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.
“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 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.