Northwestern Mutual Life Insurance won approval from the Federal Reserve Board to deregister as a Savings and Loan Holding Company, (SHLC) averting a collision with Fed oversight beginning at the first of the year under proposed capital rules.
The board’s approval of Northwestern’s request is notable because it appears to be the first such deregistration request approved under a section of the Dodd-Frank Act and ahead of Basel III capital rules that are slated to go into effect for insurers with thrifts Jan. 1.
It is also notable because the commitments provided by Northwestern as described in the FRB approval letter suggest that an institution “may disregard the amount of deposits needed to maintain deposit insurance for purposes of determining whether all or substantially all of its deposits consist of trust funds,” stated Goodwin Procter LLP.
The Wisconsin mutual insurer must continue to satisfy commitments it made as part of the deregistration process or face enforcement, most of which relate to banking activities, such as marketing FDIC-insured deposits.
Specifically, Northwestern and its limited-purpose savings association, NM Wealth, committed to not engage in activities beyond those permissible under section 5(n) of the Home Owners’ Loan Act, must not offer commercial loans, maintain or accept demand deposits or deposits that the depositor may withdraw by check for payment to third parties, and not establish an account with any Federal Reserve Board Bank nor seek to exercise discount or borrowing privileges with the Fed.
NM Wealth also must hold at least 99 percent of its deposit in a trust or fiduciary capacity save for the amount needed to maintain deposit insurance with the FDIC.
The letter from the Federal Reserve Board in Washington to Northwestern Mutual General Counsel Raymond Manista was dated Sept. 26.
At issue were proposed regulations that would make insurers with thrifts subject to consolidated federal supervision by the Fed and subject it to new bank-centric capital standards most insurers and state regulators believe are antithetical to the insurance business.
The request was granted under Section 604(i) of the Dodd-Frank Act.
This provision amended the Home Owners’ Loan Act to exclude from the definition of SLHC a company that controls a savings association that functions solely in a trust or fiduciary capacity.
Prior guidance has suggested that at least 99 percent of an institution’s deposits must consist of trust funds in order to meet this standard, but FDIC regulations require insured depository institutions to maintain at least $500,000 in non-trust deposits to maintain federal deposit insurance, the Goodwin Procter legal team pointed out.
MassMutual said it is hoping to hear word from its similar application to deregister its thrift, as well. Others have said, like Principal Financial and TIAA-Cref, that their thrift is part of their business model.
The proposals would affect separate accounts, statutory accounting, underwriting and investments. Many insurance companies and associations have spoken out on the proposed rules, as has the NAIC, in comment letters this month.
Insurance CFOs suggested in an Oct. 22 letter to the banking regulators that because insurance companies that have savings and loans have not been regulated by the Fed previously, new capital requirements should not be applicable until July 15.
“Such companies have never been subject to Basel requirements and this extremely short transition period is unduly burdensome and contrary to the express intent of Congress in the Collins Amendment,” the CFO letter said. An amendment to the legislation sponsored by Sen. Susan Collins, R-Maine, specifically mandates consolidated supervision of all non-banks which operate thrifts by the Fed.
Furthermore, the letter said that the proposed rules would require the implementation of GAAP accounting standards by January 2013, “which is simply infeasible for insurers not currently reporting under GAAP (Generally Accepted Accounting Principles).
“There is insufficient time for insurers to implement the systems and processes necessary to provide the data required by the proposals,” the CFO letter said.
The letter also contended that the proposal would call for double-counting of assets and differentiate on the capital treatment of separate account assets depending or not on whether they are considered “non-guaranteed.”
If the separate account is considered “non-guaranteed,” then the separate account assets will get a 0 percent risk weight. If the separate account assets are not considered “non-guaranteed,” then they will be treated as if they were general account assets and risk-weighted based on the underlying assets, the letter said.
The NAIC letter, also sent Oct. 22 and signed by NAIC President Kevin McCarty and NAIC CEO Therese Vaughan, Ph.D., attempted to school the Fed on existing financial standards U.S. insurers are held to under state insurance regulation and sought to work with the Fed on developing a regulatory approach that "captures the complete risk profile if an insurance enterprise."
"Northwestern Mutual did not change its existing business model in order to obtain the deregistration," said Betsy Hoylman, director of Media & Public Relations for Northwestern Mutual. "Northwestern Mutual Wealth Management Company continues to be a leading provider of financial planning, investment management, and trust services to clients.
"NMWMC was chartered in 2001 as a limited-purpose federal savings bank. Northwestern Mutual Life Insurance Company, the parent of NMWMC, registered as a savings and loan holding company as a result."