SIFI designations are credit positive for insurers

“SIFIs will be subject to additional scrutiny and requirements related to solvency, capital adequacy and liquidity,” the report adds. “They will need to pass rigorous stress testing, which would likely require them to maintain more conservative financial management, thereby limiting their ability to assume outsize risks.

The report goes on to note that a SIFI designation may avail the affected insurers of additional funds to meet “unanticipated needs in a severe stress scenario.” The report cautions, however, that a SIFI label reduces operational flexibility and challenges the company’s ability to diversify earnings and meet investor expectations.

“Specifically, if minimum capital standards do not reflect the unique business model of insurers, much higher capital requirements could make insurer SIFIs less competitive because they would need to raise prices to achieve return targets (or risk being less profitable),” the report states. “In addition, lower returns could affect SIFIs’ ability to raise capital if investors find them less attractive relative to peers unburdened by the strictures of Fed supervision. The SIFI designation can be appealed, but successful appeals are unlikely in our view.

“On balance, our perspective is that the credit benefit of a non-bank SIFI designation outweighs potential drawbacks since these issuers are less likely to take actions that would adversely affect their financial profile and are more likely to retain earnings and capital,” the report adds. “In addition, increased regulatory oversight could lead these issuers to strengthen risk management disciplines.”