FSOC Cites MetLife’s Close Calls in Crash in SIFI Defense
By Arthur D. Postal
InsuranceNewsNet
WASHINGTON – The Financial Stability Oversight Council designated MetLife as a systemically important financial institution (SIFI) because of how much trouble the company got into in the 2008 crash and also because of how woven the company is in the global economy, according to a justification the council released the day after the designation.
Financial distress at MetLife “could have significant adverse effects on a broad range of financial firms and financial markets, and could lead to an impairment of financial intermediation or financial market functioning that could be sufficiently severe to inflict significant damage on the economy,” the 340-page report said.
MetLife is the largest provider of life insurance in the United States as measured by total statutory accounting principles (SAP) admitted assets and gross life insurance in-force, with $4.4 trillion of gross life insurance in-force (excluding annuities) as of Dec. 31, 2013.
Contrary to years of reassurances that the life insurance industry sustained relatively few problems in the economic collapse, the report describes MetLife as one of many companies that faced severe difficulties. “Like many of its life insurance peers, during the financial crisis, MetLife experienced significant decreases in the value of its assets,” according to the report.
MetLife’s GAAP total equity “significantly decreased” between 2007 and the first quarter of 2009, due in part to the reduced value of the company’s fixed income portfolio. In 2008, MetLife had the second largest amount of unrealized losses among life insurers.
In 2009, MetLife’s unrealized losses amounted to 22.5 percent of all unrealized losses among life insurers, the report said, which described the erosion as unsettling: “Although a substantial portion of the decreases in the value of its assets remained unrealized, this experience is indicative of both the scale of MetLife’s investments and also the extent to which the value of that portfolio can fall.”
MetLife, a bank holding company at that time, used several emergency federal government-sponsored facilities during the crisis period.
As to MetLife’s actions during the financial crisis, the report said that in 2008 and 2009, MetLife’s subsidiary bank accessed the Federal Reserve Term Auction Facility 19 times for a total of $17.6 billion in 28-day loans and $1.3 billion in 84-day loans.
In March 2009, MetLife raised $397 million through the Temporary Liquidity Guarantee Program run by the Federal Deposit Insurance Corporation (FDIC), which enabled the organization to borrow funds at a lower rate than it otherwise would have been able to obtain, the report said.
Additionally, MetLife borrowed $1.6 billion through the Federal Reserve’s Commercial Paper Funding Facility, the report said
MetLife also accessed the capital markets beyond the use of TLGP during the crisis. Notably, the company was able to raise additional capital via debt and equity issuances between April 2008 and July 2009, the report said.
FSOC released the justification report on Friday, 24 hours after MetLife was notified that the council rejected the company’s appeal of the SIFI designation announced on Aug. 6. That designation means MetLife is now subjected to oversight by the Federal Reserve Board, as well as the National Association of Insurance Commissioners (NAIC) and other agencies, such as the Securities and Exchange Commission.
Moreover, the report said, as of year-end 2013, MetLife operated in approximately 50 countries through 359 subsidiaries.
The report addresses the dissent by S. Roy Woodall, a former insurance lawyer and member of the FSOC, as well as by the president of the National Association of Insurance Commissioners (NAIC) and by the non-voting state insurance regulator member of the FSOC, Adam Hamm, the North Dakota insurance commissioner.
The 9-1 decision by FSOC noted that, “While one or more of the state regulators’ authorities may be effective in mitigating the risks arising from an insurance company, these authorities have never been tested by the material financial distress of an insurance company of the size, scope, and complexity of MetLife’s insurance subsidiaries.”
The decision also says that while state insurance regulators have authority over MetLife’s insurance subsidiaries domiciled in their respective states, state insurance regulators generally “do not have direct authority to require a non-mutual holding company of a state-licensed insurer or any non-insurance company subsidiary to take or not take actions outside of the insurer for the purpose of safety and soundness of the insurer or for the avoidance of risks from activities that could result in adverse effects on U.S. financial stability. … State regulators do not have direct authority relative to MetLife’s international insurance activities.”
The report cites MetLife’s heavy involvement in funding agreements and funding agreement–backed securities and says that MetLife leads the U.S. life insurance industry in certain institutional products and capital markets activities, such as issuances of funding agreement–backed notes (FABNs), 29 guaranteed minimum return products (such as general and separate account Guaranteed Investment Contracts (GICs)), and securities lending activities.
Another factor was inter-agency concerns about MetLife’s use of captives as a reinsurance mechanism, and that the failure of one of MetLife’s life insurance subsidiaries could affect all U.S. insurance policyholders and the guaranty system.
MetLife is a “leading” variable annuity writer, ranked second in overall variable annuity assets in the U.S., and represents approximately 10 percent of the total market share based on net assets. As of Sept. 30, 2014, MetLife reported $100 billion of variable annuity account values with guaranteed living benefit features and $198 billion of variable annuity account values with guaranteed death benefit features.
Arthur D. Postal has covered regulatory and legislative issues for more than 30 years in Washington, D.C. He can be reached at [email protected].
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