(Corrects to remove reference to bank exit from headline and first paragraph of story published Nov. 30.)
Principal Financial Group Inc. (PFG:US), the seller of life insurance and retirement products, is weighing an exit from its status as a savings and loan holding company to limit U.S. oversight.
The insurer filed a draft application to change its status to avoid Federal Reserve regulation that may limit investing and require the Des Moines, Iowa-based company to hold additional capital. The company may operate its Principal Bank as a limited purpose trust institution, which would still hold savings products in individual retirement accounts and be supervised by the Office of the Comptroller of the Currency, Principal said.
The bank operates online with no physical branches and Principal isn’t now seeking a buyer for the unit, said Susan Houser, a company spokeswoman.
“Some of the Dodd-Frank provisions, such as the Volcker rule, along with the unknowns of new capital requirements, could have an outsized impact on Principal relative to any benefit of Fed regulation,” Chief Executive Officer Larry Zimpleman said on a Nov. 27 conference call with analysts.
Principal follows MetLife Inc. (MET:US), the largest U.S. life insurer, in moving to limit oversight. American International Group Inc. (AIG:US) is weighing a similar move, and Ameriprise Financial Inc. (AMP:US), Hartford Financial Services Group Inc. (HIG:US), and Allstate Corp. (ALL:US) have all retreated from the banking business.
“Principal will reduce the potential for restrictive regulatory oversight as a bank and may free up some capital over time,” Edward Shields, an analyst at Sandler O’Neill & Partners LP wrote in a research note.
Under the Dodd-Frank Act, insurers with thrifts are subject to federal supervision -- including new capital standards --that firms including MetLife have said are not suited to the industry. The Volcker rule limits proprietary trading and investing in private equity or hedge funds.
The rules are intended to prevent a repeat of the 2008 bailouts that the U.S. undertook as collapsing financial firms threatened the global economy.
Fed regulation may have led to “reduced flexibility for our other asset-accumulation, mutual fund and asset management businesses,” Zimpleman said on the call.
Principal’s bank had about $2.2 billion in deposits as of June 30 and 91 employees, according to Federal Deposit Insurance Corp. data. The bank expects to hold about 85 percent of that sum after a change in status, Principal said.
Filing a draft application will allow the insurer to work with the Fed to understand requirements for deregistering as a savings and loan holding company, Houser said. If the draft application is on track, Principal will file a formal application, she added.
Principal embraced the bank in June when the company said it benefits from the ability to hold customers’ government- insured deposits as the clients develop retirement plans.
The deregistration process can take as little as a month or as long as a year, depending on the complexity , said Kevin L. Petrasic, a partner with law firm Paul Hastings LLP.
MetLife, regulated as a bank-holding company, reached a deal last year to sell deposits to a unit of General Electric Co. to exit banking. The deal is still awaiting regulatory approval. The Fed has blocked MetLife’s plan to increase its dividend or resume share buybacks.
Insurers “are very unhappy with being subject at a corporate level to bank-type capital regulations, including potential application of Basel III,” said Scott Harrington, director of the Risk and Insurance Program at the University of Pennsylvania’s Wharton School.
“You have insurers that have invested significant resources in building these businesses, and now, if they sell off to a non-insurance entity, you have to presume they’re going to take a loss,” Harrington said.
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