No industry likes the thought of more regulatory hurdles, but a new coalition of insurers are striking out to make their complaints heard in Washington, D.C. As an investor, should you also be concerned that the forthcoming regulatory scrutiny is misguided?
Mr. Insurance goes to Washington
A group of seven insurance companies are joining forces in order to persuade legislators that the current approach to new regulations for non-bank financial firms are set to disrupt business on a big scale. This Big Seven includes MetLife (NYSE:MET), Prudential Financial (NYSE:PRU), Nationwide, State Farm, Mutual of Omaha, New York Life, and TIAA-CREF.
Two groups within the Big Seven are interested in addressing proposed regulations: insurers deemed "Systemically Important Financial Institutions" and those that operate under Savings and Loan holding companies. Both groups are subject to regulatory oversight from the Federal Reserve.
So far, both Prudential Financial and American International Group (NYSE:AIG) have received the SIFI designation, while MetLife in is the late stages of the Financial Stability Oversight Board's review. Even Berkshire Hathaway (NYSE:BRK-B) is under the microscope, with the Buffett brainchild recently entering the early stages of the FSOB review process.
The remaining members of the Big Seven are S&L holding companies, with the exception of New York Life - it remains free of Fed oversight, but is an interested party in the matter.
AIG is conspicuously -- though not surprisingly -- absent from the list of the Big Seven. CEO Robert Benmosche has been quite firm that the company wouldn't speak out against its SIFI designation, and doesn't wish to make any waves in Washington. For investors, this may be a good thing since the insurance behemoth's participation could result in a negative backlash, considering its crisis bailout.
For any firm that receives the SIFI designation, increased oversight from the Federal Reserve will become a norm. What will be included within the new Fed scrutiny is still unknown, as the regulator has until Jan. 2015 to decide what the SIFI rules will be. But many speculate that increased pressure for higher capital reserves will be among the new strictures.
Regulators and investors alike may note that increased capital requirements and highly scrutinized capital management plans have been somewhat of a success in keeping Wall Street's biggest banks from participating in risky business ventures. But these same capital requirements are exactly what the Big Seven are fighting against -- and it's not just because they don't want more regulations.
"We have been working on a bipartisan basis with members of Congress and other critical stakeholders to ensure that bank-centric capital standards are not applied to insurance companies," said Bridget Hagan. Ms. Hagan is a former Nationwide lobbyist, and now leads the coalition's efforts in Washington.
State regulators are generally on the side of the Big Seven, stating that insurers have adequate capital buffers, per state regulatory rules.
With insurers, stricter usage rules for their capital reserves could impose standards that disallow a company from participating in a specific market. This type of challenge to bank-centric standards is precisely what MetLife has disclosed might happen if it receives the SIFI designation.
The need to hold such large sums of capital as a buffer against market stress makes sense for banks. But, insurers argue, while some of their typical transactions are risky-looking to bank regulators, they are typical to the industry. An example would be the purchase of long-term bonds for payment of future death benefits.
Though regulators would require a bank to hold excess capital to secure against losses from the bonds, insurers argue that the buffer would not need to be as great since policies only pay out at the time of death in the future. Other instances of capital reserve requirements for banks do not level out with the insurance industry's commonplace practices, incorrectly making the businesses look excessively risky.
Ultimately, the issue posed by the insurer coalition hinges on the regulators' use of Basel III guidelines, which focus strictly on assets, while common insurance industry practices focus on liability management and asset-liability matching, according to Hagan.
Should investors worry?
If you're an investor in any of the company's designated as SIFI or those within the review process, there's no need to panic yet. Since the rules defining the oversight of SIFI companies have not been finalized, there's a good chance that regulators will realize that the banking and insurance industries are very different, and that different rules are needed for each.
Though the actions of the Big Seven seem to be increasing in both fervor and frequency, they have been at work for quite some time, meeting with Fed officials -- including Janet Yellen -- 12 times over the past year and a half. Keep an ear out for any news from the Fed regarding the treatment of SIFI firms and the insurance industry as a whole.
Editor's note: This article was updated to reflect additional information provided by the Cypress Group.