NEW YORK (TheStreet) -- Metlife (MET) says ending a practice of so-called "shadow insurance" could cut at the insurer's credit rating and lead to higher costs for consumers. Moody's, a top ratings agency, appears to disagree.
The apparent difference of opinion centers on an alleged $48 billion of claims life insurers such as Metlife, Lincoln National Life Insurance, Genworth (GNW) and Prudential (PRU) move from their balance sheets to captive reinsurance subsidiaries and the perceived costs firms would incur to make those claims more transparent to regulators, investors and policyholders.
According to a recent report from the New York State Department of Financial Services and New York State Governor Andrew Cuomo, insurers have exploited loopholes to throw some life and health insurance products into off-balance-sheet entities, minimizing reported liabilities and the capital a firm would need to service them.
Metlife says moving policies back on its balance sheet could cause ratings downgrades, increase its cost of its capital and raise prices for customers. Moody's, however, says a better disclosure and capitalization of claims may actually be "credit positive" for industry-wide ratings.Life insurers use reinsurance subsidiaries to finance reserve requirements for term and universal life policies with secondary guarantees, MetLife says. Any alternative to put those policies back on the balance sheet would come with big costs, the insurer states. "Using equity could reduce returns to levels below those required by investors and issuing debt could negatively impact credit ratings," MetLife spokesperson John Calagna said in an e-mailed statement June 12. "Access to reinsurance subsidiaries significantly reduces costs to policyholders and in some cases is necessary to enable insurers to continue to offer certain coverage." Moody's, however, only sees benefits for the industry. "We believe that a greater focus on captives by regulators is credit positive for the industry," Scott Robinson, a Moody's Senior Vice President, writes in a Monday report. "Our analysis of life insurance companies' creditworthiness on an enterprise basis has determined that many companies' captives are capitalized at lower levels than standard operating companies." According to a June 12 report from Cuomo and DFS superintendent Benjamin Lawsky, New York-based insurance companies -- the only ones that would fall under its jurisdiction -- failed to disclose the guarantees associated with nearly 80% of $48 billion in shadow insurance in their financial statements using captives. Life insurers use those off-balance sheet vehicles to manage the regulatory burden of life and health insurance products and the reserve requirements of variable annuity guarantees. "Both practices undermine the conservatism regulators have embedded in the reserving and capital regimes," Robinson, the Moody's SVP added in the Monday note.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV