March 14 (Bloomberg) -- MetLife Inc., whose plan for a share buyback was rejected yesterday by the Federal Reserve, led life insurers lower in New York trading on speculation the industry’s biggest companies may face tighter capital rules.
MetLife, the largest U.S. life insurer, dropped 4.6 percent to $37.65 at 11:42 a.m., while No. 2 Prudential Financial Inc. fell 1.7 percent to $61.98. New York-based MetLife was the biggest decliner in the Standard & Poor’s 500 Index.
U.S. regulators are taking greater responsibility over an industry that has traditionally been overseen by individual states. MetLife is required to get Fed approval for its capital plans because it owns a bank, while Newark, New Jersey-based Prudential isn’t subject to the same scrutiny. Both companies may face Fed oversight if they are classified as systemically important financial institutions.
MetLife “will have to build capital” if regulators choose to apply the Fed rules to non-bank SIFIs, Thomas Gallagher, an analyst with Credit Suisse Group AG, said today in a research report. “Since we would expect PRU to also be named a non-bank SIFI, the company may be facing similar constraints.”
The SIFI designation was created after the 2008 financial crisis when gaps in oversight between federal and state regulators allowed insurer American International Group Inc. to slide to the brink of bankruptcy. Prudential and MetLife, which is unwinding its banking business to reduce federal oversight, have said they may be subject to SIFI rules.
MetLife, led by Chief Executive Officer Steven Kandarian, would fall short of a U.S. capital standard in a severe economic downturn, the Fed said yesterday. The insurer was one of four companies to fail the Fed’s Comprehensive Capital Analysis and Review, which was applied to 19 of the largest U.S. financial firms. Kandarian, who had requested permission for $2 billion of buybacks, said he disagreed with the ruling and remains “fully committed” to returning funds to investors.
“The only issue we can foresee that could constrain MET’s ultimate capital management activities is the timing of the classification of MET, along with PRU and potentially others, as non-bank SIFIs,” Joanne Smith, a New York-based analyst at Scotia Capital, wrote today in a note to clients.
The insurer will probably stop being a bank holding company by the end of June, MetLife said yesterday. Kandarian announced a deal in December to sell the U.S. deposit banking business to General Electric Co.
MetLife, which didn’t take a bailout from the U.S. Treasury Department during the 2008 and 2009 credit crunch, is “well in excess” of minimum standards required by state regulators and will have as much as $7 billion of excess capital by the end of the year, the CEO said.
“MetLife, along with Prudential, will be classified as non-bank SIFIs, which will involve some additional oversight, but avoid significant capital restrictions,” Randy Binner, an analyst at FBR Capital Markets in Arlington, Virginia, wrote in a note to clients. “Given the amount of excess capital on the balance sheet, we believe it to be only a matter of time before MetLife begins to return it to shareholders.”
MetLife’s net income more than doubled to $6.98 billion last year as the company expanded outside the U.S. MetLife bought American Life Insurance Co. from AIG for about $16 billion in November 2010 to add customers from Japan to Poland to Chile.
“We are deeply disappointed with the Federal Reserve’s announcement,” Kandarian said. “We do not believe that the bank-centric methodologies used under the CCAR are appropriate for insurance companies, which operate under a different business model than banks.”
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