American International Group Inc. (AIG) and Allianz SE (ALV) are among insurers deemed systemically important by global financial rule makers, meaning they may face tougher capital standards and tighter regulation.
The list of nine too-big-to-fail insurers, including MetLife Inc. (MET) and Prudential Financial Inc. (PRU) in the U.S. and France’s Axa SA (CS), was published late yesterday by the Financial Stability Board, the Basel, Switzerland-based body set up by the Group of 20 nations.
The FSB, led by Bank of England Governor Mark Carney, is coordinating global regulators’ response to the worst financial crisis since the Great Depression to prevent a repeat of the turmoil that followed the collapse of Lehman Brothers Holdings Inc. and bailout of AIG.
“Today marks an important step toward more broadly addressing the risks associated with systemically important financial institutions,” Carney said in a statement on the FSB’s website. “A sound capital and supervisory framework for the insurance sector is essential for supporting financial stability.”
“Even though we continue to be of the opinion that the insurance business in general and Allianz in particular does not represent a systemic risk, we acknowledge the decision of the FSB and will continue to support its efforts for more stable financial markets,” Dieter Wemmer, chief financial officer of Munich-based Allianz, said in a statement today. “We are well positioned to manage the new requirements.”
Allianz shares dropped as much as 1.2 percent and were down 0.2 percent at 4:41 p.m. in Frankfurt trading, valuing the company at 53.6 billion euros ($70.3 billion). Aviva shares dropped 0.1 percent and Generali slid 0.4 percent. Prudential Plc (PRU) shares rose 0.3 percent in London.
“The FSB’s decision on this issue is not a rational but rather a political one,” said Stefan Schuermann, a Zurich-based analyst with Vontobel Holding AG. (VONN) “As we don’t have any global solvency standards, we don’t really know yet what the implications will be for the companies on this list.”
Insurers identified as too big to fail will have draw up recovery and resolution plans to limit the economic fallout should they go bust, the International Association of Insurance Supervisors said.
Implementation details for higher “loss absorbency requirements” are to be developed by the end of 2015 and will apply from January 2019, the FSB said. The nine companies on the list, which will be revised every year, will immediately face stricter supervision, the FSB said.
“Since the financial crisis, supervisors across the sector have worked diligently to address risks to the global financial system from systemically important financial institutions,” Peter Braumueller, chairman of the IAIS executive committee, said in a statement. “The measures and framework put forward by the IAIS today complete a major piece of this reform in a manner specifically designed for the insurance sector.”
The companies on the FSB list were included based on criteria such as size, global activity and the amount of non-insurance businesses they have, the IAIS said.
“It appears that size continues to play a significant role in the designation methodology,” the Geneva Association, an insurance lobby group based in the Swiss city, said in a statement. The list overstates the importance of top-ranked insurers compared with other institutions in the financial services industry, it said.
“Our expectation is that the FSB will rely on regulators in the U.S. to implement G-SII policy measures for U.S.- headquartered companies,” Bob DeFillippo, a spokesman for Prudential Financial, said in a statement using an abbreviation for global systemically important insurers. “Prudential will remain engaged at both the global and domestic level on developing regulatory standards that are beneficial to consumers and preserve competition.”
A group of U.S. regulators led by Treasury Secretary Jacob J. Lew this month said AIG is systemically important, meaning it could threaten the financial system if it failed.
The group, called the Financial Stability Oversight Council, also voted to designate Prudential Financial as systemically risky. Prudential Financial, the second-largest U.S. life insurer, is appealing the designation, which may impose tougher capital rules and extra oversight from the U.S. Federal Reserve.
“If companies are incorrectly designated as G-SIIs, application of heightened capital standards could end up either harming their ability to compete or could unintentionally lead to the type of systemic threat that the FSB and IAIS are trying to avoid,” Leigh Ann Pusey, president and CEO of the American Insurance Association, said in an e-mailed statement.
AIG received a U.S. rescue that began in 2008 and swelled to as much as $182.3 billion to save the firm from collapse, after bets tied to housing soured. The insurer, led by CEO Robert Benmosche since 2009, repaid the funds last year.
AIG’s rescue spared European banks from raising as much as $16 billion in capital amid the crisis, according to a 2010 report from a U.S. Congressional Oversight Panel. The banks had purchased contracts from AIG to cut the capital regulators required them to hold to guard against losses on some holdings. Banks that purchased protection from AIG included Societe Generale SA (GLE), BNP Paribas SA (BNP) and Danske Bank A/S. (DANSKE)
“AIG looks forward to working with our international, federal and state regulators to develop a regulatory framework for large global insurers that is both robust and consistent,” Jon Diat, a spokesman for the New York-based company, said in a statement.
MetLife is reviewing the proposed policy measures, said John Calagna, a spokesman for the New York-based company.
MetLife fell 1.6 percent to $48.04 at 9:45 a.m. in New York trading. Prudential Financial lost 1.2 percent and AIG slipped 0.4 percent.
In November 2011, the Group of 20 nations endorsed the FSB’s policy measures on global systemically important financial institutions and regulators published a list of too-big-to-fail banks. The FSB said in June it will follow up next year with a list of too-big-to-fail reinsurers.
Ping An will continue to augment its operational management standards and risk management capability, the insurer said today, adding that its solvency is above regulatory requirement.
Generali said it was put on the list because of its non-insurance activities, adding it has a “stated strategy of narrowing its business focus onto core insurance activities, and disposing of non-core assets.”
Axa declined to comment.
Prudential Plc said in a statement on its website that it wants to understand the implications of its designation before determining its position. Aviva couldn’t immediately be reached for comment.
The Institute of International Finance, a trade group that represents financial firms, said it supports efforts to contain systemic risk and called on regulators to ensure new rules are tailored for the insurance industry.
“Any recommendation by national or international regulators that certain insurers hold higher levels of capital should consider the impact on consumers, including the impact on price and availability of certain products,” the Washington-based group said in a statement on its website. “It is essential for measures to be implemented in a cross-border consistent manner.”
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