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For MetLife, There's Light at the End of the Tunnel

David Katz

When we last focused on MetLife MET , we thought one of the overhangs depressing the stock was the pending sale of its small banking operation. Because MetLife owns a bank -- the only the only major insurer to do so -- the parent company is subject to the Federal Reserve's stress test. It failed the test in March due to the difficulties of measuring an insurer's strength using bank metrics.

Last December, prior to the stress test, MetLife had agreed to sell the bank unit to General Electric GE . The company reasoned that, after an expected "routine" approval by the Federal Deposit Insurance Corporation (FDIC), it would get out from under Federal Reserve regulation, as it would no longer be classified as a bank-holding company -- and would then be able to deploy its excess capital for shareholder benefit. MetLife's initial plan suggested a dividend increase to perhaps $1.10 per share (a 49% bump) and a $2 billion share repurchase.

Apparently the FDIC didn't get the memo, and the agency has still not given its approval. But MetLife and GE may have found another way. On Friday, MetLife announced a slight change in the structure of the transaction: A different unit within GE will be the purchaser, with the other deal terms to remain intact.

The key effect of the change is that the deal now requires the approval of the Office of the Comptroller of the Currency (OCC), not the FDIC, as the unit's new home at GE is a federally chartered bank -- not one with a state charter. The OCC is believed to be friendlier to the process, and the FDIC supposedly prefers federal regulation for these deposits. Also, the review process at the OCC is at a staff level, and does not require the board vote that had been the gating factor at the FDIC. Under the deal structure, the FDIC's role is no longer judgmental -- it's now just administrative.

Most important, MetLife still expects to have $6 billion to $7 billion worth of excess capital by year-end that it intends to deploy for shareholder benefit. The specifics of the December dividend-and-repurchase plan may be adjusted to fit the current environment, but shareholders will be rewarded in any case.

While the parties are still hoping to close the deal this year, it may roll into early 2013. Even after "de-banking," MetLife could still be subject to Fed oversight as a non-bank, systemically important, financial institution. While these regulations have not yet been finalized, indications suggest this new supervisory regime will appropriately consider the risks and capital requirements for insurers differently from how they would for banks.

The case for MetLife is still compelling, even with the stock up from its lows reached earlier in the summer. The stock trades at just 6.7x estimated 2012 earnings per share, at only 72% of adjusted book value and with good operating fundamentals, even in this low-interest-rate environment.

MetLife stock has underperformed the S&P 500 and the financial group this year, having gained just 14% year to date, on top of a miserable 2011. The stock has tended to move whenever there's been a development on the bank sale and its implied ability to return capital to shareholders. So, as the eventual completion of the sale becomes more visible, MetLife should make up lost ground and shareholders are very likely to receive their long-delayed reward.

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