MetLife Fumes as it Fails Fed Stress Test

March 14th, 2012 by Trefis Team
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MetLife

MetLife (NYSE:MET) was one of four companies that failed the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) test, which was applied to many of the largest U.S. financial firms. Citigroup (NYSE:C), Ally Financial and SunTrust also failed the stress test, which applied worst-case scenarios through the end of 2013.

The Fed stated that the minimum total risk-based capital ratio should be 8% to withstand the stress scenario, and it estimated that MetLife would be at 6%. While MetLife is primarily an insurance company and did not participate in the Troubled Asset Relief Program, because it owns MetLife Bank it is considered a bank holding company. The company was therefore required to participate in the 2012 CCAR and submit its capital plan to the Federal Reserve for review. [1]

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MetLife plans to cease being a bank holding company by mid-2012. Last December, it reached an agreement with General Electric to sell its online banking operations, and it is also winding down MetLife Bank’s forward mortgage business. [2]

MetLife had excess capital of $3.5 billion at the end of 2011 and management expects that to grow to $6-7 billion by the end of 2012. The company wants to return excess capital to its shareholders, but its plan for $2 billion in stock repurchases and a dividend increase from $0.74 per share to $1.10 per share was rejected by the Fed.

According to Steven A. Kandarian, CEO of MetLife,

“The bank-centric methodologies used under the CCAR are not appropriate for insurance companies, which operate under a different business model than banks. The established ratios used to measure insurance company capital adequacy, such as the NAIC’s risk-based capital ratio, show that MetLife is financially strong. At year-end 2011, MetLife had a consolidated risk-based capital ratio of 450%, well in excess of regulatory minimums.” [2]

We have a price estimate of $39 for MetLife’s stock, which is about in line with the current market price.

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Notes:
  1. MetLife Misses Federal Reserve Target in Stress Scenario, March 14, 2012, Bloomberg [↩]
  2. MetLife Comments on Federal Reserve’s Comprehensive Capital Analysis and Review, March 13, 2012, Press Release [↩] [↩]