Prudential Financial Challenges Its Label As Systemically Important

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Prudential Financial (NYSE:PRU) is contesting Financial Stability Oversight Council’s (FSOC) decision to label it as a non-bank systemically important financial institutions (SIFI). [1] AIG (NYSE:AIG) and General Electric’s (NYSE:GE) GE Capital Finance Inc, which were also labeled as SIFIs last month will not contest their designation. The Fed has yet to provide clear guidelines regarding the regulations imposed on the non-bank companies deemed to be “Too Big To Fail,” but higher capital requirements and stress tests to ensure their ability to absorb losses are expected.

MetLife (NYSE:MET) failed the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) last year forcing it to sell its banking assets to GE Capital. The company might still be designated as a SIFI, but has not yet confirmed its status

See our full analysis of MetLife| AIG | Prudential Financial

Prudential is expected to have a closed door hearing before the FSOC within the next 30 days with a final decision regarding the company’s status to be announced within 60 days of the hearing.

While the final implications of the SIFI designation are still unclear companies are likely to cut back on capital intensive products like variable annuities. Prudential was the highest seller of variable annuities last year with a market share of 14% while AIG was in seventh position with a market share of 6%. MetLife was the biggest seller of variable annuities in 2011, but cut down on sales in 2012, slipping to third spot. MetLife still has a market share of 13% in the variable annuities market and a share of 11% in the overall annuities market. [2]

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. Prudential Contesting `Systemically Important’ Tag – Filing, Wall Street Journal []
  2. LIMRA []
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