New York’s Department of Financial Services last month asked about 80 life insurers in the state to provide details on financial arrangements with captive insurance companies, a person familiar with the matter said.
The companies, which include MetLife Inc. (MET:US) and Lincoln National Corp. (LNC:US), face a deadline on Aug. 8 to provide the information, said the person, who declined to be identified and wasn’t authorized to speak on the matter.
Captives are companies set up by an insurer to cover the parent’s risks. Bermuda and the Cayman Islands were the most common locations for captive insurers in 2010, according to the Insurance Information Institute. Vermont is the state with the largest number of captives, at 572 in 2010.
Ron Klug, a spokesman for the New York Department of Financial Services, declined to comment on the matter in a telephone interview. The letters sent to the companies were reported earlier by the Wall Street Journal.
MetLife uses captive reinsurers and letter of credit facilities to comply with certain reserve requirements that are related to universal life and term life insurance policies, Chris Breslin, a spokesman for New York-based MetLife, said in an e-mail.
Lincoln National discloses its use of captive arrangements and supports regulatory reviews, Michael Arcaro, a spokesman for the Radnor, Pennsylvania-based company, said in an e-mail.
“Reinsurance and the use of captive structures have always provided an avenue for effective risk management in the life industry,” Arcaro said. “Lincoln’s use of these arrangements are reviewed by numerous parties, including state regulators, ratings agencies and multiple outside actuarial firms. We have been very public on our use of captives and support periodic reviews by the appropriate state regulators.”
MetLife’s Vermont-based captive got a 30-year letter of credit in 2008 from Deutsche Bank AG, which committed to providing $2.4 billion, the Journal reported, citing securities filings and unidentified people familiar with the transaction.
The cost of the letter of credit was “significantly less” than the cost of issuing debt or selling stock and the bank arrangement allows MetLife to stay within leverage ratios used by firms that rate credit, the Journal said.
Deutsche Bank could demand payment from MetLife if the letter is drawn upon, and could declare the insurer in default if it can’t reimburse the bank, the Journal said, citing unidentified people familiar with the transaction.
The letter of credit from Deutsche Bank is an example of how they are used by industry to meet regulatory requirements related to reserves, Breslin said.
“The letters of credit support non-economic reserves. To the extent that each insurance subsidiary, including the captives themselves, is properly capitalized then a debt default at the holding company would have no impact on policyholders,” Breslin said.
John Nadel, an insurance analyst at Sterne Agee & Leach Inc., said insurers should provide more information about their use of captives.
“The vast majority of life insurers utilize captive reinsurance in one form or another,” Nadel wrote in a research note today. “Captives are a ‘black box,’ but we think more disclosure is the answer.”
Eric Berg, an analyst at RBC Capital Markets, said the captive arrangements may give a “false impression” of the insurer’s financial health, especially in cases where the captive is funded using a letter of credit that allows the bank to hold the parent company responsible for the debt.
If New York regulators change how they evaluate the captives or stop recognizing them, that may limit the ability of some insurers to repurchase shares, he wrote in a research note today.
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