American International Group Inc (NYSE:AIG), Prudential Financial Inc (NYSE:PRU) and GE Capital have all been placed on the list of nonbank financial institutions which are “systemically important” to the U.S. economy. Analysts at Barclays believe Metlife Inc (NYSE:MET) will also be added to the list.
The financial institutions received the designation at Monday’s Financial Stability Oversight Council meeting. The council was deciding which firms should be subjected to intensified scrutiny because they play a major role in the stability of the U.S. economy.
The Price is Right With Dimensional Fund Advisors’
ValueWalk's Raul Panganiban interviews Dave Plecha, Global Head of Fixed Income at Dimensional Fund Advisors. In today’s episode we discuss Dimensional’s approach to fixed income investing. The following is a computer generated transcript and may contain some errors. Q3 2020 hedge fund letters, conferences and more The Price is Right with Dave Plecha, Global Head Read More
AIG, Prudential, GE Capital Confirm Reports
Bloomberg’s Ian Katz and Zachary Tracer reported overnight that American International Group Inc (NYSE:AIG) and Prudential Financial Inc (NYSE:PRU) issued statements on Monday saying that they had been notified of the panel’s decision. General Electric Company (NYSE:GE)’s GE Capital unit said separately that the company had also received the designation from the panel on Monday.
All three companies had said earlier that the council was considering giving them the systemically important financial institution (SIFI) designation. The council itself had not said which companies it was considering to add to its list.
Next Steps For AIG, Prudential, GE
The firms which received the SIFI designation now have 30 days to appeal it. Prudential Financial Inc (NYSE:PRU) told Bloomberg it was evaluating if it should appeal. American International Group Inc (NYSE:AIG) had already said it wouldn’t appeal.
The final decision of the council will be made at the end of the 30 days. It will not officially release the names of the firms that receive the designation until after the final vote. It is expected that the number of firms which will be affected will be limited.
Implications Of The SIFI Designation
A team of analysts led by CFAs Jay Gelb and Sarah DeWitt released a research note which considers the possible implications for the firms which receive the SIFI designation. They point out that the Federal Reserve hasn’t provided all the rules for the insurers which will be regulated under the designation.
The analysts said they don’t believe AIG or Prudential will be in capital deficient positions when the new rules take effect, although they said the firms’ share buybacks might be negatively affected. They said one of the biggest issues that haven’t been resolved yet is how the central bank will look at separate account assets like variable annuities in leverage ratios. Another major point of interest under the new rules is accumulated other comprehensive income.
Will Metlife Be On The SIFI list?
Metlife Inc (NYSE:MET) has not said anything about actually being on the SIFI list, although Barclays analysts said the company believes that it will be on that list. Metlife won’t finalize its share repurchase plans until after it assesses the regulatory environment.
Recently the insurance company raised its dividend 49 percent, the first increase since 2007. The company isn’t planning to buy back any shares this year and hasn’t made it clear whether it will buy any shares back next year either. Barclays analysts said if Metlife Inc (NYSE:MET) can’t buy back any shares through 2016, its target return on equity guidance will fall 100 basis points to between 11 percent and 13 percent. In their estimations, every $1 billion of share buybacks is equal to 13 cents per share annually.
Barclays analysts also looked at the positioning of AIG and Prudential under the new SIFI designation. They believe AIG is the best positioned to adapt to new regulation of the three firms it looked at. The analysts said this is because the company has “substantial parent holding company liquidity, significantly lower asset leverage, a modest variable annuity business, no shareholder dividend … and an established record of repurchasing stock.” They did say that they expect the firm to establish a small dividend in the second half of this year, however.
Under intensified regulation, the analysts believe AIG’s share repurchases might take longer than expected initially. They’re looking for the firm to buy back $11 billion of its shares by 2015. In their estimations, each $1 billion of share buybacks is worth around 5 cents per share annually.
Analysts at Barclays note that Prudential has more asset leverage than either AIG or Metlife, but about half of its $3 billion to $4 billion annual operating income is free cash flow. They said the firm has approximately $3 billion in balance sheet capacity, of which about half might be deployable. It didn’t buy back any stock in the first quarter of this year and has said it would buy back $250 million worth of shares in the second quarter of this year.
The analysts are expecting modest share buybacks of $450 million both this year and next from Prudential.