MetLife hampered by ‘too big to fail’ restrictions

'If they're wiped out, so are their future obligations.'

Should the nation’s largest supplier of insurance be viewed as though it is no different from a bank deemed to be “too big to fail” and thus needs federal oversight? According to requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the answer is “yes,” and it has caused operational difficulties for the Metropolitan Life Insurance Co. More

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INSURANCE

MetLife hampered by ‘too big to fail’ restrictions

'If they're wiped out, so are their future obligations.'

BLOOMBERG FILE PHOTO/SCOTT EELLS
The MetLife Inc. headquarters building.
Posted 5/7/12

Should the nation’s largest supplier of insurance be viewed as though it is no different from a bank deemed to be “too big to fail” and thus needs federal oversight? According to requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act, the answer is “yes,” and it has caused operational difficulties for the Metropolitan Life Insurance Co.

On March 13, the Federal Reserve announced that four of the nation’s top 19 financial institutions failed a Comprehensive Capital Analysis and Review test mandated by Dodd-Frank. MetLife was one of the companies that failed the CCAR, commonly called the “stress test.”

In doing so, the Fed also rejected MetLife’s plan to raise its annual common stock dividend by 49 percent, to $1.10 per share from $0.74 per share, and buy back $2 billion in stock. Conversely, passing results allowed JPMorgan Chase and other banks to strengthen their dividends and buy back shares.

The insurer, which employs 2,600 in Rhode Island, believes the test is a poor indicator of the company’s strong financial status and has given the public a false perception. MetLife’s shares have dipped 9 percent since the announcement, closing at $35.82 on the New York Stock Exchange on May 2.

Fitch Ratings, a globally recognized financial-rating firm, agrees with MetLife. In a March statement, Fitch came to the defense of the insurer.

“The results of the stress test are inconsistent with our view of MetLife’s capital,” said Doug Meyer, managing director of corporate finance for Fitch.

He believes the company’s financial ground is solid. “They have fairly high ratings with us and we view them as one of the stronger companies in the insurance industry,” he said.

According to Fitch, MetLife has been unfairly penalized because the analysis was developed for banks, which have fundamentally different asset and liability profiles.

Michael G. Riley, a managing member of Coastal Management Group in Narragansett, disagrees.

“Insurance companies have obligations that go out years. They have promised payouts to all sorts of entities,” he said. “At some point they will have to pay off on policies that they have promised and the investment funds are sitting in an account. If they are wiped out then so are their future obligations.

“To look at them [the same as banks] is legitimate,” he added. “These are leveraged financial institutions. They aren’t out there with huge amounts of risk but they have future obligations.

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