Kris Tripplaar/Sipa USA/Associated Press
Updated March 30, 2016 2:15 p.m. ET
MetLife Inc. is expected to plow ahead with a plan to split up even after a court victory Wednesday rescinded the life insurer’s designation as a systemically important financial institution.
The insurer said in January that it would divest a large piece of its U.S. life-insurance unit. That “was a business decision, made strictly on business grounds,’” said one person familiar with the situation.
“There’s a clear timetable” for the divestiture, and MetLife officials expect “it will proceed as planned,” the person said.
After the financial crisis, the federal government gave the systemically important designation to a number of banks and other financial institutions that it said could pose a threat to the stability of the U.S. if they failed. Firms with the label are subject to stricter oversight from the Federal Reserve, though the rules governing nonbank SIFIs like MetLife have yet to be written.
MetLife fought the distinction for more than a year and outlined the sale plans in January partly in a bid to ease some of the capital burden it was expected to face.
Wednesday’s ruling could have major implications for two of MetLife’s biggest rivals: Prudential Financial Inc. and American International Group Inc. Both have also been labeled as systemically important by federal regulators.
Investors in Prudential and AIG “may want to know why they aren’t strenuously fighting their designation,” said Cathy Seifert, an equity analyst with S&P Capital IQ.
Even before Wednesday’s ruling, Prudential executives had already discussed ways to escape from tougher federal oversight if MetLife wins its legal challenge with the U.S., weighing whether they can challenge the designation from the Financial Stability Oversight Council after deciding not to earlier. The Journal reported last June that executives have discussed using any court victory by MetLife as ammunition at an annual review of its federal label, said people familiar with the situation.
For AIG, a challenge could be a more difficult proposition, as the company and its massive bailout amid the financial crisis were part of the inspiration for the Dodd-Frank financial regulation that created the systemically-important designation. But if AIG were to successfully shake the label, it would give ammunition to the company’s case that it doesn’t need to break up—something that activist investors have pushed for in recent months.
AIG directors are expected to take another look at potentially challenging its designation, people close to the matter said Wednesday. Directors of the big insurer next convene before and after its annual meeting this May.
That said, there are still plenty of open questions that the insurers, the government, and their lawyers will need to find answers to before they decide how to proceed.
For one, the actual decision from U.S. District Judge Rosemary Collyer is still under seal. The details of the judge’s ruling, when it is released, will provide some direction.
And the government can still appeal the decision. Plus, the Financial Stability Oversight Council could redo the process that resulted in MetLife being tagged as a SIFI. Or both. All those possibilities mean the cloud of stricter oversight from the Federal Reserve would hang over MetLife for many months, or possibly years, even after Wednesday’s victory.
That’s one reason MetLife is likely to move ahead with its plan to divest part of the life-insurance unit. In announcing that it was pursuing that option, the company said it hoped the move would ease some of the capital burden it is expected to face as a SIFI. But it also said that the move makes sense for other reasons too—a point that executives have made repeatedly in the months that followed.
A stand-alone U.S. life insurer “will be more nimble and competitive, benefiting from greater focus, more flexibility in products and operations, and a reduced capital and compliance burden,” Chief Executive Steven Kandarian said on a conference call with investors and analysts in February. In a statement Wednesday, Mr. Kandarian called the decision a “win for MetLife’s customers, employees and shareholders” but didn’t address the question of the company’s future plans.
MetLife shares popped on Wednesday’s ruling, rising 4.8% in afternoon trading. Prudential shares climbed 2.5%, while AIG is up 2.2%.
Representatives for Prudential and AIG had no immediate comment.