Insurance companies that own or operate a savings & loan will face fresh oversight from the Federal Reserve Board, which is creating a process by which to examine those financial institutions that have significant banking assets.
At present, National Underwriter has learned that the Fed has identified at least 20 institutions whose holding companies and constituent thrifts it intends to oversee. These include American International Group (AIG), State Farm, Nationwide, Prudential, Northwestern Mutual, Massachusetts Mutual and W.R. Berkley. But this list of regulated companies is considered a "moving target" by federal regulators and is subject to change.
The entire process is being overseen on behalf of the Fed by Frank Tarullo, a Fed governor who also serves as the Fed representative to the Financial Stability Oversight Council (FSOC), the unit created by the Dodd-Frank Act to ensure stronger oversight of large financial institutions.
According to information provided by the Fed, as well as industry officials and their outside lawyers, the purpose of this new process is broad, designed to increase its own understanding of the insurance business and the differences between banking and insurance. But more importantly, the Fed also intends to oversee thrifts operated by financial firms at the holding company level, through authority granted to it under the Dodd-Frank Act.
A third purpose, as noted by Federal Reserve Chairman Ben Bernanke in a recent speech in New York, is to increase federal oversight so that the oversight of large, complex financial services conglomerates – such as AIG in the run-up to the global financial crisis – does not somehow fall through the cracks.
Some of the companies on the Fed's list are already either shedding their thrift operations, or are planning to do so out of concern of facing an additional layer of regulation through the Fed. For example, Prudential has announced plans through a securities filing to downgrade its thrift to a trust bank, thereby escaping Fed oversight. As a result, its thrift will be regulated by the Office of the Comptroller of the Currency.
According to Prudential spokesman Robert DeFillippo, Prudential is accomplishing this by divesting itself of all assets insured by the Federal Deposit Insurance Corporation. That will also allow Prudential to escape regulation under the Volcker rule, which limits proprietary trading by financial firms from their own accounts.
DeFillippo explained that its trading partners in the commercial mortgage business want Prudential to trade alongside them on these securities, which Prudential believes is appropriate. "We just don't want to be considered a bank," DeFillippo said. "We are an insurance company, and that's what we want to remain."
Mass Mutual is taking the same route as Prudential, "de-registering" as a thrift holding company, according to a securities filing that has been confirmed by company officials. The officials said they are awaiting word from the Fed that the downsizing of their thrift to a trust bank has been approved.
The official said that the actions of the company to downsize their savings bank operations stems from a July 21, 2011 memo from the Board of Governors, No. S.R. 11-12, outlining their plans to be the overseer of savings and loans owned by non-banks such as insurers which take deposits and conduct other banking activities. All insurers have been re-evaluating their business model as a result of this development, prompted by the Dodd-Frank Act. This act dissolved the Office of Thrift Supervision and shifted its responsibilities to the Office of the Comptroller of the Currency as charterer of savings and loans, and the Fed as overseer of thrift holding companies.
Separately, officials of W.R. Berkley Co. have revealed in a securities filing that it plans to divest its 80 percent interest in InsurBank, a thrift based in Farmington, Conn. The remaining 20 percent is owned by the Independent Insurance Agents and Brokers of America (IIABA).
Robert A. Rusbuldt, IIABA president and CEO, acknowledged that because of the Dodd-Frank Act, Berkley is considering divesting its interest in the thrift, and "a lot of decisions have to be made," both by us and them. He said there is no immediate timetable for a decision as to what will happen with the thrift, which will be regulated going forward both by the Office of the Comptroller of the Currency and the Fed. "[The Dodd-Frank Act] means that thrifts will be regulated in a different way than before," and that Berkley believes that operating a thrift under the Dodd-Frank Act "is very onerous."
Rusbuldt said that "banks are regulated in a different way than insurers," and not only Berkley but other companies with thrifts are considering their options because of the different rules under the Dodd-Frank Act.
At the same time, Rusbuldt said that "InsurBank is profitable, it is growing, and it has a lot of independent agents as customers." According to SNL, InsureBank at the end of 2001 had total assets of $170 million, total deposits of $130 million, and year-to-year growth rates of 10 percent for assets and 11.53 percent for deposits.
Meanwhile, Thrivent Financial for Lutherans, a life insurance company, Minneapolis, Minn., has filed an application to turn its thrift into a credit union in order to escape regulation by the Fed.
Other insurers that are winding down bank-type operations are MetLife, which is selling its bank to GE Capital; Allstate, which is winding down its bank; Pacific Mutual Holding Company, which is selling its College Savings Bank unit; and Western & Southern Mutual Holding Company, which is winding down its Fort Washington Savings Co.
Officials of the Boston Federal Reserve Bank confirmed what the Fed is doing, and said the Fed "became responsible for 26 savings and loan holding companies that were primarily engaged in insurance operations" through the Dodd-Frank Act.
Dodd-Frank transferred all of the powers of the Office of Thrift Supervision to other federal agencies, and as a result, the Fed's authority is now "very broad," according to the former top counsel of a federal regulatory agency who is now in private practice.
The stronger oversight of the insurance industry by federal regulators also includes plans to designate certain institutions systemically significant (SIFI). Only a handful of insurers are likely to be so designated, however. Far more insurers will come under stronger federal oversight through the regulation of their thrifts by the Fed and the Office of the Comptroller of the Currency as successor to the Office of Thrift Supervision.
A former federal regulatory lawyer now in private practice, said the Fed, as overseer of the thrift at the holding company level, can examine an insurer, set minimum capital and liquidity requirements and restrict or prohibit transactions between the holding company and the savings association subsidiary.
The Fed can also establish and require internal controls, mandate policies and procedures that must be followed, and can take enforcement actions against officers and directors of the holding company. The Office of the Comptroller of the Currency has similar broad authority, but only over federal savings association entities and their direct subsidiaries.
Several of the companies involved, from the largest ones to the smallest ones, have confirmed that the Fed has already talked to them, and has designated a Fed Bank to examine them.
Another Washington lawyer familiar with the thrift regulation issue acknowledged that a number of institutions are divesting their thrift and bank businesses, or downgrading them to trust banks, underscoring industry concern about having the Fed as regulator.
The lawyer, who asked not to be identified, said that most of the remaining institutions are comfortable with the Fed as a regulator of its thrifts. He classified the Fed as a "diligent regulator," and that its oversight will be limited to the holding company and not the insurance operating level.
This lawyer noted that insurers are as concerned about the Volcker rule's impact on them as they are about SIFI and regulation of their thrifts, citing the comments by Prudential as reflective of the views of many insurers about the potential impact the Volcker rule could have on them. He noted that insurers lobbied "long and hard" to exempt their trading activities, which are designed to hedge against interest rate risk on long-term assets, from the Volcker rule during negotiations over the Dodd-Frank Act.
The Fed board in Washington is engaging all the Fed banks outside of the New York Fed in the enterprise, with the Chicago Fed's economics unit establishing the benchmarks through which Fed examiners will examine the books of the targeted insurers.
