By Dan Burrows

It's been almost four long years since too-big-to-fail insurer American International Group (AIG) required a massive bailout to prevent the financial system from imploding, but the bailout still haunts the insurance industry.

MetLife (MET), the nation's largest life insurer, was one of four companies to fail the Federal Reserve's recent stress test, joining Citibank (C), SunTrust Banks (STI) and Ally Financial. MetLife was subject to the stress test because it owns a bank that it can't get rid of fast enough.

The company is slated to sell its bank business to GE Capital (GE) around the end of the second quarter, at which point it will no longer be a bank-holding company subject to Fed regulation.

The albatross that is MetLife's bank led the Fed to put the kibosh on a planned share buyback and dividend hike. The company intended to repurchase $2 billion in stock and raise its dividend to $1.10 from 74 cents. MetLife's requested total payout of nearly $3.2 billion would have represented roughly 60% of estimated 2012 operating earnings, according to Sterne Agee analyst John Nadel. That's the proximate reason for the stock tanking on Wednesday. It closed down 5.8% to $37.16.

Unfortunately, the sale of its bank won't be the end of regulatory risk for MetLife -- or other big insurance companies. Even after MetLife is no longer a bank, it will likely be slapped with the so-called non-bank SIFI designation. SIFI, or systemically important financial institution, was created after the bankruptcy of AIG to prevent other insurers and the like from slipping through the cracks between state and federal regulators.

In addition to MetLife, Prudential (PRU), the second-biggest U.S. life insurer, may be subject to SIFI oversight. Shares in Prudential were likewise hammered on the stress-test news, closing nearly 2.4% lower on Wednesday, to $61.58. Regulatory uncertainty makes both companies hard-to-value holdings at this point.

"With expectations that Prudential and American International Group will ultimately be designated non-bank SIFIs (as well as MET)," writes Sterne Agee's Nadel, "we believe these stress results for MET make it incredibly apparent that applying bank capital metrics to life insurance companies (particularly those with significant separate account business) is far more onerous than typical life insurance industry metrics."

That's not to say there's no short-term upside in the stock. Nadel expects a window of opportunity between the sale of MetLife's bank at the end of the second quarter and its likely non-bank SIFI designation, which would happen no earlier than late 2012.

During that period, the company would not be formally regulated by the Fed -- and could possibly jump on a capital-management plan like the one the Fed just rejected.

"During that open 'window' period, we believe MET’s management might be willing to return capital to shareholders through buybacks and/or a dividend increase," Nadel writes.

Still, with so much regulatory uncertainty, that's a risky bet -- and probably a tough one to pull off. As long as MetLife's Fed oversight status is up in the air, investors should take a pass. It's not as if there's a shortage of large-cap dividend payers to choose from, especially ones with clearer prospects this year and beyond.

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