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MetLife removes alien status from captive

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In a continuing effort to reduce its risk profile in its variable annuity business and factoring in a continuing state regulatory probe into the captives industry, MetLife disclosed today it is bringing to the U.S. its offshore captive business.

MetLife officials said they are merging three U.S. life insurers and a Cayman Islands-based reinsurance captive “to create a larger, well capitalized U.S. life company.”

The disclosure was made at MetLife’s annual investor’s day presentation in New York, and in a filing with the Securities and Exchange Commission (SEC). 

MetLife championed its decision as a way to reduce the risk associated with its variable annuity business and also to increase transparency.

Variable annuities are “the biggest lever that we can really control in driving down that cost of equity capital,” stated Steve Kandarian, CEO of MetLife at the investor conference.

Kandarian also hilighted in his remarks how MetLife is redesigning its variable annuity products, reducing the roll-up rate and the withdrawal rate.

For example, the most recent change was in the GMIB MAX V product, where MetLife changed the guaranteed minimum income benefit its largest selling rider benefit, and the roll-up rate was reduced from 5 percent to 4 percent, and the withdrawal rate was lowered from 4.5 percent to 4 percent. These are important changes MetLife has instituted to dramatically impact the firm’s overall risk profile, officials said.

The company has significantly reduced the amount of VAs it sells, from a high of $28.4 billion in 2011, to $17.7 billion in 2011, to an estimated range of $10 to 11 billion for 2013.

“I should note at this point in time, the New York Department of Financial Services’ (DFS) industry inquiry regarding captives was an important factor in our taking a closer look at our offshore reinsurance subsidiary,” Kandarian acknowledged.  

He noted that the company assessed the current environment, including how the Dodd-Frank Act works around collateral for derivatives, opposed to the environment of 2001, when an offshore captive made more sense, and decided to take steps to bring these businesses back onshore into a more highly capitalized U.S.-based and U.S.-regulated entity.

Amongst the pressures MetLife has been under with regard to capital include oversight by the Federal Reserve Board, which last year barred it from increasing its dividend and buying back stock after failing a so-called “stress test.” Since debanking, MetLife has increased its  dividend by 49 percent, another capital-enhancing development.

MetLife had to undergo the 2012 stress test because it was a bank holding company (BHC) through its ownership of a small bank, and was therefore subject to the same scrutiny as other large financial institutions overseen by the Fed as BHCs. If it becomes a nonbank systemically important financial institution (SIFI), it will again be subject to stress tests.

MetLife knows it may be considered as a SIFI by the Financial Stability Oversight Council (FSOC), but that is still perhaps a year off, it if comes to that point. In that case, it would be subject to Federal Reserve regulatory requirements, including enhanced supervision and a higher capital threshold.

MetLife early this year sold its bank and deregistered early this year as a BHC.   

The DFS under Benjamin Lawsky, its superintendent, has been running point on the captives issue. The Federal Insurance Office (FIO) is also interested in the use of captives after concern of solvency and reserves was raised by FIO staff and appointed a federal advisory task force on the issue. It is headed by William White of Washington, D.C.  

A subgroup of state regulators at the NAIC, led by Rhode Island’s lead insurance regulator Joe Torti III, is also examining the use of captives by life insurers. The NAIC did a study on the use of captives and special purpose vehicles, and is working to finalize a draft paper. It is planning to discuss recent comments, due at the end of last month, on the latest draft on a conference call in the future.

“This decision improves the risk profile and transparency of our variable annuity business. Our investors have been telling us they would like greater transparency with respect to our variable annuity hedging strategies,” said a spokesman for MetLife. 

“MetLife has acted wisely in bringing this subsidiary back to the United States where it will be subject to stronger rules and oversight,” Lawsky stated in a release.

“The company’s decision represents a step in the right direction as we seek to address the risks created by the shadowy world of ‘captive’ reinsurance,” Lawsky said.

Lawsky stated, “captive reinsurance arrangements – which we call shadow insurance – are all too often parked offshore or in other lightly regulated jurisdictions where they are insufficiently understood and monitored.”

Lawsky characterized insurers as using captive insurance companies to quietly “off-load risk and increase leverage.”

The NAIC has pointedly dropped the reference to shadow insurance in its white paper draft.

“Now is the time to address these troubling vehicles before policyholders and our economy are seriously damaged,” Lawsky said, adding that New York regulators “will aggressively continue our investigation into shadow insurance across the industry.” It began the investigation in July 2012. 

“The DFS’s industry inquiries regarding captives encouraged us to take a closer look at our offshore reinsurance subsidiary,” MetLife added in a statement.

The MetLife presentation disclosed that it was merging MetLife Insurance Company of Connecticut; MetLife Investors USA Insurance Company of Delaware; MetLife Investors Insurance Company of Missouri; and Exeter Reassurance Company Ltd., based in the Cayman Islandsa, its offshore variable annuity reinsurer.

“We have not decided yet where in the U.S. it will be located. We are still working on that,” a spokesman for MetLife said.

Life insurers have said they support the use of captives, regardless of whether the more liberal and specially-tailored reserving methods allowed under principles-based reserving (PBR) project of the NAIC is fully implemented.

Managing risk remains a top priority for MetLife, another MetLife official noted in the presentation today.

“The variable annuity risk is a relatively larger risk at MetLife, and we are actively managing that both through risk management programs but also in resizing that risk to our total balance sheet. However, we also want to demonstrate to you that the variable annuity book does have value. And actually it has much more value with slight improvements in the markets and that the risk is manageable in the downside scenarios,” said CFO John Hele, according to a transcript of the presentation.

Most importantly, MetLife as a firm remains committed to annuities, Hele said.