MetLife’s Annuities Should Still Be Considered

MetLife made big news in mid-March by failing a Federal Reserve “stress test” administered to 19 megabanks. Federal regulators are expected to classify it eventually as a “Systemically Important Financial Institution,” i.e., “Too big to fail.”

Should that make you eliminate MetLife from your list of acceptable annuity providers? I don’t think so.

If you follow annuities, you probably regard MetLife as a big publicly held life insurance company that also issues a lot of annuities. In fact, MetLife sold far more variable annuities in the U.S. in 2011—over $28.4 billion worth—than any other insurer.

But the Federal Reserve sees MetLife as a bank holding company, because for the past 10 years or so it has owned MetLife Bank, a multi-billion institution that during the mid-2000s even dabbled in the ill-fated home mortgage business.

So, with 18 other huge banks (but no other insurers), it participated in the 2012 Comprehensive Capital Analysis & Review (CCAR) by the Fed; results were published March 13. MetLife and three others failed the test because they had, the Fed said, risk-based capital ratios of less than 8%.

That was embarrassing for MetLife. But it may not be relevant. For one thing, MetLife expects to divest its banking business this year. For another, by insurance industry standards (as opposed to banking standards) MetLife has a consolidated risk-capital ratio of 450%, according to a statement issued by its CEO.

As an annuity shopper, you might be concerned about all those billions of dollars in MetLife Investors Series variable annuity contract assets that are guaranteed by MetLife to produce lifetime incomes for their owners. But MetLife shouldn’t have a hard time keeping those promises, because most contract owners probably won’t ask it to.

As a GMIB (Guaranteed Minimum Income Benefit), the MetLife lifetime income rider requires contract owners to annuitize their assets in order to trigger the guarantee (which ensures payments for life, even if the account goes to zero before they die). Since most people prefer not to annuitize—they lose direct control over the contents of their account if they do—not many are expected to take steps to trigger the guarantee. Even if they did—in the event of a prolonged recession, perhaps—MetLife is a strong, well-diversified company with a sophisticated risk hedging program. Its failure to pass the recent Fed stress test doesn’t reflect its true strength.

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