MetLife's Lost-Client Issue Goes Back 25 Years, Still Stings

(Bloomberg) -- MetLife Inc. said its search for lost annuity customers is part of a problem going back 25 years, and the insurer is still paying for it.

There was a “lack of timely escalation” of the failure to track down some clients, the company said Tuesday in a presentation. The need to set aside more money to back those policies cut fourth-quarter net income by $70 million, according to a separate statement. MetLife had released preliminary results in January and gave ranges at the time for the reserves, while postponing a full earnings release.

The insurer had disclosed that it couldn’t find some clients and failed to pay them annuities, spurring a Securities and Exchange Commission investigation and revealing a “material weakness” in some controls. Shares fell December 15 when the firm said it was working to find those customers.

“We had an operational failure that never should have happened, and it is deeply embarrassing,” Chief Executive Officer Steven Kandarian said Wednesday on a conference call with analysts. “We are undertaking a thorough review of our practices, processes and people to understand where we fell short.”

The reserve correction dates back about 25 years, when MetLife subsidiaries “established a practice of releasing the full insurance liability after two attempts at contacting” clients, the insurer said in a filing later Tuesday. It was assumed that that the customers “would never respond and had not become entitled to benefits based on certain contractual provisions,” MetLife said.

Read more: Brighthouse inherits more of MetLife’s pain with annuity costs

The company said it will hire third-party advisers to examine the failings. About 13,500 clients were potentially affected as of Dec. 31, representing roughly 2 percent of the total group annuity operation, the insurer said. MetLife has about $40 billion in reserves backing the business.

The annuity issues have created another complication for Kandarian. He spent the last year trying to separate a U.S. retail unit, now called Brighthouse Financial Inc., in a process that led to charges against earnings. Brighthouse, which was spun off in August, said Monday that it would also have to boost reserves tied to certain annuity contracts that were administered by MetLife.

‘Solid’ Results

MetLife’s net income in the quarter was $2.1 billion, compared with a loss of $2.2 billion a year earlier, helped by a $1.2 billion benefit from the U.S. tax overhaul. Kandarian said Tuesday that the underlying results “remained solid.” The fourth quarter in 2016 was affected by changes in derivatives.

MetLife shares climbed 1.3 percent to $45.77 at 9:40 a.m. in New York, narrowing the year’s decline to 9.2 percent. That the insurer had completed its internal review and found no other problems is reassuring, Wells Fargo & Co. analyst Sean Dargan said in a note to clients.

After the disclosure of the charge, “investors have been waiting for another shoe to drop. We see no evidence of that proverbial shoe,” he wrote.

Analysts have peppered companies across the industry about group annuity businesses, which insurers generally sell through employers. Prudential Financial Inc. said Feb. 8 that the amount of clients it can’t find is small although there are “inevitably” some. The Newark, New Jersey-based company said it felt comfortable with the amount of money it had set aside for those policies.

Here’s a summary of the rest of MetLife’s results:

  • Full-year net income grew to $3.64 billion from $627 million in 2016.
  • The U.S. business’s adjusted earnings in the fourth quarter dropped 2.5 percent to $498 million on the reserve charge.
  • Profit from Asia fell to $310 million from $354 million a year earlier, partially tied to a change in Japan’s effective tax rate.
  • Latin America operations posted profit of $125 million, compared with $122 million a year earlier.
  • Profit at the Europe, Middle East and Africa businesses increased 9.7 percent to $79 million on growth in Turkey and western Europe.

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