MetLife’s proposed restructuring, announced Tuesday, has important implications for the life insurance industry, which faces significant competitive and regulatory pressures in the U.S. and globally, according to Fitch Ratings.
In a press statement, Fitch writes MetLife’s move demonstrates how the evolving regulatory environment affects the industry’s capital management and operating strategies. The prospect of increasing regulatory capital requirements associated with MetLife’s nonbank systemically important financial institution (SIFI) designation weighed heavily in its decision.
MetLife is pursuing a separation of a substantial portion of its U.S. retail life and annuity business, which would be subject to enhanced capital requirements under yet-to-be-announced U.S. nonbank SIFI prudential standards. MetLife will no longer write new U.S. retail life and annuity business — a significant strategic shift for the insurer. The U.S. business to be divested represents approximately 20 percent of the operating earnings of the firm globally and 50 percent of its U.S. retail operating earnings.
While the SIFI designation applies to only two other U.S. life insurers to date (Prudential and AIG), the threat of higher regulatory capital requirements could lead to further restructuring initiatives by U.S. life insurers and non-U.S. insurers designated as a global systemically important insurer (G-SII).
Rating implications for moves such as MetLife’s could be mixed based on the structure and nature of the disposition of more risky, market-sensitive businesses, among many potential considerations. Fitch believes that inclusion on the list of G-SIIs will continue to play a significant role in setting strategy for global insurers.
Already, one European insurer, Generali, was removed in November 2015, while Aegon was added. The Financial Stability Board did not explain its rationale for the change, but Fitch believes it was driven by how these firms are exposed to nontraditional business, which includes some market-sensitive products.
MetLife is the second of the four nonbank SIFIs in the U.S. to elect a significant asset disposal to mitigate the implications of its systemically important designation. GE, the first such firm, is disposing of its middle-market lending business and other wholesale funding dependent businesses within its GE Capital arm.
None of the eight U.S. banks with SIFI designations have made moves as significant as MetLife and GE, but certain disincentives for becoming larger have been firmly established for banks, mostly though the global systemically important bank capital buffers, the Comprehensive Capital Analysis and Review program and the U.S. adoption of Basel III capital standards.
Fitch says it remains unclear if the proposed restructuring will result in MetLife shedding its SIFI designation, as the U.S. Financial Stability Oversight Council has yet to provide an “exit ramp” for designated firms. MetLife has challenged its SIFI designation in court. Fitch expects regulatory uncertainty around this issue to persist into 2017.