3 Reasons MetLife Is Wasting Its Time Fighting the FSOC

Source: MetLife website

MetLife (NYSE: MET  ) and its CEO have been loud in opposition to the company's potential status as a Systemically Important Financial Institution -- but the company is wasting its time.

After more than 10 meetings with the council in charge of the SIFI review and numerous speeches, press releases, and other avenues, the insurer's pleas have done little to impacts its review. Insiders have even said that MetLife could receive the designation as early as July 31.

So far, both American International Group and Prudential Financial have been designated as SIFIs, while MetLife has just recently entered the final stage of the FSOC's review process. Though Prudential had initially balked at the designation, it decided not to pursue an appeal and is moving forward with the new regulatory process.

Regardless of when the designation might be handed over, there are three very important reasons why the insurer is just wasting its time fighting the process and SIFI title.

Reason 1: New rules
The designation of any company as SIFI includes added regulatory oversight by the Fed, which could impose stricter rules for capital, leverage, and liability requirements. None of the new rules have been finalized yet, but the current versions of the law essentially enforces bank-centric rules on the very different insurance industry.

It's not a surprise that insurers, including MetLife, would balk at the use of bank rules for measuring their liquidity and strength. So when a coalition of seven insurers marched on Washington to propose changes to the law, they successfully drew attention to the distinction between industries.

Thanks to the coalition, lawmakers have already proposed a bill that would allow the Fed to tailor its rules for the insurance industry and for individual companies. The bill has already passed the Senate and has hefty bipartisan support in the House. If the bill successfully passes into law, the potency of MetLife's argument would be greatly diminished.

Reason 2: Friendly face
The Federal Reserve is well versed in the idiosyncrasies of the nation's banks, but insurers were weary of its regulatory chops for monitoring insurance companies. But the Fed has taken steps to relieve them of their concerns by hiring Thomas Sullivan, who has years of experience both as an employee if The Hartford Group and also managing regulatory duties in Connecticut, with extensive knowledge of the industry's differences from the banking industry.

Coupled with the Fed's ability to tailor guidelines and rules (should the previously mentioned bill pass), Sullivan's leadership in the oversight of the SIFI-designated insurers should reassure MetLife's leadership that the increased oversight on their company won't be misguided or bank-focused.

In addition to Sullivan's hiring, AIG's newly promoted CEO Peter Hancock has stated that the Fed is the "ideal watchdog" because it looks at the company as a whole, while other regulators look at pieces and divisions individually. Hancock noted during an investor conference that the Fed even helps the company hone its message to other regulators, and though it does hold the company to high standards, AIG welcomes the high level of scrutiny.

Reason 3: Systemically Important
One of the key arguments that MetLife and its management has been trying to get across is their belief that the company is not systemically important. Based solely on the fact that MetLife is a life insurer and retirement solutions company, it's true that there's little threat that millions of its policyholders will come calling for payments, like a run on a bank. But when an insurer fails, there are still liabilities that other solvent insurance companies will likely have to take on.

MetLife is the nation's largest life insurer, with 12% industry's market share over all lines of business. In comparison, Prudential ranks third with 5.63% overall and AIG is 10th with 2.92% in market share. MetLife's assets also outsize the other two SIFI insurers:

Insurer Total Assets
MetLife $890.9 billion
AIG $547.1 billion
Prudential

$746.7 billion

Source: Company financial reports as of March 31, 2014

Banks of similar size are automatically added to the Fed's oversight under the Dodd-Frank law, leaving little room for MetLife to argue.

In addition to its size and importance within the insurance industry, MetLife provides a large share of annuity accounts to everyday investors. The three insurers represent over 18% of the market share for annuity products. Since annuities are gaining popularity again, MetLife's impact on the nation's retirees cannot be understated. Should it fail, the impact on a large swath of Americans could be potentially devastating to their retirement income, putting added pressure on any economic difficulties across the nation.

Though it's true that MetLife doesn't participate in business segments like AIG's fatally flawed mortgage-backed securities that spurred on this new regulatory oversight of SIFIs, it still remains an enormous player in the industry.

For investors
So far, the impact of a SIFI designation has been negligible for both AIG and Prudential. Once the Fed's new requirements and restrictions are finalized, there could be added pressure on the SIFI insurers for capital disbursements. But for MetLife investors, this might not change a lot -- the insurer hasn't authorized a share buyback program since 2008, though it just raised its dividend in 2013.

While MetLife may take advantage of the appeal available to SIFI designated companies (within 30 days of the FSOC's decision), investors shouldn't worry that the new title will cause any real trauma to the company or its performance.

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