Prudential Vice Chairman: Senate Passage of Bill Clarifying Fed Setting Capital Standards for Insurers ‘a No Brainer’
June 6, 2014 by Fran Matso Lysiak
NEWARK, N.J. – As Prudential Financial transitions to an insurance company that is supervised and regulated by the Federal Reserve, the debate over the Collins amendment “is a lot more about form than substance,” said the vice chairman of the company.
Mark Grier noted a couple of important developments this week concerning the supervision and regulation of insurance companies. That includes issues related to the development of capital standards for systemically important financial institution insurers and for insurers that are thrift-holding companies that also are regulated by the Federal Reserve, he said at Prudential Financial’s investor day on June 4.
The Senate passed June 3 a bill that is an amendment to the original Collins amendment in the Dodd-Frank act that clarifies the ability of the Federal Reserve to establish different capital standards for insurance companies than those for banks, Grier said. The bill must go to the House.
“But I think you have to be encouraged by the very strong statement on the part of the entire Senate that this seems kind of like a no-brainer,” he said. “At the very least, there certainly is a strong message out there about how to think about this issue and the fact that it would be nice to get it behind us and move on without having the Collins amendment issue hanging out here as it relates to capital standards.”
Last month, representatives of the U.S. insurance industry, including the American Council of Life Insurers and the National Association of Mutual Insurance Companies, were urging Congress to pass legislation that would clarify the Federal Reserve board’s authority to develop insurance-based capital standards for insurers under its supervision.
Fed regulators have previously signaled they believe Dodd-Frank requires insurance companies and banks that have received SIFI designations from the Financial Stability Oversight Council to meet the same rules outlined in the Basel III regulatory capital.
The confusion stems from differing interpretations of Section 171 of Dodd-Frank, which was authored by U.S. Sen. Susan Collins, R-Maine. Section 171 requires large financial holding companies to maintain a level of capital at least as high as that required for community banks.
Dodd-Frank charged the Federal Reserve with overseeing institutions that could pose a threat to the U.S. financial system.
American International Group Inc. (NYSE: AIG) and Prudential Financial are the two insurance companies that have received SIFI designations (Best’s News Service, June 2, 2014). Metropolitan Life Insurance Co. (NYSE: MET) has confirmed it has reached Stage 3 of the FSOC’s evaluation process for determining whether it should receive such a designation.
Turning to capital standards, Grier said the broad regulatory world, particularly at the federal level, wants to begin with consolidated statements, he said. The only place Prudential presents consolidated numbers are in GAAP financials, he said, noting the company doesn’t have consolidated statutory numbers.
Within the GAAP balance sheet, the company must find insurance business models, Grier said. “They are in there somewhere, and we have to map the insurance business concept.”
“There is an enormous amount of loss-absorption capacity in the balance sheet that is not in the capital account,” Grier said, noting that is “kind of the key thing.”
Considering Collins amendment restrictions, for example, if you could consider the loss absorption capacity when you calculate a leverage ratio, you wouldn’t be worried about equivalence to banks, he said. “You would far exceed the kind of leverage standard that the Collins amendment would imply.”
That means the Collins amendment debate “is a lot more about form than substance,” he said.
Earlier this week, the Federal Reserve Board hired former Connecticut Insurance Commissioner Thomas Sullivan to be its first senior adviser for insurance within the Banking Supervision and Regulation Division. Sullivan, who stepped down as a partner at PricewaterhouseCoopers’ Hartford, Conn. office in May, will enter his new role on June 9.
Addressing this news, Grier said Prudential has Connecticut-based subsidiaries, and is “encouraged by this development.” This gives the Fed access to someone with experience, insight and understanding into not just the process of state insurance regulation but the substance of the solvency world as it relates to insurance companies, he said.
“We look forward to the influence that he will have going forward,” Grier said.
There also are two components of reserves, Grier said. One is the best estimate of what Prudential thinks might happen. “It’s when people are going to die and we’re going to have to pay their claims or it’s how long they’re going to live and how long we’re going to be making those annuity payments.”
The second is margins — and they’re big, he said. Reserves are an estimate “of what we think we need to meet the claims, plus a whole lot more,” noting the latter translates to “tens of billions.”
Prudential Insurance Company of America currently has a Best’s Financial Strength Rating of A+ (Superior)
On the afternoon of June 4, Prudential Financial’s (NYSE: PRU) stock was trading at $88.22 a share, up 2.55% from the previous close.
(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)
