MetLife Tagged As SIFI: What It Means For Your Portfolio

MetLife Inc. MET has finally been acknowledged as a non-bank systemically important financial institution SIFI by the Financial Stability Oversight Council (FSOC) in the second and final voting process, wherein the consent of two-third of the 10 voting members was required. This brings the company under stringent regulations from the New York State and the supervision of Federal Reserve (Fed).

Strict government oversight will ultimately warrant stressful capital compliance scenarios, whereby MetLife will have to increase its capital-adequacy levels to guard against potential losses and contingencies. This will also adversely affect the capital deployment actions as the company will now have to attain approvals for any share repurchase program or dividend hikes from the Fed before sanctioning it publicly.

MetLife had shares worth about $1.26 billion available for buyback at Jun 2014-end from the authorizations in 2008. Of this, the company bought about $967.1 million shares so far in the second half of 2014. It was after six years that MetLife authorized a new share repurchase program worth $1 billion a week ago.

Estimate Revision

However since then, earnings per share EPS estimates of this Zacks Rank #3 (Hold) have witnessed a downward trend, based on the risk of being a SIFI. Accordingly, the Zacks Consensus Estimate for 2014 and 2015 dipped 0.5% and 1.7% to $5.72 and $5.95 per share, respectively, in the past 7 days.

Moreover, the Most Accurate estimate for MetLife's 2014 and 2015 earnings currently stand at $5.71 and $5.90 a share, resulting in an Earnings ESP of -0.2% and -0.8%, respectively. This indicates a slow pace of share buybacks that may hurt EPS, going forward.

MetLife Defiant to Repeal Status

The U.S. government perceives significant systematic risks related to the insurance industry, in a scenario of a catastrophe or a financial turmoil. For the same reasons, last year, the Fed had designated close peers of MetLife namely, American International Group Inc. AIG, Prudential Financial Inc. PRU and GE Capital of General Electric Co. GE, as SIFIs.

Nevertheless, MetLife believes that stringent capital rules will tighten the operational and financial flexibility of the company, resulting in additional compliance costs, which would ultimately be burdened on lower-income consumers through higher product pricing. Overall, this will skew the company's business model as well as its competitive and capital leverage, ultimately weighing on its financials.

Hence, MetLife continues to oppose this status and is preparing to appeal against the decision in the 30-day window that has been granted to it. We prefer to remain at the periphery presently and analyze future developments.

Following the announcement of the SIFI tag, shares of MetLife fell 0.6% in the after-hours trading, finally closing at $53.70 yesterday.

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