Filed Under:Life Insurance, Life Products

SIFI designations are credit positive for insurers

The Moody's report indicates the credit benefit of a non-bank SIFI designation outweighs potential drawbacks.
The Moody's report indicates the credit benefit of a non-bank SIFI designation outweighs potential drawbacks.

Moody’s Investors Service has announced the U.S. Financial Stability Oversight Council’s designation of several life insurers as non-bank systematically financial institutions to be “credit positive” for these companies.

Moody’s, New York, disclosed its stamp of approval on the SIFI designations in a June 6 release of “Credit Outlook”, a round-up of credit implications of current events, including transactions involving corporations, infrastructure developments, banks, insurers and sovereigns.

Last Monday, the U.S. FSOC named Prudential Financial, Inc. (Baa2 positive under Moody’s credit scoring system), American International Group, Inc. (AIG, Baa1 stable), and General Electric Capital Corporation (GECC, A1 stable) as non-bank SIFIs.

“Designation as a non-bank SIFI is credit positive for these issuers,” the report states. “Non-bank SIFIs will fall under the jurisdiction of the Federal Reserve System, which will provide regulatory oversight in addition to the current state insurance regulatory framework for the insurers.

“SIFIs will be subject to additional scrutiny and requirements related to solvency, capital adequacy and liquidity,” the report adds. “They will need to pass rigorous stress testing, which would likely require them to maintain more conservative financial management, thereby limiting their ability to assume outsize risks.

The report goes on to note that a SIFI designation may avail the affected insurers of additional funds to meet “unanticipated needs in a severe stress scenario.” The report cautions, however, that a SIFI label reduces operational flexibility and challenges the company’s ability to diversify earnings and meet investor expectations.

“Specifically, if minimum capital standards do not reflect the unique business model of insurers, much higher capital requirements could make insurer SIFIs less competitive because they would need to raise prices to achieve return targets (or risk being less profitable),” the report states. “In addition, lower returns could affect SIFIs’ ability to raise capital if investors find them less attractive relative to peers unburdened by the strictures of Fed supervision. The SIFI designation can be appealed, but successful appeals are unlikely in our view.

“On balance, our perspective is that the credit benefit of a non-bank SIFI designation outweighs potential drawbacks since these issuers are less likely to take actions that would adversely affect their financial profile and are more likely to retain earnings and capital,” the report adds. “In addition, increased regulatory oversight could lead these issuers to strengthen risk management disciplines.”

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Nichole Morford

Nichole Morford
Managing Editor

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