinking about starting that process.

It's increasingly looking like AIG will have to do something to satisfy investors that aren't happy with its conglomerate structure or its SIFI designation. GE is planning to file this quarter with regulators to shed the undesirable label, with the wind-down of GE Capital set to be largely completed by the end of this year.  

Does Prudential want to be the one that gets left behind?       

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net