MetLife: SIFI Designation a Product of FSOC ‘Imagination’
August 24, 2015 by Frank Klimko, Washington correspondent, BestWeek: frank.klimko@ambest.com
WASHINGTON – The Financial Stability Oversight Council’s designation of MetLife Inc. as a systemically important financial institution is not based on facts, but on the council’s imaginative concepts of how the company could lead the country into another financial meltdown, MetLife said.
“Ultimately, FSOC asks this court to endorse an infinitely elastic framework that would permit the agency to designate a company based on whatever adverse financial conditions and macroeconomic consequences its boundless imagination can conceive,” the brief said. “That free-wheeling approach is irreconcilable with the designation criteria prescribed in Dodd-Frank.”
The insurance giant has sued the federal regulator, seeking a court order removing its SIFI designation. Earlier this month, the FSOC asked the SIFI case be dismissed, claiming that company complaints lacked a legal backing or underestimated MetLife’s financial influence (Best’s News Service, Aug. 5, 2015).
The company responded with a series of legal accusations about the way FSOC determined which companies were the most risk-centric. The FSOC erred by assuming MetLife’s potential material financial distress would be immense, its filing said.
MetLife is big: it is the largest U.S. life/health insurer based on 2014 total admitted assets of $608 billion, according to BestLink. It is the company’s size, as well as its nontraditional insurance activities, that require higher levels of monitoring, the FSOC said.
MetLife disagreed. The council ignored the fact that those activities are closely tethered to the business of insurance, the company said. For instance, MetLife’s derivatives program is overwhelmingly used for hedging MetLife’s “traditional life insurance” activities by protecting the investments MetLife makes to satisfy policyholder liabilities, the company said. And, those activities are subject to state regulatory oversight, the brief said.
In its filing, the federal regulator dismissed that central MetLife argument, that it is already sufficiently regulated by the states. The state insurance regulators are no match for large, globally interactive nonbanks and would be helpless in preventing another financial meltdown, the FSOC said.
MetLife said the historical track record of state regulation is actually quite good.
“FSOC’s naked assertion that state regulation provides no consolidated supervision,” the company said, “is contradicted by the evidence of coordination among state regulators through supervisory colleges and the testimony of state insurance regulators.”
The council dismissed the ability of state regulators to alleviate a “run” on MetLife through the imposition of a stay on withdrawals, ignored reasonable regulatory alternatives to designation, and refused to consider the consequences of SIFI designation for MetLife, the company said.
Although the SIFI rules are pending, it’s anticipated nonbank SIFIs will have to comply with the Federal Reserve’s capital plan rule and develop annual capital plans, conduct yearly stress tests and maintain an adequate risk-based capital ratio. The SIFIs are already submitting to federal regulators so-called “living wills.”
To date, three insurance companies have received SIFI designations: American International Group, MetLife Inc. and Prudential Financial Inc. MetLife is the only one of the three to challenge the SIFI designation in court (Best’s News Service, June 17, 2015).
This is the final filing by either party in the case, Randolph Clerihue, senior vice president, MetLife Global Communications, told Best’s News Service. The company would not respond to questions about whether it was engaged in talks to reach an out-of-court settlement with the government. No trial date has been set.
Metropolitan Life Insurance Co. currently has a Best’s Financial Strength Rating of A+ (Superior). On the afternoon of Aug 21, shares of MetLife Inc. (NYSE: MET) were trading at $49.63, down 4.4% from the previous close.