MetLife Stock Soars on These Key Moves
For MetLife , the financial crisis was the ultimate exercise in risk management, as just about every possible thing that could go wrong for the industry did go wrong. Yet in the years since the crisis, Metlife stock has recovered much of its losses from the financial crisis, and the company appears poised to continue its recovery efforts well into the future. Let's take a look at what hit MetLife stock so hard and how the insurance giant bounced back.
The importance of insurance
When the financial crisis hit, banking stocks got the bulk of attention from investors and the general public, as the direct impact of the crisis on their core operations was a lot clearer. AIG was the primary exception, as its systemically important role as a derivatives counterparty brought the financial system to the brink of collapse and necessitated the biggest government bailout of any company receiving assistance. Yet for the most part, the bad loans on banks' balance sheets marked the epicenter of the financial crisis.
But MetLife and its insurance-company peers suffered greatly from the second-order effects of the financial crisis. In particular, because of the many investment-related products like annuities and variable life-insurance policies that MetLife and other insurance companies sell, plunging stock markets created huge potential liability for the insurers. In the aftermath of the crisis, MetLife raised the annual expenses it charged for its guarantees, while other insurers took steps like consolidating their offerings to make it easier to manage their respective risks.
Is MetLife still systemically important?
With all the regulation over companies that the Financial Stability Oversight Council deem to be systemically important financial institutions, MetLife has made moves to try to get out from under the most onerous part of the regulatory umbrella. The company sold off its retail banking unit to General Electric earlier this year, and although the move marked somewhat of a reversal of GE's own attempts to deemphasize the finance side of its business in favor of its industrial operations, the clear benefit for MetLife came from the ability to deregister itself as a bank and therefore end one extra level of oversight.
The problem MetLife sees from additional regulation is that higher capital requirements could hurt its returns and therefore force customers to pay more for its products. Already, MetLife has made significant changes to eliminate unprofitable parts of its business, as both it and Prudential Financial have stopped selling new individual long-term care insurance policies. If the company has to maintain greater capital reserves, MetLife will have less room to extend benefits like guaranteed income or withdrawal rights on its annuity and life-insurance products.
Moreover, low interest rates and volatile investment markets have made it extremely difficult for insurance carriers to earn money from products like annuities. Hartford Financial has taken the extreme step of ending sales of new annuities outright, making offers to buy out existing annuity-holders to help the company make the transition toward becoming a pure property and casualty insurer.
Yet despite the challenges that necessitated those moves, investors have applauded the success they've brought to MetLife and its peers. MetLife stock hasn't risen as much as some of its peers, but the entire group has performed impressively over the past year.
What's next for MetLife?
Perhaps the best news for MetLife could come from the trend toward higher interest rates that we've seen over the past month or so. As the economy gets on more solid footing, the Federal Reserve will need to pull back on the extraordinary measures it has taken in recent years. Resulting higher yields on bonds would help MetLife earn more on its investments, and the resulting boost in profits could be the catalyst that keeps Metlife stock moving higher in the years to come.
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The article MetLife Stock Soars on These Key Moves originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends AIG. The Motley Fool owns shares of AIG and General Electric and has the following options: Long Jan 2014 $25 Calls on AIG. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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