MetLife Stumbles, Then It Uses Words Buffett Has Called ‘Ugly’

Updated on
  • Reserve ‘strengthening’ damages earnings, brings stock plunge
  • MetLife has weakness in accounting, faces an SEC inquiry
Photographer: Michael Nagle/Bloomberg

MetLife Inc. is dealing with what Warren Buffett warned were some “ugly” insurance words.

The insurer disclosed Monday that it was “strengthening” reserves, or setting aside more money to back policies for annuity and pension clients. MetLife’s review of the businesses has drawn a Securities and Exchange Commission inquiry and questions from state regulators including in New York.

Years ago, Buffett called reserve strengthening the “ugly twin” of another piece of insurance jargon: loss development. He said executives use the terms to obscure their own mistakes.

“We recommend scrapping the term loss development and its equally ugly twin, reserve strengthening,” Buffett, whose Berkshire Hathaway Inc. owns insurers but not MetLife, wrote in 2002 in his annual letter to shareholders. “Reserve strengthening implies that adequate amounts have been further buttressed. The truth, however, is that management made an error.”

MetLife said it would boost reserves by as much as $575 million before taxes and announced a “material weakness” of internal controls for financial reporting. That followed a disclosure in December that it had lost track of some annuity and pension clients that had moved jobs or relocated, and was tweaking its processes to find them.

Shares Fall

MetLife shares tumbled 8.9 percent to $49.58 at 11:59 a.m. in New York, erasing its gain for the year. The insurer said that 2017 net income was cut by as much as $195 million, and postponed the release of earnings from this week to Feb. 13.

“Material weakness in financial controls is not something you want to see anywhere -- let alone at an insurance company that sells financial promises and prides itself on balance-sheet strength,” David Havens, an analyst at Imperial Capital, said Monday in a note to clients. “The ‘unresponsive’ client matter is also a concern as it does raise the question (a question facing the overall industry) of whether MET is being proactive enough in ensuring that its clients receive the insurance benefits they are entitled to.”

MetLife’s troubles are another setback for Chief Executive Officer Steve Kandarian. He worked to separate a U.S. unit that sells life insurance and annuities to individuals, called Brighthouse Financial Inc. While he was seeking to exit from a capital-intensive business, the separation took longer than expected and resulted in charges against earnings.

Management Changes?

“We believe this news will add to the discontentment of MET’s shareholder base,” Tom Gallagher, an analyst at Evercore ISI, wrote in a note to clients. “As a result, we think there will be greater investor pressure to consider management changes, including external candidates.”

MetLife is among insurers that agreed to take on pension obligations from employers seeking to limit volatility from retirement offerings. The New York-based company has struck such deals with Sears Holdings Corp. and PPG Industries Inc. Pension risk transfers give the insurance companies more assets to invest.

Customers can hold policies for decades, posing a challenge to insurers to make certain that data and processes are up to date. Companies have run into similar issues before by not locating old clients. Aegon NV’s Transamerica and New York Life Insurance Co. were among insurers that agreed in 2013 to pay millions to resolve a multistate probe into whether they withheld funds from life insurance policyholders.

During an earnings call Tuesday, analysts asked rival Principal Financial Group Inc. about MetLife’s actions. Executives at the Des Moines, Iowa-based insurer said they were confident about their own reserves in pension businesses, while declining to discuss MetLife’s situation. Principal already has procedures in place to find unresponsive customers, they said.

MetLife’s announcement “is certainly a negative,” Mark Dwelle, an analyst at RBC Capital Markets, said in a note. “We think investors will be focused on assessing whether this is the full scope of the issue, particularly since MET indicated that the SEC has made an inquiry into the matter.”

Read more: MetLife doubles Sears pension bet in $512 million risk swap

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