Captives of Industry | 100journalists

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Regulatory concerns about the health of MetLife’s insurance balance sheet are not new. The U.S. Treasury was sufficiently concerned in 2014 with its size and complex financial arrangements that the Treasury Department’s Financial Stability Oversight Council (FSOC) designated MetLife as a systemically important financial institution (SIFI), which means it should be subject to Federal Reserve oversight and possibly enhanced prudential standards, similar to those applicable to large U.S. bank holding companies after the 2008 global financial crisis.

In a 2015 legal filing, the FSOC specifically pointed out that MetLife’s practice of reinsuring with captives presented dangers. It wasn’t really about reinsurance, rather the company was circularly using letters of credit, collateral funding and notes to reinsure its own reinsurers. The FSOC warned that if something goes wrong, losses could soar and ripple through the wider financial system.

“In the event of significant financial difficulties at MetLife, losses to MetLife’s customers and counterparties through the exposure transmission channel could be exacerbated due to its use of captives. In addition, the potential for conversion of exposures off-balance sheet affiliated captives in funded exposures could contribute to asset liquidation risk,” the FSOC said in the filing.

MetLife successfully sued to end federal oversight through an SIFI designation. The Trump administration later removed two other major insurers, AIG and Prudential, from federal oversight and changed rules to review activities rather than entities. Thus, there is no federal regulation of corporations, only control of insurance activities, even though corporations are playing an increasingly large and important role in the global financial system.

MetLife declined an interview or comment request for this story.

John Patrick Hunt, a financial regulation expert at the University of California, Davis, who has joined a group of law professors backing the government’s attempt in the MetLife case to put big insurance companies under federal trusteeship, said said MetLife’s reliance on unorthodox practices remains troubling.

“MetLife appears to be tackling the riskiest complex products called CLOs (secured loan obligations), as well as using captive Bermuda reinsurers to reduce the capital that U.S. regulators would otherwise require companies to hold to cover losses” , did he declare. “Both would increase the risk that investment losses will render the insurance conglomerate insolvent, i.e. unable to honor its commitments.”

If a company the size of MetLife were to struggle and had to sell its holdings quickly, the damage could ripple throughout the economy. “If the insurer fails and cannot honor these contracts, it could contribute to the failure of the other party to the contract in a falling domino effect, similar to what we saw during the global financial crisis” , Hunt said.

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