MetLife Inc. (MET:US) said it would combine an offshore reinsurer with three U.S. life units after regulators began an investigation into the use of intra-company liability transfers, saying such arrangements could mask risk.
MetLife, the largest U.S. life insurer, plans to merge subsidiaries in Connecticut, Delaware and Missouri with its offshore reinsurer for variable annuities, known as Exeter Reassurance, according to a slide presentation for the company’s investor meeting today. The combination requires regulatory approval and will probably be completed in 2014, MetLife said.
The merger “proactively addresses recent regulatory concerns about the use of captive reinsurers,” New York-based MetLife said in the presentation. It could also help the company be in a “better position to deal with Dodd-Frank derivative collateral requirements.”
New York State’s Department of Financial Services, led by Benjamin Lawsky, began an investigation into captive insurers in July, requesting information about the arrangements from about 80 life insurers in the state, including MetLife. The entities can threaten financial stability and reduce the amount of reserves insurers hold to pay future claims, Lawsky said in a speech last month.
“This financial alchemy, let’s call it shadow insurance, does not actually transfer the risk for those insurance policies off the parent company’s books, because in many instances, the parent company is ultimately still on the hook,” Lawsky said “Shadow insurance could leave insurance companies less able to deal with losses.”
Lawsky praised MetLife’s announcement in a Twitter message today, citing “progress on making the shadowy world of insurance ‘captives’ more transparent.”
MetLife Chief Executive Officer Steve Kandarian said the offshore reinsurance program began in 2001 and “makes less sense” now.
“The New York Department of Financial Services’ industry inquiry regarding captives was an important factor in our taking a closer look at our offshore reinsurance subsidiary,” Kandarian, 61, said at the investor presentation. “We’re going to take steps to bring these businesses back on shore and to a more highly capitalized, U.S.-based and U.S.-regulated entity.”
Captives are units set up by a firm to cover risk elsewhere in the company. They may be located in offshore locations such as Bermuda and the Cayman Islands, or in the U.S.
MetLife fell 0.5 percent to $43.08 at 10:29 a.m. in New York, trimming this year’s advance to 31 percent. Prudential Financial Inc. (PRU:US), the No. 2 U.S. life insurer, is up 28 percent since Dec. 31.
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