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  • New FED Standards May Impact Life Insurers

    December 28, 2011 by Arthur D. Postal

    By Arthur D. Postal

    December 21, 2011

    Insurers
    designated as systemically significant would be subject to the same capital
    standards as banks under a proposed framework by the Federal Reserve Board, a
    life insurance analyst warned today.

    In a
    note to investors, John Nadel of Stern Agee, Inc. in New York, said the issue
    is so important to life insurers that the industry “should coordinate for a
    united front” in fighting it.

    For
    example, he said that counterparty limits the proposal would impose could make
    insurers designated as Systemically Important Financial Institutions (SIFI) in
    key business areas, like the sale of variable annuities. He also cited limits
    on credit exposures that could make life insurance SIFIs non-competitive with
    their non-SIFI life insurer counterparts.

    Nadel notes that MetLife, Prudential Financial and
    American International Group are the leading candidates to be designed as SIFI
    by the Financial System Oversight Board (see story on ACLI, MetLife comments).

    These
    are the same three companies cited by the Wall
    Street Journal
    in a story on the issue Monday.

    Agee
    also says that Lincoln National and Hartford Insurance Group, because they
    received aid under the Troubled Asset Relief Program (TARP), could also be
    designated as SIFI.

    In his
    investor’s note, Nadel said that, “Over the past several months, we’ve gotten
    the sense from various executives in the life sector that the feeling was the
    arbiters in Washington were better understanding the key differences in
    business models between life insurers and large, multi-national banks.”

    But he
    said, “That distinction is very clearly missing from the document just released
    by the Fed.”

    At the
    same time, Nadel cautions, the Fed is asking participants to comment on various
    provisions within the proposed rules, including those surrounding capital requirements.

    The
    Fed proposal, published for comment Tuesday, involves steps the Fed is required
    to take under the Dodd-Frank financial services reform law to strengthen
    regulation and supervision of large bank holding companies and systemically
    important nonbank financial firms.

    The
    proposal includes a wide range of measures addressing issues such as capital,
    liquidity, credit exposure, stress testing, risk management, and early
    remediation requirements.

    Nadel’s
    view is that if the proposal doesn’t address the differences between banks and
    insures measuring the risks and appropriate capital levels for life insurers
    using bank regulatory capital standards “would essentially ignore the business
    models and create a completely uneven competitive environment within the life
    insurance industry for those designated nonbank covered companies and those
    excluded from the Fed’s purview.”

    Nadel
    added that if the same standards are adopted for insurers designated as SIFI as
    those banks with the same designation, it would lead to “celebrations” at
    companies like New York Life and Massachusetts Mutual “if key competitors such
    as MetLife and Prudential simply can no longer price competitively in certain
    product lines because their capital requirements are higher for the same risk.”

    Specifically,
    Nadel said the proposed counterparty exposure limits are of particular concern.

    He
    said that given the significant exposure to variable annuities and related
    hedging; and “what appears to be a constant reduction in available
    counterparties willing to underwrite the other side of the hedge, we are
    somewhat concerned by the proposed single-counterparty limits set forth in the
    document where in most instances single-counterparty exposure would be limited
    to 25 percent of capital.”

    “We
    need to do more work on this subject, but assuming the VA business continues to
    grow at a reasonable pace over time, this could pose a threat to hedging
    programs for nonbank covered companies,” Nagel warns.

    “We
    note, too, that VA’s are the logical product set on which to focus; however, we
    note the counterparty category includes extensions of credit (including loans,
    deposits, and lines of credit), securities lending, as well as other
    exposures.”

    He
    said the proposal also sets a stricter 10% limit for credit exposure between a
    covered company and a counterparty that each either have $500b+ in consolidated
    assets or are both nonbank covered companies.

    Originally Posted at LifeHealthPro on December 21, 2011 by Arthur D. Postal.

    Categories: Industry Articles
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