MetLife Faces A Growing Risk Of Scandal-Related Losses

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Photo: Yepoka Yeebo / Business Insider

MetLife, Inc. received a $3.2 million fine for loan service and disclosure practices connected to a banking unit that it’s planning to sell. As the New York insurer continues experiencing such problems, its investors have been increasingly exposed to the possibility of scandal-related losses this year.MetLife’s financial statements have reflected an AGR score of 4 as of June, indicating higher accounting and governance risk than 96% of comparable companies. Between June 2010 and September 2011, MetLife’s AGR score had improved to as high as 48, putting it into average territory. Before that period the insurer’s AGR score had languished for at least five quarters at no higher than 7.

When examiners conducted reviews from November 2010 to January 2011, they found deficiencies at residential mortgage loan servicers and foreclosure processors, the Federal Reserve Board said. MetLife and other large mortgage servicers received corrective actions in April 2011, as U.S. regulators worked toward a $25 billion settlement announced on March 12, 2012 to address alleged abusive practices at Bank of America Corporation, J.P. Morgan Chase & Co., Wells Fargo & Company, Citigroup Inc. and Ally Financial Inc.

The Fed also found on March 13, 2012 that MetLife had failed its stress test for financial strength. The insurer’s CEO Steven A. Kandarian countered in a statement at the time that the Fed’s “bank-centric methodologies” were inappropriate for insurance companies. “The established ratios used to measure insurance company capital adequacy, such as the NAIC’s (National Association of Insurance Commissioner’s) risk-based capital ratio, show that MetLife is financially strong,” Kandarian said.

MetLife’s financial statements, however, suggest that the insurer presents its business in the most positive light possible rather than the most conservative one. For example, companies include a significant amount of assumptions in estimating the future liabilities of their pension plans. As of the three months ended March 2012, MetLife had assumed that the assets in its pension would have a 5.8% rate of return, in contrast with the industry median of 5.48%.

Investors and regulators have raised questions about the veracity of the company’s statements. The City of Westland Police & Fire Retirement System filed a class action lawsuit on January 12 in the U.S. District Court in New York’s Southern District, alleging that MetLife managers including its former CEO C. Robert Henrikson misled them about the insurer’s potential liabilities between February 2010 and October 2011.

They alleged that MetLife regularly used a government-maintained database about U.S. deaths to find out whether to stop making annuity payments to dead customers, but not to find out whether claims were due on life insurance policies. On April 23, 2012 MetLife said that it had resolved multi-state examinations related to this matter, but it did not describe the size of the settlement clearly. The California Department of Insurance said July 24 that “it is anticipated that upwards of $500 million in benefits will be paid out” and the agreement required MetLife to pay $40 million collectively to the states participating in the settlement.

CEO Kandarian was MetLife’s chief investment officer from April 2005 to April 2011 before taking on his current role the next month. Meanwhile, MetLife’s management has had other turnover. turnover. After the New York Times reported on April 21 that Eduardo Castro-Wright, then the CEO of Wal-Mart de Mexico, was the driving force behind years of bribery at the retailer, MetLife said April 24 that Castro-Wright resigned from its board “due to personal reasons.”

In another red flag, Kandarian became not only CEO but also chairman of the MetLife board effective January 1, 2012. He said in a statement that MetLife was “emerging from a period of extraordinary global economic challenges with enhanced strength and opportunities to extend MetLife’s industry leadership and define a new standard of quality,” but this move also effectively made Kandarian his own supervisor.

MetLife is rated “D” on its environmental, social and governance characteristics overall. If the company experiences any regulatory problems in the years ahead, its next fine could easily be more than $3.2 million.


Photo: GMI Ratings

Region: North America
Sector: Financials
Industry: Insurance – Life / Health
Market Cap: $ 32,328.2mm (Large Cap)
ESG Rating: D
AGR: 4


Photo: GMI Ratings

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