Analysts: MetLife, MassMutual Both Winners in Major Deal

The weekend sale of MetLife Inc.’s captive agency force and broker-dealer to MassMutual Financial Group for $300 million is a win for both companies, analysts said.

MetLife lowers its cost structure and MassMutual nearly doubles its army of agents to 9,600 advisors.

MetLife gains as it slashes headcount by about 4,000 agents and advisors to whom it will no longer have to pay benefits, a trio of A.M. Best & Co. analysts said Tuesday. MassMutual, a seller of whole life products, gets overnight access to a portfolio of MetLife annuities, they added.

“That’s where MetLife has been growing — via third-party dealers,” said Michael Adams, A.M. Best’s primary MetLife analyst.

MetLife’s retail distribution network encompassed 40 local sales and advisory operations around the country.

Selling its Premier Client Group, affiliated broker-dealer MetLife Securities and related assets to MassMutual is expected to save MetLife $100 million this year and $250 million annually thereafter, MetLife said in a securities filing.

Ever since MetLife demutualized in 2000, the New York-based carrier’s captive agency channel, known as MetLife Premier Client Group, has been in retreat. Sales growth through independent agents, third-party distributors and in the post-Internet era, the direct sales channel all hurt MetLife, the analysts said.

Analysts at Keefe, Bruyette & Woods estimate MetLife’s captive advisor force generates between $500 million and $1 billion in revenue, but only “modest profits.” So from a financial perspective, the sale doesn’t mean much either way to MetLife’s bottom line.

Analysts had speculated earlier this year that MetLife would either spin off its captive sales channel, ditch the advisory unit through an initial public offering, or sell it to a competing carrier. Ultimately, it chose the latter.

In an announcement Tuesday, A.M. Best & Co. retained its financial strength ratings and issuer outlook of “stable” for MassMutual, and “under review” ratings for MetLife.

Where Does MetLife Go With the Independent Channel

MetLife, via a spokesman, said it was too early to say whether the company would boost sales through independent agents and third-party distributors like Fidelity. But if MetLife wants to boost independent agency sales, there are plenty of ways to do it.

MetLife could simply recruit more independent agencies and third-party distributors, or opt to tinker with the compensation structure now that the company has eliminated the fixed expenses associated with a captive agency force.

“That’s one way to encourage higher sales — is to change the compensation structure,” said Joan Sullivan, an analyst with A.M. Best & Co.

Selling Private Client Group and MetLife Securities to another carrier doesn’t increase the number of independent agents in the market since the transaction at its core involves the rebranding of MetLife captive agency force to MassMutual.

Agents who decline to join MassMutual will have to either retire for find an independent agency to join if they want to remain in the business. “They would have to find work elsewhere,” said Joe Zazzera, assistant vice president with A.M. Best & Co.

A “significant number” of the 4,000 retail captive agents working in MetLife’s Premier Client Group, however, are expected to join MassMutual, MetLife said in a company filing.

There are more than 74,000 financial advisors in the insurance agency, broker and producer group channel, according to data compiled by Tiburon Strategic Advisors earlier this year.

If the captive agency channel was proving to be too expensive for MetLife, what makes MassMutual think it can do a better job of it once the transaction closes in the third quarter?

For one, the fixed costs taken on by Springfield, Mass.-based MassMutual will now be spread out over 9,600 advisors instead of 5,600, MassMutual executives have said.

MassMutual advisors are under contract to sell a certain amount of proprietary products every year, but are free to sell products from other insurance carriers, as are MetLife’s 4,000 advisors, according to company spokesmen.

In a Feb. 24 note to clients, Credit Suisse analyst Thomas Gallagher said MetLife’s sale of the captive agency force may risk losing some distribution relationships, but that these would not be enough to cause a “permanent disruption” to MetLife’s overall distribution.

MetLife Finds a More Efficient Way to Sell

The deal stands to vault MassMutual as the top individual and whole life provider in the U.S., the company said.

The MetLife products that will be sold by the new MassMutual agency force include a host of annuities manufactured by MetLife, including — reportedly — a new fixed indexed annuity tailor-made for MassMutual agents and clients.

The FIA is part of a 10-year deal, according to reports, and complement MassMutual’s annuity portfolio of fixed deferred, income and variable annuities.

Ever since 2011, when MetLife variable annuity sales hit a record of $28.4 billion, the company has been pulling back on variable annuity sales. In the third quarter of 2015, MetLife sold $5.2 billion worth of individual variable annuities, LIMRA Secure Retirement Institute reported.

The beneficiary of MetLife’s annuity manufacturing prowess now falls into MassMutual’s hands. The deal was hailed by Roger Crandall, chairman, president and CEO of MassMutual, as “the transformative creation of a distribution powerhouse.”

“This should help MassMutual improve its sales ranking in variable annuities from the 20th position (LIMRA third-quarter numbers) as it currently lags behind its mutual peers,” said Andrew Edelsberg, senior director with Kroll Bond Rating Agency in New York, in an email to InsuranceNewsNet.

MetLife, meanwhile, will be able to concentrate on developing annuities into a newly regulated world without the major headache of having to actually sell them – a “decoupling” of distribution from the manufacturing, the two companies said in a joint news release.

In short, MetLife is willing to cede some distribution control by selling its captive distribution network in exchange for less regulatory risk.

MetLife “Derisking” Regulatory Exposure

Company executives have made no secret of MetLife preferring lower-risk businesses that generate more cash and incur less volatility than variable annuities. Likewise, MetLife wants to avoid the potential impact of higher capital requirements at all costs.

Despite “encouraging” comments by the Federal Reserve on capital rules for traditional insurance lines, MetLife executives cringe at the thought that Federal Reserve could view variable annuities as nontraditional, said Steven A. Kandarian, chairman, president and CEO in a conference call with analysts last month.

International regulators consider variable annuities nontraditional products, which trigger higher capital requirements. MetLife already has enough on its hands challenging its designation as a systemically important financial institution, or SIFI, in court.

“The complicated regulatory environment, the federal-state-international (regulatory) interaction, these will force changes,” said Howard Mills, a former regulator and Deloitte’s global insurance regulatory leader, in an interview last month with InsuranceNewsNet.

The sale of MetLife’s captive channel, which the company has retained in one form or another for more than 100 years, is one of those changes.

Separate from insurance company capital requirements are new rules around the sale of products into qualified retirement accounts, rules which U.S. Department of Labor regulators are set to release in final form in the coming weeks.

Many industry experts believe new fiduciary rules will make it more difficult to sell variable annuities, and that the broker-dealer segment is staring at a new era of consolidation — hence MetLife’s desire to get out of the proprietary retail distribution business.

KBW analysts wrote in a Feb. 25 note to clients that selling Private Client Group and MetLife Securities would reduce MetLife’s regulatory risks in the face of the DOL as it shrinks its proprietary distribution of variable annuities.

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected].

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