Will MetLife Be the Next Too-Big-to-Fail Insurer to Face a Breakup?

Large global life insurance MetLife doesn’t lend itself to a breakup, but activist investors may still look to split the company just as Carl Icahn is trying to split AIG.
By Ronald Orol ,

With Carl Icahn's recent attack on American International Group (AIG) - Get Report , some insurance industry observers said they are wondering whether MetLife (MET) - Get Report could become the next target of an activist's attack.

AIG and Metlife are members of a small, exclusive club of large companies that are subject to a costly and time consuming form of government oversight that comes with tough capital and liquidity rules and Federal Reserve Board stress tests set up to see if they can survive a financial crisis intact without wreaking havoc on the markets. 

Icahn wants AIG to break into three units, predicated on his thesis that such a move would likely mean the remaining operations would be freed from extra government oversight at the same time that it would reveal shareholder value hidden among disparate units. 

Even though MetLife has the same focused costs and prohibitions -- both are designated by government regulators as Systemically Important Financial Institutions -- it would be a much harder target for an activist to tackle than AIG. 

For one thing, MetLife, unlike AIG, was not considered a poster child for the 2008 financial crisis, so it may be more difficult to get investors on board with the campaign. 

Also, while AIG has three distinct businesses -- life, property and casualty, and mortgage insurance -- that could be broken up, MetLife is predominantly a large global life insurance company that has only a small auto and home insurance operation in the property and casualty category. 

As a result, any activist effort to create a catalyst for shareholder value by seeking to split up MetLife would likely find it a difficult target.  

An activist could seek to separate MetLife's domestic insurance operation from its international business, but analysts point out that the domestic life insurance unit would still likely retain the SIFI designation simply due to its size. 

However, should a large activist fund launch a MetLife campaign, it could focus on how the insurer's SIFI designation makes it unable, at least for now, to conduct a large transformative acquisition. The argument could be that without the company's ability to grow through deals, shareholders are stuck in an insurance company that can't expand effectively.

Josh Esterov, an analyst at CreditSights, said the effective prohibition, at least for now, is in place at all three insurance SIFIs: Prudential (PRU) - Get Report , AIG and MetLife.

"Until standards are finalized or at least very clear, transformative M&A is out of the question because the companies would not risk being stuck in an inefficient capital structure," Esterov said.

That situation may have meant the small group of big SIFI insurers had to remain on the sidelines while Switzerland-based Ace Limited (ACE) acquired N.J.-based property and casualty insurer Chubb in July for $28 billion.

One former Treasury Department adviser said any activist that might consider targeting MetLife or Prudential would likely hold off to see first how the Icahn-AIG battle plays out.

Another factor is that MetLife, so upset about its designation, decided in January to become the first (and only) SIFI to challenge the government over the regulatory regime. 

Oral arguments for the precedent-setting case are set for Feb. 10 with Supreme Court Justice Antonin Scalia's son, Eugene, a partner at Gibson Dunn & Crutcher, defending the insurer. 

MetLife plans to argue that not only does it not create systemic risk but, on the contrary, its life insurance offerings are a source of financial stability. That court decision will likely be appealed and could take years to reach a conclusion. But MetLife could eventually succeed at removing the SIFI label and costs on its own. 

Until that happens, however, the costs of being a SIFI are substantial enough that it puts MetLife under a spotlight. One of the other remaining SIFIs, General Electric (GE) - Get Report , launched a major initiative in April to divest of most of its financing business as part its own effort to convince regulators in Washington to de-designate it. 

That move received the praise of another activist, Trian Fund Management's Nelson Peltz, who described those financial units as "legacy" businesses.

Beyond Icahn, only a small group of elite funds could take on an insurance company with $56 billion in market capitalization and more than $467 billion in assets under management. John Paulson of Paulson & Co., an Icahn ally in the AIG campaign, previously ran a breakup campaign at Hartford Financial Services (HIG) - Get Report and could do it. In addition, Peltz, Paul Singer's Elliott Management, Barry Rosenstein's Jana Partners, Jeff Ubben's ValueAct Capital Partners, Corvex Management and Jeff Smith's Starboard Value all are big enough to try.

But without an obvious catalyst, those insurgents are likely to focus their energy elsewhere.

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