MetLife Inc., the largest U.S. life insurer, wants desperately to shed its label as a bank holding company. And it’s not hard to see why. The company’s plans to deploy capital by buying back shares and increasing its dividend have been on hold for months, pending the results of the Federal Reserve’s Comprehensive Capital Analysis and Review process, better known as the “stress tests.”
Unfortunately for Met, capital deployment is going to have wait a bit longer, as the Fed announced last week it had failed the test for projected minimum Tier 1 leverage ratio. In fact, the company’s projected minimum leverage ratio of 3.6% was higher than a number of firms that passed, but for reasons that were unexplained, the Fed applied a higher standard (a 4% minimum ratio, as opposed to the typical 3%) to Met and three other firms that weren’t traditional lending institutions.
The choice to hold Met to a higher standard is particularly ironic, as the bank-centric Tier 1 capital system is wholely inappropriate for gauging the strength of a life insurance company to begin with. Among other things, it treats the separate accounts owned by Met’s retirement account customers, such as variable annuity policyholders, as if they were Met’s own risk-weighted assets. The process also gives no credit to the fact that, under state-based insurance regulation, life insurers already must stochastically test their reserves every quarter, something that is not required of banks.
In this week’s edition of the FIRE Podcast, we talk with Randy Binner, an equity analyst with FBR Capital Markets in Arlington, Va., about how the Fed’s tests are inappropriate for the life insurance sector, and also about how investors remain wary of such seemingly arbitrary regulatory decisions in the wake of the Dodd-Frank Act.