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MetLife Fails Federal Reserve "Stress Test"

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MetLife, Inc. (NYSE: MET) was one of four large financial institutions late Tuesday deemed to have failed a “stress test” imposed on large banking institutions by the Federal Reserve Board, a decision roundly criticized by MetLife and insurance analysts.

Industry analysts said the decision was based on evaluating MetLife by using criteria used to evaluate banks and not insurance companies.

“It is likely to be reversed later this year as Fed officials recognize the differences between banks and insurers,” said John Nadel, an analyst at Sterne Agee in New York.

The impact of the decision was to bar MetLife from following through on plans to buy back stock and increase its dividend.

Nadel cautioned that the impact of the decision was not likely to be felt by other insurers.

He said in a conference call that it is unlikely that life insurers other than MetLife, Prudential and American International Group will be designated as “systemically significant,” and therefore subject to federal as well as state regulation. He said “it was almost a certainty” that those institutions will be designated as SIFI.

Nadel said that he believed that most insurers other than MetLife, Pru and AIG will be subject to federal regulation, and that the rest of the industry will remain subject to state regulation as well as oversight by rating agencies.

In a headline on the investment note used to comment on the Fed decision, Andrew Kligerman, an analyst and a managing director at UBS in New York, said, “Test Causes Stress, Applicability Unclear.”

Kligerman said that the criteria used to evaluate MetLife was a “difficult (and possibly inappropriate) measuring stick for an insurer.”

In MetLife’s reaction to the Fed decision, Steven A. Kandarian, chairman, CEO and president, said that amongst the things MetLife was penalized for was the holding of funds of variable annuity customers in separate accounts.

MetLife, according to LIMRA, is the largest seller of VAs that offer “living benefits” payouts. He also said that the Fed’s methodology unfairly resulted in “harsh treatment” for MetLife’s corporate bond portfolio.

Kligerman, in an interview, discounted the concerns about the VAs with living benefits portfolio.

“If a company is properly hedging its risk, then the situation is being adequately addressed,” Kligerman said.

He also contended that the ratios being used by the Fed to evaluate MetLife are “not the same as those used to evaluate insurers.”

He added that, “insurance risks should be evaluated very differently than those of banks.”

Specifically, MetLife was one of 19 large financial institutions subject to the stress test.

It was based on four criteria involving capital and leverage used by the Fed in administering the stress tests.

Nadel said it was likely to be reversed when MetLife finishes in June its transition from a bank holding company by selling its bank deposits to GE Capital.

He said MetLife will be designated as SIFI by this Fall, but he also said that industry officials have been reassured by Fed officials that by then, the Fed will recognize the differences between banks and insurers and will evaluate insurers based on insurance metrics. To be evaluated separately from banking was an imperative for insurance companies.

In a statement, Kandarian said in reaction to the Fed action that, “MetLife is financially strong and well positioned for both the current environment and a potential further economic downturn.”

He said that, “We are deeply disappointed with the Federal Reserve’s announcement.”

Kandarian said that, “We do not believe that the bank-centric methodologies used under the Comprehensive Capital Analysis and Review (CCAR) program are appropriate for insurance companies, which operate under a different business model than banks.”

He said the established ratios used to measure insurance company capital adequacy, such as the NAIC’s risk-based capital ratio, show that MetLife is financially strong.

At year-end 2011, Kandarian said, MetLife had a consolidated risk-based capital ratio of 450 percent, well in excess of regulatory minimums. At year-end, MetLife had excess capital of $3.5 billion.

“We project our excess capital will grow to $6 billion to $7 billion at year-end 2012, before any capital distribution actions,” and that “it continues to be our strong belief that excess capital should be returned to shareholders and we remain fully committed to doing so.”

He said the capital plan rejected by the Fed requested approval for $2 billion in stock repurchases and an increase of MetLife’s annual common stock dividend from $0.74 per share to $1.10 per share.”