MetLife Inc., the largest U.S. life insurer, is looking beyond Warren Buffett’s Berkshire Hathaway Inc. as Chief Executive Officer Steven Kandarian seeks ways to limit risk from retirement products known as variable annuities.
“To our knowledge, there’s only one major player who has a balance sheet large enough to offer variable annuity reinsurance, but it’s very pricey,” John Hele, MetLife’s chief financial officer, said at a presentation to investors. “Warren and Ajit do very high returns on their side, so it really doesn’t make economical sense, from what we’ve seen.”
Kandarian is seeking to show that MetLife can generate adequate returns on annuities after the industry was burned by low interest rates and stock-market volatility, which increased liabilities. Buffett and his reinsurance lieutenant, Ajit Jain, have profited by assuming obligations from insurers cutting risks or narrowing their focus.
MetLife spent the first portion of Wednesday’s investor meeting detailing cash flows from annuities and strategies to limit market-related losses on the contracts, which typically guarantee minimum returns for clients. Kandarian has raised fees and cut guarantees while scaling back sales.
“We think that we’ve got a pretty good risk profile here,” said Eric Steigerwalt, who oversees the U.S. retail business. “We’re committed to this business.”
Still, Steigerwalt said MetLife is researching options to cut risks tied to contracts sold before the financial crisis, which carried higher guarantees and suffered when equities plunged. He said the New York-based insurer has weighed paying clients to give up some contracts or guarantees, a step taken by Hartford Financial Services Group Inc. and U.S. units of Axa SA and Aegon NV.
“If we can find a couple of places where it would be appropriate for the client, and helpful to Met, we could do something like that,” Steigerwalt said in response to a question about annuity buyouts. “We have not announced anything. We don’t intend to announce anything tomorrow. But we’re thinking about every possibility.”
Kandarian’s company slipped 1.1 percent to $42.82 at 4:01 p.m. in New York trading. The insurer has rallied 30 percent since Dec. 31.
MetLife is targeting $10 billion to $11 billion in U.S. variable annuity sales this year, down from $28.4 billion in 2011. Sales were about $15.3 billion in 2007. The company has said the amount at risk is greatest from contracts sold prior to the financial crisis that began in 2008.
Cigna Corp. agreed in February to pay Omaha, Nebraska-based Berkshire $2.2 billion to take on as much as $4 billion in liabilities tied to death benefits and retirement products sold more than a decade ago. Reinsurance deals give Buffett more funds to invest and make acquisitions at the firm he’s built from a textile maker into a $278 billion company that hauls freight, operates electric utilities and manufactures chemicals.
Buffett didn’t respond to a request for comment sent to an assistant. Chris Breslin, a MetLife spokesman, declined to comment on any contact between the insurer and Berkshire.
MetLife also said it would combine an offshore variable-annuity reinsurance unit with three U.S. subsidiaries, after New York State’s financial regulator began an industrywide investigation into the use of such intra-company liability transfers, saying they could mask risk. The combination was spurred by the New York Department of Financial Services’ inquiry and by new derivatives regulations, Kandarian said.
DFS Superintendent Benjamin Lawsky praised Kandarian’s plan. He said his probe of the arrangements, known as captive reinsurance, would continue for the industry.
“The company’s decision represents a step in the right direction as we seek to address the risks created by the shadowy world of ‘captive’ reinsurance,” Lawsky said in an e-mailed statement. “Now is the time to address these troubling vehicles before policyholders and our economy are seriously damaged. We will aggressively continue our investigation into shadow insurance across the industry.”
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