MetLife Inc. (MET) has no intention of surrendering to the Financial Stability Oversight Council’s (FSOC) non-bank systemically important financial institution (SIFI) label imposed last month. The insurer giant is suing the regulatory body for putting the company into stressful financial scenarios. For this, MetLife has appointed law firms Gibson, Dunn & Crutcher LLP and Sullivan & Cromwell LLP, and filed a lawsuit in the US District Court in Washington DC.
Formed in 2010 by nine federal agencies as part of the Dodd-Frank Act, the FSOC’s purpose and intentions have now come under critical review by both the political and industrial communities in the US. It has been condemned for lacking transparency, building an authoritarian structure and non-disclosure of evaluation procedures used for considering a company a SIFI. MetLife has even alleged that its efforts to reach out to these regulators in the past have simply seen dust. Hence, the company decided to challenge the FSOC’s operations and get rid of the SIFI label.
MetLife’s Plea
MetLife emphasizes that unlike other financial institutions like Lehman Brothers Holdings Inc. and American International Group Inc. (AIG) that had a big chunk of problem derivative contracts on their books triggering the financial downfall of 2008, the company is “too big to fail” in an event of a financial crisis. While MetLife did not take any capital help from the government during the 2008 crisis, the latter had loaned AIG $182 billion as bailout, which ultimately proved to be a fruitful investment.
MetLife also proclaimed to have maintained a healthy and less-risky balance sheet without any significant systematic risk in the financial industry. With $400 billion of gross notional derivatives at Sep 2014-end, the company considers itself well-hedged against risks of volatility in interest rates, currencies and capital markets. Moreover, with a market capitalization of $57 billion, the company stated in its filing that it writes credit default swaps only for those contracts on which it receives a premium to insure credit risk. MetLife had even de-registered itself as a bank holding company in 2013, by divesting all of its banking operations to terminate Federal oversight.
While over one-third of the top U.S. insurers have already come under the purview of the Federal oversight, MetLife also faces capital rules from the states and credit rating agencies. However, additional and more stringent capital compliance from FSOC will not only affect capital deployment actions adversely but also tighten the operational and financial flexibility of the company, resulting in additional compliance costs, which would ultimately be a burden on lower-income consumers through higher product pricing. Overall, this will skew the company’s business model as well as its competitive and capital leverage, ultimately weighing on its financials. Based on these factors, MetLife has appealed to re-analyze the case.
Outlook
While its peers, AIG, Prudential Financial Inc. (PRU) and GE Capital of General Electric Co. (GE) have accepted their SIFI designations in 2013, MetLife is the fourth non-bank entity to be tagged with this label. However, MetLife’s decision to challenge the regulators has raised hope for other non-banking companies, including large asset managers like BlackRock Inc. (BLK) and Fidelity Investments that will likely be added to the SIFI list soon enough.
MetLife management is ready to accept stronger rules but has vowed to oppose the systematically risky label with all its might, although a final outcome of this litigation is not expected before 9–12 months. Overall, we believe that a favorable result for MetLife will serve as an eye opener for regulatory bodies as well as the industry. On the other hand, an unfavorable outcome will not only hurt MetLife with higher expenses from litigation but also see sterner capital rules being imposed on the company. Currently, we remain at the periphery to analyze future developments.
MetLife carries a Zacks Rank #3 (Hold).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment