MetLife's Former Insurance Unit Has Tough Task Ahead -- WSJ

By Leslie Scism Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (August 7, 2017).

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Shares of Brighthouse Financial, MetLife Inc.'s spun-off insurance operation, will begin trading Monday in the industry's latest response to nearly a decade of ultralow rates.

Brighthouse is built around MetLife's historic core selling life insurance to U.S. households. In recent decades, the unit grew to be one of the nation's biggest sellers of retirement-income annuities to consumers. But the ultralow interest rates ushered in by the global financial crisis of 2008 have hurt the profitability of these products.

The concept behind the spinoff is simple. For MetLife, the goal is a higher share valuation once the company is freed of slower-growing operations and facing less pressure from low interest rates. For Brighthouse, the hope is that by "standing on its own two feet, being smaller, more nimble," the firm can perform better, said MetLife Chief Executive Steve Kandarian in an interview.

"We think MetLife has good risk-management, but now Brighthouse has to function on its own," said Deep Banerjee, a credit analyst with Standard & Poor's Ratings Services. "How will it execute as an independent insurer?"

After the Brighthouse spinoff, roughly 40% of MetLife's business will be international life insurance, which is less affected by low rates than in the U.S. MetLife also will continue selling insurance and pension products to employers, and it is keeping an asset-management unit and some other operations.

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Brighthouse must first win the confidence of independent brokerage firms, financial advisers and outside agent groups to sell its products, analysts said. In a move that cut costs, MetLife last year sold its agent network to Massachusetts Mutual Life Insurance Co.

Brighthouse Chief Executive Eric Steigerwalt said the new company is in a good position to make sales.

"We've kept the vast majority of our distributor relationships" from the MetLife years, he said. Brighthouse also will sell annuities through MassMutual's enlarged sales force.

Mr. Steigerwalt's team is a mix of experienced MetLife managers and new hires. The company has agreements with MetLife for such things as call centers and investment management.

"Over the next couple years, we will transition off of the MetLife agreements," he said.

Brighthouse also will have a large segment of "runoff" business of contracts MetLife sold and Brighthouse is responsible for, but which aren't currently being marketed. Mostly, these are certain types of life-insurance policies.

U.S. life insurers' core business has long been under pressure. Sales of individual policies have been largely flat industrywide for nearly a decade, after falling more than 40% from the 1980s through 2008, according to industry-funded research group Limra.

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.

MetLife isn't the only company taking action as low interest rates persist. In May, French insurance company AXA SA said it is planning an initial public offering of stock in its large U.S. operations. Manulife Financial Corp. is exploring a spinoff or IPO of its Boston-based John Hancock Financial Services unit, The Wall Street Journal reported last month.

But MetLife's decision is one of the starkest yet of life insurers grappling with low rates. Bankers, analysts and consultants say numerous other insurers are watching closely.

The spinoff is part of a "great restructuring of the global life-insurance industry," said Sean Dargan, director of life-insurance equity research at Wells Fargo Securities. "We expect other companies who focused on growth by selling" these same products to explore divestitures, he added.

Buyers could be newer entrants backed by private-equity firms, he said.

In the short term, volatile trading is expected for Brighthouse as many MetLife shareholders sell their new shares because they won't be paying dividends.

The actual conversion took place late Friday, when MetLife common shareholders received one share of Brighthouse common stock for 11 MetLife shares. MetLife will initially hold onto about 20% of Brighthouse. In filings, it has said will dispose of the shares "as soon as practicable and within five years."

Janney Montgomery Scott analyst Larry Greenberg expects buyers to include investors who have been successful in buying shares of other spinoffs.

"Longer term, we think shares are most appropriate for value-oriented, patient accounts, or for investors who are looking to make a macro/capital markets call" on interest rates and the stock market's direction, he said. Many annuities are more profitable when markets are rallying.

Brighthouse has a book value -- assets minus liabilities -- of approximately $10 billion to just over $11 billion, depending on the calculation methodology. Some analysts think it will trade at less than this book value, as is the case with rival Voya Financial Inc.

Brighthouse, which will be added to the S&P 500, is trading on the Nasdaq Stock Market. MetLife will continue on the New York Stock Exchange.

Write to Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

August 07, 2017 02:47 ET (06:47 GMT)