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By Jeff Bater
Jan. 13 — Legal experts say MetLife's decision to divest part of its business will not necessarily cause the largest U.S. life insurer to drop its challenge to a federal oversight body that designated the company systemically important.
MetLife Inc. plans to separate much of its domestic retail business as Chief Executive Officer Steve Kandarian works to shrink the company amid tighter government oversight (08 Banking Daily, 1/13/16). The insurer said it is weighing a possible sale, spinoff or public offering of the operation — a divestiture that would reduce the company's size by around $240 billion in assets.
MetLife was designated as a systemic risk by the Financial Stability Oversight Council (FSOC) in December 2014, and it mounted a court challenge shortly afterward, calling the FSOC's determination arbitrary and capricious, and saying the regulatory body exceeded its authority (191 Banking Daily, 10/2/15).
Lawrence Baxter, a Duke University law school professor, said he doesn't think the announcement to divest affects the legal appeal in and of itself.
“It is conceivable that be presenting a very different risk profile the court might consider the case moot, but only their lawyers would know whether this is planned or even possible,” he said in an e-mail. “It is also possible that there would be less incentive by MetLife to pursue the appeal, though I doubt it because the remainder of the company would still be under the designation until this is reversed by a court or the FSOC does a renewed (de) designation at its next annual consideration.”
John Coffee, a professor at Columbia University Law School, said in an e-mail that MetLife may proceed with its challenge “unless it can get the FSOC to agree that it is no longer a SIFI.”
“The more that Met Life shrinks, the less it looks like a SIFI,” he said. “Although the decision maximizes value for shareholders and its stock has soared today, I suspect that more of the motivation was to escape increased regulatory scrutiny and higher capital requirements.”
Jaret Seiberg, an analyst at Guggenheim Securities, said in a market commentary he thinks regulators see MetLife's move “as proof positive that the SIFI designation process for nonbanks is working as intended.”
The size of an entity is just one factor FSOC considers when designating a nonbank SIFI, along with interconnectedness and substitutability.
Seiberg said he thinks the divestitures plan is sufficient to cause the regulatory body to reconsider the systemically important designation for MetLife as it would entail the divestiture of $240 billion of assets, while adding such a reconsideration is unlikely to occur until after the transaction closes.
Another analyst, Randy Binner of FBR & Co., said in a note that the new entity MetLife plans to divest would have total assets of $240 billion, in contrast to $250 billion of assets at Lincoln National and $215 billion at Principal Group. Neither of those companies has been designated a nonbank SIFI.
In announcing the divestiture, Kandarian said the company's retail business, as part of a SIFI, faces “higher capital requirements that could put it at a significant competitive disadvantage.”
“Even though we are appealing our SIFI designation in court and do not believe any part of MetLife is systemic, this risk of increased capital requirements contributed to our decision to pursue the separation,” he said in the company statement Jan. 12.
MetLife is represented by Eugene Scalia, a partner with Gibson, Dunn & Crutcher LLP in Washington, D.C. Scalia referred questions to MetLife, which declined to comment on the status of the lawsuit.
— With assistance by Rob Tricchinelli
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