MetLife Blasts Fed’s Stress Test After Failing To Pass

MetLife Inc., the largest life insurer in the United States, was one of four bank holding companies that failed the Federal Reserve's stress test, the central bank announced March 13. But MetLife has fired back at the Fed, arguing the capital standards laid out by the stress test are inappropriate for insurance companies. Also failing were Citigroup Inc., Ally Financial Inc. and Suntrust Banks Inc., which all have insurance subsidiaries.

The stress test, officially dubbed the 2012 Comprehensive Capital Analysis and Review, applied worst-case financial scenarios to 19 complex bank holding companies through the end of 2012. In failing the four financial institutions, the Fed rejected their capital management plans.

Of the 19 companies evaluated in this year's stress test, MetLife was the only one that focuses the majority of its business on insurance.

MetLife's failure was viewed as a shock to some industry observers, who said they had expected the life insurer to be viewed as having a strong capital position. According to a report released by UBS Investment research, MetLife's 2011 year-end excess capital was estimated to be $3.5 billion, above a $1 billion buffer. UBS said it was "surprised" by the Fed's decision.

However, the Fed took issue with the company's total risk-based capital ratio and the fact its minimum tier-1 leverage ratio fell short of the Fed's target levels.

Steven A. Kandarian, chairman, president and chief executive officer of MetLife Inc., responded to that finding in a statement that took issue with how the Fed applied those standards to insurance companies.

"MetLife is financially strong and well positioned for both the current environment and a potential further economic downturn. We are deeply disappointed with the Federal Reserve's announcement. 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," Kandarian said. "The established ratios used to measure insurance company capital adequacy, such as the NAIC's risk-based capital ratio, show that MetLife is financially strong. At year-end 2011, MetLife had a consolidated risk-based capital ratio of 450%, well in excess of regulatory minimums."

He noted MetLife's excess capital is expected to grow to $6 billion to $7 billion by year-end 2012, before any capital distribution actions.

Kandarian also said MetLife is moving forward with plans to cease being a bank holding company by the second quarter of this year. In December, MetLife announced it would sell most of its $10.7 billion depository business of its bank subsidiary to GE Capital Financial Inc. (Best's News Service, Dec. 27, 2011). Prior to the announcement of that transaction, MetLife said it would be getting out of the banking business to avoid the additional scrutiny placed on large banks under the Dodd-Frank Act (Best's News Service, July 21, 2011).

MetLife's banking subsidiary, MetLife Bank, is also getting out of the traditional mortgage-origination business, citing an "uncertain marketplace and regulatory environment" (Best's News Service, Oct. 13, 2011).

The institutions that passed the test included American Express Co., Bank of America Corp., the Bank of New York Mellon Corp., BB&T Corp., Capital One Financial Corp., Fifth Third Bancorp, the Goldman Sachs Group, Inc., JPMorgan Chase & Co., Keycorp, Morgan Stanley, the PNC Financial Services Group Inc., Regions Financial Corp., State Street Corp., U.S. Bancorp, and Wells Fargo & Co.

Shares of MetLife (NYSE: MET) were trading at $37.51 midday March 14, down 4.95% from the previous close.

Metropolitan Life Insurance Co. currently has a Best's Financial Strength Rating of A+ (Superior).

(By Jeff Jeffrey, Washington Correspondent: jeff.jeffrey@ambest.com)