MetLife Unwavering in Battle Over Systemic Risk Rules
June 4, 2014 by Ian Katz and Zachary Tracer
Steven Kandarian got MetLife Inc. out of banking to escape Federal Reserve oversight. Now, the insurer is fighting again to avoid the central bank’s reach.
Kandarian, MetLife’s chief executive officer, has called regulatory uncertainty the primary challenge to meeting profit targets as he shuns stock buybacks amid concerns that the insurer will face tighter capital rules. Rival American International Group Inc. embraced U.S. oversight. And Prudential Financial Inc., after resisting supervision, said “moving on is the right thing for us to do.”
The CEO’s objection is that New York-based MetLife could be labeled a potential risk to the financial system by a U.S. panel. Kandarian’s campaign features closed-door sessions with regulators and lawmakers, the submission of thousands of pages of supporting documents and help from consultants Oliver Wyman and Promontory Financial Group LLC.
“We truly believe we’re not systemically important,” Kandarian, 62, said in an interview. Asked whether he would file a court appeal, an option considered and then rejected by Prudential, he said that “nothing is off the table.”
Kandarian has embarked on a Washington blitz that included meetings with Fed governors including Daniel Tarullo and Janet Yellen, who is now chair, and a dinner with journalists. His April 24 discussion with deputies of the Financial Stability Oversight Council, or FSOC, followed nine other meetings that MetLife executives had with the panel’s staff, according to a person with knowledge of the matter.
Dodd-Frank
The CEO’s concern derives from both what he knows and what he doesn’t. The Fed could impose stricter capital, leverage and liquidity requirements and demand stress testing for crisis scenarios, though the central bank hasn’t yet described how it may adapt regulations for insurers deemed systemically important financial institutions. He also retains the memory of MetLife failing a Fed stress test in 2012, when it was still a bank- holding company, and the rejection of his plan to boost dividends and buy back stock.
Even after selling bank deposits and retreating from mortgage origination, MetLife could again be overseen by the Fed under the Dodd-Frank law, which was designed to prevent a repeat of the 2008 bailouts. The law created the FSOC, a group of regulators led by Treasury Secretary Jacob J. Lew, which identifies non-bank SIFIs for Fed supervision.
AIG, which received and then repaid a $182.3 billion U.S. rescue, has already been designated a SIFI, as have Prudential and General Electric Co.’s finance arm. MetLife, the biggest U.S. life insurer, didn’t take a Treasury bailout.
Bank Risks
At the same time that MetLife is arguing against being named a SIFI, it’s also lobbying to change a part of Dodd-Frank that applies bank-capital rules to systemically important insurers. U.S. Senator Susan Collins, the Maine Republican who sponsored that amendment, offered a revision in March, saying she never intended for the Fed to subject insurers to bank standards. Congress has yet to vote on the proposed change.
Kandarian has said MetLife doesn’t face the same risks as banks because his company doesn’t have as much of its funds subject to immediate withdrawals. On some life policies, insurers collect periodic premiums and make payments only when a customer dies.
While Yellen, a voting member of the FSOC, said in February that insurers should have different capital rules than banks, she also said the so-called Collins amendment restricts what the Fed can do in designing the standards. Lew and other regulators have increasingly felt pressure from lawmakers including House Financial Services Committee Chairman Jeb Hensarling about the FSOC’s criteria for evaluating insurers and the transparency of the decision-making process.
Political Issue
“The insurance industry has done an excellent job of making the whole systemic framework for insurance companies a political issue,” said Karen Shaw Petrou, managing partner of Washington-based research firm Federal Financial Analytics Inc.
Kandarian became CEO in 2011, after he helped guide the firm through the financial crisis as chief investment officer. In 2012, MetLife hired Heather Wingate, who handled government relations for Citigroup Inc. during the crisis, to oversee lobbying. Wingate was previously a liaison to the Senate for President George W. Bush.
Kandarian pressed his case in a speech in April 2013 at the U.S. Chamber of Commerce’s capital markets conference. He said insurers are already overseen by states and that he welcomes such oversight because solvent carriers have to take on liabilities when competitors fail.
Proper regulation “would recognize that applying bank- centric capital rules to a few large insurers would result in competitive distortions and harm to consumers,” he said.
Pension Backing
He told the group his perspective had been shaped by a stint from 2001 to 2004 as executive director of the Pension Benefit Guaranty Corp., the U.S. corporate pension insurer. At the time, the fund faced deficits from airline and steel-maker failures, and Kandarian said part of his mission was to protect taxpayers from having to bail out the company-funded agency.
Kandarian also has enlisted Sullivan & Cromwell LLP to prepare materials making MetLife’s case that insurers are unlike banks, which are “heavily short-term funded,” H. Rodgin Cohen, the law firm’s senior chairman, said in an interview.
At Kandarian’s April meeting, FSOC deputies asked questions without indicating whether they found his points compelling, according to a person with knowledge of the matter. MetLife has been in the final stage of the designation process since July.
Suzanne Elio, a Treasury spokeswoman, declined to comment. FSOC doesn’t discuss companies unless they are designated.
Ideal Watchdog
Prudential and AIG both were at that last stage for about eight months. A two-thirds vote of the council’s 10 voting members, which include the chairmen of the Securities and Exchange Commission and the Federal Deposit Insurance Corp., is required to label a company systemically important.
AIG, which was bailed out after it was unable to meet obligations at its derivatives unit, is one of the principal reasons the FSOC was formed. The company has a different relationship with the government than other insurers, in part because its rescue was led by the Fed and Treasury.
Peter Hancock, the CEO of AIG’s property-casualty business, said last week that the Fed is an ideal watchdog because it looks at the company in its entirety, while about 200 other overseers around the world take a narrower view.
The Fed does “a good job of helping us coordinate our message to the other regulators, also, importantly, to rating agencies,” Hancock said at an investor conference. “We’re being held to very high standards there and we welcome that.”
AIG’s assets were $547.1 billion as of March 31, compared with $890.9 billion for MetLife and $746.7 billion for Prudential. Banks of that size are automatically overseen by the Fed under Dodd-Frank.
Liquidity Risk
AIG is better positioned than MetLife or Prudential to deal with potential restrictions on buybacks that stem from being designated systemically risky, according to analysts at Goldman Sachs Group Inc. The insurer has ways to use the cash in its main businesses that aren’t available to those rivals, in part because AIG’s property/casualty insurance unit is much larger, the analysts said in a note last month.
While MetLife raised its dividend in 2013 and this year, the company hasn’t authorized a buyback since 2008.
The FSOC has legitimate reasons to look at insurers and how they’d unwind if in danger of failing, Petrou said. The firms can face “overnight liquidity risk” because they don’t have access to the Fed’s discount window, she said.
The FSOC, in voting 7-2 to designate Newark, New Jersey- based Prudential in September, said “potential effects of a rapid liquidation of a significant portion” of the insurer’s assets and possible challenges to unwinding the company could lead to “significant damage on the broader economy.”
Edward DeMarco, then-acting director of the Federal Housing Finance Agency, voted against designating Prudential, as did Roy Woodall, who was named to the council as an independent member with insurance expertise.
“The asset liquidation analysis appears to assume a contemporaneous run against the general and separate accounts by millions of life insurance policyholders and a significant number of annuity and other contract holders,” Woodall said. That’s a scenario “for which there is no precedent, and for which the likelihood is believed by most experts to be extraordinarily low.”
–With assistance from Craig Torres in Washington.
