Judges named in MetLife SIFI case

WASHINGTON — Judges appointed by President Barack Obama Monday in the federal government's ongoing case regarding whether or not MetLife is a systemically important financial institution (SIFI) will constitute a majority on the panel that will review the Financial Stability Oversight Council's appeal of a lower court decision earlier this year.

Judge selection was viewed as a negative for MetLife's chances of sustaining the lower court decision handed down on March 30 by Judge Rosemary Collyer, who declared MetLife's SIFI designation "arbitrary and capricious." That ended the Federal Reserve's oversight of the company. The government is appealing that decision. Oral arguments are scheduled on that appeal for Oct. 24 before a panel of the U.S. Court of Appeals for the D.C. Circuit.

Collyer's decision was largely rooted in the arguement that the government had not taken into consideration the additional costs MetLife will bear as a SIFI.

The government's formal appeal was filed June 15.

The case is MetLife v. FSOC, No. 16-5086.

The judges selected by a lottery in the U.S. Court of Appeals for the D.C. Circuit are:

- Sri Srinivasan, an Obama appointee;
- Patricia Ann Millett, an Obama appointee; and
- A. Raymond Randolph, an H.W. Bush appointee.

Thomas Gallagher, an analyst at Evercore ISI, said his initial analysis of the judges pool indicated the likelihood of getting a majority of Obama-appointed judges was below 20 percent.

Gallagher added that "there was a chance" the government might have pulled its appeal if the judge selection disadvantaged their case, as a lost case in the U.S. Court of Appeals could set a negative legal precedent. This could work against the FSOC in similar cases in the future, i.e., make it easier for Prudential Financial to also try and get out of its SIFI designation.

"However, with the judge selection now seemingly looking better for the FSOC case," Gallagher said, "we expect FSOC to stick with it. In the event that MetLife still wins this appeal, it is unclear whether the FSOC would try and move it to the Supreme Court, given derivative implications for regulating other financial institutions more broadly."

Gallagher said the outcome of this appeal would have been a lot more important to MetLife had it not been pursuing a breakup of the company.

"With a breakup already underway with Brighthouse and what we would view as a pretty clear final step to ensuring that MetLife sheds the SIFI designation, we believe there is still a high probability that MetLife is unlikely to be a SIFI in the next two or three years (around the time that insurance annual SIFI stress testing likely comes into play), regardless of the outcome of this case," Gallagher said.

He also explained that if the government wins the appeal, MetLife is more likely to shed the remainder of its high-capital cost variable life and annuity now known as "Remain-Co.," the last part of its retail life insurance business.

But, Gallagher added that even if it loses and proceeds with its sale of its retail businesses, MetLife "will attempt to have the case tried at the Supreme Court and will likely be a more drawn out process."

In any event, Gallagher said the selection of the judges will not interfere with MetLife's decision to announce after its board meeting Tuesday its plans to spin off the Brighthouse annuities and life policy businesses sold to individuals through an S-10 filing to the Securities and Exchange Commission. MetLife has named Eric Steigerwalt, MetLife executive vice president, to head the spun-off business. Gallagher said the SEC filing will provide a clearer picture of MetLife's ongoing capital position.

Gallagher anticipates that if MetLife ultimately loses the retail run-off block and shorter-term corporate benefit funding business now designated as "Remain-Co."

MetLife plans to include the following entities in Brighthouse, MetLife Insurance Company USA, General American Life Insurance Company, Metropolitan Tower Life Insurance Company and several subsidiaries that have reinsured risks underwritten by MetLife Insurance Company USA.

The new company would represent, as of Sept. 30, 2015, approximately 20 percent of the operating earnings of MetLife and 50 percent of the operating earnings of MetLife's U.S. retail segment, according to a company statement outlining the separation.

The new company would have approximately $240 billion of total assets, including $45 billion currently reported in the corporate benefit funding and corporate and other segments. Approximately 60 percent of current U.S. variable annuity account values, including 75 per cent of variable annuities with living benefit guarantees, are in entities that would be a part of the new company. The new company would also contain approximately 85 percent of the U.S. universal life with secondary guarantee business.

The parts of the U.S. retail segment that would stay with MetLife and are known as "Remain-Co." are: the life insurance closed block, property-casualty, and the life and annuity business sold through Metropolitan Life Insurance Company (MLIC). MLIC would no longer write new retail life and annuity business post-separation, MetLife said. Gallagher indicated that these If MET eventually loses the lawsuit, we think it may add an additional step to the process, where following the separation of the on-going retail business, the company moves to shed more assets related to the retail run-off block and shorter-term corporate benefit funding business at Remain-Co.

See also:

Insurers earn investor ire

FSOC seeks prompt arguments in MetLife case

Dodd-Frank drafters rip MetLife ruling

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