How Long Will Regulation Stifle Buybacks At American International Group, Metlife, and Prudential?

Three of the biggest insurance companies in the U.S. have collectively announced $4.0 billion worth of share repurchase programs in the past few days. American International Group (AIG 0.05%), the largest property and casualty (P&C) insurer in the U.S., was the first one to announce $2.0 billion share repurchase program on June 5^,th . 

MetLife (MET 0.69%), the largest life insurer in the U.S., and Prudential Financial (PRU 0.63%) each announced $1.0 billion share repurchase authorizations on June 10^th.  

Close to the chest
The nation's three biggest insurance companies have been managing their capital conservatively, as two of them (AIG and PRU) have already been designated as systemically important financial institution (SIFI) and MET is under review for a possible designation as systemically important by the Financial Stability Oversight Council, an entity created by the Dodd-Frank financial-overhaul law.

The SIFI designation means that the companies will be subject to stricter capital standards, as their failure could pose a threat to United States' financial stability. However, the non-bank SIFI rules have not been established yet.

While MetLife is fighting to avoid the Federal Reserve's (Fed) increasing oversight, as it believes it is not a systemically important financial institution, the rival American International Group embraced the central bank's oversight last year and Prudential Financial after initially resisting supervision, said "moving on is the right thing for us to do." 

The encouraging signals
The buyback announcements came after the central bank appointed Tom Sullivan as the insurance supervisor at the Fed and the Senate unanimously passed a bill, which allows the Fed to apply distinct capital standards for insurers: American International Group, MetLife, and Prudential Financial.

This legislation would be highly favorable for these insurers, as it would allow the Fed to craft separate rules for insurers instead of using bank-centric capital rules. 

Ed Mills, an analyst at FBR Capital Markets wrote in a note, "It is becoming increasingly clear that the Fed will be given the flexibility to tailor its regulation of insurance companies. This should be a strong positive for the insurance firms deemed systemically important." 

The appointment of Tom Sullivan, a former Connecticut insurance commissioner, is also positive for both consumers and insurers, as he is someone who has keen regulatory and industry insight. He is someone who understands the significance of state-based regulation, and can tell the difference between insurance and banking. 

While Prudential is being prudent, MetLife takes a directional positive step
Prudential's $1.0 billion share repurchase authorization did not come as a surprise, as it represents the same level the company has bought back over the last 3 years. On the other hand, MetLife's decision to resume its buyback program after a break of 6 years (the company last bought back shares in 2008) marks a shift from the company's previous bunker capital strategy.

The recent appointment of Tom Sullivan to head up the Fed's insurance regulation and the unanimous passage of legislation through the Senate to clarify the Collins amendment, gave MetLife enough confidence that rules are unlikely to be onerous for the insurance companies, hence a modest buyback announcement of $1.0 billion.

American International Group
I think American International Group's $2.0 billion buyback announcement was a little disappointing, as it is below the low end of what most analysts were expecting.

While the company's management thinks that AIG will have substantial capital generation and deployment opportunities in the years ahead, AIG is taking a more prudent approach to announce smaller, more frequent buybacks.

There is still uncertainty with future Fed regulation regarding non-bank SIFI rules, and the company wants to avoid making a bold repurchase announcement with an outsized authorization.

Foolish takeaway
Looming Fed regulation of American International Group, MetLife, and Prudential Financial has been an overhang on these stocks.

All these companies have excess capital to return to their shareholders but they have been taking a measured approach toward capital deployment. Buybacks would be meaningfully accretive to book value per share, with both AIG and MET trading at a discount to their book values and PRU trading at a premium of only 10%.

Moreover, these stocks can also be revalued upward, once there is more clarity that Fed-regulated insurers are likely to avoid onerous bank-focused capital rules.