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March 14, 2012 at 10:20 AM
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.
