MetLife Heads for Record Gain as CEO Controls Fat Tail

For MetLife Inc., it’s what the insurer isn’t selling that’s helping this year’s record rally.

MetLife, the largest U.S. life insurer, is retreating from products such as variable annuities, where profits are tied to market fluctuations, after equity-market swings and low bond yields unnerved investors, contributing to a 30 percent stock slide in 2011. Steve Kandarian was named chief executive officer that year and revealed the strategy shift in 2012. The shares have jumped 56 percent since Dec. 31, headed for their best annual gain since the company went public in 2000.

MetLife is cutting “fat-tail risk,” Kandarian said in October, referring to vulnerability to extreme market swings. The company is scheduled to hold a conference call tomorrow to discuss its performance and 2014 outlook.

“We must accept risk to earn an appropriate return for our shareholders, but determining the type of risk is a critical management decision,” said Kandarian, 61. “Relative to a few years ago, we have been actively diversifying MetLife’s risk profile.”

U.S. life insurers underperformed most industries over the past decade after making market bets that should have been left to banks, McKinsey & Co. said in a report this year. Insurers are better suited to managing risks tied to life expectancies, according to the report.

“One of the main things that they’re trying to do is shift their business mix to higher returns and less volatile lines of business,” Jimmy Bhullar, an analyst at JPMorgan Chase & Co., said of MetLife in a phone interview. “Five years down the road, MetLife’s business mix will be a lot better.”

Kandarian’s Goal

The strategy is part of an effort by Kandarian to increase return on equity to at least 12 percent by 2016, compared with about 11 percent last year. He’s highlighted that MetLife’s cost of equity capital, a metric that climbs with volatility, is higher than the profitability measure. He showed investors a presentation in May that displayed the gap between the figures.

“This slide is not necessarily a happy slide,” Kandarian said. “We’re working on both, trying to drive up the return on equity for MetLife and drive down the cost of equity capital.”

Kandarian is ending MetLife’s December practice of releasing per-share earnings guidance for the upcoming year at the annual presentation. Such projections have limited value given the sensitivity of results to capital markets, and the insurer will still discuss how much certain operations typically earn, the CEO said in October.

Annuities Outlook

The insurer expects to sell about $11 billion in individual variable annuities this year, after raising prices and cutting benefits on the products, according to a projection that month. MetLife sold $17.7 billion of the retirement products in 2012, down from $28.4 billion the prior year.

MetLife is building sales outside the U.S. after acquiring American Life Insurance Co. from American International Group Inc. in 2010 and adding Chilean pension provider AFP Provida SA this year. Kandarian’s company announced in September a life-insurance joint venture in Vietnam.

MetLife set a target of earning at least 20 percent of operating profit from emerging markets by 2016, compared with 14 percent in 2012. It is working to expand in group benefits and protection products while cutting costs, mainly in the U.S.

The Standard & Poor’s 500 Insurance Index is one of the four worst performers among 24 S&P 500 industry groups over the past decade. Every stock on the 21-company measure has gained in 2013, led by Genworth Financial Inc., which doubled through yesterday. Prudential Financial Inc., the No. 2 U.S. life insurer, gained 67 percent.

Wave Riding

“They’re all riding the same wave,” Randy Binner, an analyst at FBR Capital Markets, said by phone. “A better stock market and higher interest rates.”

MetLife is “outperforming our peers,” said John Calagna, a spokesman for the insurer, who said the best basis of comparison includes global competitors like France’s Axa SA and The Hague-based Aegon NV, which each advanced less than 40 percent this year though yesterday.

Uncertainty over the prospect for stock repurchases may pressure MetLife shares, according to Eric Berg, an analyst at RBC Capital Markets. He cut his price target last month by $5 to $55 and rates the shares the equivalent of neutral. Regulators are reviewing whether to label MetLife a systemically important financial institution, a designation that could lead to tighter capital requirements.

“There may be no share repurchases next year as Met sorts through what being a SIFI will mean,” Berg said by phone. “My concern is that they will have a further buildup of excess capital.”

Lincoln National

Lincoln National Corp. is among U.S. insurers that gained more than MetLife this year in New York trading. The Radnor, Pennsylvania-based company almost doubled since Dec. 31 by yesterday as it expanded variable-annuity sales.

Results at Lincoln, the No. 2 seller of the retirement products this year, are closely linked to rising stocks and higher rates. CEO Dennis Glass said today he’s seeking to diversify the company’s sources of earnings by adding more risks tied to lifespans to reduce volatility.

“In a rising market, derisking would actually be a headwind in terms of performance,” said Bhullar, who has a neutral rating on Lincoln and outperform for MetLife. “If market trends deteriorate, it should help the performance.”

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