WASHINGTON BUREAU — Prudential Financial Inc. is still trying to keep the federal government from classifying it as a “systemically important financial institution” and subjecting it to a new layer of regulation, analysts say in a new investment note.
But executives at Prudential, Newark, N.J. (NYSE:PRU), seem to believe that federal regulators are likely to treat the company as a SIFI and subject it to a new layer of oversight, John Nadel and Dennis Zavolock, analysts in the New York office of Sterne Agee Group Inc., say in a report on an investor day event Prudential held Thursday.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created a Financial Stability Oversight Council (FSOC) and a Federal Insurance Office (FIO) at the U.S. Treasury Department. The FSOC is supposed to work with the FIO to determine whether some insurers or insurance holding companies are SIFIs and ought to be regulated by the Federal Reserve Board as well as by state insurance regulators.
If an insurer that was a SIFI failed, and if its home state regulators failed to resolve its problems with 60 days, the Federal Deposit Insurance Corp. could step in to resolve the problems using the insurer insolvency laws in effect in the home state.
Prudential managers are lobbying to prevent the company from being designated as a SIFI, Nadel and Zavolock say.
“Unfortunately for investors, it appears this process will be somewhat long-lasting, leaving uncertainty overhanging Pru and other larger insurers, and likely pressuring the upside in stock valuations,” the analysts say.
Prudential executives said they are continuing to brief federal regulators on the differences between their company and American International Group Inc., New York (NYSE:AIG).
Prudential managers “seemed to believe it’s inevitable that politicians and federal regulators will deem Pru systemically important (among other insurers), if only because of the history of AIG,” the analysts say.
Unlike the business that AIG was running 2008, when that company sought federal help, other large U.S. insurers do not have credit default swaps businesses and either have no securities lending operations or far better matched securities lending operations, the analysts say.
Prudential managers seem to hope they can educate regulators about the many major differences between typical insurance company balance sheets and bank balance sheets, the analysts say.
Regulators could use different metrics for insurers classified as SIFIs than for banks classified as SIFIs, the analysts say.