MetLife Ruling Raises Questions About Other ‘Too Big To Fail’ Nonbanks

A federal judge Wednesday stuck down key parts of MetLife’s designation as a systemically important financial institution (SIFI). This raises questions as to whether other large nonbank financial companies also will fight to get out from under the “too big to fail” designation.

U.S. District Judge Rosemary M. Collyer, in a sealed opinion, granted MetLife’s request to dismiss the SIFI designation issued two years ago by the U.S. Treasury’s Financial Stability Oversight Council (FSOC).

The judge’s decision “validates MetLife’s decision to seek judicial review of our SIFI designation,” said MetLife chairman, president and CEO Steven A. Kandarian, in a statement on the company’s website.

“From the beginning, MetLife has said that its business model does not pose a threat to the financial stability of the United States,” Kandarian added. “This decision is a win for MetLife’s customers, employees and shareholders.”

A Treasury Department spokesman said the government “strongly disagreed” with the court’s decision.

“We are confident that FSOC’s determination was lawful and will continue to defend the council’s designations process vigorously,” the Treasury Department spokesman said. “In response to the financial crisis, Congress enacted Wall Street reform, created the FSOC, and directed it to address potential threats to financial stability.”

Reports that the Treasury Department would appeal the court decision could not be verified.

Three other nonbank financial institutions have been designated as systemically important by FSOC, a group created by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act overhaul. These three financial institutions are AIG, Prudential and General Electric’s financing arm.

FSOC renews its nonbank SIFI designation every year.  The judge’s decision Wednesday means that the other companies are likely to seek removal from the SIFI designation, which insurers find onerous as it requires additional oversight by the Federal Reserve.

A SIFI designation sets MetLife on a regulatory future more closely resembling that of banks, which are held to different capital standards — standards that MetLife executives insist should not apply because MetLife is not a bank.

Decision Not Expected to Affect Capital Management

Douglas L. Meyer, managing director for Fitch Ratings, told InsuranceNewsNet that he was surprised by the court’s decision.

“It will be interesting to see how FSOC responds and how AIG and Prudential respond,” Meyer said.

Judge Collyer’s decision isn’t expected to have any impact on the capital profiles of the insurers. In addition, Meyer added, any potential appeal by the FSOC would not change MetLife’s and Prudential’s recent approach to capital management.

“They thought about that before the (judge’s) announcement,” Meyer said. “It has every bit as much to do with strategic than with regulatory considerations. Those haven't changed. At this point they are committed to moving down the road for strategic reasons.”

MetLife has been scaling back on its exposure to life and annuity products that require setting aside large reserves. A.M. Best & Co. data indicates MetLife’s reserves rose to $249.9 billion at the end of last year from $224 billion in 2011.

Last month, MetLife also announced it would sell its 4,000-advisor-strong retail distribution channel to MassMutual, a signal the company as lowering its regulatory exposure even further.
In a news release Wednesday, Fitch Ratings said the court’s decision would have no impact on ratings assigned to MetLife.

Were MetLife to reconsider some of its recent strategic actions in light of Wednesday’s decision, rating agencies may need to “revisit the status of the ratings as certain entities are under review,” Andrew Edelsberg, senior director of insurance with the Kroll Bond Rating Agency, told InsuranceNewsNet.

If Wednesday’s decision ultimately stands, “MetLife will likely have greater flexibility with regard to maintaining capital at the insurance operating entities,” Edelsberg added.

In a January credit report on MetLife, A.M. Best analysts wrote that the company’s capital deployment plans “have been on hold due to recent federal regulations and uncertainty surrounding MetLife’s nonbank systemically important financial institution status.”

The FSOC designated MetLife as a SIFI in 2014 and earlier this month the FSOC reiterated its position in maintaining the SIFI designation for the company.

MetLife had pursued a separate challenge to the designation in U.S. District Court for the District of Columbia, a decision on which was rendered Wednesday.

Judge Collyer granted MetLife’s request as to three of several counts in its complaint, and a hearing on the dispute has been scheduled for April 6.

InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].