Although MetLife has deregistered as a bank holding company with the sale of its bank to GE Capital in February, it is maintaining a tough stance toward any possible designation as systemically risky, subject to what it feels is ill-fitting future regulation by the Federal Reserve.
In its annual report filed with the SEC March 22, MetLife said that substantial uncertainty remains on the regulatory front because it still faces the possibility of being named a nonbank systemically important financial institution (SIFI), which would place it back under Federal Reserve supervision.
The report to shareholders went further, in a statement by chairman and CEO Steven Kandarian, by defending its perceived position as not systemically risky to even one firm, noting that even if deemed to be a SIFI, it should get rules tailored just to the life insurance business model.
Kandarian also warned of economic and public policy consequences both at the company level and for consumers.
“The relevant question to ask of MetLife is: Would the failure of our company ‘threaten the financial stability of the United States’?"
"We believe the answer is no’,” Kandarian stated.
“Not only would we pose no threat to the broader economy, we cannot think of a single firm that would be brought down by its exposure to MetLife,” the CEO added.
Kandarian went on to enumerate the risks to itself and the economy of being named a SIFI.
MetLife, when a bank holding company, was subject to stress tests, what it felt were inappropriate capital requirements and a Federal grip on its ability to buy back shares. MetLife was under constraints imposed by the Fed on raising its dividend and buying back shares after MetLife failed the stress test.
Naming the nation’s largest life insurers as SIFIs and subjecting them to unmodified bank-style capital and liquidity rules would constrain our ability to issue guarantees, said Kandarian, pressing for the need for specially-tailored regulation, not blanket bank-centric regulation on the companies deemed to be nonbank SIFIs.
The federal government could undermine competition in our industry by imposing a potentially onerous layer of federal regulation on a select few life insurance companies, which are already regulated by the states, Kandarian said.
“Life insurers would have to raise the price of the products they offer, reduce the amount of risk they take on, or stop offering certain products altogether,” if they are faced with costly new regulations, Kandarian warned.
He also warned of the federal government unwittingly possibly thwarting consumers’ needs for retirement products.
“At a time when government social safety nets are under increasing pressure and corporate pensions are disappearing, sound public policy should preserve competitively priced financial protection for consumers,” he stated.
Kandarian suggests identifying and regulating only those activities that fueled the financial crisis in the first place.
He underscored his and his colleagues’ argument that regulated life insurance activities were not responsible for the financial crisis.
“Perhaps that is why the federal government’s own report on the crisis, the Financial Crisis Inquiry Report, mentions “life insurance” only once in 663 pages,” he pointed out to shareholders.
MetLife is not under consideration yet as a nonbank SIFI in that it has not been contacted by FSOC, it said. The FSOC does not comment on these deliberations until a time when any designations are made public. The FSOC by all accounts is carefully deliberating AIG and Prudential, both of which have made public the fact they are under nonSIFI Stage 3 consideration.
These insurers may or may not be under consideration as global SIFIS or G-SIIs by the International Association of Insurance Supervisors (IAIS) – they have been subject to the data calls – but there are ongoing efforts by the Federal Insurance Office (FIO) to coordinate and align the process.
G-SIIs' regulatory requirements are not as clear, but a big concern for life insurers is that the variable annuity businesses and their hedging portfolios are a factor and could cause issues with product guarantees if heightened capital standards are overlaid upon them. The Geneva Association issued a report last week that variable annuity business is not systemically risky.
MetLife isn’t the only insurer that has deregistered as a bank or as a thrift/savings and loan company in the wake of the Dodd-Frank Act and accumulating evidence that strict and precise Federal Reserve prudential regulatory standards, including Basel III, would apply to subject insurers, regardless of the size of their banking assets or role.
In fact, Kandarian, with other top MetLife officials, met recently with Fed Governor Jeremy Stein and others to discuss its concerns raised last fall regarding the Basel III notice of proposed rulemaking (NPR) and its application to insurance activities, including the treatment of separate accounts, accumulated other comprehensive income, corporate debt, and insurance subsidiaries’ regulatory capital requirements.
MetLife said earlier in a letter to federal banking agencies that it was primarily concerned that the board may apply the risk-based capital standards proposed in these NPRs as part of the final Enhanced Prudential Standards for SIFIs.
If insurance companies are determined to be systemically important, MetLife wrote it had significant concerns about the potential application of these risk-based capital standards to insurance companies.
“As a liability driven business, insurance often has long term cash flow patterns, and an insurance company's investment portfolio composition and credit quality distribution is highly linked to and driven by the liability profile of its insurance products,” the Oct. 22 letter signed by General Counsel Nicholas Latrenta stated.
MetLife is concerned the Fed is ignoring the linkage between assets and liabilities and focusing on assets as the primary basis for determining capital requirements.
MetLife made a number of recommendations in its letter, including exclusion of Separate Account assets in the calculation of Tier 1 leverage.
“These Separate Account asset balances are matched directly against Separate Account liabilities and do not have an impact on the financial leverage of the insurance company. Separate Accounts should be ... considered offset by the related liabilities,” the Basel 3 letter stated.
In the NPR “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Prompt Corrective Action, and Transition Provisions (Basel III NPR), the banking agencies are proposing to revise their minimum risk-based capital requirements and criteria for regulatory capital, as well as establish a capital conservation buffer framework, consistent with Basel III.
The proposed requirements would apply to all banking organizations that are currently subject to minimum capital requirements as well as top-tier savings and loan holding companies domiciled in the United States.
Last year, Northwestern Mutual Prudential, and MassMutual, who also applied, got approval from the governors of the Federal Reserve System to deregister as a savings and loan holding company, giving them a temporary – or permanent – excused absence from Fed oversight.
All three insurers had limited trust services operations. However, about two dozen more insurers, especially some property casualty insurers have thrifts that are more part of their business model and cannot as easily shrug off their thrift.
In its annual report for 2012, Prudential Financial repeated the fact that it is under consideration by the Financial Stability Oversight Council (FSOC) for a proposed nonbank SIFI determination and that it could be subject to new capital and liquidity standards, including requirements regarding risk-based capital, leverage, liquidity, stress-testing and other matters under the Federal Reserve System as spelled out in the Dodd-Frank Act. However, it didn’t get into public policy or defend the insurance model in its annual report, speaking around the edges of the expected sea change instead.