FSOC - MetLife - Explanation of the Basis of the Financial Stability Oversight Council’s Final Determination....

  • MetLife v FSOC
  • 2014 1218 - LC - MetLife v. FSOC - D85-2, 85-2 - 15-cv-45 - Explanation of the Basis of the Financial Stability Oversight Council’s Final Determination that Material Financial Distress at MetLife Could Pose a Threat to U.S. Financial Stability and that MetLife Should be Supervised by the Board of Governors of the Federal Reserve System and Be Subject to Prudential Standards  ---   [BonkNote]   ---  387p
    • 68p 
    • JA-0342, FSOC_00000357
  • Contagion / Writedowns
  • Disorderly Resolution
  • Failed Companies
  • Historical Precedents / Lack of
  • Implausible Scenario – Metlife – FSOC
  • LIRP / Life Insurance Policy as Investment / Retirement Plan
  • Mitigating -
    • Stays / Moratiums - Contract vs State Insurance Regulator
    • Surrender Charges, Lack of Insurance, Higher Costs, Renewing, Taxes
  • NOLHGA - State Guaranty and Security Fund Associations (GAs)
  • Policy Loans
  • Securities Lending
  • (p15) - [Disorderly Resolution] - The complexities involved in resolving MetLife could aggravate the threat posed to U.S. financial stability by the company’s material financial distress.
    • In addition to the significant challenges associated with the coordination of domestic and international regulators and judicial bodies in resolving such a large, internationally active organization, a rapid and orderly20 resolution of MetLife could be complicated by a number of other factors. 
  • (p93) - [Contagion] - MetLife’s size and market prominence increase the potential for MetLife’s material financial distress to cause or exacerbate contagion.
    • MetLife holds approximately 10 percent of the total admitted assets (on a statutory basis) in the U.S. life insurance industry422 and has a market share of life insurance products of approximately 16.6 percent.423
    • Institutional and individual contract holders and policyholders with the ability to surrender or withdraw their contracts early may seek to do so.
    • MetLife’s material financial distress could lead investors to withdraw from other insurers or other significant financial intermediaries, out of fear that those firms could also experience distress.424
    • These actions could lead to a reduction in the provision of credit and a reduction in financial markets activities by market participants seeking to reduce exposures to other financial firms, which could impair financial intermediation and financial market functioning.
    • Institutional policyholders could potentially experience greater losses because of institutional products that have redeemable, investment-like features that may increase MetLife’s near-term liabilities and do not have any additional third-party protections.
      • Notably, the avoidance of contagion effects was an important concern before the intervention that helped to prevent the potentially disorderly failure of AIG in the fall of 2008.425
    • The exposure of institutional customers and individual policyholders to MetLife is significant enough that the negative effects of MetLife’s material financial distress could be transmitted to other financial firms and markets, and materially impair those entities, which could in turn cause an impairment of financial intermediation or financial market functioning that could be sufficiently severe to inflict significant damage on the broader economy. 
  • (p97) - [Guaranty Associations / NOLHGA] - 4.2.3 Exposure of U.S. Policyholders and the GAs 
    • (p97) - MetLife is the largest insurance organization provider of savings and retirement products in the United States, with approximately 50 million U.S. customers as of June 30, 2013.448
      • As of June 30, 2013, MetLife had $275 billion of U.S. general account liabilities449 that create exposure for MetLife policyholders and contract holders in the event of MetLife’s material financial distress and inability to satisfy these obligations.
      • In addition to the assets in MetLife’s general account available to support these liabilities, the various states’ GAs act as a mitigant to reduce policyholder exposure to MetLife in the event MetLife fails to satisfy its obligations.
      • An important consideration in this analysis is that the GAs have no experience handling the failure of an insurer with the size, scope, and complexity of MetLife.
      • MetLife has estimated that as of June 30, 2013, the total exposure of the GAs attributable to MetLife’s life insurance and annuity products is approximately.450
    • (p100-101) - MetLife states that “[i]t is very unlikely that MetLife’s customers — its life insurance and other policyholders—would be materially impaired if MetLife experienced material financial distress or were put into receivership by a state insurance authority.”462
      • However, MetLife has acknowledged that certain policyholders could face losses as a result of its insolvency. According to MetLife, the “Guaranty Associations would fully cover 97 percent of MetLife’s policies.” <Then PageRedacted>
      • These provide examples of policyholder losses that could occur, but losses may vary depending on MetLife’s financial condition.
    • As in the insolvencies of Executive Life Insurance Company and Executive Life Insurance Company of New York (described in section 4.2.6), MetLife’s material financial distress could result in a general account shortfall in excess of the estimates, particularly during a period of financial stress in the financial services industry and in a weak macroeconomic environment.
      • This increased general account shortfall could be caused by, among other things, MetLife’s size, scope, complexity, usage of FABNs and FABCP, amount of operating leverage, extensive use of captive reinsurance, and increases in general account liabilities for guaranteed benefits resulting from equity market declines.
      • While policyholder losses can be drawn out over an extended time period, the full extent of losses could be greater than historical examples would indicate.
    • (p103) - [re: Executive Life Insolvencies vs a potential MetLife Insolvency] - Based on NOLHGA’s estimate that the insolvent subsidiaries held $6.7 billion in GA-covered obligations and $2.7 billion of assets, the shortfall, after accounting for expenses and litigation settlements, was 54 percent of GA covered obligations.484
      • Losses in the event of a MetLife insolvency at even a fraction of this scale could pose unprecedented demands on the various states’ GAs.
  • (p139) - [Contagion / Writedowns] - 677 One analysis of the contagion effects on other insurers of announcements by First Executive in January 1990 of a write-down in its bond portfolio, and by Travelers in October 1990 of losses on its CRE portfolio, concluded that “the primary significance of the write-down announcements to the market was their anticipated effect on policyholders’ behavior [at other insurers].”
    • George Fenn and Rebel Cole, “Announcements of Asset-Quality Problems and Contagion Effects in the Life Insurance Industry,” Journal of Financial Economics volume 35, issue 2 (1994) - 29p 
  • (p172) - [LIRP / Life Insurance Policy as Investment / Retirement Plan] -
    • (p172) - Many life insurance and annuity products are purchased not only to pay death benefits in the event of the death of the insured, but also as a long-term investment vehicle to accumulate assets for savings or retirement.
    • If policyholders were to lose confidence in the ability of MetLife’s insurers to satisfy their obligations, they may prefer to bear the costs of surrendering their policies instead of risking potentially larger losses.
    • (p171) - MetLife markets this “tax-free” withdrawal strategy across various insurance products that accumulate cash value.823
      • 823 - For example, MetLife marketing material states that cash value life insurance can “Provide a smart way to save through its cash value. This is money that can be used for college, emergencies or during retirement without tax implications.” See MetLife, “Life Insurance as an Asset,” (2012), available at
        https://www.metlife.com/assets/ib/retirement/campaign/ml-life-insurance-asset.pdf;” see also MetLife,
        JA-0511
        CONFIDENTIAL FSOC_00000526
        Case 1:15-cv-00045-RMC Document 85-2 Filed 09/30/15 Page 177 of 222
        https://www.chamberlitigation.com/sites/default/files/cases/files/2015/Final%20Designation
        %20%5Bas%20paginated%20from%20RJA%20vols%204%20and%205%5D%20--%20MetLife%20v.%20FSOC%20%28DDC%29.pdf
        15-
  • (p172) - [Policy Loans] - Moreover, if policyholders wanted to keep their life insurance policies in effect, they could take out policy loans, which could also subject MetLife to a liquidity strain.
  • (p210} - [Stays / Moratoriums] - MetLife states that with the invocation of its contractual right to defer surrender payments on certain contracts, it would have “sufficient readily saleable assets” to meet the level of surrenders in this scenario.98
    • As set forth in Table 42, Oliver Wyman concludes, “MetLife has sufficient saleable assets to meet any of the assumed levels of policyholder surrenders and other liability payment demands without causing any meaningful disruption in any relevant asset market.”983
      • In particular, the analysis concludes that MetLife’s asset sales would affect asset values by no more than for any asset class.984
  • (p211) - [Failed Companies] - 4.3.9.3 Review of Oliver Wyman Analysis
    • The Oliver Wyman analysis incorporates findings from several case studies on failed and distressed insurers as well as MetLife and industry historical experience.