MetLife receives preliminary SIFI designation from FSOC

Washington, Sept. 4 — After more than a year of review, the Financial Stability Oversight Council (FSOC) voted today to preliminarily designate MetLife, the country’s largest life insurer, a nonbank systemically risky financial institution or SIFI, and the insurer said it is weighing its options.
The Council’s vote was unanimous with one member voting present. AIG, when it was designated, had an unanimous vote. Prudential Financial’s final designation vote was 7-2, with an abstention from the new SEC chairwoman.
“MetLife strongly disagrees with the Financial Stability Oversight Council’s preliminary designation of MetLife as a SIFI,” stated after the vote.

“MetLife is not systemically important under the Dodd-Frank Act criteria. In fact, MetLife has served as a source of financial strength and stability during times of economic distress, including the 2008 financial crisis,”MetLife CEO Steven Kandarian continued in a prepared statement this afternoon.
The preliminary designation came in a closed meeting of the FSOC, over which U.S. Treasury Secretary Jacob Lew presides.

Construction of the US Treasury Building, 1857, image courtesy LOC

Construction of the Treasury Building, 1857, courtesy LOC


Kandarian said that MetLife is not ruling out any of the available remedies under Dodd-Frank to contest a SIFI designation.

Prudential Financial appealed the decision last year by the FSOC and lost but did not pursue the matter through the court system.

MetLife now has 30 days to request a hearing before the Council to contest the proposed determination. After any hearing, the Council may make a final determination regarding the company.

FSOC does not intend to publicly announce the name of any nonbank financial company that is under evaluation before a final determination is made.

Instead, MetLife did the talking today: “The current regulatory system oversees a stable industry that pays out more than $500 billion every year. Imposing bank-centric capital rules on life insurance companies will make it more difficult for Americans to buy products that help protect their financial futures. At a time when government social safety nets are under increasing pressure and corporate pensions are disappearing, the goal of public policy should be to preserve and encourage competitively priced financial protection for consumers,” Kandarian stated.
If assets are treated as short-term under accounting or capital rules, then insurers will not be there to buffer the risk they have taken on with huge pension plans, insurers have argued.
When and if New York-based MetLife is formally designated, it would be subject to enhanced prudential supervision from what (again) will be its primary regulatory Federal Reserve Board, with a host of accompanying  holding company oversight and capital standards, a yet to be worked out by the Fed.
The vote by the 10-member Council would not mean a proposed SIFI designation is official until MetLife is given a chance to respond, which may mean it decides to appeal or does nothing and the time-frame to respond elapses.

However, the most interesting part of MetLife’s potential designation will be the rationale used by FSOC. For example, for Prudential, last year, the FSOC majority started with the premise of an impaired insurer, with a run on the bank scenario, that many in the insurance industry–and the independent insurance expert, Roy Woodall, thought was implausible, according to his dissent.
Last year, FSOC determined that Prudential’s material financial distress could pose a threat to financial stability focusing on two of the channels: exposure and asset liquidation.
“The Council has based its conclusion solely on what is referred to as the First Determination Standard; namely: ‘material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States,'” Woodall stated in his dissent.
Under Dodd Frank regulations, FSOC can, but does not require, that it begin with the company in distress and make determinations from there.
Passing that up brings the Second Determination Standard, dealing with the activities of an institution, into play.
“Given the questionable and unreasonable basis for the Council’s reliance solely on the First Determination Standard, it is my position that it would have been prudent for the Council also to have considered the Second Determination Standard pertaining to activities,” Woodall stated in the Prudential dissent of September 2013.
The fact that there were no dissents today–a ‘present’ vote is not a dissent–it appears the FSOC COULD have used the second determination route with MetLife.
Reaction from the Hill will certainly come, as some concerned lawmakers there have been attempting to stop FSOC in its tracks and have it reconsider SIFI designations until there is further disclosure on proceedings.
Rep. John K. Delaney, D-Md., a member of the House Committee on Financial Services,stated he had concerns about the process behind the MetLife designation, particularly regarding an alleged lack of communication and transparency.
“I generally support FSOC and its goals, but believe the details can be improved,” said Delaney, who, in July introduced with Rep. Dennis Ross, R-Fla., the FSOC Improvement Act (H.R. 5180) to address concerns about lack of transparency in the SIFI designation process.

MetLife, like its insurance SIFI brethren AIG and Prudential, is already designated as a global systemically important insurer (G-SII) by the Financial Stability Board (FSB) and the International Association of Insurance Supervisors (IAIS), which is expecting to designate any global reinsurers it deems systemically risky this November.
MetLife has been regulated by the Fed before, back when it owned a bank. MetLife debanked in early 2013 in part to get out from under the Fed’s Tier One capital-focused oversight, where it was subject to stress tests it believed befit banks, not insurers.

Insurance trades were having none of what the FSOC delivered today.

The American Council of Life Insurers (ACLI) said it “is extremely disappointed” by the designation today of another life insurance company, MetLife, as a SIFI.

“No single life insurer poses a systemic risk to the U.S.economy,” it simply stated.
For its part, he Property Casualty Insurance Association of America (PCI)’s Robert Gordon, senior vice president, policy development and research, stated that “while a particular combination of facts, including the performance of non-insurance activities, may trigger a determination of systemic risk for an institution, such a determination does not alter the fact that property and casualty and other traditional insurance activities do not give rise to systemic risk.”
Rep. Scott Garrett, R-NJ), chairman of the Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises, who once tried to gain entry to a closed FSOC meeting, let loose on the preliminary decision: “Today’s irresponsible and inappropriate designation of another U.S. business as too-big-to-fail only strengthens my resolve to reform the out-of-control FSOC….This designation flies in the face of a unanimous, bipartisan vote in the House of Representatives to postpone any additional designations,” he said.
Garret and others have been engaged in a flurry of letter-writing over the past months to get answers from Lew and FSOC.

FSOC’s Woodall troubled by IAIS’s proposal to limit involvement; others weigh in

The ability for international authorities to confer with policymakers with authority for financial stability in the insurance sector would be greatly hindered under an International Association of Insurance Supervisors (IAIS) proposal to basically cease “Observer” status Jan. 1. argues a member of the US Financial Stability Oversight Council (FSOC.)

FSOC Independent insurance member Roy Woodall says that the proposal detailed in the IAIS Notice of Request for Comment of Aug. 4, 2014, would render null and void  the purpose for joining as an “Observer” earlier this year, (see http://www.insurancejournal.com/news/national/2014/02/18/320673.htm) and could dampen oversight of global financial stability.

“Relegating systemic risk policymakers to only those opportunities afforded to the general public would reduce the likelihood of effective attainment of the IAIS goal of providing a meaningful contribution towards global financial stability,” Woodall stated in a comment letter to the IAIS late last week.
The IAIS is and must remain a critically important resource to systemic risk policymakers throughout the world.  To achieve its objective of contributing to global financial stability, the IAIS should consider how best to ensure that it continues to have the strongest possible ties with systemic risk policymakers so that they will benefit from and be able to act upon the informed and knowledgeable efforts of the IAIS in the area of global financial stability,” Woodall wrote.

Comments on the proposal are due Sept. 2.

The Notice of Request for Comment announced  two agreements by the  IAIS Executive Committee: an agreement that non-members would no longer generally participate in meetings but rather be invited when necessary to provide targeted, technical input; and that IAIS engagement with outside stakeholders would increase through special sessions, more dissemination of   documents and the use of conference calls as opposed to the in-person high-level meetings the IAIS has been holding  thus far.

But the IAIS proposal could have the unintended effect of excluding policymakers with legal authorities for financial stability regarding the insurance sector and who may not themselves be supervisors–like himself, Woodall argues.

For global financial stability to be most effective it needs experts on the insurance sector, and to include those with legal authority, he points out.

Woodall suggests that the IAIS could provide for participation by systemic risk policymakers as non-voting members, a suggestion that has been thorny in the past.

The IAIS could reconsider revising its bylaws so that  the IAIS could include “national organizations” and their members, which would  include systemic risk policymakers who serve on the FSOC — and members of other similar national bodies elsewhere, Woodall suggests.

For instance, the IAIS has similarly recognized the need for engagement by critical participants in other areas and has welcomed the participation of organizations like the World Bank, the Asian Development Bank and others as non-voting members, he notes.

Woodall acted to join as an “Observer” after a proposed IAIS bylaw amendment that would have permitted systemic risk policymakers to join as non-voting members was tabled by the IAIS Executive Committee at the annual meeting in Washington, D.C. in 2012.  U.S. members of the IAIS Executive Committee at the time  were divided on the motion, with reports of concern about the wording and  the inclusion of too many non-specific insurance entities with too broad a view of a jurisdiction’s financial  stability officials.

The NAIC and the U.S.  are already heavyweight members because of their numbers and agencies represented, which include the Federal Insurance Office and the Federal Reserve Board now, too.

Woodall noted that as an “Observer” he benefits from perspective of other Observers, who also would fall off the IAIS rosters under the proposal. Woodall says the other groups help give a by better understanding the implications for industry and consumers of matters under IAIS consideration.

As such, he says he is sympathetic to the goal of ensuring that the IAIS not become wholly detached from those who may be able to provide such important perspectives.

Consumer advocates who recently also were granted Observer status, including those in the U.S. funded through the National Association of Insurance Commissioners (NAIC) are also slamming the proposal by the IAIS.

Center for Economic Justice (CEJ)’s Birny Birnbaum, a seasoned consumer advocate and also a member of FIO’s advisory committee, criticized the unequal access some parties have had  and its potential effects on all stakeholders, including his constituency, consumers, in his Sept. 2 comments.

“We applaud the IAIS proposal to stop ‘pay-to-play’ and allow any interested party to follow and participate in the activities of the IAIS. However, meaningful participation by consumers of insurance in IAIS processes requires the establishment of a formal IAIS consumer participation program reflecting a commitment to obtain consumer input….”

“We note the irony of a request for comment on public participation procedures with a note on page 1 limiting the information to Members and Observers,” Birnbaum added.

Peter Kochenburger, one of the internationally-focused NAIC consumer advocates, and an insurance law professor at University of Connecticut where he  is executive director of the Law School’s Insurance Law Center, said he agrees with the serious concerns state regulators, insurers and trade associations that the IAIS draft procedures would greatly limit stakeholder involvement.  

“Closing most meetings to outside observers reverses the presumption of openness and transparency, and doesn’t speed up any processes – allowing stakeholders to observe proceedings does not mean IAIS working groups must have public comment periods, or even interact with stakeholders at these sessions,” Kochenburger said.  “If the IAIS was considered a public deliberative body, its draft procedures would violate many state open meeting laws,” he added.  

Consumer observers are further disadvantaged, though, he said.

“We don’t come with the power and resources of insurers and other stakeholders; if we are listened to it is not because of our market share in a country, but the quality of ideas, and commitment and experience in consumer (policyholder) protection.  Our credibility and therefore our effectiveness often depends on speaking publicly at hearings and committees and being able to communicate directly with supervisors.  Much of this will be lost, along with the opportunity to meet consumer observers from other countries, who will now have equally minimal opportunities to meet in person,” Kochenburger said.

The proposed procedures will reduce the opportunity for contributions by closing meetings that once were open, says Property Casualty Insurers Association (PCI)  of America’s Dave Snyder, a long-time Observer.

The general rule in the proposal is that meetings will be closed but guests may be invited in at the discretion of the IAIS.

“This is the most fundamental of all flaws in the new procedures. The reverse should be the case, especially when the role of IAIS, as noted by the paper, has significantly increased,” stated Snyder, who says PCI strongly agrees with the remarks of the NAIC (comments here), which trumpets transparency and stakeholder participation for their own sake and as a means to increase the likelihood of acceptance and overall efficiency.

Snyder welcomed open Executive Committee sessions  but said these would not  compensate for closing other meetings and closing meetings combined with inviting “guests” into them.

Observers have decried  the proposed policy not only because it will change the dynamics  of interaction but because it comes at a critical time–the IAIS is not a sleepy organization leased a few desks by a banking oversight body in Basel, anymore.

A global insurance capital standard by 2016 for globally active insurance groups is under development, with expected  implementation by 2019, alongside the development of capital standards for global systemically important insurers (G-SIIs) and possibly for global reinsurers.

The IAIS is also developing basic capital requirements (BCRs), which are planned to be finalized this year for implementation by global systemically important insurers (G-SIIs.) BCRs will serve as the foundation for higher loss absorbency (HLA) requirements for G-SIIs, and it is anticipated that their development and testing will also inform development of the ICS, the IAIS stated last year.

IAIS observers include in the United States as of 2013:  ACE, INA Holdings Inc .,  ACORD
AFLAC, AM Best, American Council of Life Insurers (ACLI,) American Insurance Association(AIA), AIG, Assured Guaranty Municipal Corp., Barnert Global Ltd., Cigna International Corp. CNA Insurance, Deloitte LLP, DLA Piper, LLP, Duane Morris LLP, Examination Resources LLC, Genworth Financial, Liberty Mutual Group, MassMutual Financial Group, MetLife, New York Life International, Northwestern Mutual, Promontory Financial Group, LLC, Property Casualty Insurers Association of America (PCI), Prudential Financial Inc, Reinsurance Association of America USA, Starr International USA Inc., The Chubb Corp., Transatlantic Reinsurance Co., Travelers Companies, Inc., Treliant Risk Advisers, United Health Group and XL Group.

International organizations such as the International Actuarial Association, the World Federation of Insurance Intermediaries and Insurance Europe are also Observers.

Right now, all eyes are on 21st Annual Conference of the IAIS in Amsterdam, October 23- 24, 2014. The theme of IAIS 2014 will be: ’Enhancing policyholder protection and financial stability through governance and risk management’. The group will decide then how to proceed. See: http://www.iais2014.org/
However, the American Council of Life Insurers (ACLI) warns, “that the IAIS should refuse to become an ivory tower bureaucratic elite,” by instead continuing inclusive interaction with diverse stakeholder groups with… those who may not agree on approach but who have the same objectives. “This is how you will be prepared for the next crisis and not the last one,” stated the ACLI comments, written by Robert Neill, formerly of FIO.

Yes, the book on MetLife is closed; vote on SIFI desgination next step

The Financial Stability Oversight Council voted Aug. 19 unanimously to close the evidentiary record on a what it says is a nonbank financial company, which we shall refer to as MetLife.
MetLife has been in Stage 3 of the review process for potential designation as a systemically risky financial institution (SIFI) for over a year.
Closing the books is the next step before the FSOC gathers in person or by phone to vote to potentially designate the largest U.S. life insurance company a SIFI, as it has for AIG, GE Capital and Prudential Financial, the second-largest U.S. life insurer. Prudential contested its proposed designation in an appeal, lost its bid and finally accepted it in lieu of a further battle and a higher standard of proof in the courts.
MetLife has long argued that it is not a SIFI, and it will be of interest to many to see whether the vote is unanimous or not.
The vote for Prudential was broken by three dissents, two from voting members Roy Woodall, the appointed independent member with insurance expertise, and Edward DeMarco, then acting chair of the Federal Housing Finance Agency (FHFA), and one from the representative from the state regulators, Missouri Insurance Director John Huff. The Securuties and Exchange Commission (SEC) had abstained in light of the recent Mary Jo White appointment.
When MetLife reached Stage 3 of the FSOC’s designation process in mid-July 2013, CEO Steven Kandarian stated that,
“I do not believe that MetLife is a systemically important financial institution. The Dodd-Frank Act defines a SIFI as a company whose failure ‘could pose a threat to the financial stability of the United States.’ Not only does exposure to MetLife not threaten the financial system, but I cannot think of a single firm that would be threatened by its exposure to MetLife.”

He argued against the scenario that the FSOC in large used that summer to finally designate Prudential, a run on the bank scenario.

“The life insurance industry is a source of financial stability. Even during periods of financial stress, the long-term nature of our liabilities insulates us against bank-like ‘runs’ and the need to sell off assets,” Kandarian said July 16, 2013.
“If only a handful of large life insurers are named SIFIs and subjected to capital rules designed for banks, our ability to issue guarantees would be constrained. We would have to raise the price of the products we offer, reduce the amount of risk we take on, or stop offering certain products altogether.”
MetLife is already a global systemically important insurer, as designated by the Financial Stability Board (FSB) after a review by the International Association of Insurance Supervisors (IAIS), as are AIG and Prudential.
The FSOC said in its resolution approving the completion of the record that “the nonbank financial company” has submitted written materials and information to the Council and the Office of Financial Research (OFR) and the staffs of the Council members and their agencies have analyzed such materials and information. The council member agencies are led by the Treasury Secretary or his designee. Including him, there are 10 voting members. They are listed here, by agency: http://www.treasury.gov/initiatives/fsoc/about/council/Pages/default.aspx
The OFR was planning on hiring more insurance expertise at one point, in the spring.

IAIS proposing removing ‘observer’ groups, adding public forum and phone time

UPDATE with NAIC consumer rep comment

July 31, Washington—In a move that had been anticipated by some for awhile, the International Association of Insurance Supervisors (IAIS) told members and observers that it is proposing the elimination of “observer” status. If this proposal becomes policy, it would go into effect January 2015.
Comments on the proposal, which is expected to become public Aug. 4, will be due on Sept. 2.
The IAIS, which did not confirm this action or timeline. It has been developing and weighing new processes for participation by interested parties for some time and will continue to do so.
Some groups have in the past been vocal about their  criticism of the move toward what they feel has been a trend at the IAIS toward less transparency and more closed meetings. Observers say the policy will definitely change the dynamics  of interaction with the IAIS at a critical time.

A global insurance capital standard is in the works by 2016 for globally active insurance groups, with implementation by 2019, alongside the continued development of capital standards for global systemically important insurers (G-SIIs) and possibly for global reinsurers.

The IAIS is also developing basic capital requirements (BCRs), which are planned to be finalized this year for implementation by global systemically important insurers (G-SIIs.) BCRs will serve as the foundation for higher loss absorbency (HLA) requirements for G-SIIs, and it is anticipated that their development and testing will also inform development of the ICS, the IAIS stated last year.

“You are talking about very complex issues here –the idea that  they are decided in closed sessions is absurd….Corporate governance now being thrown out the window–they spend 10 years opening up these meetings, and now with the flick of a switch they are going to close them,” one industry executive noted.  “Why is it that the public that is most effected by this have little time…less than a month… to comment?”

Also, recently, there are some key observers who just got their ‘wings.” The latest inductees into the observer ranks had strongly pushed for inclusion–namely, consumer groups and the independent insurance member of the U.S. Financial Stability Oversight Council (FSOC.)

Peter Kochenburger, one of six National Association of Insurance Commissioners  (NAIC) consumer representatives designated for IAIS observer participation was worried about the effect of any new policy after consumers had just gotten their foot in the door.

Unlike big insurance  companies, the consumer advocates are less well known and could have really benefitted from face-time with their counterparts from different countries as well as from having an audience with international regulators, he noted. He expressed concern that  eliminating observer status will reduce the effectiveness of consumers’ participation although that is not the intent of the new proposal.

Kochenburger, a University of Connecticut law professor and executive director of the law school’s insurance law center, says he thinks communicating only via e-mail, conferences calls and the like does not enhance understanding and developing trust (if not agreement) between the parties.  However, he noted, consumer groups will always be very strapped for paying for travel (despite funding up to a point by NAIC) and always vastly outnumbered by the industry in public live meetings so the proposed this emphasis on written communication/comments could help level the playing field a bit.  He also supported the IAIS intention of setting out specific processes and timelines for stakeholder participation, and welcomed written participation.

 

Roy Woodall, the appointed independent insurance expert and insurance voting member at FSOC, gained observer status this winter after trying for more than a year and half to become part of the proceedings. Woodall had publicly expressed strong concern in Congressional hearings about not having access to important regulatory discussions on financial stability of insurers in the FSOC’s wheelhouse when associates at NGOs and other service-oriented organizations could join the top-level discussions.

The Federal Reserve Board, also an FSOC member, was approved for membership –more than observer status-in the fall of 2013. The Federal Insurance Office is also a member.
Observers pay a flat fee of $19,000 Swiss Frances (CHF). A 2013 IAIS list denotes 144 observers for a possible total of 2.736 million CHF which is over $3 million US dollars.
Members pay quite a bit more. Total such fees for 2013 were 3,848,900 CHF or $4.237 million converted today. The NAIC pays a hefty 317,000 CHF, or almost $350,000, dwarfing the fees of any other member. They also bring more people to the table.
The Federal Insurance Office fee is $14,100 CHF and the UK, Canada, the Netherlands and Bermuda have a membership fee of 67,000 CHF, the top fee among most other global jurisdictions.
It is thought that the Financial Stability Board (FSB) could help fund the difference if and when Observers are dropped from membership, although no one is publicly discussing options.
IAIS observers include in the United States as of 2013:  ACE, INA Holdings Inc .,  ACORD
AFLAC, AM Best, American Council of Life Insurers (ACLI,) American Insurance Association(AIA), AIG, Assured Guaranty Municipal Corp., Barnert Global Ltd., Cigna International Corp. CNA Insurance, Deloitte LLP, DLA Piper, LLP, Duane Morris LLP, Examination Resources LLC, Genworth Financial, Liberty Mutual Group, MassMutual Financial Group, MetLife, New York Life International, Northwestern Mutual, Promontory Financial Group, LLC, Property Casualty Insurers Association of America (PCI), Prudential Financial Inc, Reinsurance Association of America USA, Starr International USA Inc., The Chubb Corp., Transatlantic Reinsurance Co., Travelers Companies, Inc., Treliant Risk Advisers, United Health Group and XL Group.

The NAIC consumer representatives, as noted,  and international organizations such as the International Actuarial Association, the World Federation of Insurance Intermediaries and Insurance Europe are also observers.

Late summer, fall harvest of non-bank SIFIs, G-SIRs (global reinsurers)?

SIR? G-SIR?
It should come as no surprise when MetLife receives a proposed systemically risky financial institution(SIFI) designation when the Financial Stability Oversight Council (FSOC) meets July 31 in a closed session –if the decision is ready, whether or not people agree with it.
At least one other institution in consideration for a nonbank SIFI designation will also be discussed at the scheduled meeting, it appears from the FSOC notice.
There was a nonbank SIFI in Stage 2 (out of 3 stages before a designation is proposed) in late March, which could be a reinsurer like the behemoth Berkshire Hathaway, or an asset manager, like BlackRock, which also early on (2011) argued against its sector’s consideration by the FSOC. Yet, because the FSOC minutes show that the deputy director for financial stability in the Federal Insurance Office (FIO) provided an update on the status of the ongoing analysis of this nonbank financial company in Stage 2, a insurer or reinsurer could be under the microscope–although it could be an asset manager that owns an annuity company. Berkshire is expected by some to be named, along with other global reinsurers, a global systemically important reinsurer (G-SIR) in November by the Financial Stability Board. (FSB.)
For its part, MetLife has been meeting with Federal Reserve Board officials for at least two years as they have noted in presentations and filings, regulators and lawmakers have requested input on capital adequacy frameworks for insurers as an alternative to the Basel framework prescribed under the US Basel III final rule. met has been under consideration as a SIFI in stage 3 analysis for more than a year by the FSOC, where it came under review when it divested its bank holding company status. As such, it has been very familiar with Federal Reserve oversight and the onus of stress tests. Insurance-applicable capital standards have yet to be developed. All SIFIs will be subject to Basel III, and insurers are hoping for some insurance-centric adaptation.
What will be interesting, once the MetLife decision is released, will be the rationale used for determining MetLife’s proposed SIFI-hood, and the language of the dissent or dissents which could follow.

If a run on the bank scenario is not used as the starting culprit in the FSOC analysis, MetLife would still have to be shown to cause systemic risk in a failure if it were a SIFI. Its global position and leveraging, and enormous third party asset management arm, MetLife Investment Management, could conceivably be argued to cause  any systemic risk problem more than the insurance operations. According to a snapshot profile, it it manages 12 accounts totaling an estimated $12.3 billion of assets under management with approximately 11 to 25 clients. It purchases commercial real estate. Asset managers are already being explored for their systemic risk. 

There is a strong and lively camp that resolutely believes insurers are just not systemically risky. There are bills in the House, two approved by a panel, that would curtail FSOC’s SIFI designation process pending a review, allow certain members Congress and other agency officials to sit in on closed meetings,  and new efforts  this week to reform FSOC and the Office of Financial lResearch  introduced by U.S. Rep. Dennis Ross, R-Fla., Rep. John Delaney, D-Md, Spencer Bachus, R-AL., Kyrsten Sinema, D-Az.,  and Patrick Murphy, D-Fla.,

“Dodd-Frank turned four this week,” Ross stated.  Unfortunately, it has become increasingly evident that aspects of the law are not working as promised. FSOC and OFR are agencies that were established to identify potential risks to our nation’s financial stability but they have been broadly criticized for their lack of transparency, flawed research, and inadequate designation process. …. In many cases, the SIFI designation can lead to a large cost increase for consumers.” Ross and fellow concerned House members  wrote a letter to Secretary  of the Treasury Jacob Lew in April detailing concerns with judging asset managers as risky and suggesting the need for specific ways in how they pose risk.

All of this concern, FSOC hand-wringing and legislation will come too late for MetLife, at least.

The rationale used for the case to create Prudential Financial’s SIFI designation was pummeled by many, including the insurance contingent on the FSOC, excepting Treasury official and FIO Director Michael McRaith, a nonvoting member. The run-on-the-bank scenario was held as improbable, and FSOC insurance expertise member Roy Woodall also worried about how the insurer could possibly ever exit from SIFI-hood under the scenario offered. FSOC began its examination from an assumption that Prudential was in distress from a run on the bank.  Woodall dissented on Prudential’s SIFI designation, but not on AIG‘s.

“The Basis does not establish that any individual counterparty would be materially impaired because of losses resulting from exposure to Prudential. Instead, the Basis relies on broader market effects and aggregates the relatively small individual exposures to conclude that exposures across multiple markets and financial products are significant enough that material financial distress at Prudential could contribute to a material impairment in the functioning of key financial markets,” Woodall stated in his dissent.

Treasury officials were concerned about Prudential’s extensive derivatives portfolio and activities for hedging and otherwise.

The majority FSOC rationale offered for MetLife is likely to be a bit different, but invite still find criticism.
Prudential was officially designated by the FSOC on Sept. 19, 2013 after an appeal failed, and as such is subject to enhanced supervision by the FRB pursuant to Dodd-Frank.
Prudential states outright in its resolution plan filed with the Fed “the failure of the Company would not have serious adverse effects on the financial stability of the United States.”
Prudential is also subject to regulation as an insurance holding company in the states where Prudential’s U.S. insurance company material legal entities are domiciled, which currently include New Jersey, Arizona and Connecticut.
There are no capital or enhanced standards or Basel 3 adaptations worked out yet for Prudential, which is being overseen by the Boston Fed. The company says it will continue to work with the regulators to develop policies and standards that are appropriate for the insurance industry.
Its first order of business was filing a resolution plan, which it did just before the July 1 deadline. AIG also had to do one, and MetLife will have to do one as well.
The Resolution Plan describes potential sales and dispositions of material assets, business lines, and legal entities, and/or the run-off of certain businesses that could occur, as necessary, during the hypothetical resolution scenario.
Pru’s resolution plan describes potential asset or business sales that could occur during this hypothetical resolution of Prudential and its material legal entities as the result of the hypothetical stress event.
Prudential says that Under the hypothetical resolution scenario, each of Prudential Financial, Prudential Asset Management Holding Co., the holding company of Prudential’s asset management business, and (Prudential Global Funding (PGF, its central derivatives conduit) would voluntarily commence a bankruptcy proceeding under Chapter 11 of the Bankruptcy Code in the applicable federal court.
Once the Chapter 11 proceeding began, PFI and PAMHC would likely sell certain businesses and reorganize around the businesses each elects to retain.
PGF, Prudential’s central derivatives conduit, would quickly liquidate what limited assets would remain and settle any other liabilities following the termination and closing out of its derivatives positions, Pru’s resolution plan states.
Under the hypothetical resolution scenario, each of the primary insurance regulators for the insurance subsidiaries would file uncontested orders to start rehabilitation proceedings against the relevant insurer material legal entities in their respective states of domicile.
MetLife, which has more extensive global businesses than Prudential, which concentrates its overseas business in Japan, would have to include these in a resolution plan.
MetLife would have 30 days to request a hearing, which then must happen in another 30 days, once it is notified of FSOC’s initial decision. Without a request, a final determination is made by FSOC within 10 days.

Lew “comfortable” with Prudential’s SIFI designation, FSOC process & FSOC’s work

Well, the Financial Stability Oversight Council’s (FSOC) hearing over its 2014 annual report is over and done with. Treasury Secretary Jack Lew testified that FSOC has an important, unprecedented job to do, it is doing that job with rigor and transparency, agencies are no longer “siloed,”and that Dodd Frank Act  and its FSOC really shouldn’t be meddled with — except perhaps for technical reasons.

During the June 24 hearing, lawmakers on the House Financial Services Committee pointed out “push back” from the primary regulators on the Council, such as from the independent insurance expert Roy Woodall and from the Securities and Exchange Commission (SEC), on some of the reviews of their sectors’ companies and products.

The lawmakers complained about lack of transparency, the possible avoidance of systemically risky financial institution (SIFI) designations, international capital standards, insurance accounting principles, and how a financial company might be trapped in the label with no way out once it got its SIFI designation, the suggestion that it was not the insurance portion or the state insurance regulators that were at fault with the AIG financial meltdown in a credit default swaps blaze and a variety of problems perceived by their constituents and others with regard to the FSOC process.

After all, the Committee passed two bills last week that put the FSOC on a shorter leash, one a moratorium on SIFI designations for six months and  the other opening up FSOC to the Sunshine Act and the meetings to select members of Congress and federal agency board members.

“I believe the review of the record was a robust one and it warranted the decision,” Lew stated in a reference to Prudential Financial’s SIFI designation last year, after a hearing.  The  decision stands and the company has not appealed it through the courts as it could have, Lew noted. The bar for winning such a court appeal is high, though, the industry has noted.

The FSOC process with Prudential was one that “reflected rigor and analytic quality and I am both comfortable with and concur with the judgment that was made,” Lew said.

Designation is “a big deal” and there is not an opportunity  at all for the potential designee to directly address the final information charges that are used to justify the decision before full FSOC or have the FSOC justify the charges that made their decision, charged  Rep. Gwendolynne  “Gwen” Moore, D-Wis.

Lew said this  was not correct. “There is extensive back and forth between a company and the FSOC ” in the stage three process, Lew said.

Other Committee members  wanted to know what a company could do to fend off stage 3 review, perhaps ditching some of its risky business beforehand, so to speak. Lew said full disclosure before stage 2 might not make sense for the company because it would have to report to financial markets and might affect the company before a decision had been made.

There is a company in Stage 2 now that is an insurer or has large insurance elements, based on a review of the FSOC meeting minutes, which is believed to be Berkshire Hathaway. Bloomberg first reported Berkshire Hathaway may be under FSOC scrutiny in January.

Berkshire Hathaway  sort of passes the criteria for stage 1 of a SIFI if one looks at size. But insurance, although core, is mixed with massive  investments and holdings, including now a major interest in RJ Heinz and  is not 85% of the holding company.  A SIFI must be “predominantly engaged” in financial activities, a US nonbank SIFI “must derive 85% or more of its consolidated annual gross revenues from financial activities or have 85% or more of its consolidated assets related to activities that are financial in nature.”

Of 2013 sated balance sheet revenues, about $36.7 billion were insurance premiums earned, about  $94.8 billion were  in sales ad service revenues, about  $34.8 billion were in  revenues from railroad, utilities and energy businesses, and almost  $16 billion in interest, dividend, investment income, revenue of financial and financial products and derivative gains, all totaled.

Whether it is systemically risky from a reinsurance perspective, even as it appears to be  in stage 2 FSOC analysis, is another question. Warren Buffett wrote in the 2012 annual report AND the 2013 annual report that “if the insurance industry should experience a $250 billion loss from some mega-catastrophe – a loss about triple anything it has ever experienced – Berkshire as a whole would likely record a significant profit for the year because it has so many streams of earnings.”

Indeed, “All other major insurers and reinsurers would meanwhile be far in the red, with some facing insolvency,” Buffet wrote.

Lew  also said once the SIFI designation is made, companies get reviewed once a year. The FSOC chair, said sometimes it will be a product and not a firm that is an issue, and urged lawmakers to let “the process run its course,” and not put FSOC in a place where “you are afraid to ask the question” about whether some company or product is indeed systemically risky.

There are many instances [under review] where there is not a risk and where FSOC does not need to take action, Lew stated. One lawmaker made it seem as if there was a “gotcha” situation with the SIFI designation. He pushed for something called “self-correctness,” something a company can do before it reaches stage 3.

“What?” asked Lew, calling FSOC’s review process of companies very transparent.

As for international accounting and/or capital standards, Lew acknowledged it might be difficult to go about creating them but it was a good thing to “eliminate some of the noise between different systems.”

Lew also told lawmakers that  the goal of going in and amending Dodd -Frank Act was not a good idea on a broader basis,  unless it involved a technical fix (perhaps the reworking Collins Amendment legislation to free Fed-supervised  insurers fro the same minimum capital standers under Basel 3 than the banks).

Lew answered multiple inquiries into the IRS and White House handling of  issues, computer crashes at the White House, cybersecurity  and information-gathering initiatives and other elements of the financial and political system.

 

Is FSOC exploring other options besides SIFI designations?

In a week when U.S. insurers flocked to testify or follow or promote Congressional hearings addressing easing Dodd Frank’s federal government powers strictures on insurance company oversight, U.S. Treasury Under Secretary for Domestic Finance Mary Miller opened the door to policy options for review of industries or companies under review for systemic risk.

But is it enough to allow insurers through? Or, has that door shut?

The Treasury Secretary chairs the Financial Stability Oversight Council (FSOC) that reviews threats to stability and designates financial institutions like Prudential Financial and AIG as systemically risky (SIFIs.) If FSOC identifies risks posed by asset managers or their activities that pose a threat to financial stability, it has a number of policy options, Miller stated during an FSOC-hosted conference on the asset management industry May 19.

These options include highlighting potential emerging threats in its annual reports to Congress, making recommendations to existing primary regulators to apply heightened standards and safeguards, and, of course, the SIFI-label: designating individual firms on a company-specific basis.

“If we identify risks that require action, we will seek to deploy the most appropriate remedy,” Miller stated in her remarks. However, “it is possible that at the end of this comprehensive review, the Council may choose to take no action,” she allowed.

Options seen as less radical than a SIFI designation which subjects  a company to enhanced (to put it mildly) prudential supervision under the Federal Reserve Board’s regime were previously raised in the dissent of then-acting director of the Federal Housing Finance Agency, Edward DeMarco, to the FSOC’s 7-2 vote on Prudential’s SIFI designation.

“To the extent that the Council has concerns about the potential for runs on standard products and existing regulatory scrutiny, those concerns would be better addressed by tools other than designation, such as the Council’s Section 120 authority,” DeMarco wrote in September in his dissent. Section 120 holds that FSOC may provide for more stringent regulation of a financial activity by issuing recommendations to the primary financial regulatory agencies to apply new or heightened standards and safeguards, including standards enumerated in section 115, for a financial activity or practice conducted by bank holding companies or nonbank financial companies under their respective jurisdictions, instead of blanketing the company itself with a SIFI designation.

FSOC’s plunge into the intense review of the asset management industry coupled with this apparent new tack doesn’t mean that MetLife is off the hook as a future SIFI, though, even though MetLife is a huge asset manager already.

The New York insurer, and one-time bank holding company, has been under Stage 3 review since mid-July 2013, likely the longest Stage 3 review thus far for a company.

If MetLife were cited as a SIFI on the same basis as Prudential, beginning with a distressed company and a run-on-the-bank by millions of policyholders and the ensuing contagion scenario, the oft-cited dissent from FSOC insurance expert Roy Woodall would probably be similar, which may be unpalatable to Treasury, even if the votes are there to designate MetLife.

At a hearing also this week on FSOC designations as a possible danger to the U.S. financial system, Woodall’s statement that FSOC’s “underlying analysis utilizes scenarios that are antithetical to a fundamental and seasoned understanding of the business of insurance, the insurance regulatory environment, and the state insurance company resolution and guaranty fund systems,” was quoted by Eugene Scalia of Gibson, Dunn & Crutcher LLP in Congressional testimony May 20.

Treasury probably wants to avoid listening to, over and over again refrains similar to, “the designation of Prudential purports to be based on a risk assessment, but a risk analysis that assesses neither the probability nor the magnitude of the event is not a risk assessment at all,” as stated by as Scalia in the Tuesday House Financial Services  hearing.

Also this week, House Financial Services Chairman Jeb Hensarling, R-Texas, called on FSOC to “cease and desist ” SIFI designations until it gets questions answered, and many are trying to push for greater FSOC transparency, so the FSOC bloom is off the rose, for now.

“Many think it odd that FSOC has chosen insurance companies and asset managers as targets for SIFI designation when there are others that pose far greater risks to financial stability.  Insurance companies are heavily regulated at the state level, and asset managers operate with little leverage. And since they manage someone else’s funds, it is almost inconceivable that an asset manager’s failure could cause systemic risk,” Hensarling stated.  

Treasury’s Miller also broached the  subject of the work of the Financial Stability Board (FSB) in ongoing work regarding the identification of global systemically important financial institutions. MetLife has already been identified as a global systemically important insurer (G-SII) by the International Association of Insurance Supervisors (IAIS), under the direction of the FSB, and some on Congress have expressed concern that a foreign body that is not a regulator is somehow directing domestic policy on U.S. capital and other standards. The NAIC, the state insurance regulators,  think the FSB mandate is so powerful, they want to be part of the group or its discussions.

Miller took the opportunity to try and allay these concerns.

“While the FSB and the Council have a shared objective of promoting financial stability, it bears emphasizing that the domestic and international processes are entirely independent.  In its work, the Council adheres to the standard and considerations for designations that are listed in the Dodd-Frank Act and in the Council’s public guidance,” Miller stated.

The Council is the only authority that can designate an entity for Federal Reserve Board supervision and enhanced prudential standards,” she stressed.

Concerns about dealing with so-called bank-centric capital standards themselves also had another airing when the Housing and Insurance Subcommittee of the Committee on Financial Services heard testimony on H.R. 4510, the legislative fix to the Collins Amendment in Dodd Frank that would free Federal Reserve-supervised insurers from preparing statements in accordance with GAAP and their assets and liabilities from the minimum leverage capital requirements and risk-based capital requirements required under Sen. Susan Collins’, R- Maine, now infamous Section 171.

 

Author: Liz Festa, in Washington, May 21, 2014