Tagged As Too Big To Fail AIG And Prudential Will Face Closer Scrutiny

June 7th, 2013 by Trefis Team
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Insurance giants AIG (NYSE:AIG) and Prudential Financial (NYSE:PRU) have confirmed the Financial Stability Oversight Council (FSOC) has proposed that they be designated as systemically important financial institutions (SIFIs). [1] Although clear guidelines have not been provided by the Fed as to the regulations imposed on the non-banking companies deemed “Too Big To Fail”, higher capital requirements are expected to be imposed on these institutions, restricting their ability to return capital to their shareholders in terms of dividends and share buybacks.

MetLife (NYSE:MET), which had to sell its banking assets to General Electric’s (NYSE:GE) GE Capital Finance Inc. after failing the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) last year, is also expected to be designated SIFI but has not yet confirmed its status. The FSOC has not released an official list of companies that will qualify as SIFIs.

See our full analysis of MetLife| AIG | Prudential Financial

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The firms now have 30 days to appeal against the designation. AIG has stated that it will not contest the FSOC’s decision while Prudential is considering its options. MetLife’s CEO, Steven Kandarian, has stated that insurance companies should not be classified as SIFIs as the insurance business does not present a systemic risk to the U.S. economy. [2] Although AIG was at the heart of the 2008 financial crisis and required a $182 billion bailout, Kandarian argued that its problems were based on the company’s investments and not the insurance business. MetLife raised its dividend by 50% earlier this year, the first increase by the company since 2007 after shedding its bank holding company status.

Variable Annuities Could Be Affected

While it is unlikely that AIG or Prudential will find themselves in capital deficient positions, they are likely to cut back on capital intensive products like variable annuities which require insurers to maintain a high level of capital to support their income guarantees that they promise consumers. Prudential was the highest seller of variable annuities last year, with a market share of 14%, while AIG was in seventh position with market share of 6%. MetLife was the biggest seller of variable annuities in 2011, but it cut down on sales in 2012, slipping to third spot. [3] MetLife still has a market share of 13% in the variable annuities market and a 11% share in the overall annuities market.

We will monitor the situation closely and update our models for the insurance companies once the Fed sheds some light on the regulations that will be imposed on the SIFIs.

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Notes:
  1. FSOC Tabs AIG, Prudential, GE Capital For Stricter Oversight, Forbes, June 4, 2012 [↩]
  2. MetLife Is on Offensive, Wall Street Journal, April 9, 2013 [↩]
  3. LIMRA [↩]