Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 1 of 190
IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
METLIFE, INC.,
Plaintiff,
v. Civil Action No. 1:15-cv-45 (RMC) FINANCIAL STABILITY OVERSIGHT COUNCIL,
Defendant.
REDACTED JOINT APPENDIX
VOLUME 13 OF 16
PAGES 2372 TO 2599
Eugene Scalia (D.C. Bar No. 447524) Benjamin C. Mizer, EScalia@ gibsondunn.com Principal Deputy Assistant Attorney General Amir C. Tayrani (D.C. Bar No. 490994) Kathleen R. Hartnett, Ashley S. Boizelle (D.C. Bar No. 1010322) Deputy Assistant Attorney General GIBSON, DUNN & CRUTCHER LLP Joseph H. Hunt, Director 1050 Connecticut Avenue, N.W. Diane Kelleher, Assistant Branch Director Washington, D.C. 20036 Elisabeth Layton, Senior Counsel Telephone: (202) 955-8500 [email protected] Facsimile: (202) 530-9606 Deepthy Kishore, Trial Attorney Eric B. Beckenhauer, Trial Attorney Indraneel Sur (D.C. Bar No. 978017) Caroline Wolverton, Trial Attorney GIBSON, DUNN & CRUTCHER LLP Tamra Moore, Trial Attorney 200 Park Avenue U.S. DEPARMENT OF JUSTICE New York, NY 10166-0193 Civil Division, Federal Programs Branch Telephone: (212) 351-4000 20 Massachusetts Avenue, N.W., Room 7110 Facsimile: (212) 716-0875 Washington, D.C. 20530 Counsel for Plaintiff MetLife, Inc. Telephone: (202) 514-3183 Facsimile: (202) 616-8470 Counsel for Defendant Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 2 of 190
TABLE OF CONTENTS
Item AR Page(s) JA Page
VOLUME 1
Authority to Require Supervision and Regulation of Certain Nonbank Financial Companies, 77 Fed. Reg. 21,637 (Apr. 11, 2012) AR-1-26 JA-1
Financial Stability Oversight Council, Hearing Procedures for Proceedings Under Title I or Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act AR-27-33 JA-27
Minutes of the Financial Stability Oversight Council (July 16, 2013) AR-34-39 JA-34
Minutes of the Financial Stability Oversight Council (Sept. 4, 2014) AR-44-51 JA-40
Minutes of the Financial Stability Oversight Council (Dec. 18, 2014) AR-63-76 JA-48
Letter from Amias M. Gerety, Deputy Assistant Sec'y, FSOC, to Steven Kandarian, MetLife, Inc. (July 16, 2013) AR-77-79 JA-62
Letter from Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC, to Ricardo A. Anzaldua, MetLife, Inc. (Aug. 20, 2014) AR-80-82 JA-65
VOLUME 2
Explanation of the Basis of the Financial Stability Oversight Council's Proposed Determination Regarding MetLife ("Proposed Designation") REDACTED IN FULL AR-83-308 JA-68
VOLUME 3
Proposed Designation (cont'd) REDACTED IN FULL AR-309-55 JA-294
VOLUME 4
Explanation of the Basis of the Financial Stability Oversight Council's Final Determination that Material Financial Distress at MetLife Could Pose a Threat to U.S. Financial Stability and that MetLife Should Be Supervised by the Board of Governors of the Federal Reserve System and Be Subject to Prudential Standards (Dec. 18, 2014) ("Final Designation") AR-356-571 JA-341
11 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 3 of 190
TABLE OF CONTENTS (continued)
Item AR Page(s) JA Page
VOLUME 5
Final Designation (cont'd) AR-572-742 JA-557
Basis for the Financial Stability Oversight Council's Final Determination Regarding Met Life, Inc. (Dec. 18, 2014) AR-743-73 JA-728
VOLUME 6
Letter from Ricardo A. Anzaldua, Met Life, Inc. to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (Nov. 10, 2014) REDACTED IN FULL AR-1056-83 JA-759
VOLUME 7
Met Life's November 13,2013 Voluntary Submission (all sections) REDACTED IN FULL AR-1433-706 JA-787
VOLUME 8
Met Life's November 13,2013 Voluntary Submission (all sections) (cont'd) REDACTED IN FULL AR-1707-2006 JA-1061
VOLUME 9
Met Life's November 13,2013 Voluntary Submission (all sections) (cont'd) REDACTED IN FULL AR-2007-251 JA-1361
VOLUME 10
Met Life's October 16,2014 Voluntary Submission (all sections) REDACTED IN FULL AR-2252-539 JA-1606
VOLUME 11
Met Life's October 16,2014 Voluntary Submission (all sections) (cont'd) REDACTED IN FULL AR-2540-776 JA-1894
VOLUME 12
Met Life's October 16,2014 Voluntary Submission (all sections) (cont'd) REDACTED IN FULL AR-2777-973 JA-2131
111 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 4 of 190
TABLE OF CONTENTS (continued) Item AR Page(s) JA Page
Excerpts from Met Life, Inc., Annual Report (Form 10-K) (Feb. 27, 2014) AR-3497-821 JA-2328
VOLUME 13
Transcript of FSOC Nonbank Financial Company Hearing (Nov. 3, 2014) AR-3955-4095 JA-2372
Letter from Ricardo A. Anzaldua, Met Life, Inc. to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (Aug. 6, 2014) AR-4096-99 JA-2513
Letter from Ricardo A. Anzaldua, Met Life, Inc. to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (Oct. 30, 2014) AR-4230-34 JA-2517
Memorandum Attached to Letter from Brian W. Smith, Mayer, Brown & Platt, to Jay B. Bernstein & Betsy Cross (Sept. 29, 2000) REDACTED IN FULL AR-4312-55 JA-2522
Letter from Robert deV. Frierson, Bd. of Governors of the Fed. Reserve Sys., to Steven Goulart, Met Life, Inc. (Oct. 29, 2010) ..AR-4366-70 JA-2566
Excerpts from Met Life, Inc., Annual Report (Form 10-K) (Feb. 21, 2012) AR-4371-99 JA-2571
VOLUME 14
Bd. of Governors of the Fed. Reserve Sys., Commercial Paper Funding Facility AR-11388-467 JA-2600
VOLUME 15
Letter from James Donelon, La. Ins. Comm'r, to Jacob Lew, Sec'y, U.S. Dep't of the Treasury (March 27, 2014) AR-27985-90 JA-2680
Letter from James Donelon, La. Ins. Comm'r, to Jacob Lew, Sec'y, U.S. Dep't of the Treasury (Nov. 7, 2014) AR-27991-96 JA-2686
Oliver Wyman: Analysis of Market Consequences of Severe Financial Distress (Feb. 14, 2014) REDACTED IN FULL AR-48134-75 JA-2692
Letter from Ricardo A. Anzaldua, MetLife, Inc., to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (Sept. 18, 2014) AR-61158-60 JA-2734
1V Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 5 of 190
TABLE OF CONTENTS (continued) Item AR Page(s) JA Page
Letter from Ricardo A. Anzaldua, Met Life, Inc., to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (Oct. 6, 2014).... AR-61161-62 JA-2737
Letter from Ricardo A. Anzualda, Met Life, Inc. to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (May 21, 2014) AR-62369-72 JA-2739
Letter from Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC, to Ricardo A. Anzaldua, Met Life, Inc. (Oct. 3, 2014) AR-62393-96 JA-2743
Letter from Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC, to Ricardo A. Anzaldua, Met Life, Inc. (Oct. 7, 2014) AR-62401-08 JA-2747
Letter from Ricardo A. Anzaldua, Met Life, Inc., to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (Oct. 22, 2014) AR-62439-45 JA-2755
Letter from Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC, to Ricardo A. Anzaldua, Met Life, Inc. (Oct. 30, 2014) AR-62457-58 JA-2762
Letter from Dave Jones, Cal. Ins. Comm'r, to Jacob Lew, Sec'y, U.S. Dep't of the Treasury (Oct. 27, 2014) AR-62470-78 JA-2764
Letter from Karen Weldin Stewart, Del. Ins. Comm'r, to Jacob Lew, Sec'y, U.S. Dep't of the Treasury (Oct. 13, 2014) AR-62479-86 JA-2773
Statement of NOLHGA President Peter G. Gallanis (Mar. 27, 2014) AR-62501-15 JA-2781
Letter and Supplemental Statement from NOLHGA President Peter G. Gallanis to Jacob Lew, Sec'y, U.S. Dep't of the Treasury (Oct. 14, 2014) AR-62516-44 JA-2796
Letter from Wayne Goodwin, N.C. Comm'r of Insurance, to FSOC (Oct. 29, 2014) AR-62545-50 JA-2825
Nonbank Financial Company Designations Final Rule and Interpretive Guidance Fact Sheet AR-62551-56 JA-2831
Letter from Thomas Leonardi, Conn. Ins. Comm'r, to Jacob Lew, Sec'y, U.S. Dep't of the Treasury (Oct. 24, 2014) AR-62842-61 JA-2837
Letter from Kathy Belfi, Connecticut Financial Regulation Division, to Patrick Pinschmidt, Deputy Assistant Sec'y, FSOC (May 27, 2014) REDACTED IN FULL AR-62867-71 JA-2857 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 6 of 190
TABLE OF CONTENTS (continued) Item AR Page(s) JA Page
Email from Diane Fraser to Michael Maffei (Sept. 11, 2013) AR-65867-68 JA-2862
Letter from Benjamin M. Lawsky, Superintendent, N.Y. Dep't of Fin. Servs., to Jacob Lew, Sec'y, U.S. Dep't of the Treasury (July 30, 2014) AR-66153-57 JA-2864
VOLUME 16
Confidential Materials Subject to Protective Order REDACTED IN FULL
vi Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 7 of 190 Page -1
UNITED STATES OF .AMERICA DEPARTMENT OF THE TREA.WRY
FINANCIAL- STABILITY OVERSIGHT COUNCIL + ++
NONBANKFINANCIAI COMPANY HEARING
MONDAY
NOVEMBER 3, 2014
The Caincil met in the Media toot.,
U.S TreaOury, 1500 Pennsylvania Avenue, N.W.,
Washington, D.C., at 3:06 p.m., Ma Le*
Secretarir of the Tiea4pury, pkesiding.
Neal R, Grass atid Co., Inc. 202-234-443a Washington DC wownealrgross.corb JA-2372 GOJNFIDENTIAL F$00 600039§5 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 8 of 190
Page 2
PRESENT JACK LEW, Secretary of the Treadury, Chairperson of the .ounci1 TODD COHEU1, Hearing Clerk JANET YELLEN, Chairman of" the Board of Governors of the Federal Reserve System MARTIN Ot. GRUENBERG, Chairman of the Federal Deposit Insurance Corporation MARY JO WHITE, Chair, Securities and Exchange Commission TIMOTHY MASSAD, Chairman of the COmmodity Futures Trading Commission. RICHARD CORDRAY, Director, Consumer Financial Protection Burdat mmovrbt WATT, Director, Federal 045V4ing Finahce Agency' THOMAS J. CURRY, Comptroller of the-Currency ADAM anmm, National Association of Insurance COMmissionera (NAIC) DEBBIE MATZ, Chairman, National Credit Union Administrktion (NCUA) ROY WOODALL, Independent Member with Insurance Expertise RICHARD BERNER, Director, Office-of Financial ResedrOhr Department of the Treabury MICHAEL MCRAITH, Director, Federal Insurance Office, Department of the Treasury JOHN P. pucliEsT, Commissioner, Louisiana Office of Financial Institutions DAVID MASSEY, Deputy Securities A4.24histiatot, North Ctrolina Department of the Secretary of State, Sedurities Dividion
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC wsim.nealrgross.corn JA-23t3 CONFIDENTIAL Fsoc 00003986 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 9 of 190
Page J
From MetLife:
STEVEN KANDARIAN, Chairman, President and
CEO
RICA/R.100 AN1ArobbA, Executive Vice. President
and General Counsel
JOHN BELE, Executive Vice President and
Chief Financial Officer
Neal R. Gross ind Co., inc, 202-234-4433 Washington DC inMALnealrgross.com JA-2374.
CONFIDENTIAL Ft0C, CI0003957 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 10 of 190 Page 4
C-0-14T-T-E-141-T-S
Call to Order and Opening Remarks 5 Jack Lew Secretary of the Treasury
Presentation by Metliife 8
Steven Kandarian 8, 58 CEO, Chairman, and President MetLife
Ricardo Anzaldua 23 ExecutiVe Vice President and General Counsel MatLifo
John Hale 42 Executive Arica President and Chief rinancial otgicer MetLife
Questions and Comments 65.
Neal R. Gloss and Co., Inc. 262-234-4435 Washington DC www.nealrgross.cong
JA42375 CONFIDENTIAL F§OC_00003958 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 11 of 190 Page 5
1 P
2 3:01 p.m.
3 SECRETARY IEW: (presiding). Good
4 afternoon.
5 would like to call this hearing
6 to order
7 Let me b#gin.by welcoming the
8 representatives, from MetIife. We would Like
9 to thank you for your engagement in the
10 process over the last yeAr4
11 thirik the entire Coundil is here
12 today. Well, Dick is here. He was in the
13 hall.
le And we are looking forward to your
15 presentation.
16 Ln Septerber the gouA41 yoted to
17 make a proposed determination regarding
18 144t.Life, and we have provided the company with
3.9 wrttten explapatImn of the Coll4ctt's bests for
20 that action.
21 in response to the proposed
22 :d4termination, MetItift slbmittedmatarials for
Neal R. Gtosspnd Co., Inc. 202-234-4433 Washington DC www.nealrgross.corn JA-2376
C NFIDECJ1T1AL FS4C 04003951 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 12 of 190
Page 6
1 Alta. written hearing to the Council on October
2 16th. The company should know that we are
3 carefully reviewing those materials, and we
4 Will also consider the inforMation we feceiVe
5 today in the Council's evaluation of )4ettife.
6 Any decision by the Cou4cil to
7 make a final determination would require a
8 second super-majority vote of the Counoii
9 members, and this hearing is a kes'Y pirt of the
10 process. It will enable the Council to
11 receive additional information and allow us to I
12 hear from you directly before the Council
1.3 considers whether to make any final
14 desjignatibn.
15 BefOre we begin, let me twice a few
16 'comments about our process here today. !e
17 have scheduled 90 minutes, and you may
is allocate the time for your presentation as you
19 wiah. W4 only ask that you reserve at leapt
20 30 minutes for Council members to ask
21 questions at the end of your presentations,
22 Because. the purpose- of the hearing is to allow
Neal R, Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA,2377 CONFIDENTIAL FSOC_Oriongeo Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 13 of 190 Page 7
1 MetLife to present its views to the Council,
2 we will ask questions, but we will not get
3 into a dialog about the Council's analysis.
4 I *ill facilitate this heating
5 with the assistance of Todd Cohen/ who it
6 serving as the hearing clerk. And I will make
7 sure that everyone on the Council has a
A chance) if they chooseh to ask at /east one
4 gwastion.
10 would also ask that the
11 presenters from MetLife introduce themselves
12 before they begin speaking.
13 As we previously informed the
14 csimpany, after this heating MetLife may submit
15 supplemental written materials up to seven
1.6 days from now. We will prepare a transcript
17 of this hearing., so that we have a pleai
18 record of the discussion, and we will make
19 that transcript available for the company when
it is available.
21 And Iswill now turn it over to
22 MetLife to proceed as you please with your
NealR.GrgssAndCp., Inc. 202-234 -4433 Washington DC www.neairgross_com
JA-2378 CONFIDENTIAL FSOC. 00003961 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 14 of 190 Page
1 presentation.
2 Thank you.
3 MR. KAIIDARIAN : Thank you Mr.
4 Chairman.
5 My name it Steve Kandatian, and I
6 am, the CEO, ChairMan, and President of
7 MetLife. I joined Mettife in the year 2005 as
0 the Chief Investment Officer. That has some
9 bearing on thin hearing in the setae that I
10 was the parson overseeing the assets, tha
11 balance sheet, when the crisis hit in 2008.
12 I became CEO in 2011.
13 So, let me just mention a couple
14 of things that I think are important upfront.
15 I think the policy goal of Dodd- Franc is
16 tclear. It is to protiadt the American. taxpayer
17 by ending bailouts. That is the stated
18 purpose. And we certainly support that
19 inAZpQS e.
20 Tie Assignation criteria, which is
21 material that financial distress at MetLife
22 could-pose a threat to the finanCal stability
Neal R. Gross,,and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2379 COMMENnAL FSC1,4004SS61 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 15 of 190
Page 9
1 of the United States, is another criteria that
2 we think is very important, and we agree with
3 that criteria. But that designation must be
4 based upon reasonable analysis, and we would
5 like to talk toyou about that today.
6 Maybe before I go into some of the
7 specifics, I can tell you 4 little bit about
my baCkgroqnd, in the tieqge that I at one time
.9 fiat on that side of the table. I ran the
10 Pension Benefit Guarantee Corporation front
11 2001, late 2001, to 2004.
12 I bring that up betause in, many
13 ways I dealt With the same issues that you are
14 grappling with today, and they are critical
15 issues to our country. We had a P e#3,ion
16 spqem, at that point inAtima in the private
17 sector that I was overseeing in that =16 that
18 I found quite troubling, had some, I thought,
19 systemic risks associated with it. And I
20 worked very hard on trying to improve that
21 system, improve the funding rules, and the
22 legislation that finally gOt passed in 2005 I
Neat R. Gtoss and Co., Inc. 202-234-4433 Washington DC w).nealrgross.corn JA-2380
CONFIENTIALQ FSOC. 00p03136a Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 16 of 190 Page 10
1 worked on before my departure.
2 So, I want you to know that f
3 understand the position all of you are in. L
4 think it is a Ver, 9eiy iiiipaktant issue that
5 our country faces post?-.2Q011.
6 Now,, unlike perhaps what the FDIC
7 faces when there is a failureiof a. bank, and
A oftentimes actions have to be taken very, very
0 quickly, over a weekend porhitps, and there are
10 runnings on banks and there's panics, and so
11 *on, the insurance industry is much more like
12 the agency that I over8aw at one point in
13 'time, the PBGC, It is sort of a slower-
14 rolling failuke of a Company. And I will glint
15 'you- some examples of that.
1.6 Ther$ was a company out in
17 California called ExecutiVe Fife. And I won't
16 go through all the gory details, You may have
19 beard. of it. But, basicallY, they were buying
20 junk bonds and ustrig- it to try to compete
21 against companies like MetLife at that point
22 in time and underpricing insurance by doing
Neal R. Gtoss,andC0., 202-234-4433 Washington DC www.nealrg ross. cam JA-2381 CONFIQENTIAL FSOC. 00003904 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 17 of 190 Page 11
1 that. And they were assured by the people
2 issuing those junk bonds that, "Don't worry
3 about it. They're not goidg to fail on you,
4 and you will be fine."
5 Well, that. Company finally failed
6 if the early 1990s when the junk bond tarket
7 crashed. That was in 1991 when that company
failed. And it was finally resolved in the
.9 etate pf New York to the year pf 2Q22. Zhat
10 is 21 years later. And during those 21 years,
11 policyholders got paid out on their policies.
12 And finally, the State of New York decided
13 they couldn't resolve this without bringing in
14 the guaranty flihd systole' which exists in the
15 life insurance industry.
1.5 So, 'Ay point there isn't that an
17 insurance can't fail:. My point is that it is
18 not the kind of failure that you see that
19 causes panic, that causes people to take rash
20 actions and move very, very quickly.
21 MetLife is big, it is important,
22 but we feel strongly it. is not systemic.. That
Neal R. Grass and Co., Inc. 202-234-4433 Washington DC vwAv.nealrgross.corn JA-2382
CO RF tDENT1 AL FSOC 00003065 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 18 of 190
Page 12
1 is, it would not being down another company if
2 MetLife. were to fail.
3 estabilizing runs .have not and
4 will not occur in the inStiranc industry, for
5 the reasons I just mentioned. And by the way,
6 the other thing I should mention is that
7 regulators have the right to ate P in 4nd stop
8 any sort of run, if you will on an insurance
9 company, even if it were to occur.
10 Sof it people panicked about
11 something, the insurance regulators. have a
1.2 right to step in. They can slow things down.
13 It is a Much slower process in terms of
14 'unraveling an insurande bonpaCny that is in
15 trouble,.
1.6 And just t0 give you some sense
17 about how we feel at MetLife about the
18 position we are in, maybe just for a second
19 put, yourself in our shoes. We raised $2.3
20 billion of capital in octaper of 2008, a month
21 after Lehman failed.
22 Now we didn't do that because we
Neal R, Gross end Co-, Inq. 202-234-4433 Washington DC wwychealrgrosS'.corn
JA-2383 CONFIDENTIAL FSOC_00003966 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 19 of 190 Page 13
felt we were illiquid. We didn't do that
2 because. we felt we were insolvent. We knew we
3 were liqUid and we *ere solveht. We wanted to
4 make sure that we had the cobfidence in the
5 financial city, that Netlate had access
6 to capital markets and we were really a solid
7 company.
And, no one knew, as many of you
around goon who were involved in this, at
lo that pOiAt in time what was going to happen in
11 this country. Would Congress pass. legislation
12 that resulted in TARP? Would the banking
13 system be resolved, and-so on and so forth?
14 So, we took extra measures to be especially
15 careful.
16 NO had derisked our portfolio
17 going into that crisis. In addition, we
18 further derisked our liabilities coming out of
14 the crisis. We had certain kinds of variable
20 annuities that we derisked. We sell fag legs
21 of those annuities than we did before. Qur
22 security lending business has shrunk
Neal R. Gtoss and Co., Inc. 21:12-234-4433 Washington DC inifww.nealtgross.com JA-2384 CONFIDENTIAL FSOC_00003967 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 20 of 190
Page 19
1 dramatically from that time. The vast
2 majority of the securities we hold in that
3 account. are gotdrnment-bacied securities,
4 nearly 90 percent.
5 And we were strong enough, aoMing
6 out of that crisis, without taking TARP money,
7 to pay $16.4 billion for a Division of AIG
called Alico. That money Oent bank to repay
9 U.S. taxpayers in part for the monies provided
10 to AIG during lts problems.
11 So, MetLife is a highly-
12 capitalized insurer. It is a AA4rated
13 company_ And by the way, it is 'strongly
14 regulated. It is very strongly regulated by
15 the State of New Yorke by othet states 'in the
16 United States, by governments outside of the
17 United States where we do business, like
18 Japan.
19 Now one other point I should
20 mention is our strong support for good
21 regulation. Let me go back to the Executive
22 Life story.
Neal R. Gross and Cc.1 Inc. 202-234-4433 Washington DC wvAy.nealrgross.corn JA-2385 CONFIDENTIAL FSOC_00003968:. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 21 of 190
rage io
'
1 So, think back to the 1900s, when
2 MetLife was losing business to Executive Life
3 because they underpriced insutance and they
4 were able to win the marketplace in terms Of
5 winning pOoplels business that way, until they
6 finally failed. Well, when they failed,
7 MeLife not only lost business it otherwise
would have had) had EOcutive Life not
9 underpriced those insurance policies, but
10 MetLife actually has to write a check in that
case. In this case, it was $114 million we
12 wrote to the State of New York in the year
13 2013 for its failure, for Executive Life's
14 failure.. So, the point I am trying to make is
15 we support strong regulation because we pay
16 for misdeeds in our industry-
17 NOw a lot of people are counting
18 on, us. bur customers are counting on us 10
19 make these long-term promises come due-and
20 provide them access to financial protection
21 for themselves and their families at an
22 Affordable price. Our employees count on us.
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC volvwstealrgross_corn JA-2386 CONFIDENTIAL FSOC_OOOL13069 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 22 of 190 Page 16
1 There's 65,00-0 peoide who work fOr MetLife.
2 Our shareholders count on us to provide them
3 a fair return, and many Of our shareholders
4 are pension funds and people with their 401(k)
5 accounts, people looking for, again, security
6 it their later years.
7 And 'we .can't achieve any of these
8. goals if we are forced to hold appreciably
9 pore capital than our peers. By the way, we
10 compete against over 800 other companies in
11 the life insurance industry.
12 There are. four reasons that we
13 believe. the FSOC should not designate MetLife.
14 'First, there ig a batter approach than just
15 simply looking at how big MetLife is. You
1.6 could look at an activities -based approach
17 that was used for asset managers. In fact, we
18 began talking about this in the year 2009.
19 testified before the douse
20 Financial Services Committee to Barney Frank
21 in 2009. And one of the things Imiggested in
22 terms of the taw was. that don't look at the
Neal R. Grassland Co., Inc. 202-234-4433 Washington DC www.nealrgross_corn JA-2387 CONFIDENTIAL FSOC 00003970 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 23 of 190 Page 17
1 size as a primary factor; look at the
2 activities that A company engages in.
3 And exaMple I gave was Long Terri
4 Capital. Long Term Capital Management, I
5 think many of you may remember from the 1980s,
6 was a highly -leveraged hedge fund. They
7 invested in a very .concentrated way. they
8 were leveraged 25 -to -1. And when they finally
got themielves into deep tiOuble with the
10 Russian debt crisis in the late 1990s, they
11 had to be bailed out. In this case, they
12 .weren't bailed out directly by the federal
13 governments although the federal government
14 certainly was at the table. The bankb in VOW
15 York bailed out Long Term Capital.
1.6 SO, if you look simply at asset
17 size, as we have I think largely here, Long
18. Term Capital was a part of the screen. It
19 wasait that big, but it. was risky. It was
20 engaged in activities that were risky.
21 So, we think the activities- based
22 approach makes sensor, not just for asset
Neal R. Gtoss tsnd Co., Inc. 202-234-4433 Washington DC vwew.nealrgross.com JA-2388 CONFIDENT AL FSOC 00003971 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 24 of 190
Page 18
managers, where it has been employed by rsoc,
2
3 We also think the designation is
4 premature, given that the FtOdential rules
5 have not yet been written. 711eie has been
6 announcement Of a QIS, and the results, of
7. course, are going to take time to come in. As
a of now, the position is by, the Federal Aesei'Ve
9 that Basel III %mink rules would be applied to
10 non.,.bank SIFIs unless the Collins amOndment is
11 changed. We are hopeful that it will be
12 changed, but there is no guarantee., certainly.
13 And I can certainly tell'you the Basel III
14 rules would make it extremely uneconomic for
15 Us in many of our lines of business.
1.6 But even if a fix is made to that
17 legislation, to the Collins amendment, we
18 still would be placed at a competitive
15 disadvantage to many other companies we
20 compete, against every day, because the rules
21 require that the Fed have enhanced supervision
22 above and beyond what already exits today.
Neal R. Grass and Co., Inc, 202-234-4433 Washington DC vvww.nealfgross.corb JA-2389
CONFIDENT! AL FSOC _0000397_2 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 25 of 190 Page 19
1 So, we will be on an unlevel playing field,
2 regardless of whether the Collins amendment is
3 changed. And consumers will pay higher costs,
4 and we believe taxpayers will be no safer.
5 Now we kind of talked about it
6 among ourselves, the next thing that I will
7 mention to you, but I think it is important
8 that you know this. We hired a while back an
9 investment bank to help us with an analysis.
10 And the analysis really goes to the issue of
11 how bad does it get for MetLife in terms of
12 the capital rules if we are finally
13 designated.
14 And frankly, what we have under
15 consideration is a breakup of MetLife. You
16 should be aware of that. And I say it to you
17 only in the sense that I don't want people to
18 say later on, "Geez, we had no idea that you
19 were thinking of this."
20 We have gone through the stress
21 test once before because we were a bank-
22 holding company. We had a little bank. It
Neal R. Gross and Co., na 202-234-4433 Washington DC www.nealrgross.com JA-2390 CONFIDENTIAL FSOC_00003973 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 26 of 190 Page 20
1 was an internet bank. We have sold it since.
2 But we were structured as a bank-holding
3 company, and therefore, we were captured by
4 Dodd-Frank under the rules, given our size, as
5 a bank SIFI. And we went through the stress
6 test. Under Basel rules, we failed that
7 stress test.
8 Among other things, we have a lot
9 of separate account assets. If you come buy
10 a variable annuity from us or a variable life
11 insurance policy from us, and you go invest in
12 some Fidelity funds or some other funds, those
13 assets are on our balance sheet. There is an
14 exact same number of liabilities against that
15 on the other side of our balance sheet. The
16 experience of those assets up or down do not
17 belong to MetLife; they belong to our
18 policyholders. They are separate legally, and
19 so on and so forth. But, from a GAAP
20 perspective, they are on our balance sheet.
21 Among other reasons, that is one
22 of the reasons why MetLife failed the stress
Neal R. Gross and Co., na 202-234-4433 Washington DC www.nealrgross.com JA-2391 CONFIDENTIAL FSOC_00003974 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 27 of 190 Page 23
1 test using Basel rules, because the banks
2 don't have those kinds of accounts. When you
3 do the ratio of how much capital do you need
4 for your total assets, including the separate
5 account assets, we failed; among other things,
6 it caused us to fail.
7 So, given that experience, we felt
8 like, if this gets to a point where we are
9 designated and the rules really are Basel
10 rules, we weren't sure we can continue on in
11 our current configuration.
12 I think that would send a very
13 confusing signal to the marketplace if a AA-
14 rated insurer that did not take TARP money,
15 that was liquid, that was solvent, that had an
16 operating profit right through the crisis
17 every single year, would be the first company
18 to break up.
19 Now MetLife also could benefit,
20 No. 3 in terms of reasons why I don't think
21 MetLife should be designated, from changes in
22 the FSOC process. Chairman Lew acknowledged
Neal R. Gross and Co., na 202-234-4433 Washington DC www.nealrgross.com JA-2392 CONFIDENTIAL FSOC_00003975 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 28 of 190 Page 22
1 that PSOC is still a young organization. The
2 Council has talked aboUt possible changes in
3 the coining months. We would lose that
4 opportunity, if we ate debighated no*, to
S benefit from any changes that may be coming.
6 So, there might be one set of tUleb fof
7 designation for those that went first and a
t different set of rules for those who come
9 later. We thipic it makes sense for those
10. rules to be sorted out before we are finally
11 designated.
12 And the fourth reason I would give
13 you is that the record for MetLife is quite
14 different than thiik record was for AIG aid for
15 Prudential. Wee, have presented very careful
16 analysis demonstrating .that nd globally
17 systematically impoEtant bank has exposure to
la met Life larger than 2 percent of its capital.
19 We have shown that even a hypothetical run on
20 jAetiife, which we don't believe is even
21 possible, would have little impact upon the
22 asset markets and asset prices; and that
Neal R. GrOss and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2393 CONFIDENTIAL FSOC 00005076 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 29 of 190 Page 23
1 MetLife is safer and easier to resolve than
2 both Pru and AIG, given our structure, our
3 corporate structure, where virtually all of
4 out assets and liabilities, 98 perdent of our
5 assets and 96 percent of out liabilities, are
6 in ,already heavily-regulated entities, and
7. virtually all of our derivatives activities.as
well are in thoSe regulated entities, and coma
9 under all of the CFTC/SEC kinds of rulOs as
10 well.
11 So, there is a change today, or in
12 the future, for TSOC to send a powerful
13 message that it is committed to a robust
14 process, th4t it looks at each company solely
15 on the evidence. for that company.
1.6 So, with that, I will turn it over-
17 to Ricaido.
la MR. ANZALDUA: Thank you/ 'Steve.
19 And thank you, Members of the
20 Council, for making yourselves available
21, today. I know that it was difficult to find
22 an availability where everybody could be
Neal R. Grass and Co., Inc. 20P -234-4433 Washington DC wwwineairgross.can JA-2394 CONFIDENTIAL FSOC,- 00003977 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 30 of 190 Page 24
1 (present, and we really do very much appreciate
2 this opportunity to speak in front of you.
3 I am Ricardo Atmaidua. I am
4 Executive Vice; President and General Counsel
5 of MetLife. I joined MetLi5e in December of
6 2012, after spehdinT 2007 to 2012 as Associate
7 General Counsel and Senior Vice President at
The Hartford Financial Services Group.
9 SR, I also came thro4gh the
10 financial crisis with a close attention to tile
11 impacts of the crisis on the insurance
12 industry, accompanied the formulation and the
13 promulgation of Dodd-Frank, and thought about
14 the iMplidations of. Dodd-Frank for insurance
15 companies.
16 So, I' an going to address today
17 the framework under the Dodd-Fkank Act for the
18 ,decision that FSOC will be mak )-ng and the
19 framework toot the states bave for regulating
20 insurance companies.
21 John will, then, address some
22 additional specific concerns we have with the
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.corn JA 2395 yat4FtDENT(AL FSOC 0:14103g78: Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 31 of 190
(Page 25
Notice of 'Proposed Determination, particularly
in light of the state regulatoty framework..
3 We think the basis in the NM for
4 designating MetLife is mistaken. At the
5 highett conceptual level., we think that the
6 designation rationale is deficient because it
doesn't do what Dodd-Frank and what F§OIC's own
ruled and, guidanCe
9 What is required is,an affirmative
10 finding, as Steve said, 4y thAt material
11 financial distress, at MetLife could pose a
12 threat to -U.S. financial stability. The
1S finding must especific to MetLife as it
14 exists ttoday. And this is an important
15 element of the analysis.
1.6 Acid the finding must be based on
17 two assessments.. First, under. VSOC's rules,
le there must be an assessment of MetLife's
1p likelihood of experiencing material financial
20 distress, and, second, if that material
21 financial distress were to occur at MetLife,
22 an assessment of the consequences for U.S.
NeWR.GapsamiCoInc. 2Q2-234-4433 Washington DC wwwilealrgross.Call JA-2396
CONFIQENT1AL Ft0C_00003979 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 32 of 190 Page 26
1 financial stability. And each of these two
2 assessments must be based on reasoned analysis
3 and empirical evidence.
4 The NPD faid in all thtee
5 respects. There is no attempt in the NPD
6 whatsoever to AnalyIe the probability that
7 MetLife could experience material financial
distress. Rather, it assumes material
4 financial distress at MetLife.
10 Second, the NPD's rationale or
11 *thy MetLifee's hypothetical failure Would pose
12 a risk to the U: S. financial stability rests
13 entirely on unreasonable speculation and not
14 on analysis of inaudible acenaioi.
15 And third, and most importantly
16 fox; my presentation, there is nO attempt to
17 analyze and explain why existing regulatory
18 scrutiny of MetLife is insufficient, I will
ipend,most of my time this afternoon on that
last item, the Council's obligation under
,Docid=Frank to consider the existing state
22 regulatory system.
Neal R. GrossAndCo., Inc. 202-2$4-4433 Washington DC www.nealrgross.com JA-2397 CONFIDENTIAL FSOC, 00003980 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 33 of 190
Page 27
1 Existing regulatory scrutiny is a
2 key component in both. assessing MetLife's
3 vulnerability to material financial di&tress
4 and in assessing whether material financial
5 .distress at MetLife could actually threaten
6 U.S. -financial stability.
7 The NIT contains no tevidence to
8 suggest that existing #e4glatory scrutiny is
9 inadequate, To illustrate how existing
10 regulatory scrutiny should be donsidered with
31 respect to MetLife, a quick review of
12 MetLife's structure is a good placer to start.
13 As Steve just noted and shown on
14 Exhibit 1, MetLife operates almost exclusively
15 within r4mjulated inaVrance coMpanies.
16 'Substantially all of its activities, 98
17 percent of assets ,and 96 percent of
la liabilities, are in regulated insurance
19 entities. We have no large non-insurance
20 companies, We have ilo derivatives dealer.
MetLife's structure has important
22 implioations for the issues before rtoc. As
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC woAy.nealrgross. corn
JA-2358 CONFIDENTIAL FS0q_00003981 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 34 of 190 Page 28
1 New York Superintendent Ben Lawski put it in
2 a letter to ksoc, and shown on Exhibit 2,
3 "MetLife does not engage iii any non-
4 traditiohalp"non-insuranbe activities that
5 create any appreciable systemic ribk.." He
6 went oft td say that, "In the event that
'MetLife or one or more of its insurance
8 subsidiaries were to fail,. the New York
9 Department of Financial Services and. 0,ther
10 State regulators would be able to ensure an
11 orderly resolution of the enterprise." And
12 finally, he noted that, "MetLife's insurance
13 'businesses already are closely and carefully
14 regulated."
15 Each MetLife insurance company is
1.6 a separate legal entity, separately
17 capitalized, subject to regulation, and
18 independently resolvable using it. assets.
19 Now let's take a look at Eldlibit 3, which
20 gives a simplified view of MetLife's operating
21 structure.
22 The point of this slide is to show
Neal R. Grosa,and Co., Inc. 202-234-4433 Washington DC www.iiealrgross.com
JA,2399 CONMENTML Fsoc ornme..2 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 35 of 190 Page 29
1 that MetLife conducts the vast majority of its
2 operations through just a few regulated
a operatihg companiet.. The three' U.S. operating
4 companies ide#tified in the three darker boxes
5 on the left side of Exhibit 3, are U.$,-
6 opekating companies subject to state insurance
7 regulation, and they account for 69 percent of
MetLife's consolidated assets and over 90
9 percent of NstLife's total V.S. assets.
10. I will point out that there is a
11 typo in the footnote. It says that it. is 69
12 percent of U.S. assets. In fact, it is
13 consolidated assets.
14 Another 18 percent of MetLife's
15 consolidated assets are held in the four
16 insurance companies identified in the lighter-
17 colored boxes, which are regulated in very
18 similar fashion by non-U.S. regulators.
19 So, jist these seven regulated
20 entities account for 07 percent ofuetLife's
21 consolidated assets.
22 Our regulated entities not shown
Neal R. Gross and co., Inc. 202-234-4433 Washington DC vwner.nealrgross.corn
JA-2400 CONFIDENTIAL FSOG_00003_903 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 36 of 190 Page 30
1 'on the tdble, most of them entities that hold
2 our non-LLS. operations, hold only 11 percent
3 of, our consolidated assets. And all bf our
4 ,icon -insurance cOMpanies, including eliir holding
5 company, hold just percent of our
6 consolidated assets.
7 Let me turn, then, to.the state
insurance regulatory system that our 17.8.
.9 entities are subject to. Regulation and
10 supervision of,MetLife's insurance companies,
11 including captive reinsurance companies, is
12 robust and extensive.
13 Louisiana Insurance Commissioner
14 James Donalon de"Scribed this supervision in a
15 letter to FSOC earlier this year, excerpted on
16 Exhibit 4. "Life insurance Companies," he
17 ,said, "operate under a 'stringent state
18 regulatory framework that includes, among
19 other things, restrictions on types, amounts,
20 and concentrations of Assets; types and
21 concentrations of viabilities; risk-based
22 capital and reserving requirements that
Neal R. Grass and Co., Inc. 202-234-4433 Washington DC www.nealrgross.corn JA-2401 CONFIDENTIAL FSOC 000(33984 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 37 of 190 Page 31
1 protect against financial distress; financial
2 reporting and disclosure requirements, and
3 ongoing supervision and examinatiOn."
4 Specifically, insiicance regulators
5 oversee an insurer's financial condition and
6 potentially risky activities. They approve
7 intercompany transactions, and they limit
8 their non - insurance activities.
9 The core principle of these
10 regulatory, standards is maintaining the
11 solvency and integrity of the operating
12 companies. Each entity is legally separate
13. from all the other entities. And so, no
14 assets of any entity are available to satisfy
15 liabilities of any other entity in-the holding
1.6 company group..
17 Thifi has two important
18 implications for assessments related to
19 financial stability. First, the robust
20 supervisory oversight of operating comparlies,
21 of domestic insurance companies, makes the
22 possibility of failure very remote.
Neal R. Gtassand Co., Inc. 202-234-4431 Washington DC www.nealrgross.corn JA-2402 CO UFtlIENTIAL FSQG CIGQQ3985. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 38 of 190 Page 32
1 Second, even in the rare instances
2 whete failure does occur, the regulatory
3 structure prOtedts against financial diAtress
4 at .aji insurance company have contagious
S effects even within the same affiliated group
6 of companies.
7 Another core element of the state
regulatory system is coordination among the
9 regulators of our various subsidiaries. One
10 method of coordinating regulation between the
11 various U.S. states- and the regUlators who
12 supervise MletLifers non-U.S. operations :takes
11 place through an International 6ollege of
14 Supervisors that now meets annually to
15 !exchange information.
16 The College is described ima
17 letter to FSQC from Connecticut Commissioner
18 Tom Tseonardi where he said, "Supervisory
19 C011Ogggls all.ow regulators to understand an
20 insurance group's group-wise business
2.1 activities and risks and an opportunity to
22 timely coordinate and implement reasonable
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgrDss.com JA-2403 CONFIDENTIAL FSOC. 00003486 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 39 of 190
33
1 measures to mitigate risks."
2 No I would like to turn to the
3 key items in the insurance regulector's
4 toolkit. The first of the regulator's key
5 tools is the risk-bahed capital system. State
6 insurance risk-based capital requirements have
7. been developed and 'Strengthened over decades.
8 They are specifically calibrated to the
9 business of insurance and to insurance risks,
10 and =PO-lance with `them ts regularly tested
by state insurance regulators. Tile/3e
12 standards are one tool designed to enable
13 early detection of financial distress and
14 early regulatory intervention.
15 Another important tool is the
16 broad authority that ,state regulators have to
17 manage iii tress and the infrequent failures
18 that do occur. These powers include
19 intervening promptly while assets are still
20 well in excess of policy liabilities and
21. establishing a receivership that will. _ensure
22 continuing delivery of service and benefits to
Neal R, Gross and Co., Inc. 202-2U-4443 Waslpigtan QC www.nealrgross.dorii
CONFIDENTIAL FSOC 00003987 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 40 of 190 `Page 34
1 policyholders And. suspending payments and
2 surrenders, when necessary_
3 This .brings us to the insurance
4 regulAtor's resolut4On toolkit. The
5 'resolution apparatus is very different in
6 insurande than in banking, as Stevd mbntioned.
A good way to understand the differences is to
look at the timeline for the resolution of a
9 distressed 4nsurer, whd.Ch is svmmarized on
10 Exhibit 6,
1 The process begins with a
12 regulator, upon determining the -need to
13 intervene, applying for a court order. Within
14 the next day or two, the court issues an order
15 that temporarily freezes everything in place.
1.6 It imposes a moratorium on All payments,
17 including payments on surrenders and other
18 benefits. Soon thereafter, the moratorium is
19 usually modified to permit sustainable policy
20 payments, such as death benefits and annuity
21 payments for individual pol3.cyhd2ders.
22 And finally, several weeks into
Neal R. GrqssAncl Co., Inc. 202-234-4433 WashirOanDC www.nealrgross.corn
J A-2405 CONFIDENTIAL FSOC b3o$$ Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 41 of 190 Page 35
1 the process, the resolution authorities begin
2 preparing and developing a plan of
3 restructuring and lit uidatian that can be
4 impleyiented in a stable context, typically,
5 over Several years, and often, as Steve
6 mentioned, over a decade, more than a d6cade.
7 Dodd-Frank and FtOt's own rules
appear to place great importance on the
,ability to resolve a troubled finauqial
10 instiiution rapidly. And as the NTD
11 acknowledges, rapid in the insurance context
12 means the ability to implement a timely plan
11 for resolving the company that calms marketa
14 and participants.
15 In an insurance receivership, the
1.6 action that calms the markets and participants
17 is the Court order that free2es everything in
18 place, which occurs promptly, usually within
19 24 hours of a regulatiir's request.
20 The state system of insurance
21 regulation also does an excellent, job of
22 protecting policyholders. In fact, in an
Neal R. Gt 4ss and Co., Inc. 202-234-4433' Washington DC www.nealrg ross. corn
JA-2406 CONFIDENTIAL FSOC 00003989 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 42 of 190
Page 36
1 insurance insolvency, the vast majority of
2 policyholders incur no losses at-all.
3 Certainly, that would be true for MetLife. In
4 a hypothetical insolVency, ftlll .benefitt would
5 be paid on over 97 percent Of MetLife's
6 policies.
7 So, hoit do you get to that result?
First; it le important to note that, because
.9 regulators closely monitor insurance
10 companies, the assets of insolvent inAllrara
11 typically total 90 to 95 percent of policy
12 liabilities.
11 Second, under insurance law, it is
14 mandated that the assets of the insolvedt
15 insuret be distributed pro =vita among all
126 Policyholders. So, in.a typical insolvency,
17 96 percent or more of each policyholdei's
18 dlaims will be covered by the assets of the
19 insolvent insurer. Any shortfall between that !
21) asset amount and the policyholder claps is
21 covered by the Stte Guaranty Associations up
22 to a certain benefit amoUnt, generally
Neal R. GlvssOndCo., 202-234-4433 WastimtanDC www.nealrgross_corn JA-240 CONFIDENTIAL F§OC_00003940 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 43 of 190 Page 37
1 $300,040.
2 In the case of MetLife, that
3 threshold. of State Guaranty AssOciatibn
4 coverage covers ° Vet 97 percent of our
5 policies. SO, that is hOw the equation works.
6 Furtheit as our Submission
7 materials document, the assessment capacity icif
0 the State Guaranty Funds could easily
9 accoma4date hypothetj.cal ins42.ve4cy of
10 MetLife with several orders or magnitude --
11 excess capacity to spare.
12 Although insurers fail
infrequently, when they do, state insurance
14 #egulators and receivers have a long Aistory,
15 going back over 30 years, of resolving those
16 failures Successfully. As California,
17 Insurance Commissioner paiie 'Jones has written
18 to FSOC, "The state-based insurer resolution
19 process would be able to effectively handle an
20 insolvency of a life insurer the sizeof
21 MetLife. State insurance receivers use the
22 long-term nature of insurance obligations and
Neal R. Gtoss and Co., Inc. 202-24-4433 Washington DC www.nealrgross.com JA2408 CONFIDENTIAL FSOC 00003991 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 44 of 190
Page 38
1 the fact that policyholders place higher value
2 on insurance protection-than on immediate cash
a value to effective manage insurer
4 insolVencies.n
5 The letter I cited previously prom
S superintendent Lawski also notes the ability
7. of state regulators to =ordinate, to handle
8 large insurer' insolvelncies.
9 so, on thq topic. of resolvability,
10 the upshot is that each MetLife insurance
11 subsidiary can be resolved separately by its
12 regulator. As I mentioned, it is key that
13 less than 2 percent of the coMpany's
14 activities are conducted outside regulated
15 insurance subsidiaries. We have no large non-
insurance companies and, as Steve mentioned,
no separate derivatives dealer.
That makes Metifife very, differeilt
3.9 from Prudential and MG, whieh have
20 consolidating derivatives entities that face
21 .Wall Street, and they enter into back-to-back
22 Intercompany agreements between that
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC Virgirwsiealrgross.eorb JA-2409 CONFIDENTIAL FsCic_nosmooaf Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 45 of 190
Page 3'9
1 consolidator .and their domestic insurance
2 companies. And remember that there is no
3 legal justificatiot for taking assets frdn one
4 coppeny to satisfy the liabilities of any
S affiliate.
6 Ndw, on the non-U.S. side, like
7 its U.S. operations, MetLife's foreign
8 operationd are Separately capitalized and
9 resolvable in or4erly fashion without any
10 impact on the U.S. economy. If more than one
11 subsidiary fails, state Ad non-U.S. receivers
12 coordinate and cooperate, as demonstrated by
13 their long history of cooperating to
14 successfully resolve Multiple affiliated
15 entities.
16 We think it is cleat from the
17 structure of MetLife and' the nature of
18 insurance regulation that there are no
19 Werat4444. or structural obstacles to the
20 orderly resolution of MAttike.
Zl Before I finish on existing
2:2 regulatory scrutiny, let me point out that
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgrosscom JA-24i0 CONFIDENTIAL F500 00003993 - _ Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 46 of 190 Page 40
1 insurance regulators from six different states
2 with oversight of entities representing more
3 than 90 percent of MetLife's U.S, assets have
4 sq0mitted letters in this proceeding
5 explaining, based on their experience, how the
6 state system works and how state regulators
7. would respond. They have all expiessed the
view that MetLife would not be capable of
9 creating systenlia risk.
10 We understand that PSOC. may- have
11 been in contact with some of our regulators
12 prior to making ,the proposed determination.
13 Yet, the NPb does not present any analysis of
14 why, notwithstanding existing regulatOry
15 scrutiny, MetLife, neverthelessi presents a
16 threat to U.S-. financial stability.
17 The inevitable conclusion from
18 this analysis, in our view, is that
19 debignation of MetLife as a sly' amcrurits to a
20 determination by 'SOC that state regulators
21 .cannot nr would not do their job with respect
22 to MetTalfe.
WAR.GmssAmiCaJna 202-24 -4433 Washington DC www.nealrgross.corn JA-241I CONFIDENTIAL FSOC. 00003994 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 47 of 190 Page 42
1 In closing, I would like, to return
2 to a couple of points about the legal
3 frameiiickk add obligations that must guide the
4 Councii's decisionmaking. These are -points
5 that, in our views preclude a decision by FSOC
6 to designate,MetLife undei Section 113 of the
7 Dodd-Frank Act.
First, Dodd-rrank authorizes FSOC
9 to designate only noq-bank entities that are
10 engaged in greater than a specific percentage
11 of financial activities, as defined in
12 relevant law. As explained in the letter we
13 submitted to FSOC 'last week, the level of
14 financial activities of MetUfe does not meet
15 that threshold requirement under the
16 applicable definitions..
17 Secohd, I would like to note the
18 legal significance of the point Steve made
19 aboxit treating asset manager4 differently from
20 insurance comparries And about the lack of
21 clarity regarding the standards and regulatory
22 consequences of designation, including
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.corn JA-2412 c0 RF EtITI Al_ FS0c. (10403ear,a6. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 48 of 190 Page 42
1 .applicable capital standards. These are not
2 only flaws in the process, but also legal
3 reasons why it is improper to designate
4 MetLife.
5 And finally, I would like to state
6 our Objection, a respectful objectign, to t.hla
7 MPID's pervasive,speculaEion And implausible
a scenarios. These include positing contagion
9 so great would diistml4lize the-U.S.
10 financial system and positing surrenders in
11 such volumes that they would trigger massive
12 asset sales and disrupt asset markets.
13. These types of conclusions should
14 'be based on reasoned analysis- and evidence.
15 They are not. Instead, as John is about to
16 discuss, the Speculation is aither. withbut
17 'basis or it is based on incorrect inforMatiOn.
IS Thank you very mc'th. And with
19 that, I 1411 turn the podium over to John.
20 MR. link: Thank you, kicardo.
21 I'm John Hole. I'm the Executive
2Z Vice President and Chief financial Officer of
Neal R. Geriss and Co., Inc. 202-234-4433 Washington DC www.nealrg ross. corn JA-2413
CO I4F LOENTi AL FSOC 0000399E Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 49 of 190 Page 93
MetLife. I have been with the firm just over
2 two years.
3 In my prior toles, I have been CF a
4 of ING droqp, N.V., a large bank and insurance
5 company. I have also been an investment
6 ipanker, aid I am an actuary by piofassion.
7 So, I actually have detailed expirience in
0 both the banking world, and the insurance
9 world, and Ehey are quite different.
10. I plan to cover the three mair
11 elements of the NPD's rationale for why
12 Mettife is systemic.
13 One, the expo sure of the U.S
14 financial system to MetLife.
15 Two, the potential market impact
16 of asset liquidatidns by. MAtLife to satisfy
17 policyholders/ surrenders foi cash.
18 And three, the potential contagion
19 impact on other. life insurers ig-MOtLife comes
20 under financial stress.
21 2,n all three cases, the NPD makes
22 significant errors in both the facts presented
Neal R. Gross and Co., Inc. 202-234-4433 Wasthngton DC www.nealrgross.com
JA-2414 CbNFIDENTIAL F90C 00003_497 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 50 of 190
,Page 44
1 and the rational offer for designation. These
2 errors are of such significant materiality
3 that, oboe corrected'; the conclusion reached
4 by the NPD dan no longer be supported. I will
5 highlight a few of the factUal and conceptual
6 flaws this afternoon. MbtLife's original
7 submission to the FSOC and our response to the
8 NP1) contain an exhaustive and detailed list.
9 As you can see from Exhibit 11,
10 the NPD dramatically overstates counterparty
11 exposure to MetLife through capital markets
12 activities. The NPID;s headline number, #188
13 billion, shdWh in the left bar in this Chart
14 includes items that federal banking regulators
15 ,exclude from their exposure caldul4tions, at
1.6 in the U.S. Basel III Final Rule. Apropos
17 calculation would start by subtracting the U of securities collateril pledged 19 against these exposures, including 'securities
20 lending and derivatives.
21 The NPD alto double-counts a
22 collateral financ1ng arrangtment and includes
Neal R.,GtossandCo., Inc. 202-234-44n WistgnigthinDC Www.nealrg reiss.com
JA -2415 CONFIDENTIAL FSOC 00003695 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 51 of 190 Page 45
1 letters of credit that can be drawn only if
2 ,specific conditions materialize over time,
3 ikrespectiVe of whether or nbt the company is
4 also experiencing financial distress, Theie
5 errors total another
6 In the interest of time, I will
7 not go. into the details of the two remaining
items in the chart, which are explained in
9 detail in our response to the NPD.
10 If all of bur statements are fixed
11 and counterparty exposure to MetLife
12 measured the same way it is for a bank or
13 other financial institution, the correct
14 number is no more than $90 billion. But ever{
15 this is overstated because it includes
1.6 MetLife's market capitalization of..$50.
17 billion, which the NPD acknowledges, quote,
18 "Is not a significant direct source of risk to
19 financial stability". End quote.
20 That _leaves $26 billion of debt
21 and $14 billion of other liabilities,
22 including only about $3 billion of net
Neal R. GtassandCo., Inc. 202-234-4433 Washington DC www.nealrg ross. cam JA-2416 CONFIDENTIAL FSOC _000 0309S Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 52 of 190 Page 46
derivatives exposure. Using the Wt's
2 definition of capital markets exposure to
3 include outstanding debt and Market
4 capitalization, it is difficult to understand
why, say, Berkshire Hathaway with $64 billion
6 in debt. and $277 billion of market
7 ,capitalization, should not be considered a
systemic risk. 4r similarly, say Visa, with
a market capitiklization of $135 billion, is
lo not systemic.
11 finally, because MetLife's equity
12 and debt are so widely held, we would argue
13 that the $14 billion of'other liabilities is
14 the best measure of ekposres It is
15 impossible for this level of exposure. to be
1.6 'systemic to the U.S. .financial system.
17 As EXhibit 12 demonstrates, the
is 141M) also overstates the exposure of globally
aystemigally important banks tc NetW.fe,
20 making it appear an Average of 10 times higher
2.1 than it actually is The 'OD exposure is
22 reaching as high as 12.3 percent of total
Neal R. GhissanaCo., Inc. 202-234-4433 Washington DC vwew.neallrgrossicom JA-2417
CONFIDENTIAL .ffsoc OQOQ4O04 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 53 of 190 Pagd 47
1 equity.
2 When correcting for the
3 overstatements I have just mentioned, and
4 other' detailed in our response to the NPD,
5 the &ctuAl exposure is not higher than 2
6 percent of total equity for any GSIB. For
7 example, the NP!) includes the third-party
a asset management business bf in
9 its exposure calculation, which is clearly not
10 an exposure, itself. This
11 overstates exposure by 10.8 percent of total
12 equity. Correcting for this and other errors
13 reduces exposure tO MetLife
14 from 11.4 percent of total equity to 0.4
15 percent of total equity.
16. Similarly, the failurp to aqcount
17 for securities collateral results in an
18 overstatement of exposure by
19 6.3 percent of total equity. Correcting for
20 this and other errors reduces. the exposure of
21 from 8.3 percent to 1.4 percent
22 of total equity.. These actual exposures of
Neal R.Ger.oss4ind Co., Inc. 202-234-4433 Washington DC vvww_nealrgross.corn
JA-2410 CONFIDENTIAL FSOC_00004001 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 54 of 190 Page 48
the GSIEls to MetLife do not represent systemic
2 risk to, theq.T.S. financial system,
3 My second point this afternoon is
4 that the NPp's asset liquidation theory of
5 systemic risk is based on three assumptions
6 that are wholly implausible.
7. First, millions of MetLife
customers would surrender their policies for
4 cash and not exchange them for other policies
10 over a short period of time.
11 Second, MetLife would_be forced to 1
12 rapidly liquid assets.
13 And thirde the resulting impact on
14 'asset prices would be so severe that other
15 holders of those same assets would suffer
1.6 large equity losses.
17 For such a bkoad-based run on
18 MetLife to be plausible, you must not only
believe that .thillions of policyholders would
simultaneously act against their own economic
self-interest, you, must also believe that
22 state regulators would fail in their duty to
Neal R. Griiss,and Co., Inc. 202-24 -4433 Washington DC www.nealrgross.com JA-2419 CONFIDENTIAL FSOC 00004002 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 55 of 190
Pagd 49
1 halt such a run before it could have, a
2 destabilizing effect. In addition,, you must
3 disregard. the fact that there's no evidence of
4 a destabilizing run by retail policyholders in
5 history.
6 As you can see on .Exhibit 13, the
7 NPD tries to make a run on a life insurance
company seem plauSible by arguing that
policyholders would, on average# lose only 12
10 percent of their contract value upon surrender
31 for cash. As this, exhibit demonstrates, this
12 dramatically understates the loss that
13 policyholders' would suffer.. It ignores the
14 tax,Conbeguences of surrendering for cash. tt
15 ignores the loss of life insurance Coverage,
1.6 which may be costly or even impossible to
L7 replace if the health of the individual has
18 .deteriorated. And it ignores the loss of
19 guarantees, such as interest rate guarantees
20 that pay no longer be AvOlable in the
21 marketplace.
22 This chart also shows that, even
Neal R.Gross4nd Co., Inc. 2m-A4-44A4 WastingtanQC ivww.nealrgross_corii JA-.246 CONFIDENTIAL FSOC_00004003 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 56 of 190 Page 50
1 if the cost of surrender were only 12 percent,
2 as the NPD states, that is still far higher
3 than the expected loss if the customer
4 retained the policy all the way through
5 insolvency. After- taking account of the
6 'guaranteed fund protections provided by. the
7 states, the average customer who retained a
4 policy would only lose 0.1 to 0.3 percent of
the contract's value. In short, individuals
10 have powerful economic incenttves not to
11 surrender their policies, even if their life
12 insurance company' is in trouble.
13 As you can see on Exhibit 44, you
14 might ask whether peoplb making decisimis
15 about surrendering would be aware of these
16 -economic incentives. To help analyze this
17 question, we, hired NORC at the University of
18 Chicago, a survey research firm used by -,he
19 Fed and other- government agencies, to examine
how retail customers would react to news that
21 their life insurance company was in some sort
22 of distress.
Neal R. Gross,and Co., Inc. 202-2U-4433 Washington DC www.nealrgross_corn JA-2421 CONFIDENTIAL FSOC_00004004 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 57 of 190 Page 51
1 The survey asked customers how
2 they would respond to news of financial
3 difficulty, goIernment intervention or- a
4 bailoixt, other customers cashing out, or a
5 bankruptcy filing. In *very case, a
6 substantial majority said they would respond
7 by contacting their agent or insurer.
8 This is critical because agents
are reguj.red by insurance laws, and for
10 registered products by SEC rules, to provide,
11 accurate information to their clients. Agents
12 would not tell their clients to surrender
11 their policies for cash because it would be
14 against the client's financial interest to do
15 SO.
1.6 Agents would. explain there are two I
17 supeiior options available. One, keep the
18 policy in force and see it resolved under the
19 'Guaranty Association or, two, transfer the
20 ,policy to anoOler like insurance company by
21 way of a tax-free exchange, as long as the
22 client is still insurable.
Neal R. Gtoss and Co., Inc. 202-234-4433 Washington DC WWW.flealrgross.corn JA-2422 CONFIPENTI Al F sag, 00004005, Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 58 of 190 Page 52
1 Either reaction by policyholders
2 would protect the financial system against
3 asset liquidation riak. In the first case,
4 assets would not .be sold, and in the second
5 case, Mettife would sell assets while another
6 life insurance company would buy assets,
7 reducing or eliminating the impact on prices.
Finally, the NPDss assliapilon of la
9 mgssive run on MatLife is contrary to
10 everything we know about individual
11 policyholder behavior. Retail investors
12 behave very differently' from institutional
investors in a crisis, as a number of you are
14 aware.
15 In fact, the SEC's recent Final
16 Rule on. mbney market fund. reform. was premise&
17 on this difference between retAil and
18. institutional behavior. of
19 the MetLife liailities that can be
20 surrendered are held by individual
/1 policyholders or pengig5n plan participants.
22 They will not run in the way the NW supposes.
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2423 CONFIDENTIAL. FSOC 00044QO6. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 59 of 190 Page 53
1 As you can see on Exhibit 15,
2 although all historical experience indicates
3 that the elevated. levels of surrenders
4 hypothesiked in the NPp has never Occurred, We
5 asked Oliver "Wyman to conduct a detailed
6 analyais of hypothetical asset liquidation
7 scenarios to determine whether asset sales
8 would have & systemic impact on asset marIcets.
.9 s the exhibit demonstrates, th4 result of the
10 Oliver Wyman analysis that., even in the event
of an hypothetical run on MetLife, the impact
12 of our asset sales on the market would be too
13 small to threaten financial stability.
14 As you can *eta, eveh in the most
15 extreme scenarios, asset sales remain a small
16 Percentage of market trading voltmies. To be
17 clear, these are not percentages of average
18. trading volumes; these are percentages of the
19 lowest trading volumes for which recent
20 'historical evidence is available, which for
21 most asset classes vas during the 2008 and
22 2009 financial crisis.
WAR.GAmOnidCa,Inc. 202-2344433 Washington DC www.nealrgross.corn JA!2424
CONFIDENTIAL FSOC- 60004007 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 60 of 190
Page '54
1 Because this study is. so
2 important, 1 would like to spendia few minutes
3 ,explaining the scenarios under which the asset
4 males were analyzed. As yoi.2 can see in the
5 Upper righthand Donner, Scenario 1 is a proxy
6 for the 2008 financial crisis. And Scenario
7 2 is a 2008 prbIty .plus a material MetLife
8 downgrade. Both are goitlgo-doitcern scenarios
9 that have capital market stresses comparable
10 to thirseverely7adverap scenario used by the
11 Federal Reserve for bank cpArt testing.
12 In Scenario 3, Oliver Wyman
13 .assumed that MetLife stops all new sales and
14 enters into a liquidation bode_ fn this
15 scenario, surrehders.156cur at a higher rate
16 and over a shorter timeframe than has ever
17 occurred'at any major U.S. insurance company,
18 including those who have wiled.
19 Scenario 4 reflects the immediate
20 exercise of the maximum amount of surrenders
1.1 by MetLikeis general gcrunt policyholders as
22 well as the payment of all other accelerable
Neal R. GtossandCo., Inc. 202-234-4433 VirastingtanDe Voffici.nealrgross.com
JA -2425 CONFIDENTIAL f500_00004008. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 61 of 190 Page 55
1
2 surrender does surrender,
3 Let me be 'clear. Scenarios 3 and
4 4 are hot plausible, They are pgesehted
5 entirely for hypothetical and illustrative
6 tpurposes and deliberately set aside the fact,
7 the key fact, that in real life .the relevant
4 regulator, faced with, distress of this
4 -magnitude, would certainly intervene.
10 These scenarios were designed
11 simply to test the outer limits Of the logic
12 cited by FSOC in the Prudential designation.
13 The conclusion: even, in scenarios so
14 urirealistit that they could never' happen in
15 the real world, MetLife can execute an orderly
16 sale of assets that does not cause instability
17 in the U.S. financial system.
18 in response to the asset
liquidation analysis, the NPD speculates there
could be other scenarios that lead to larger
sales .over a shorter period of time, but there
22 cannot. For example, the NPD envisions
Neal R. GrassandCo., Inc. 202-234-4433 WaWrigtanDC www.nealrgross.com JA4426 CONFIDENTIAL FSOC. 00004000 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 62 of 190 Page 56
1 scenarios where liabilities must be paid prior
2 to the contract 'maturity dates, which is
3 impossible. The NPD also-ehvigions a
4 different order of asset sales Where MetLifs
5 would dispose of illegal assets first. This
6 assumes that MetLife's management would decide,
7 to incur large realized losses without any
offsetting econosiic benefit. To absume
MetLife,s management would engage. in
la irrational behavior that is harmful to the
11 company is simply illogical.
gy third and final topic. this
13 afternoon is Contagion. As you can see on
14 Exhibit 16 and as demonstrated ta the Oliver
15 Wyman failure study that we provided. to FSOC,
1.6 life insurance insolvenciles do nit. result in
17 contagion. Nevertheless, the NPD speculate',
18 that contagion could occur in the .event of
distress at Metiife on the theory that no
20 company of our significappe has ever fella&
21 That is not true.
22 The NPD disregarded evidence
Neal lt. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.corn JA.2427. ONMOtNTIAL rt0Qj300040:10 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 63 of 190 Page 57
1 related to the 1994 insolvency of Canada's
2 Confederation Life, highlighted in .the
3 Insurance Failure StUdy. Like MetLife,
4 Confederation i Life was a household name in its
5 home country and a major financial
6 institution. Confederation Life's general
7 account assets eguiled 2.3 percent of Canada's
GDP in 1994. Upon the insolvency of
9 Confederation Life, regulators in Canada,
10 Michigan, and Georgia took over the company's
11 major businesses..
12 The impact on Confederation Life's
11 competitors was nonexistent. As you can see
14 on this slide, the other top five life
15 insurance companies in Canada saw no decrease
16 in sales and no increasia iii surrenders. In
17 short, there was no contagion.
la This absence of contagion was the
19 same for every major insprance failure that
20 was analyzed. if you nave not had a chance to
21 look at the Life Insurance Failure Study we
22 submitted, i hope you will do so.
Neal R.GtossanaCoolna 202-234-4433 Wastington DC vw.rw.nealrg ross. cam JA-2428 CONFDENTlAL FSC).-00004011 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 64 of 190 Page 58
1 To sum up, me believe the NPD
2 contains such significant factual and
3 conceptual flaws that it does dot provide a
4 rational basis for the designation of MetLife.
5 It overstates .cduntatparty exposure, to MetLife
6 through capital* markets activities% Tt
7 overstates the exposure of GSIBS to MetLife.
0 tt dfiderstates policyholder losses ,upon
9 surrender for cash. It fails to consider the
10 role of'expert advice in policyholder
11 ,decisions to surrender. It posits
12 policyholder surrender and asset liquidation
1S scenarios that are impassible. And it. ignores
14 evidende demonstrating the absence of
15 contagion even in the failure of a nationally-
16 significant insurer.
17 Thank you for the opportunity to
10 address the Coun6i1, and I willnow turn it
19 back to Steve.
20 MR. KANDARIAN: Thank you, john.
21 I will sum up quickly, Mr.
22 Chairman. I know you want to leave 30 minutes
Neal R. Gross and Co., Inc. 202-234-4433 Wasuiington DC www.nealrgross.com 14.249 CONFIDENTIAL FSOC 00004012' Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 65 of 190 Page 59
1 for questions.
2 The question before you today is
3 not whether or not the life insurance industry
4 should be regulated at the state level or the
5 federal level. That is a debate that is worth
6 having some other day, but that is not the
7 question before us today.
8 The question is, could MetLifels
9 failure pose a threat to the financial
10 stability of the United States? We have tried
11 to make the case here today that it would not.
12 If the concern is truly systemic
13 risk, that we want to protect taxpayers by
14 ending bailouts, then we would like to know
15 what it is we are doing that makes us
16 systemic. Perhaps we can stop doing it. We
17 have had no communication to us as to what it
18 is that people think makes MetLife systemic.
19 And again, I would caution that
20 FSOC should not assume that it can designate
21 MetLife, see how it goes, come back to it two
22 or three or four years later, and maybe we are
Neal R. Gross and Co., na 202-234-4433 Washington DC www.nealrgross.com JA-2430 CONFIDENTIAL FSOC_00004013 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 66 of 190 Page 60
1 not so systemic after all, and we can reverse
2 things. The market won't allow us to operate
3 that way, especially if the capital rules are
4 really harsh. Activism investment alone will
5 put tremendous pressure on the company to do
6 a number of things, including restructuring
7 the company.
8 Now restructuring MetLife might be
9 acceptable to FSOC if there is some benefit to
10 the financial system, that some threat is now
11 removed. I accept that. But we have proved,
12 I believe, with the evidence we put forward
13 that is not the case.
14 The consequences, on the other
15 hand, are clear: higher consumer costs,
16 competitive distortions in the marketplace,
17 and the potential dismantling of MetLife, with
18 no taxpayer benefit.
19 Now this is probably the most
20 important challenge to MetLife in its history,
21 greater than the Great Depression, greater
22 than the 2008 crisis. Let me just mention
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2431 CONFIDENTIAL FSOC_00004014 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 67 of 190
Page 61
that, after the Great Depression, Mettife
2 financed the Empire Building shortly
thereafter the crash of 1929. We finainced
4 Rockefeller Center. The company ca0e,through
5 thosit kinds of crises without any significant
6 change to its operations. It remained strong.
7. Again, after 2008's crisis, we
wrote a check for $16.4 billion that
9 effectiirely went back to the federAl
la government by our acquisition of Alico krom
11 AIG.
12 There really is a difference in
13 terms of banks versus insurance companies and
14 in terms of looking of the issue under Dodd-
15 Frank. Metlife does a tremendous amount of
1.6 business with all the major banks. If hose
17 banks have higher costs due to regulation, we
le would end up absorbing those higher costs by
19 doing business with those banks going forward.
20 We are unable to do business with
21 other banks.. They don't do the same kinds of
22 things that major money center banks. dO. We
Neal R. Gross and Co., Inc. 2M-234-4433. Washington DC www.nealrgross.com JA-2432 nNFIDtivTIAL FSOC 60004015 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 68 of 190 Page 62
1 can't go and clear our trades. We can't bty
2 securities. We can't do all the things we do
3 with bahks, with community banks, our oredit
4 unions, or even in many CaseA regional banks.
5 $o, these are companiet that are all competing
6 against each other. WhatkVer regulatkon hits
7 all of them gets passed through. There is no
8 competitive landscape that is being altered.
9 Potentially three insurers will bp
la designated out of over 800, and there's 20
11 -insurance companies with more than $100
12 billion in assets in this country, plus all
13 the mid-size and smaller insurance companies.
14 Unlike some of the banks, MetLifeJ
15 has never enjoyed a-lower cost of capital by
1.6 being a. big. Insurer. There is no sort of
17 implicit guarantee by the federal government
18: that people thinks stands behind Metlife, and
19 therefore, we get this cheaper costar
20 capital, and if you put capital rules that arm
21 higher on us or higher regulations-, that
22 somehow that just levels the playing field;
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgrossicom JA-2433
CO ts.IF MI ENT FSQC (100:140-t& Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 69 of 190 Page 63
1 that is not the case in insurance, unlike
2 banking.
3 No one of (Alt competitors,
4 Lincoln National, has $250 billion of assets,
5 and they took TARP money, by the way, And
6 they told recently analysts that they do not
7 expect that the increased capital requirements
for PrUdential, AIG, and they think idetLife,
9 will impact them. In fact, they put it gut
10. there with analysts-, "You know, that's going
11 to help our margins-because those. guys will
12 have to raise their prices to consumers, and
13 we can kind Of draft up belOw them and even
14 get more market share and higher margiqs. You
15 know, it would be great for us." That is what
1.6 is being told to the marketplace right now by
17 our competitors.
18 Again, all the things might have
19 a good social purpose if there is a,
20 clemonstrable analysis .saying somehow MetLife
21 is truly aystemtc; the taxpayers are at, r1.$1:
22 if MetLife were to fall, and here is a
Neal 11, Gross and Co., Inc. 202-2344433 Wag/ NUM DC vomw.nealrgross. corn JA -2434 CiiNFItiENTI AL Fsoc, 0000413-17 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 70 of 190
Page 641
1 reasonable probability that MetLife could
2
3 So, I ir§Uld simply ask you,. as you
4 think about the final designation process, not
5 to vote for MetLife to be da:Signated, to vote
6 against designation for MetLife,, for four
7 compelling reasons.
0 Again, the activities -b4Aed
9 approach we think makes sense here. If
10 MetLife were to engage irk activities like AIG
11 did -- maybe t should talk about that for one
12 minute.
13 Financial Products Group shut out
14 banking off the holding company outside
15 regulated entities by the state re4U14torf;
IS got them in very, very deep trouble. WO have
17 never done that.. Other insurance companies
IS have never done that. We have no intention of
19 doing that. If somewhere down. the road my
20 successor wants to go do that, thell that would
21 be a different issue for FSQC to consider in
22 terms of regulation.
NesIR,GNssandCa,Inc. 202-2344433 Washington DC www.nealrgross.com 144435 CONFIDENTIAL FSOC_00004018. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 71 of 190 Page 65
1 We don't yet know what the capital
2 rules are. And to say they are going to
3 .grotebt tax)ayerse at this point in time it is
4 very difficult to say that will be the Case.
5 The negative consequencet I thihk
6 we have laid out very clearly -= to consumers,
7 to !deflate, to the insurance industry overall.
In additioh, as you have mentioned
4 bitfore, Mr, .Chairman, FSOC's processes are
10 being loolted at. We think it makes sense to
11 pause haze. We think designation would be
12 premature at this point in time, until the
13 procesbes are looked at more fully.
14 I think, host impottahtly, you
15 have a recotd now before you that does not
16 support designation in. the unique case of
17 MetLife.
18 So, with that, I am happy to take
1 yout questions, as are my c9ileagues.
20 awg4tAlly Awl Thank you for the
21 presentation, and we will now take turns
22 asking questions. And I will take the
Neal R. Gross,and Co., Inc. 242-24 -4433 Washington DC www.nealrgross.corn JA-2436 CONFIDENTIAL FSOC_00004619 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 72 of 190 Page 66
1 liberty of beginning with the first question.
2 And t would like to ask .a question
3 about the OliVer WVIdananalytgis and the issue
4 of asset liquidation,. In the 2008 financial
5 Crisis, just as in other periods of market
6 ciitti4, we have seen repeatedly that events
7 can be hard to predict and there can be
8 unanticipated conaequencds.
9 In particular, when a firm is in
10 financial distressi there can be significant
11 short-term ungertainty about the potential
12 repercussions across markets, and market
13 (participants are not always wi1lin4 to wait
14 and see how things will play out.
15 For that reason, the ptopoted
1.6 designation, when the .Council apalyked the
17 potential effects of an asset liquidation by
18 MetLife, we addressed the range of possible
19 scenarips and found that in some cases there
20 could be signiEicant effects on the market.
21 n contrast, the Oliver Wyman
22 analytis that you submitted concludes that it
Neal R. Gthss and Co., Inc. 202-234-4433 Washington DC www.nealrgros.can JA-2437 CONMQENTIAL FSOC clomom Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 73 of 190 Page 67
1 would be nearly impossible for iMetLife's asset
2 sales, when conducted over a six month period,
3 to affebt market fthictionirig. How does ott
.4 analysis take into account the potential
5 reaction or overreaction by market
6 participants that could arise froM tlie kind Of
7 uncertainty that occurs during financial
crisis, if 140tLife were to dxperiinde
9 financial astress9
10 MR. KELE: Thank you, .101r.
11 Chairman.
12 how we looked at it, and as
13 well as Oliver Wyman looked at it, is We
14 looked at a range of scenarios. As you could
15 see, we looked at the 2008 financial crisis.
16 We looked, at the 2008 .financial crisis with a
17 signifidant downgrade for Metlalfe that did not
1 happen in the 2008 crisis. And then, Scenario
1 3 A:s we stop wrIting pew business and we have
20 surrenders higher by retail policyholders than
21 As ever seen by any other insurer in failure.,
22 and all institutional holders. Everything
Neal R. Gross find Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2438 CONFIDENTIAL FSOC, 00004821 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 74 of 190 Page 68
1 CoMes due and everything is paid. Sor the
2 securities lending portfolio, the capital
3 markets all stops and pay has come due.
4 So, we agree that in a crisis it
5 could be far worse than we maybe have seen in
6 2006. And in Scenafit 3, it modeldaall that
7. coming true. So-, every institutional holder
cal led oz put back business to us who could do
9 it, MOst of our institutional business cannot
10 be put to us at all; they have to wait until
11 it comes due, We assumed all that happens,
12 and we assumed the retail policyholders
13 surrender at a rate much higher than has ever
14 been seen in any insurance fekilute. Apd, evert
15 them, the asset sales that are needed for
16 MetLife to meet these cash payOuts "was still
17 absorbable by the financial markets.
18. We have not been privy to see the
19 opalysis that theLNTD cites that talks about
20 other scenarios-. Of course, we would be happy
21 to review those and provide input back on
22 those, should those be provided to us.
Neal R. Gross and Co., 1116. 202-234-4433 Washington DC www.realrgross.corn JA-2439 CONFIDENTIAL FSOC_60004021 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 75 of 190 Page 69
SECRETARY LEW: If I can just
2 follow up, in terms of the retail holders, you
3 ,aait the assumption is that it Would be a
4 higher surrender rate than has been
5 experienced ever in the past. just toughly,
6 what order of differential did you addum?
7 MR. HELE: to general, a good
third higher, I would say, as you looked at
the. different types of asset classes that we
10 have seen. Sof quite significant, a third to
11 a half higher than what has been seen
12 historically.
13. SECRETARY LEW: Thank you.
14 MR. AN DUA.: I would add that
15 the analysis further makes conservative
1.6 assbmptions about the nvionment that are
17 more conservative than the 20118 financial
18 Crisis. So, not only did Olive= Wyman assume
19 A higher level of surrenders, but it also
20 assured a more distressed environment in which
21 to sell the assets than, in tact, took pl.,&ce
22 in 2008 by several factors.
Neat R. Grass and Co., 202-234-4433 Washington DC www.nealrgross.com JA2440 CONFIDENTIAL FSOC 00004023 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 76 of 190 Page 70
1 Sot the way that the analysis was
2 done vas. in order to try to hypothesize an
3. extremely stressful market environsient, not
4 just to take the goos environment and make it
5 more difficult by increasing the level of
6 surrenders;
7 SECRETARY" LEW: thank you.
Chair Yellen
5 CHAR yEL;a41 Tha4 you.
0. I would like to ask about
11 MetLife's use of funding-agreement-backed
12 instruments. These instruments create
13 exposures to MetLife by other financial
14 entities, including money market fUnds.
15 And my questions are, first, why
16. does MetLife use this short.term funding
17 mechanism and, second, is this type of
le funding, is it -something that other life
19 insugance companies also Ilse to the. same
20 extent? How does $etLife compare with other
21 Companies?
22 Mgr_ BELE: Thank you, Chairman
Neal IR, Gross and Co., Inc. 202-234-4433 Washington DC vwvw.nealrgross.corn JA-2441 CONFIQENT1AL FSOC_00004624 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 77 of 190 Page 71
1 Yellen.
2 We do issue insurance contracts
3 from the regulated insurance companies, whidh
4 are, then flinded through "various shorterterm
5 funding agreements and different types of
6 funding ftyatAms We take those proceeds and
7. invest in assets, So, it is really almost's
matched-book type of business.
We chit this under supervision of
10 the New York State Insurance Department, and
11 they review the size and tenor of this. We do
12 extensive asset liquidation runs to make sure,
13 and liquidity runs to make sure that we can
14 meet all dashfraWs as they came due within
15 this' business. So, it. is a well-regulated,
16 well=controlled system that does give us
17 spread, income. These funding notes and
lA funding agreements are not used for general
19 corporate purposes, and all proceeds go as an
20 Insurance contract into regulated entities.
21 CHAIR YELLEN: Could you just
22 comment on whether or not other insurance
Neal R. Gross and Co., Inc. 202-24 -4433 Washington DC www.neairgross.can JA-2442 CONFIDENTIAL FSOC_00004025 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 78 of 190 Page 12
1 companies tely on this?
2 IIELE: Yes, there are other
3 insurers who do. this. to various extents.
4 Gives the size of our balance Sheet and the
size of !deflate, by a dollar size, 1 believe
6 we are the largest player, but it is a well-
7 regulated and well-supervised system.
8 SECRETARY LEK: Chairman
9 Gruenberg?
10 CHAIRMAN GRUENBERG: I would, like
11 to just ask about your assumptions- relating to
12 resolution. As t understand it from your
13 description, if you were to envision a failure
14 of your firm or material entities of your
15 firm, I take it each of the respective
16 regulatory authorities responsible for each
17 material entity 'would, in turn, take
18 responsibility for the failure Of the entity,
19 and that would apply whether i was a dwptestic
20 entity or a foreign entity. Is that right?
21 Is that the basic assumption that Wu would --
22 MR. ANZAIDUA: Thank you, Chairman
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrg ross. coin JA-2443
CONFIDENTIAL FSOC d0004d2E._ Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 79 of 190 Page 73
1 Gruenberg.
2 Yes, that is the basic assumption
3 The regulatdr that 19 responible for
4 supervision of the entity that enters into
5 distress would be the regulator that takes
6 charge of the resolution of that entity.
7 CHAIRMAN GRUENBkRG: -And I take it
a you assume that each of these entities Ore so
9 independent that there really are no
10 interconnections among these entities that
11 would be of consequence in a resolution
12 scenario?
13 MR. ANZALDUA: It is actually not
14 an assumption. We actually do not have
15 interconnections, any material
1,5 intercorkzections, among the entities. There
17 are very few intercompany ariangements that
la are detailed in our disclosure, but none Of
19 them is material,.
20 CHAIRMAN dRUOURG: -So, I take it
21 you would defer to each individual authority?
22
Neal R. Gegss arid Co., Inc. 202-234-4433 Washington DC vornoLnealrgross.com JA-2444 CONFIDENTIAL FSOC 60004027 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 80 of 190
P=, "nu= 1
Neal R. Gross,and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2445 CONFIDENTIAL FS000000402$ Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 81 of 190 Page 75
1
3 CHAIRMAN GRUENBERG: And I take
4 it4 I thihk you mentioned or bade reference to
the Supervisory Colleges that you hold. Is
6 that your principal vehicle for consultation
7 with the foreign authorities in jurisdictions.
a in which you have operations?
HR. ANZALDUA: No, sir. cur
10 principal mode of consultation with the
11 regulators of our foreign entities. is direct
12 consultation with fhe regulator. Each one of
13 our foreign entities is operated by a
14 mans geMent team in the foreign country that is
15 in active and robust dialog with its own
1.6 regulator'.
17 The Supervisory College is really
18 an opportunity for the regulators for talk to
14 each other, but we are tp constant
20 communication with ail of our regulators all
21 around the world.
22
NealR.GkissandCajna 202 -234 -4433 Washington DC www.nealrgrossesom JA-2446 CONFIDENTIAL Fsocja0d4029, Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 82 of 190
Page 7.6
1. I I I I I
I I 1 I a a 15 CHAIRMAN GRUENBERG: Okay. Thank
1.6 you.
17 NA. ARIALDUA: Uh-hum.
18. SECRETARY LW: Chairman Massadl
19 CHAIRMAN MASSAD: Thank you.
20 In the discussion, in your
21 disoutsion of reinsuranos, you refer to some
22 reserves as being redundanE, apparently, as a
Neal R, Gross and no., Inc. 202-234-443:3 Washington DC www.nealrgross.corn JA -2447 CONFIDENTIAL Ft0C 00004030 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 83 of 190 Page 77
1 ,result of overlapping requirements at the
2 state level. If the reserves are truly,
3 redundaht in that sdride, why haven't states
4 acted to try to harmonize those?
5 MP. RELEt The states currently
6 have a large harmonization project undetway.
7 It is called Vrinciipled Reserving, whiCh would
8 address this directly; as Well as even New
9 York State is actually proposing to change the
10 reserves or these products.
11 You know, these reserves have been
12 'around for some time. Companies use. various
1S formd of reinsurance subsidiaries to
14 essentially use a lower form of capital to
15 fund the redundant portion of it And that is
15 where we have a very tiny exposure to the
17 financial system from that. And that is all
la within and contained -- MetLifeis exposure to
1p any of this finaficing is within the numbers we
20 showed in the exhibit, so under 2 percent of
21 any GStB. SO, really, not a material exposure
22 to the U.S. financial system.
Neal R. Geoss and Co., Inc. 2Q2-234-4433 Washington DC www.nealrgross.com JA-2448 CbNMOENT6NL FSOC.00044031 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 84 of 190
Page 78
1 MR. ANZALDUA: If /could just add
2 a point on terminology, the redundancy doesn't
3 actually refer to overlapping requirements,
4 It refer0 to an element of the teserVe that is
redundant ° Vet what the actual ecohOmig risk
6 in the pr6duct is. SO, the redundant piece is
7. a piece of reserves that is bverreserving on
8 economic risk. It is an actuarial concept.
9 SECRETARY LEW: Chair White?
10 CHAIR WRITE: The question I have
it is, to go back to your comment about the Dodd-,
12 Frank sort of.frame*ork for the Council's
13 decision hero, determination. And I believe
14 you made the point that the Council needed to
15 determine the likelihood that the firm would
1.6 experience material, financial distress rather
17 than assuming that it has material financial
is distress an4, then, what are the various
impacts. What is the basis for that
20 argument --
21 HR.. ANZALMA: Thank you , Chairman I
22 White,
Neal R. GOIss and Co., Inc. 202-234-4433 Washington DC vwww.nealrgross.con)
JA -2449 CONFIDENTIAL FS0c, 00004032 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 85 of 190 Page 79
1 CHAIR WHITE: -- given the
2 statutary language?
3 MR. ANZALDUA: Adtually, this is a
4 logical inference from the statutory language,
5 and it is aatually codified in 'SOC's own
6 rules. It really does stand to reason that
7 the structure of Dodd -Frank really will not
8 sWld up based on a naked speculation, a naked
9 assumption of material financial distreis,
1G 'because if that can be assumed, then, as it
11 were, the statute proves too much. rf you can
12 assume material financial distress' at any
13 'entity, and then, place that sfinancial
14 distress on an entity of sufficient size into
15 the Market enviwonment, you will have. gone 90
1.6 percent of the tray towards finding a systemic
17 impact.
18 And so, I think that is why VSOC
itself decided to put into -its rule the
20 necessity of making 'a Aatermination that there
21 actually is -- it is actually, I think,
22 correct to.ihink about it as a reasoned
Neal R. Gedss and Co., Inc. 292-234-4433 Washington DQ, www.nealrgross.com iA-2450 CONFIDENTIAL FSOC. 00004033 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 86 of 190 Page BO
1 tanalysis of the likelihood of vulnerability to
2 material financial distress. There has to be
3 some basis) for doncluding that there is a
4 vulnerability to Material financial distresa:
5 Otherwise, the statutory construct doesnt
6 really work.
7 CHAIR WHITE: And so, when you say
FSOCTs rules embodying the statutory
a objectiVe, you are talking abolit the part
10 where vulnerability ia discussed?
11 MR. IMAIDUA: That's. correct.
12 SECRETARY LEW: I'M trying to
13 remember where we were.
14 Director MclUith?
15 DIRECTOR McRAITH4, Good afternoon.
16 So, r was pleased to hear that you
17 don't view this as a referendum on the state
18 regulatory system. T think I want to
acknowledge the letters from my former
colleagues and acknowledge what think is
beyond true, which is the state regulators, by
22 and large, serve the public generally very
,Neal R. GrassAndCo., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2451 CONFIDENTIAL F§OC._00004034 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 87 of 190 Page 81
1 well.
2 At the same timet the system is
3 not beyond reproach. There are weaknesses in
4 the stem, and theta ate ineffivianclet and
5 areas where there is ineffectiveness as well.
6 In fait, some of those were highlighted in
7 materials that you submitted.
But I want to talk for a moment
about the capital issue, Of course, states
10 evaluate capital at 'a licensed entity level
11 only, and only in the U.S. for the U.S.-
12 licensed entities, and the risk-based capital
13 is a minimum capital.
14 So, those of us familiar with the
15 insurance sector are aware that it is really
16 the companies Like MetLife often build their
17 capital perspective or their models around
18 rating agency expectations. People refer to
19 the rating agencies as de facto regulators, in
20 fact, often.
21 So, what is your view of the role
22 of the rating agencies in the insurance
WAR.GrassAmICa,Inc. 202-234-4433 Washington DC www.nealrgross.corn JA-2452 CONFIDENTIAL FS0000004035. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 88 of 190 Page 82
1 marketplace, And how- important is that rating
2 to MetLife?
3 MR. KANDAPIAN: It is important,
4 but it is not dispoSitift. So, I rah. the
5 investments department; I would look at those
6 capital Charges thit the ratin4 avert oitas would
7 utilize when they came 'up with .theses PBC
Er numbers for us, which could end up determining
9 our rating as i company. But we did our own
10 internal analysis on credit. We didn't, rely
11 upon their credit ratings. It is one; of the
12 reasons that we came to the =isle:was well aA
13 we did. We didn't rely upon third-party
14 ratings of securities or the RBC system to --
15 DIRECTOR McRAITH: sorry, I
16 should be more clear in my question. HOW
17 important is the rating of MetLife to the
18 company itself?
19 MR. KANDARIAN: It is very
20 important. We have a AK rating. That is
21 important in terms of providing 'consumers
22 confidende that we -tan perform our long-term
Neal R. Geoss and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2453 CONFIDENTIAL FSOC. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 89 of 190 Page 83
1 liabilities, our long-term promises to them.
2 But companies do operate within a
3 'tangle. Sode of the Mutual comPanies, as yOu
4 know, halm AAA ratings. They don't, halie
5 shareholders. So( return on equity is not a
6 .key faqtor for them.
7 MetLife, as I say, a AA is kind of
8 the right place to be. Sox% companies have
9 single A ratings, stin vary strong ratings,
10 but they operate with less capital
11 proportionately than we do, trying to drive up
12 the return on equity. But we have kind of
13 caught that middle part of the spectrum and we
14 target a AA rating for us.
15 Does that address your question?
DIRECTOR McRAITH: ;Yes, that is
fine. Thank you.
KANDAR/AN: okay .
15 SECRETARY LEW: Director lidtt?
20 DIRECTOR WATT: I take it that you
21 believe you will never gat to this point, but
22 in the. unlikely event that you did, and you
Neal R. Gtoss and Co. 202-234-4433 Washington DC vwew.nealsgross.com JA-2454 CONFIDENTIAL OC 00004037 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 90 of 190
LPage 8.4
had to go to liquidation, x am wondering
2 whether you could walk us 'through your vision
3 of, hOW asset sales would take place,
4 particularly in an Area where, in a time When
5 the entire economy is in a state .of distress.
6 MR. HELE: I would be pleased to
7. answer that, Director Watt.
I think Soenario,3 is quite
9 indicative of just the question that you
10 mentioned. It is a liquidation scenaricL We
11 assume that we stop all new sales and that -we
12 meet the needs of all investors or people,
13 ipolidyholderb With us. We assume all
14 institutional policyholders will redeem as
15 quickly as they possibly can. WE assume the
1.6 securities lending busineps stops, We 4ssume
17 the capital-markets-type business, the funding
18. agrdements business stops, and we have to
repay those. We assume retail policyholders
20 surrender at a higher rate than has ever been
21 seen,
22 And Scenario 3 does not assume
Neal R. GtQss end Co., Inc. 202-234-44334 Washington DC www.nealrgross.corn
JA-2455 tbNFIQtNTIAL FSOC. 00004038 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 91 of 190 Page 85
that we invoke the contractual right that we
2 have to a six-month deferral of policyholder
3 payments. Sol this was actually written into
4 almost all of our contracts oh the 'retail
5 side. It was introduced in 1934, '35, if I
6 remember toy history cotrectly, so that
7. insurers would be able to manage through
difficult times in terms of payouts. but we
did not assume that in Scenario 3.
10 And we also made another major
11 assumption that was quite contrary to the 2008,
12 crisis. We did not assume that Treasury
13 yields go down; in other words, that Treasury
14 values gd up dramatically in value. We just
15 assume. interest rates stay the same.
1.6 So, *hat happened in 2008 Was many'
17 financial institutions, including Mettife, paw
18 our Treasury securities and ageimies gain
19 quite a bit in value because interest rates
20 were dropped through dramatic actions by the
21 Federal Reserve and others. Sb, we did not
22 Passume that, for the sake of being
Neal R. Gross and Co., Inc, 202-234-4433 Washington DC vvww.neairgross.com
JA -2456 CONFIDENTIAL FSOC- oommon Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 92 of 190 Page 86
1 conservative.
2 And even then, the sell order, as
3 detailed in the Oliver Wymari study, showed we
4 are able to meet the heeds. We do plan to
5 sell the most liquid assets first, so as not
6 to intur capital bosses that would
1 dramatically impact our capital positions.
8 And we also abdUme a steady order of flow of
9 thede over time.
10 And thLs is Mite an unrealistic
11 scenario when you really step back and think
12 about it because, if MetLife were to announce
13 we are not selling any new business and we are
14 essentially going into liquidation, I would
15 expect we would be in detailed conversations
2,6 with the New York and all of our major
17 regulators who would likely invoke maybe
18 ;something much more Draconian on the
situation, as their 4aveii done in almost every
20 other major insurance failure. that. is
21 highlighted in the separate Oliver Wyman study
22 on insurance failures.
Neal R. Gross)ndCo., Inc. 202-234-4433 Washington DC ywiw.nealrgross.00111 JA72457 CONFIDENTIAL FSOC 00144040 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 93 of 190 Page 8.7
DIRECTOR WATT: And I understand
2 you are not assuming a liquidation, and that's
3 what you are SAying; you are assuming all of
4 the things that would not requite a
liquidation, is what I understood you to be
6 saying in ydur answer?
7. MR. AELE: In Scenaiio 3, Oliver
8 Wymilin assumed that surrendeks were et a higher
9 rate than ever seen in history, 4nd Metlii.fe
16 was able, through its sales of' its existing
11 securities, to meet those needs ..and the
12 market impacts of those sales are not material
13 to the U.S financial system.
14 MR. ANZALDUA: SO4 I 'think ybu're
15 asking the question whether MetLife is being
16 liquidated? Ot Are yOu asking the question
17 about the liquidation of the assets?
18 PIRECTOR WATT: I am asking the
29 question about the liquidation of the, assets
20 in a scenario where everybody else is also in
11 distress.
22 14R. ANZALDUA: Where everybody
Neal R. Gross and Co., Ind 202-234-4433 Washington DC www.nealrgross.corn JA-2458 CONFIDENTIAL Ft0C_00064041 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 94 of 190 Page 88
1 else ia also in distress?
2 DIRECTOR UMMt: The entire economy
3 is in distress.
4 MR. ANZALDUA: That is what the
5 scenario assumes. It assumes a-more stressed
6 economy than we had in '08, and that is the
7 scenario of liquidating those assets.
a As John pointed cut in his
9 presentation , we don't think that that is a.
10 real plausible scenario-. It is designed to
11 test the limits of the analysis. And what it
12 shows is that the assets can be sold into the
13 markets without disrupting those markets and
14 depressing the prices of the assets to an
15 extent that would have a systemic impact.
16 MR. REIM: The Oliver, Wyman
17 analysis in SceniriO4 3 and 4 assumed the
18 lowest trading volume seen in the lait five
19 years, which for some asset alittsses were
20 actually not in the 2008 or late 2008; some
21 were at other times-. So, each asset class at
22 1 a different time.
NealR.GtossanaGa,k14 202- 234.4433 Washington DC www.nealrgross.com JA-2459 CO4FAIENTlAi FSOC_00004041 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 95 of 190 Page 89
1 Nevertheless, the analysis assumed
2 the lowest trading volume seen in recent
3 history for all of the analysis for. the sales
4 of all the asset classes,, and did not assume
5 an increase in Treasury price, in the price of
6 the Treasuries.
7 SECRETARY LEW: Commissioner
8 Ducres0
9 COMMISSIONER DUCRBAT: Thank you.
10 So, getting' back to Collins
11 second, I think I read in your presentation
12 about the pricing on the policies and maybe
13 scaling back the impact on Collins. And I
14 ,heard yOu talk about the Separate account
15 impact.
3,6 But what 'other major impacts woUld
17 the Collins amendment have if it is repealed
18 and you are able to operate, but you are Under
19 the supervision of the Fed? What else is but
20 there other than the separate accountiissue?
21 MR. KANDARIAN: I oan't tell 'you
22 ,fo.r. certain. It will be whoever the Federal
Neal R. Gt4ss Era Co., Inc. 202 -234 -44.33 Washington DC www.nealrgross.com JA-2460
CONFIDENTIAL FS00000 04043 11 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 96 of 190 rage iu
1 ReserVe comes up with for rules if the Changes
2 to Collins go throUgh. That bill was passed
3 by the Senate oh unanimous cons'ent. We are
4 hoping the House will pass the bill in a lame-
5 duck session. And we are hoping the President
6 will sigft the bill.
7. At that point, we will have to
wait and see what draft rules come otit or the
9 Federal. Reserve, and we will know better than
10 in terms of the impact upon MetLife.
11 COMMISSIONER DUCREST: Do you
12 still anticipate a 'competition issue, with the
13 other tO0 insurers yott are talking about or
14 wherdi is the Major impact?
15 MR. KANDARIAN: In any case, the
1.6 Fed will be req uired to have heightened
x7 supervision and heightened capital iules. 8Q,
la it will be higher; We dont know much higher
14 because the rules have not been drafted At
20 least we haven't seen 'ally rules.
21 COMMISSIONER DUCREST: Okay.
22 MR. KANDARIAN: We know what tasel
Neal R. Gross and Co.. Inc. 202-234-4433 Washington DC www. n ea lrg ross. corn JA-2461 CONFIDENTIAL FSOc_00004044 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 97 of 190
Page 91
1 III rules look like. We don't know what these
2 Other ules might look like:
3 SECRETARY LEW: Directory Coidtay?
4 DIRECTOR CORDAAY: So, I gUess
5 share Robe of tie concerns and maybe degree of
6 skepticism expressed by some of my colleagues.
7 Obviously, this exercise depends critically on
various assumptions that have to be made about
9 the position of the entity and the position of
the marketplace. And they have to be, for the"
purposes of the F80, pretty severe stress
assumptions.
13 And I landerstAnd that you believe
14 that your analysis- has done enough and is
15 suffidieht, but I Sense that there is
16 -disagreement among the .Counoil with that
17 claim: I mean, you started by indicating
is reasons to think that MetLife itself could not
be in a position of potentially become
tnsolvAnt, and I understand why yoq have
confidence in your company and believe that
22 would, not occur..
NialR.GOssandCo.) Inc, 202-234-4433 Wastihgton DO w+Mtv_nealrgross_com JA-2462 CONFIDENTIAL t0c_00004045. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 98 of 190 Page 92
1 But in the kind of situations we
2 are talking about; where there is inevitably
3 goidg to be stress across the market,
4 difficulty in dispoSing of assets, yOU haire
5 made assumptions about. how difficult that will
6 or will not be. That may or may not be
7 satisfactory from our point of view.
And you took issue with Chair
'White's view of the statute, which is used; on
la hypotheticais and contingencies and uses in
11 certain areas a "could" standard and,
12 therefore, inevitably relies on severity of
13 assumptions. I guess it is difficult to be
14 convinced that your scenatiom are sighificant
15 enough to the kind of severe distress that we
1.6 are talking about here.
17 I noted your last slide wheie you
18 indicate there is no evidence of
19 failuTe of the fourth-largest Canadian
2) insurer. The asset size of that in comparison
21 to Met4fe would be what?
22 AAR. imik: On asset size, they
Neal R. Stasis and Co., Inc. 202-234-4433 Washington DC www.neairg rms. cam JA.2463 ChNR0MWrtAL FSOC40004046 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 99 of 190 Page 93
1 were 2.7 percent of Citnada's GDP, and we are
2 3.7 percent of U.S. SOP.
3 DIRECTOR CORDRAY! Asset size?
4 MR. HELE: It was 1994. I have to
5 go lOok it up. I will have to get back to you
6 on that, sir.
7 latterik OORDMAY: Okay. Much
0 smaller, I'm quite sure, than MetLif.
9 MR. ILEpEr 'es, the GDP ip smaller
10 in Canada. I think thq _-
11 DIRECTOR CORDRAY: And therefore,
12 it was possible you described, I believe you
13 described, to dispose of the assets, I think
14 you said there was a Georgia ineureethat
15 bought up some of the assets? Or how did you
1.6 describe that?
L7 MR. RELE: "The supervision of
IS Confederation Life was supervised by the
19 Camodian insurer regulator. They had
20 operating sUbsidiaries in Michigan and (Georgia
21 and, through reguIatorat saw an orderly
22 dissolution, meaning all policy or liabilities
Neal R. Gross)na Co., Ind. 202-2344433 Washington DC www.nealrgross.com JA.2464 GO 14F I DENTI AL F SOO. 00004047 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 100 of 190
Page 94
1 without any contagion impacts in (Canada,
2 Michigan, or Georgia.
3 DIRECTOR CORDRAY: So, a much
4 smaller institution in :1984?
MR. HEM 1994, sir.
6 DIRECTOR CORDRAY: 1994? All
7 right.
Not obvious to me it is congruent
to the kind of stress scenarios we have to
10 consider here. And that is a Canadian
11 ,insurer.
12 What'ie The largest resolution Of
13 an Mexican insurer that you have seen by
14 comparison, say, to the situation MetLife
15 Might face? What level of assets?
16 NB. KELE; I would iqave to get
17 back to you on exactly, to put it in today's
18 dollars, because --
15 DIRECTOR .CdRDRAY: Anything close
20 to Mettife that you can remember?
21 MR. HELE: No, sir.
22 May 7 Address your first question,
Neal R. Grois and Co., Ina-. 262-2344433 Wasb inciton DC www.neairg ross. corn JA -2465 CONMENTIAL Ft0C 00004048. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 101 of 190 Page 95
1 I though?
2 DiRECTOKCORDRAk: Absolutely.
3 MR.,HELE: The aSsuOptiona that
4 were in the Oliver Wyman analysis, at every
5 step 'Oliver Wyman hied to make conservative
6 assumptions, both in polidylvlder behayidr, in
7 asset liqUidation, in the prices of
treasurers. So, conservative on conservative
9 won conservative. And we put that forth and
10 provided that all to FSOC.
11 In the NFD we saw other scenarios
12 were spoken about that could be different, but
13 we have. not seen what those scenarios could
14 be. If we could sea those scenarios, we would
15 4De happy to respond to those and analyze those
16 in how Vie have looked at it. But, a.ga4n, Tote
17 haven't seen those. We have only read about
18 other scenarios that could be there, that
lg could 1;.e diffexent.
20 And we really, with Oliver Wyman
21 and all of usr we really can't find any that
22 are more severe that are plausible because in
Neal R, Grass 3nd 0o., inc. 202-234-4433 Washington DC wmy.nealrgross. corn JA-2466 CONFIDENTIAL FSOCLD0004040 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 102 of 190 Page 96
1 all of these scenarios you have to do ±t at a
2 level that is just above insolvency from the
3 state regulatory systet. Because once the
4 states cone in and take over the company, they
5 can atop all payouts and there will be no
6 asset liquidations, and it will be resolved
7 over a long period of timet, and that's
Executive-Life-wise.
4 'DIRECTOR COMM': The other piece
10 was you are a significant company with
11 significant holdings overseas and the like.
12 And if Irm understanding your presentation,
13 you have suggested that that is not a concern
14 because each of those, I guess, in sodie ways
15 is somewhat ring-fenced and distinct from one
16 another and would be reaolveid if they had
17 problems, by their regulator$ localized, as
18 Chairman Gruenberg, you and he discussed back
and fofth.
Is that also the way you .see the
different pieces of the American entity that
22 .you lay out on EXhibit 3? So, the entity that
Neal R.GrgssAndCo., Inc. 202-234-4433 Wastington DC www.nealrgross.com JA-2467 CONFIDENTIAL FSOC. 00004050 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 103 of 190 tPage 97
1 is overseen by Connecticut, the entity that is
2 overseen by Neto Yorks and the entity that is
3 overseen by Delaware, are they ==
4 MR. ANZALDUA: That 'is correct.
5 DIRECTOR CORDRAY; =- distinct
6 from one another in the same manner, would not
7. infect one another, involve any tcontagion one
8 to another?
.9 MR. ANZALDUA: That is correct.
10 Each entity is separate from eaah other
11 entity. 4. is ring-fenced. And if an entity
12 wete to enter into financial distress, the
13 regulator for that entity would be responsible
14 for its resolution.
15 DIRECTOR CORM/AY: So, in yout
1.6 yiew, is there any need for of any benefit to
17 cooperation or looking -across and coordination
18 among the different states or is that just
19 completely irrelevant to your scenarios?
20 MR. ANIAIJOVA: No; it is important
21 becauSe the entities, even thopgh they are
22 domiciled in a particular state, sell
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC 'wvA.nealrgro$s.cofn JA -2468 CONFIDENTIAL FSOC_C$0004051 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 104 of 190 Page 91
1 insurance products all throughout the UnIter_
2 States. And that is true of all of our
3 insurance entities. So, there is a necessity
4 for coordination among the regUlatorq,
5 irrespective of whether a particular entity
6 supervised by a particular regulator is itself
7 in distress.
DIRECTOR CORDIRAY: I am, not sure I
fully understaild that. %at, in any event,
10 there are different mechanisms being
11 considered, but not yet completed among the
12 state-regulators for further cooperation anc:
13 coordination, to i.earn lessons from the
14 financial crisis, is that correct? Ss 011 of
15 that completed and in place?
16 MR. ANZALDUA: I 'm not .surer what
17 you're referring to.
18 DIRECTOR CORDRAY; I thought that
19 there had been efforts underway among the
20 state regulators to further coordinate in the
21 wake of the crisis. It that wrong?
22 MR. ANZALDUA: the regulators are
Neal IR, Gross and Co., Inc:. 202-234443a Washington DC vwvw.nealrgross.00rn JA-2469 .CONFIDENTIAL F soC 00004052 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 105 of 190
Page 99
1 always in communication with each other. 'The
2 U.S. state regulators coordinate through the
3 'National Absobiation of Insurance
4 CommissionetS, and they have been involved in
5 efforts to make their cOordination more robust
5 for at least the last 35 years. And it is an
7 ongoing process.
8 They always examine the evolution
9 of markets and opportunities to iniike th04..r
10 coordination more effective, if they perceive
11 issues. And there wasn't, frankly, much in
12 the crisis that produced anything in the way
13 of sttesses at insurance companies.
14 DY CTOR CORDidar-. And' could -you
15 desctibe how you see if there- is, in fact,
federal involvement? Would you perceive that
17 there would be coordination between the
18- federal and the state regulatibtb, and would
that be, helpful or harmful on your per.ception
20 of it?
21 MR. ANyAIDUA: Wel1, that would be
22 speculation about the way that the Fed
Neal IR. Gtoss and Co., Inc. 202-234-4433 Washington DC www.nealrgross.corn JA-2470 cbNFIDENTIAL Fsocoa 004053 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 106 of 190 Page 100
1 regulates systemically-important insurers, and
2 .we don't really have any visibility into What
3 kind of regulation the Fed is conceiving of at
4 this time.
5 DIRECTOR CORDRAY: Do you have a
6 sande that state regulators iii themselves are
7. 'able to assess systemic issues across the
entire national' and potentially international
4 Systei?
10 Wt. AnALDUA: I think that state
11 regulators focus on the entities that they are
12 'responsible for supervising. I don't think
13 that they think it. is their role to look at
14 syStamic risks across entire econoMied.
15 Steve?
16 MR. KANDARIAN YeZ, I would. like
17 to do back to Directoi Cordray's earlier
18 comments about the size of MetLi,fe. FSOCts
19 Final Rule says_ size is an important factor,
20 although not the exclusive factor, 14
21 assessing whether a non-bank financial company
22 could pose a threat to the financial
Neal R. GrassAndCo., Inc. 202-24 -4433 Washington DC www.nealrgross.corn
JA-2471 CONFIDENTIAL FSOC. 00004054 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 107 of 190 Page 103
1 stability,
2 And t think, again, what John said
3 I would' like to echo, which we would love to
4 see the ahallsis FSOC hits COMO up with to
5 suggest that our resolution would cause a
6 problem to financial stability in the United
7 Atates.
We have presented analysis to
4 suggest otherwise, but we haven't an your
10 analysis. Inc I think the analysis under the
11 statute has to be reasonable. It has to be a
12 'reasonable analysis, not just we're big.
13 That's our point of view.
14 DIRECTOR CORDRAY: AOlgted,
15 although, as you say, it is, at.a minimum; an
1.6 important factor.
17 MR. KANDARIAN: It is an important
18 factor.
19 DIRECTOR, CORpRAY: Ndbody says it
20 is not important.
21 Tom_ KANDARIAN: But just because
22 MetLife. is 61g, we don't view as being
Neal R. Gross,and Co., Inc. 202-24 -4433 Washington DC mgw.nealrgross.com
JA-2472 CONFIDENTIAL FSOC_00004055 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 108 of 190 Page 102
1 sufficient for designation.
2 DIRECTOR CORDRAk: And when you
a ate talking about trying to dispose of assets
4 and the like, the larger an entity is, the
5 more difficult it will be, you know, in
6 relation to the rest of the market.
7 MR.. ICANDARfAN: Yes, and we
8 presented an analysis around that. W,wolild
9 welcome seeing your Analysis.
10 DIRECTOR CORDRAY: Uh-hum. Okay.
11 All right. Thank you.
12 SECRETARY Itti: Director Berner?
13 DIRECTOR BERNER! You have already
14 fielded a lot of questions about asset
15 liquidation, but I wanted to focus on one
1.6 aspect of that, just to come back to.it. The
voluntary submission, as you noted, talks
18. about liquidation across a Number of asset
14 classes of a realistic scenario. And so, one
20 of the aspects of this is related to liquidity
21 in the marketplace, the ability to sell assets
22 without having a big impact on price.
Neat R. Gross and 0o., Inc. 2112-2141-4433 Washington DC WWw.nealrgross.coth JA-2103 CONFIDENTIAL FSOC_00004056 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 109 of 190 Page 103
1 You know, market participants have
2 noted: that, even in today's environment,
3 market liquidity is less than Wat you might
4 feNpeot, and they are concerned about it. I
5 share that concern.
6 Typically, in a regular
7 environment your corporate bond Volume is
pretty high relative to sort of the average
9 -daily trading volumes, So, I am won4ering,
la against that backdrop and the assumptions in
11 the kind of scenarios that are being talked,
12 about, whether they are yours or others'
13. scenarios, could it be that, if you are
14 required to liquiclate pa4ts of your portfolio,
15 that that would have a material impact on
16 corporate spreads? It would further erode
17 market liquidity? What do you think the
IS results would look like?
19 MR. Ott: Well, clear/y, if
20 jdetTE44fe, which is, as you say, a larger
21 participant In some sectors of the market,
22 -particularly covered bonds -- it is one of our
Neal R. Crass and co,, 202-234-4433 Washington DC www.nealrgross.com JA-2474 CONFIDENT AL FSOS.1_00C104057 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 110 of 190 Pagd 104
1 larger assets classes were to sell a great
2 deal ,of those in a short period or time, it
3 mar impabt prices.
4 We are highly diversified. We do
5 have a lot of different assets in which to
6 choose froM, if we are in need of liquiaty.
7 And we do significant liquidity testing over
8 the shoit-term.
P $l#-, nevertheless, I think the key
10 question comes pack to would these asset
11 prices changes cause a systemic risk to the
12 U.S. financial system. So, the fact. that
13 corporate bond spreads may change or one
14 segment of one pricing of asset classes
15 changes in almmiod-of time, it that going to
1.6 cause a destabilizing effect oil.the entire
17 U.S. financial system?
IR And we believe froth the analydis
Ghat has been presOnted, if shows that the
20 sale of assets of MotTafe, even in scenario*
21 that are quite remote, Scenarios 3 and 4, do
22 not cause an impact on the overall U.t.
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2475 CONFIDENTIAL FSOC_00054-05ET Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 111 of 190 Page 105
1 financial system.
2 And, in particular, the study and
3 the details looking at the exposure of GSIBs
4 to these various asset classes, I think is a
5 very relevant part of the analysis.
6 DIRECTOR BERNER: Thanks.
7 SECRETARY LEW: Controller Curry?
8 CONTROLLER CURRY: No, thank you.
9 SECRETARY LEW: Commissioner Hamm?
10 COMMISSIONER HAMM: Thank you, and
11 thank you all for your presentations this
12 afternoon. I have a number of questions, but
13 if I only get one, I would like to go back to
14 this issue of the consequences of designation.
15 You touched on it a little bit in your
16 beginning comments, Steve, with the potential
17 breakup of MetLife. So, I would like you to
18 expand on that, if you would a little bit.
19 And here is how I would ask the
20 question: if MetLife were to be designated,
21 what would the short-term reaction of MetLife
22 be over the next six months? And then, what
Neal R. Gross and Co., na 202-234-4433 Washington DC www.nealrgross.com JA-2476 CONFIDENTIAL FSOC_00004059 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 112 of 190 Page 106
1 would the long-term reaction be over the
2 course of the next couple of years? And then,
3 how would those reactions of MetLife impact
4 your current policyholders and potential
5 future policyholders?
6 MR. KANDARIAN: So, designation
7 alone isn't the biggest issue for us. The
8 biggest issue will be what the capital rules
9 will be. So, if the capital rules are
10 extremely harsh from our perspective and makes
11 us uncompetitive in certain lines of business,
12 then we will have to exit those businesses in
13 some form. And that is what is being studied:
14 how would you do that? How would you exit
15 those businesses?
16 In other words, do those
17 businesses become uneconomic as a public
18 company based upon certain capital rules that
19 might make, let's say, a certain kind of
20 retail insurance policy 50 percent more
21 expensive from a capital charge perspective?
22 I mean, we operate in a very
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2477 CONFIDENTIAL FSOC_00004060 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 113 of 190 Page 107
1 competitive universe. And again, we don't
2 compete just against a handful of big
3 insurance companies. We compete against all
4 kinds of insurance companies. There's over
5 800 of them. Now, clearly, the bigger ones we
6 are competing with more often, but lots of
7 companies out there.
8 And we have expectations that are
9 put on us by the marketplace in terms of
10 return on our capital, return on equity. I
11 would say we are doing well by those measures.
12 But if you say your capital is going to be
13 doubled or upped 50 percent for certain
14 products, then we are going to be sinking to
15 not only the bottom of the list, but well
16 below the bottom of the list, the very, very
17 bottom, in terms of return expectations for
18 our company going forward for certain lines.
19 Our shareholder base won't accept
20 that for a return. They are not going to
21 accept a 6- or 7-percent return on equity for
22 certain parts of our business. And we will
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2478 CONFIDENTIAL FSOC_00004061 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 114 of 190 Page 108
1 have to take action once we know what those
2 capital rules are.
3 So, we are doing work now because,
4 when the rules come out, we have to have an
5 answer to our shareholder base and to
6 analysts. We can't say, "Oh, we just saw the
7 rules. We'll get back to you in eight months
8 after we analyze this." We have been
9 analyzing this since the beginning of 2013.
10 So, we have a lot of "what if?" scenarios. If
11 this, then that; if this, then that.
12 We have made no decisions. We
13 haven't put any stakes in the ground. But we
14 have to be prepared, or we wouldn't be doing
15 our job as management.
16 SECRETARY LEW: Chairman Matz?
17 CHAIRMAN MATZ: Thank you. Thank
18 you for all the information that you have
19 provided us and for coming here today. It has
20 been very helpful.
21 I have two questions. One is a
22 followup on the question asked by Commissioner
Neal R. Gross and Co., na 202-234-4433 Washington DC www.nealrgross.com JA-2479 CONFIDENTIAL FSOC_00004062 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 115 of 190 Page 109
1 Hamm. I was surprised that you suggested
2 that, if MetLife is designated and the Collins
3 amendment is in place, that it would result in
4 the breakup of MetLife. That seems very
5 extreme. And I am wondering if that is
6 premised on the existence of the Collins
7 amendment or if you foresee that simply as a
8 result of designation.
9 MR. KANDARIAN: It is not solely
10 based on designation. So, the interpretation
11 that we understand from the Federal Reserve is
12 the Collins amendment requires the Federal
13 Reserve to utilize no less than bank rules,
14 Basel III rules, as I understand the
15 interpretation, for any non-bank SIFI.
16 And our view of those rules,
17 depending on how they are applied to MetLife,
18 could result in capital charges far in excess
19 of what we have today in our current regime.
20 So, if that were to occur, we would be
21 uncompetitive in certain lines of business,
22 significant lines of business, not one or two
Neal R. Gross and Co., na 202-234-4433 Washington DC www.nealrgross.com JA-2480 CONFIDENTIAL FSOC_00004063 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 116 of 190 Page 110
1 little things, but major parts of our
2 business.
3 And if we are not competitive
4 going forward, if we know that, then we will
5 have to take actions. So, I am not saying we
6 will break up, sitting here today in front of
7 you. I am simply saying, with a look at what
8 those rules are, how they are interpreted, how
9 they are applied by the Federal Reserve if we
10 are finally designated, and if there are put
11 in effect, at that point in time we will have
12 to make a decision.
13 CHAIRMAN MATZ: So, absence the
14 withdrawal of the Collins amendment, the
15 designation alone would not necessarily result
16 in the breakup of MetLife?
17 MR. KANDARIAN: We would have to
18 wait and see what -- so, it is not a
19 withdrawal of the Collins amendment. It would
20 be, just to clarify, it is basically an
21 amendment to the Collins amendment by Senator
22 Collins herself, which would provide
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2481 CONFIDENTIAL FSOC_00004064 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 117 of 190 Page 111
1 flexibility to the Fed to employ insurance-
2 like rules as opposed to bank-like rules to
3 non-bank SIFIs, including MetLife, if we were
4 designated on a final basis.
5 So, we would have to wait and see
6 what those rules were. All it does is give
7 flexibility to the Fed. It doesn't say what
8 the rules will be. So, I have no answer for
9 you in terms of what happens next because I
10 haven't seen the rules under a law that has
11 yet to be passed and rules that have not yet
12 been drafted, as far as I know.
13 CHAIRMAN MATZ: I also wanted to
14 follow up on the question raised by Chair
15 White. You take exception to the analysis
16 done by FSOC premised on material financial
17 distress. Yet, in your 10-K there are about
18 30 pages of risks that could cause financial
19 distress to MetLife. So, I am having a little
20 trouble reconciling why you feel that FSOC
21 shouldn't premise our analysis on material
22 financial distress, yet the 10-K goes on and
Neal R. Gross and Co., m. 202-234-4433 Washington DC www.nealrgross.com JA-2482 CONFIDENTIAL FSOC_00004065 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 118 of 190 Ptge 112
1 on about various. -- and even says, you know,
2 that there are realized losses around
3 payMents, certain tecurIties may have a
4 mattlitia2 adverse effect oh our net incdbe, and
5 that's similar statements throughout.
6 MR. KANDARIAN: So, I will let
7 Ricardo answer the legal point. But we are
8 not saying that an insurance company,
.9 including MetLife, in theory, could not fail.
10. Ttiat is not What we are saying.
11 And in terms of what we put in our
12 proxy statement's in our 10-Ks and .10-Qs in
13 terms of risks, those are requirements Under
14 the securities law. You have to liit all the
15 potential risks to a company. We don't have
1.6 probabilities on those risksr but those are
17 risks. You have to make sure you list all the
18 risks, so investors have a chance to draw an
19 assessment as to what those risks really are
20 in terms of probabilities..
21 CHAIRMAN MATZf All right. Can r
22 just follow up?
Neal R. Gtass4nd Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2483 CONFIDENT! AL FSOC.00004066 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 119 of 190 Page 113
I So, of those many risks listed
2 here, which are the most significant to you,
a the most likely to ,caust financial distress .at
4 MetLife?
5 MR. KANDARIAN: The biggest risk
6 to MetLife j.st being designated a Slit And
a having bank rules applied to us.
CHAIRMAN HAM And irrespective
of tat?
la (Laughter.)
11 MR. KANDARIAN: Second place is
12 way down the list.
13 CHAIRMAN. MATZ: And what would
14 that bia?
15 'MR. KANDARIAN:. A 10-year Treasury
16 at 1 percent for 15 years.
17 MR. ANZALDUA: i don't have
18 anything to add. That was too eloquent.
19 (Laughter.)
20 CHAIRMAN MAt2L Thank you.
21 $tCRETARY LEW: Administratpr
22 Massey?
Neal R. Grossand Co., Inc. 202-234-4433 Washington DC wwyd.nealrgross.corn JA-2484 CONFIDENTIAL FSOc_00004067 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 120 of 190 Page 114
1 MR. ?WSSEY: Okay, thanks.
2 Well, gentlemen, maybe you could
help re understand something I am having a
4 little bit of trouble gettidg. I 40 a
5 securities regulator at the state level, and
6 I am it an insurance regulator, although
7 Since I have keen involved with the FSOC, I
have learned more about insurance regulation
4 than I could have ever dreamed exi,sted_
10 But it seems to mgt. that the
11 existing integrated system of insurance
12 regulation is fOcused inward toward the
13 insurance industry and is designed to. keep
14 that industry aid the companies that Make it
15 up healthy.
1.6 Now, but the FOC, it seers to me,
17 has a larger view, .which is to determine
whether and from what direction issues are
14 going to be originated that impact the
20 ,national and even global economy, the national
21 economy_ Let's just leave it at that_
22 So, .can. you tell me if the scope
Neal R. Gtoss and Co., Inc. 202-24 -4433 Washington DC www.neairgross.com JA-2485 CONFIDENTIAL FSOC,_00004068, Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 121 of 190 Page 115
1 and the authority that are built into the
2 existing ILs- insurance regulatory system is
3 brodd enough to address issues that arise
4 outside of the insurance Industry, but are
5 generated, like a noise and an echo that
6 reverterates, like market-moving. events that
7 would originate with a material distress on
8 MetLife? Is the insurance regulatory system
9 adequate to address the more global issue of
10 economic financial stability?
11 MR. ANZALDUA: lhat is a
12 'fascinating question. I think that the
13 question is a very interesting question, and
14 / think it relates back to scmethi,ng that
15 Steve Said at the outset, which is, does it
make sense to have fedeal regulation. of
insurance as opposed to the state system we
have today? But that is not the question that
19 we are here to answer.
20 The. question that we are here to
21 answer, and really the answer to your question
22 down at the analytical level, is can FSOC find
Neal R. Gross ancliCo.1 Inc. 202-234-4433 Washington DC www.nealrgross.com JA-2486 CONFIDENTIAL FSOC 00004009 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 122 of 190 P&ge 116
1 a 'plausible scenario where stress at an
2 insurer produces external effects'? That is
3 what we are trying to find and that is what
4 Dodd-Frap,k requires the FSOC to find.
5 The. 'insurance regulatory system is
6 not designed to serve the purposes that are
7 set out in DoadrFrank. That's for sure.
8 Wt. ASSEY:: Well, thank. you.
9 SECRETARY LEW: Mr. Woodall?
10 MR. WOODALL: Gentleman, I
11 appreciate your being here. A lot of the
12 questions that I think should have been asked
13 haVe been asked, and I think you are doing a
14 good job.
15 It was only Friday evening that I
16 got your lette-r, Ricard0c on your.
17 predominantly-engaged point. It was kind of
18 a latecomer, and I thought maybe since
19 everybody hadn't had a chance, I would ask
20 that.
21 You take" the position that MetLife.
22 does. not qualify as a non-bank financial
Neal R. Geos.s.and Co., Inc. 202-234-4433 Washington DC wvAy.nealrgross.com JA-2487 CONFIDENTIAL Ft0C_DO004074 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 123 of 190
PAge 117
1 company under the predominantly-engaged test
2 under Dodd-Frank and the Fed's companion rule.
3 And then, your first argument I get; you're
4 'under Section 4(k)(4)(Eq of the bank holding
5 company law. And you bake the distindtion
6 between domestic and U.S. revenues and assets,
7 given the statute explains that all activities
are to be in aiy state, and therefore, those
9 aren't -- I get that one.
10 The second argument I ai having a
11 little bit more trouble. That is the one that
12 you base on 4(k)(A)AI), where you were talking
15 more in terms of about, directly or indirectly
14 controlling or owning companies in
1$ accordance with relevant state insurandel laws
16 gbverning such investments.
11 Could you expand on that to
10 see -- MAybe you could answer the questions"?
19 I have maybe a couple more on It.
20 MR. A$zALDUA: Are you trying to
21 test My ability to put everybody to sleep?
22 {Laughter.)
Neal R. Gross and Co., Inc. 202-234-4433 Washingtan DC w.nealrgross. cam JA-24811
CONFIQENTIAL FSOQC10004071 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 124 of 190 Page 11B
1 'MR. WOODALL: No. I'm last.
2 MR. AN DUA: It is an extremely
3 ConVOluted analYSis. In summary, what it
4 4thOunts to is thatt under the applicable
5 definitions in the Sank Ho14ing Company AO,
6 for purposes of insurance described as engaged
7 in financial activities, only insurance within
8 the United States counts. That is the way to
a translate the meaning of all that statutory
10 palaver into English.
11 And if you would like, we can
12 submit a more detailed elaboration of the
15 argument. I thin' that is the .best way to use
14 our time.
15 MR. WOODALL: Yes, it is really
1:6 the second argument, because it almost was
17 saying, well, MetLife is not a bank holding
Is company; it is not an insurer, and theefore,
19 it doesn't fall into those pategor,ies, either.
20 It seemed like a comPletely difplient,argument
21 that I got a little Iost,in, but that I just
22 thought you might have -'-
NealR.GrQssanciCci, Inc. 202-234-4433 Washington DC wmv.nealrgross.com
JA -2489 CONFIDENTIAL Ft00_00004072 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 125 of 190 Pagd 119
MR. ANZALDUA: We will provide a
2 further written elabdration.
3 MR. WOODALL: Okay. And I Would
4 just like to state for the record, too, that
5 my present vote on your proposed designation
6 was due to the fact that I wasn't ready to
7 cast a yes or no vote, because you had
a requested a meeting with the Council prior to
9 the vote,, apd 1 felt that you should have had
10 tfiat opportunity. And that is the reason for
11 my present vote..
12 MR. ANZALDVA: Thank' you, Member
1'3 Woodall.
14 SECRETARY LEW: Well, thank you
15 very much.
16 I am going to take the libeity of
17 maybe one followup question. Theke has been
is a.lot of discussion about the historical basit
15 of Oliver WYman4s study. And if I was looking
20 at things co;:rectty, in the contagion study it
21 looked at historical examples of resolvability
22 that cumulative were like $38 billion, which
Neal R. Gross and Co., Inc. 202-24-4433 Washington DC www.neakgtoss.cOm JA-2490 CONFIDENTIAL F SOC_00004073 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 126 of 190 Page 120
1 is less than 10 percent of the size of
2 MetLife.
3 NOW size alone isn't everything.
4 But I am fonder/n.4 what gives ma odMfort that
5 the contagion risk from such a so mush smaller
6 Set bf institutions is indicative of what
7 would be experienced if there were serious and
isustained material distress at MetLife.
9 MR. HELE « Well, Chairman Lew, I
10 think the average customer of MetLife probably
1 doesn't know the size of our balance sheet,
12 but they know we're big. They know we have
13 been in businets for a long time They know
14 we have a large'brand. They know that they
15 have cote to trust us over a long period of
1.6 time.
17 And we would reApectfully submit
18. that the failure of Confederation Life in
19 Canada was a very similar set of facts,
20 smaller scale. The Canadian economy- is
smaller than the U.S. economy. But,
22 nevertheless, a nationally-known brand, been
Neal R. Gross and Co., Inc. 202-234-4433 Washington DC www.nealrgross.com JA.2491 COSAFKIENTtAL FSOC. 04OQ4074 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 127 of 190 Pag4 121
1 in business for 123 iyears.
2 Also in the study was Equitable
3 Life of the UK, which was a household name
4 across all of the UK when it failed as well.
5 So, there have been examples, no
6 on the dolla'r scale,becAuse the U.S. economy
7. is larger,'but in terms of impact for people
in thinking about it. Or, even regionally,
Execttive kite in California Wae aktramcply
10 well-known in California. You know, 'there 'has
11 just never been any signs of contagion for
12 well-known people .on the same relative scale,
13 and that is why we believe that there is not
14 the same type of risk that there are in banks
15 and other things that there are when it comes
16 to life insurance.
17 And-it is also very much due. to
le the fact that people have bought the life
15) insurance for a very differeiat purpose. It is
20 long-tergi saviigs. Xt is a long-term need.
21 It is opt easy to move. You pay penalties,
22 And in the consumer aiudy that was sponsored
Neal R. Gtoss and Co., Inc, 202-234 -4433 Washington DC www.nealrgross.corn JA-2492' CONEIQENTIAL PSOC. 00004075 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 128 of 190 Page 122
1 as well, this comes Out in quite some detail.
2 §o, it is really a combination of factors_
3 SECRETARY LEW: Well, thank you
4 very much.
S We ran in a little bit of overtime
6 to give everyone a chance. f appreciate
7 everyone's indulgence on the time.
a I would invite Council mimbers Uho
P have other questions that they would. like to
10 ask to submit them and request the company
11 include responses to any questions- in the
12 materials that are due to be submitted by next
13 Monday-
14 And, on behalf of the Council, 1
15 would like to thank all of the representatives
16 from MetLife ho axe here for their
17 presentations. today.
18 And with that, this hearing, is
19 adjourned.
20 Thank you.
21 (Whereupon, at 4 : 54 ,p.m. , the
22 hearing was adjourned.)
Neal R, Gross and Co., Inc. 202-2344433 Washington DC lenvw.nealrgross.c&n JA-2493 CONFIDENTIAL FWC 00004076 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 129 of 190 Page 123
Neal R. Gross and Co., Mu: 202-234-4433 Washington DC 4Arvw nealrgrosstcom
CONFIDENTIAL Ft0C_Ci0004077 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 130 of 190 Page 124
Neal R. Gross and Co,, inc! 202-234-443'3- Washington DC vwvw.nealrgrosS, corn JA 2495 CONFIDENTIAL FSOC_00004078 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 131 of 190 Page X25
Neal R Gross artd Cot, In 202-234-443 Washington DC www.nealtgros*conl JA02494 CONFIDENTIAL FSOC_00004079 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 132 of 190 Page 12 6
Neat R. Gross and Co 202-234-443 Washington DC www nealrarosscorti 4A-24.7 CONFIDENTIAL FSOC._00004080 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 133 of 190 Page 127
Neal R. Gross and Co:, ino. 202-234-4433 Washington DC .www.nealrgrossscom JA4498 CIONIDENT1AL FS 00004081 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 134 of 190 Page 128
Neal R. Gross ancl Cm, Inc. 202-234-4433 Washington DC www.nealrgfossCOril JA.24,99 CO NF IDENTI AL FSOC__600 04082 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 135 of 190 Page 12 9
Neat R_ Gross and Co. Ina 202-234-4433 Washington DC wft.nealrgtossxon, JA.2500 CONFIDENTIAL FSQC;_00004083: Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 136 of 190 Page 130
Neal R. Gross and Co Iris 202-234-4433 Washington DC wmfv.n0-airgross,zom JA.2501 CONFIDENTIAL FSoc_00004u44 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 137 of 190
Page 1.31
Neal R. Gross and Co,, 202-234-4433 Washington DC www.nea.lrgr-oss,com JA-2502 CONFIDENTIAL FSOC_0000408& Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 138 of 190 Page 132
1
7
. _ Neal R. Gross and Cos, Inc. 202 -234 -4433 Washington DC www.nealigross.coni
JA-2503 CbliFIDENTIAL FSOC_00004086 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 139 of 190 Page 133
Neal R. Gross and Co. Inc. 202-284-4433 Washington DC www,nealrgrossxorn JA 2504 CONFIDENTIAL PSOC2)0004087 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 140 of 190 Page 13 4
Neal R. Gross and Ca , triC. 202-234-4433 Washington DC www.neairgrosS).COrn JA-2505 CONFIDENTIAL FSOC, 00004088. Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 141 of 190
Page 135
NeAl R, Gross and Coi. he, 202-234-4433 Washington DC www.nealrgross, COM
JA-25011 CONFIDENTIAL FS00 00004083 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 142 of 190 Page 136
Neal Ft Gross and Cek 202-234 -4433 Washington DC www_nealrgross corn JA-2507 CONFIDENTIAL ESDC _60004o9u Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 143 of 190 Page 137 . . . - - -.
64
I :4
ti.
t ;
1 ::}
' 1
I '
n,
7?,
I.:
ti
..,,i
, g : ,
0 0
,.ti,.
1:),
A ri .i
1,; ,,," . R ,:is
i 0
ij
iii! -77
ii
_ - 10
lir
C
..;.
'',1 S' ,.
i !:I
I
11,
' - 7
ii.
, (4,!1
<1.'' Neal R. Gross and Co,, MC. 202-234-443 Washington DC vo"v_nealrgrosscom
JA -28Q8 CONFIDENTIAL FS0000004091 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 144 of 190 Page 138
Neal R Gross and Co hi 2a2-234-4433 Washington DC www.nealrgr-oss.cOrn JA-2$09 CbNrIDENTIAL nt3C_110004092 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 145 of 190 Page 139
1
Neal R. Gross and Co,, 202-234-4433 Washington DC www.nealrgross.com JA4510 CONFIDENTIAL FSOCCX1004093 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 146 of 190 Page 140
II
_
Neal R_ Gross and Co., Inc: 262-234-4433 Washington DC www,nealrgross.corn JA-2511 CONFIDENTIAL FS00000(14094 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 147 of 190
141 ERTIFICATE
This is to certify that the foregoing transcript
In the matter of: Nonbank Financial Company Hearing
Before: US Treasury-FOSC
Date: 11-03-14
Place: Washington, DC
was duly recorded and accurately transcribed under my direction; further, that said transcript is a
true and accurate record of the proceedings.
Court Reporter
NEAL R. GROSS COURT REPORTERS AND TRANSCRIBERS 1323 RHODE ISLAND AVE., N.W. (202) 234-4433 JAAStiC, D.C. 20005-3701 www.nealrgross.com
CONFIDENTIAL FSOC_00004095 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 148 of 190
Met Life, Inc. 1095 Avenue of the Americas New York, NY 10036-6796 MetLife
Ricardo A. Anzaldua Executive Vice President General Counsel
August 6, 2014
Mr. Patrick Pinschmidt Deputy Assistant Secretary Financial Stability Oversight Council 1500 Pennsylvania Avenue, NW Washington, D.C. 20220
Re: Request for Consideration of an Activities-based Approach to Regulating Insurance in Lieu of Further Designations
Dear Mr. Pinschmidt:
I am writing to request that the Financial Stability Oversight Council (the Council) consider the same "activities-based" approach toward perceived systemic risk in the insurance industry, including Met Life, that it is considering for the asset management industry.
Following its meeting on July 31, 2014, the Council issued a "readout" stating that the Council has directed its staff "to undertake a more focused analysis of industry-wide products and activities to assess potential risks associated with the asset management industry."1 The Council's announcement followed the earlier release of a study by the Office of Financial Research (OFR) on asset management and financial stability, which the Council had requested "to better inform its analysis of whether-and how-to consider such firms for enhanced prudential standards and supervision under Section 113 of the Dodd-Frank Act."2 It also followed a conference on the asset management industry convened by the Council "to hear directly from the [asset management] industry and other stakeholders, including academics and public interest groups, on [the asset management industry and its activities]."3 At that conference, the Council heard from representatives of the Securities and Exchange Commission, the Bank of England, New York University,
1 Press Release, U.S. Treasury Dept, Financial Stability Oversight Council Meeting July 31, 2014 (July 31, 2014) (available at
2 Office of Fin. Research, Asset Management and Financial Stability, page 1 (Sept. 2013). 3 Press Release, U.S. Treasury Dep't, Financial Stability Oversight Council (FSOC) to ft s t Public Asset Management Conference (Mar. 28, 2014) (available at h
JA-2513 CONFIDENTIAL FSOC 00004096 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 149 of 190
Columbia Business School and the Wharton School, as well as several asset management companies.
These actions by the Council with respect to the asset management industry stand in sharp contrast to the actions taken by the Council with respect to the insurance industry and Met Life. The Council has not requested an analysis of potential systemic risks posed by the insurance industry before proceeding with designation decisions, despite a recommendation by the OFR's advisory committee on research that the OFR "should conduct a detailed study to determine whether and where systemic risk issues may arise in the insurance industry and how such risks are currently handled in the regulatory framework."4 In making that recommendation, the members of the advisory committee noted that:
[O]ur call for a study does not pre-suppose an answer to whether this sector poses any threats to financial stability. Rather, we believe it is necessary to understand more fully the role that such non-deposit-based institutions play in financial markets and to identify any potential impact on financial stability that this industry may have well before a systemic shock occurs.s
Furthermore, the Council has not reviewed the possible application of an activities-based approach toward any potential systemic risks within the insurance industry, but instead has proceeded to designate two insurers and is actively considering the designation of MetLife.
To be clear, MetLife believes that neither the business of insurance, nor the structure or operations of MetLife itself, pose a systemic risk to the financial system or warrant Federal Reserve oversight. Nonetheless, if the Council intends to proceed in the belief that Federal Reserve oversight in the industry may be necessary, it is important that an activities-based approach be considered as an alternative to designation of MetLife.
MetLife has actively promoted the idea that the Council consider adopting an activities-based approach to assessing potential risks associated with the insurance industry. The attachments to this letter document the long-running efforts by MetLife to encourage the Council to consider the approach it now appears to be adopting with respect to the asset management industry. These documents evidence the following sequence of events:
e May 16, 2012 testimony before the House Financial Services Committee Subcommittee on Financial Institutions and Consumer Credit of the US House of Representatives by William Wheeler, President of MetLife's Americas
4 :OFR Fin. Research Advisory Comm., Research. SUbcorarn., OFR. Study on the Insurance Sector Recommendation, 1 (Feb. 25, 2014) (available at
.5 Id. :at
2
JA-2514 CONFIDENTIAL FSOC 00004097 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 150 of 190
Division, recommending that the Council identify and regulate any activities engaged in by insurers that helped fuel the financial crisis (behind tab 1); April 10, 2013 commentary at the US Chamber of Commerce Capital Markets Summit in Washington, DC by MetLife Chairman, President and CEO Steven Kandarian, recommending that regulation focus on those activities that caused the financial crisis in the first place (behind tab 2); May 2, 2013 MetLife presentation to Staff of the Board of Governors of the Federal Reserve, analyzing an activities-based alternative framework to Basel for use in regulating insurance companies (full version behind tab 3 and condensed version behind tab 4).
Neither the Council nor the Federal Reserve has offered any reason why the approach suggested in these public statements and private analysis is not appropriate.6 In fact, no federal agency has responded in any fashion to these statements and analysis.
The divergence in treatment between the asset management industry and the insurance industry indicates an absence of standards in the designation process. The Council has made no attempt similar to its study of the asset management industry to study and evaluate the insurance industry or to consider applying an activities-based approach to any potential systemic risks posed by the insurance industry. Instead, it has pursued the designation of individual insurance companies and provided the public with little, if any, insight into the rationale for those designations. The insurance experts on the Council have dissented from those designations, and the Council has made no attempt to respond to those dissents.
Moreover, the Council has taken this disparate approach despite the fact that one of the authors of the Dodd-Frank Act has stated publicly that he sees no difference between the asset management industry and the insurance industry when it comes to systemic risk. At a July 23, 2014 hearing before the House Financial Services Committee, former Congressman Barney Frank told the Committee, "I don't think asset managers or insurance companies that just sell insurance as it's traditionally defined are systemically defined .... Their failure isn't going to have that systemic reverbatory [sic] effect."7
In response to these actions by the Council, I am writing on behalf of MetLife to formally request that, before taking any further actions on designations of insurance companies, including MetLife, the Council: (i) conduct an analysis of any potential systemic risk posed by the insurance industry; and (ii) determine whether to apply an activities- based approach to the industry.
6 The Dodd-Frank Act specifically authorizes the FSOC to use an activities-based approach to fulfill its systemic risk-related duties in the requirement to "make recommendations to primary financial regulatory agencies to apply new or heightened standards and safeguards for.financial activities or practices that could create or increase risks of significant liquidity, credit, or other problems spreading among bank holding companies, nonbank financial companies, and the United States financial markets." 12 U.S.C. 5322(a)(2)(K)(emphasis added). ' Assessing the Impact of the Dodd-Frank Act Four Years Later Before the H. Comm. on Fin. Sens, 113th Cong. (statement of the Honorable Barney Frank during question and answer session) (unofficial transcript).
3
JA-2515 CONFIDENTIAL FSOC_00004098 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 151 of 190
The application of an activities-based approach to the insurance industry would be more appropriate than a strained, and we believe arbitrary, designation of Met Life. Met Life has made extensive submissions to the Council demonstrating that the company and its activities do not pose a systemic risk to the financial stability of the United States, even if the company were subject to material financial distress. This conclusion was affirmed by MetLife's primary state regulator, Benjamin Lawsky, the Superintendent of the New York State Department of Financial Services, in a submission to the Council on July 20, 2014.
The application of an activities-based approach to regulating the business of insurance has been recognized as a more effective means to address industry-wide risks than the designation of individual companies.8 An activities-based approach would allow the Council to target any particular activities engaged in by insurers that may pose systemic risk, especially non-traditional and non-insurance activities. Moreover, an activities-based approach would have an important economic policy advantage: it would help mitigate the market distortions and anti-competitive effects that flow from designating individual companies and applying supervisory standards to those companies that are materially different from those applied to non-designated companies.
Met Life appreciates your consideration of this request and looks forward to your response.
A. Anzaldua
8 Daniel Tarullo, Governor, Bd. of Governors, Fed. Reserve Sys., Address at the 2011 Credit Markets Symposium (Mar. 31, 2011) (available at nO2D1 13
4
JA-2516 CONFIDENTIAL FSOC_00004099 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 152 of 190
Met Life, Inc. 1095 Avenue of the Americas. New York, NY 10036-6796
Ricardo A. Anzaidua Executive Vice President October 30, 2014 General Counsel
VIA ELECTRONIC MAIL
Patrick Pinschmidt Deputy Assistant Secretary Financial Stability Oversight Council Department of the Treasury 1500 Pennsylvania Avenue, N.W. Washington, D.C. 20220
Re: MetLife's Classification As A "Nonbank Financial Company" Under Section 102 Of The Dodd-Frank Act
Dear Mr. Pinschmidt:
In advance of MetLife's November 3, 2014 hearing to contest the findings in the Explanation of the Basis of the Financial Stability Oversight Council's Proposed Determination regarding IVIetLife ("NPD"), I write to reiterate that MetLife does not qualify for designation as a systemically important nonbank financial company by the Financial Stability Oversight Council ("FSOC") because it does not satisfy the statutory criteria set forth in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act" or "the Act"). In addition to failing to satisfy the requirements for designation as a systemically important nonbank financial company under Section 113(a)(2) of the Dodd- Frank Act, MetLife does not satisfy the predicate requirement of Section 113(a) that it constitute a "nonbank financial company." See Dodd-Frank Act § 113(a) (limiting designation authority to "determin[ing] that a U.S. nonbank financial company shall be supervised by the Board of Governors of the Federal. Reserve") (emphasis added); see also 12 C.F.R. § 1310.10.
Section 102 of the Act defines a "U.S. nonbank financial company" as a company that is incorporated or organized under the laws of the United States or any State and is "predominantly engaged in financial activities," Dodd-Frank Act § 102(a)(4)(3); see also 12 C.F.R. § 1310.2. The Act further provides that a company is "predominantly engaged in financial activities" if
(A) the annual gross revenues derived by the company and all of its subsidiaries from activities that are financial in nature (as defined in section 4(k) of the Bank Holding. Company Act of 1956) and, if applicable, from the ownership or control of one or more
JA-2517 CONFIDENTIAL FSOC_00004230 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 153 of 190
October 30, 2014 Page 2
insured depository institutions, represents 85 percent or more of the consolidated annual gross revenues of the company; or
(B) the consolidated assets of the company and all of its subsidiaries related to activities that are financial in nature (as defined in section 4(k) of the Bank Holding Company Act of 1956) and, if applicable, related to the ownership or control of one or more insured depository institutions, represents 85 percent or more of the consolidated assets of the company.
Dodd-Frank Act § 102(a)(6); see also 12 C.F.R. § 1310.2. In other words, to be deemed a "U.S. nonbank financial company" under Dodd-Frank, 85% of MetLife's consolidated assets or consolidated annual gross revenues must be attributable to "activities that are financial in nature," as that phrase is defined in Section 4(k) of the Bank Holding Company Act.
Section 4(k) identifies nine categories of activities that are deemed "financial" in nature for purposes of the FSOC's designation authority. The NPD refers to two of these provisions: Section 4(k)(4)(B) and the Federal Reserve's related FSOC regulation, 12 C.F.R. part 242, app. A, (b), which restates Section 4(k)(4)(B)'s statutory language; and, secondly, 12 C.F.R. part 242, app. A, (i), which is the Federal Reserve's codification of Section 4(k)(4)(I) of the Bank Holding Company Act for FSOC purposes. Citing these provisions, the NPD finds that MetLife is "predominantly engaged in financial activities." NPD at 28 & nn.85-86. In fact, however, MetLife does not qualify as a "nonbank financial company" under either section.
Section 4(K)(4)(B) refers in full to:
Insuring, guaranteeing, or indemnifying against loss, harm, damage, illness, disability, or death, or providing or issuing annuities, and acting as principal, agent, or broker for purposes of the foregoing, in any State.
12 U.S.C. § 1843(k)(4)(B). On its face, Section 4(k)(4)(B) covers the activities identified only when they occur "in any State." 12 U.S.C. § 1843(k)(4)(B) (emphasis added); see also 12 C.F.R. § 225.86(c); 12 C.F.R. Part 242, app. A, (b) (repeating statutory definition). Where statutory language is clear, "that is the end of the matter," and an agency "must give effect to the unambiguously expressed intent of Congress." Chevron USA Inc. v. NRDC, Inc., 467 U.S. 837, 843-44 (1984); see also Time Warner Entm't Co. v. FCC, 56 F.3d 151, 190 (D.C. Cir. 1995) (rejecting agency's interpretation of statute where it conflicted with "a clear statutory definition"). Accordingly, Section 4(k)(4)(B) cannot be construed to extend to any insurance activities conducted by MetLife entities outside of the United States.
JA-2518 CONFIDENTIAL FSOC_00004231 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 154 of 190
October 30, 2014 Page 3
Similarly, Section 4(k)(4)(I) provides:
Directly or indirectly acquiring or controlling, whether as principal, on behalf of 1 or more entities (including entities, other than a depository institution or subsidiary of a depository institution, that the bank holding company controls) or otherwise, shares, assets, or ownership interests (including debt or equity securities, partnership interests, trust certificates or other instruments representing ownership) of a company or other entity, whether or not constituting control of such company or entity, engaged in any activity not authorized pursuant to this section if-(i) the shares, assets, or ownership interests are not acquired or held by a depository institution or a subsidiary of a depository institution; (ii) such shares, assets, or ownership interests are acquired and held by an insurance company that is predominantly engaged in underwriting life, accident and health, or property and casualty insurance (other than credit-related insurance) or providing and issuing annuities; (iii) such shares, assets, or ownership interests represent an investment made in the ordinary course of business of such insurance company in accordance with relevant State law governing such investments; and (iv) during the period such shares, assets, or ownership interests are held, the bank holding company does not routinely manage or operate such company except as may be necessary or required to obtain a reasonable return on investment.
12 U.S.C. § 1843(k)(4)(I) (emphasis added); see also 12 C.F.R. Part 242, app. A, (i).
As indicated by the italicized text, this Section also refers to activities subject to "State law." See also 12 C.F.R. §§ 225.86(c), 242.3; 12 C.F.R. Part 242, app. A, (i) (repeating statutory requirement that the shares represent an investment made "in accordance with relevant state law"). Accordingly, under this section too, MetLife's foreign activities cannot be included in determining whether the 85% threshold is met. In relying on these provisions to characterize MetLife as a "nonbank financial company," the NPD fails to draw this crucial distinction between foreign and domestic activities. See NPD at 28. Yet in the case of Metlife, more than 30 percent of consolidated assets and more than 25 percent of consolidated revenues are associated with insurance activities outside the United States, as reported in the Company's 2013 10-K. It follows that MetLife's activities in the U.S., which fall within Sections 4(k)(4)(B) and (I) of the Bank Holding Company Act, are insufficient to satisfy the 85% threshold. See also 12 C.F.R. Part 242, app. A, (b), (i).
JA-2519 CONFIDENTIAL FSOC_00004232 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 155 of 190
Oct Ober 30, 2014 Page 4
The NPD thoefore erred in the bases it cited for determini ©g that Met Life is "predominantly engaged in financial activities." While this is sufficient reason in itself for the Council to reject the designation. proposed in the NPD, in fact none of the provisions of Section 4(kX4) establishes that Met Life is predominantly engaged in financial activities.
Two other provisions of Section. 4(k)(4) have been interpreted by the Board of Governors of the Federal Reserve System ("Board") to address certain insurance activities.' Section 4(k)(4)(F) has been interpreted by the Board to include certain enumerated authorized activities, including credit life insurance that secures rephytnent of a loan made by the institution itself or an affiliate and other very limited insurance activities permitted to. bank holding companies that are not financial holding companies.' See 12 C.F.R. §§ 225.28, 225.86; see also' 12 C.F.R. Part 242, app. A, (1). Although Section 4(k)(4){17), unlike Sections 4(kX4)(B) and 4(k)(4)(1), is not limited to "State" activities, and thus may be viewed as applying globally, it cannot serve as a basis for characterizing MetLife as a nonbank financial1.11MEM=1111., company because, with the exception MetLife of does not engage in activities outside of the 11S. t are ctha o by the Boa rdvered's Section 4(kX4)(F) regulations related to insurance. Accordingly, that Section has no bearing on whether MetLife is predominantly engaged in financial activities.
Finally, under Section 4(kX4XG) of the Bank Holding Company Act, the Board has characterized certain insurance activities as financial in nature, including all insurance agency activities, 12 C.F.R. § 211.10(a)(9), and "[u]nderwriting life, annuity, pension fund- related, and other types of insurance, where the associated risks have been previously determined by the Board to be actuarially predictable," id. §211.10(a)(17). However, Section 4(k){4XG), like Sections 4(k)(4)(B) and (I), is limited by its terms to activities "in
The NPD relied solely on Sections 4(k)(4)(B) and (I) as the bases for determining that MetLife is predominantly engaged in financial activities. Although,MetLife is setting forth additional analysis of it activities under Section 4(k), FSOC may not rely on any other basis for determining MetLife to be predominantly engaged in -financial activities since MetLife has been given no opportunity to respond to any contention that FSQC might make in connection with any other provision. 2 That Section refers in full to; "Engaging in any activity that the Board has determified, by order or regulation that is in effect on November 12, 1999, to be so closely related to banking or Managing or controlling banks as to be a proper incident thereto (subjedt to the same terms and conditions contained in such order or regulation, unless modified by the Board)," 12 U.S.C. § 1843(k)(4)(F).
JA-2520 CONFIDENTIAL .F800_00004233 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 156 of 190
October 30, 2014 Page 5
the United States."3 Therefore, Met Life's foreign insurance activities cannot be included pursuant to this section for purposes of calculating whether Met Life meets the 85% revenues or assets threshold under Section 102(a)(6) of the Dodd-Frank Act.
For these reasons, and contrary to the NPD's finding (see NPD at 28), Met Life is not "predominantly engaged in financial activities" within the meaning of Section 102(a)(6) of the Dodd-Frank Act and thus cannot be classified as a "U.S, nonbank financial corporation" that is eligible for designation as a systemically important financial institution under Section 113(a)(1) of the Act. Because Met Life is not "predominantly engaged in financial activities," Met Life can only be designated if FSOC finds that it is "organized or operates in such a manner to evade the application of [Title I of the Dodd-Frank Act]." Dodd-Frank Act § 113(c); see also 12 C.F.R. § 1310.12. FSOC has not, and cannot, make such a finding. For this reason, and those set forth in. Met Life's October 15, 2014 submission to FSOC, Met Life is not an appropriate candidate for designation as a systemically important financial institution.
Sincerely,
Rticaido A. Anzaldua
That Section refers in full to: "Engaging, in the United States, in any activity that - (I) a bank holding company may engage in outside of the United States; and (ii) the Board has determined, under regulations prescribed or interpretations issued pursuant to subsection (c)(13) of this section (as in effect on the day before November 12, 1999) to be usual in connection with the transaction of banking or other financial operations abroad." 12 U.S.C. § 1843(k)(4)(G).
JA-2521 CONFIDENTIAL FSOC_00004234 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 157 of 190
BOARD OF GOVERNORS OF THC FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551
ADDRESS OFFICIAL CORRESPONDENCE TO THE BOARD October 29, 2010
Mr. Steven J. Goulart Senior Vice President and Treasurer MetLife, Inc. 1095 Avenue of the Americas New York, New York 10036
Dear Mr. Goulart:
This is in response to the notice by MetLife, Inc. ("MetLife"), New York, New York, requesting the Board's prior approval of its proposed acquisition of all the voting shares of American Life Insurance Company ("Alico") and Delaware American Life Insurance Company ("Delam"), both of Wilmington, Delaware (collectively, the "Alico Companies"). The notice is required under section 163(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank").1
MetLife is a financial holding company within the meaning of the Bank Holding Company Act ("BHC Act").2 The Alico Companies underwrite and sell life, health, and property casualty insurance and annuities, and they provide asset management, investment advice, and employee benefits consulting services, all of which are activities that are financial in nature under section 4(k)(4) of the BHC Act.3
Section 4(k) of the BHC Act generally permits financial holding companies such as MetLife to acquire shares of companies that conduct activities that are financial in nature without prior Board approval.4 Section 163(b) of Dodd-Frank contains an exception to this rule, however, that requires prior Board approval of acquisitions by bank holding companies with assets of $50 billion or more of shares of companies with assets of at least $10 billion that are engaged in activities under section 4(k) of the BHC
Pub. L. No. 111-203, § 163(b), 124 Stat. 1376, 1422-23 (2010). 2 12 U.S.C. § 1843(l). 3 12 U.S.C. § 1843(k)(4). 4 12 U.S.C. § 1843(k)(6).
JA-2566 CONFIDENTIAL FSOC_00004366 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 158 of 190
2
Act. Met Life and the Alico Companies exceed these asset thresholds and, accordingly, the proposal requires the Board's prior approval.5
In reviewing a notice under section 163 of Dodd-Frank, the Board is required to consider the standards listed in section 4(j)(2) of the BHC Act.6 Accordingly, the Board has considered carefully whether the proposed acquisition "can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices."' In addition, the Board has considered the extent to which the proposed acquisition "would result in greater or more concentrated risks to global or United States financial stability or the United States economy."8
As part of its review of the proposal under the factors enumerated in section 4(j)(2) of the BHC Act, the Board has considered carefully the financial and managerial resources of the companies involved, the effect of the proposal on competition in the relevant markets, and the public benefits of the proposal. In reviewing the financial resources of MetLife and the Alico Companies, the Board has considered the financial condition of both organizations, including information about capital adequacy, asset quality, and earnings performance. The Board also has evaluated the financial condition of the combined organization at consummation, including its projected capital position, asset quality, and earnings prospects, and the impact of the proposed funding of the transaction. The Board notes that MetLife's subsidiary depository institution is well capitalized and would remain so on consummation of the proposal. Based on its review of the record, including all the considerations noted above, the Board finds that MetLife has sufficient financial resources to effect the proposal.9
The Board also has considered the managerial resources of the organizations involved and the proposed combined organization and, in particular, has reviewed the examination records of MetLife and its subsidiary depository institution, including assessments of their management, risk-management systems, and operations.
As of June 30, 2010, MetLife had total consolidated assets of approximately $574 billion. Alico had total assets of $109.6 billion, as of May 31, 2010, and Delam had total assets of $66.2 million, as of June 30, 2010.
6 Dodd-Frank at § 163(b)(4). 12 U.S.C. § 1843(j)(2). 8 Dodd-Frank § 163(b)(4). 9 The proposed transaction is structured as a partial share exchange and a partial cash purchase of shares. To fund the cash purchase of shares, MetLife will use existing resources, along with proceeds from issuing additional debt and equity.
JA-2567 CONFIDENTIAL FSOC_00004367 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 159 of 190
3
In addition, the Board has considered its supervisory experiences and those of other relevant federal supervisory agencies with MetLife and its record of compliance with applicable banking and anti-money laundering laws. The Board also has considered carefully MetLife's plans for implementing the proposal, including its risk-management systems after consummation. Based on all the facts of record, the Board has concluded that considerations relating to the financial and managerial resources of the organizations involved in the proposal are consistent with approval.
In addition, the Board carefully considered the competitive effects of MetLife's proposed acquisition of the Alico Companies. In the United States, MetLife and the Alico Companies both underwrite and sell life, health, and accident insurance and annuities. The Alico Companies, however, derive limited revenues from their U.S. operations.1° The U.S. markets in which MetLife and the Alico Companies compete are regional or national in scope and unconcentrated, with numerous competitors. As a result, the Board expects that consummation of the proposal would have a de minimis effect on competition for these services.
The Board also has reviewed carefully the public benefits and possible adverse effects of the proposal. The proposal is part of a global divestiture program by American International Group, Inc. ("AIG") to repay the financial assistance it received from the U.S. government. For the reasons discussed above and based on all the facts of record, the Board has determined that consummation of the proposal is not likely to result in significant adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices, and that consummation of the proposal can reasonably be expected to produce public benefits that would outweigh any likely adverse effects. Accordingly, the Board has determined that the balance of the public benefits required to be considered is consistent with approval.
As required by section 163(b) of Dodd-Frank, the Board also has considered the extent to which the proposed acquisition would result in greater or more concentrated risks to global or United States financial stability or the United States economy. In its review under this factor, the Board has considered whether the proposal would result in a material increase in risks to financial stability, due to an increase in the size of the acquirer or in the extent of the interconnectedness of the financial system, or a reduction in the availability of substitute providers of critical financial products or services. In particular, the Board notes that because the Alico Companies' business is conducted primarily overseas, the acquisition will not result in a material increase in MetLife's share of the U.S. life insurance market, and will not cause the company to become a critical provider of any product or service in the United States.
10 For their fiscal year ending November 30, 2009, the Alico Companies derived 2 percent of their total revenues from U.S. operations, or approximately $280 million.
JA-2568 CONFIDENTIAL FSOC_00004368 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 160 of 190
4
The interconnectedness of the Alico Companies to the other parts of the U.S. financial system is also limited and the Alico Companies are not substantially involved in credit derivative markets. The acquisition is not likely to materially reduce the availability of substitute providers of any critical financial products or services. Furthermore, the transaction will contribute to reducing the size and scope of AIG, a larger company. Based on all the facts of record, the Board concludes that considerations under this factor are consistent with approval.
Based on all the facts of record, including the commitments made to the Board in connection with the notice, the Board has determined that the notice should be and hereby is, approved. In making this determination, the Board has relied on all the information, representations, and commitments provided by MetLife to the Board in connection with the notice. This determination also is subject to the Board's authority to require modification or termination of the activities of a bank holding company or any of its subsidiaries as the Board finds necessary to ensure compliance with, or prevent evasion of, the provisions and purposes of the BHC Act and the Board's regulations and orders issued thereunder.
Sincerely yours,
f2A-eI/t-cl e. V. q7kLevv.___. Robert deV. Frierson Deputy Secretary of the Board
cc: Ivan J. Hurwitz, Vice President Federal Reserve Bank of New York
JA-2569 CONFIDENTIAL FSOC_00004369 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 161 of 190
5
U:\Labitzky \Current Projects\MetLife, Inc. [6118]\Final ApprovalLetter.1029.fordist.doc PFH:DAL:se
bcc: Kathleen O'Day Rich Ashton Paul Hannah Dominic Labitzky Sharon Ellis Donna Faircloth Rose Leggon Robin Prager Betsy Howes-Bean Arlene Mayeda Board Records Legal Records (2)
JA-2570 CONFIDENTIAL FSOC_00004370 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 162 of 190
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K (Mark One) 2 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-15787 MetLife, Inc. (Exact name of registrant as specified in its charter)
Delaware 13-4075851 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
200 Park Avenue, New York, N.Y. 10166-0188 (Address of principal (Zip Code) executive offices)
(212) 578-2211 (Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered Common Stock, par value $0.01 New York Stock Exchange Floating Rate Non-Cumulative Preferred Stock, Series A, par value $0.01 New York Stock Exchange 6.50% Non-Cumulative Preferred Stock, Series B, par value $0.01 New York Stock Exchange Common Equity Units New York Stock Exchange 5.875% Senior Notes New York Stock Exchange 5.375% Senior Notes Irish Stock Exchange 5.25% Senior Notes Irish Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes 2 No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No 2 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 2 No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit andpost such files). Yes 2 No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 2
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See thedefinitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer 2 Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No 2 The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2011 was approximately $46 billion. At Febmary 21, 2012, 1,060,330,384 shares of the registrant's common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from the registrant's definitive proxy statement for the Annual Meeting of Shareholders to beheld on April 24, 2012, to be filed by the registrant with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the year ended December 31, 2011.
JA-2571 CONFIDENTIAL FSOC_00004371 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 163 of 190
Table of Contents
Table of Contents
Page Number Part I Item 1. Business 4 Item 1A. Risk Factors 32 Item 1B. Unresolved Staff Comments 71 Item 2. Properties 71 Item 3. Legal Proceedings 72 Item 4. Mine Safety Disclosures 72 Part II Item 5. Market for Registrant's Common Equity. Related Stockholder Matters and Issuer Purchases of Equity Securities 72 Item 6. Selected Financial Data 74 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 77 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 192 Item 8. Financial Statements and Supplementary Data 203 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 439 Item 9A. Controls and Procedures 439 Item 9B. Other information 441 Part III Item 10. Directors, Executive Officers and Corporate Governance 442 Item 11. Executive Compensation 442 Item 12. Security Ownership of Certain Beneficial Owners arid Management and Related Stockholder Matters 442 Item 13. Certain Relationships and Related Transactions. and Director Independence 445 Item 14. Principal Accountant Fees and Services 445 Part IV Item 15. Exhibits and Financial Statement Schedules 446
Signatures 447
Exhibit Index E-1 EX-3,1 EX-3.2 EX-3.3 EX-3.4 EX -3.5 EX-3 .6 EX-4.1(a) EX-4.45 EX-4.82 EX-10.10 EX-10.11 EX-10.35 EX-10,45 EX-10.46 EX-10.47 EX-10.48 EX-10,49 EX-10.58 EX-10.66 EX-10.67 EX-10.74 EX-10.75 EX-10.76 EX-10.80 EX-10.81 EX-10.88 EX-10.89 EX-10.90 EX-10.93 EX-10,94 EX-12.1 EX-21.1
JA-2572 CONFIDENTIAL FSOC_00004372 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 164 of 190
EX-23.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2 EX-101 INSTANCE DOCUMENT EX-101 SCHEMA DOCUMENT EX-101 CALCULATION LINKBASE DOCUMENT EX-101 LABELS LINKBASE DOCUMENT EX-101 PRESEVIKTION LINKBASE DOCUMENT EX-101 DEFINMON LINKBASE DOCUMENT
JA-2573 CONFIDENTIAL FSOC_00004373 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 165 of 190
Table of Contents
As used in this Form 10-K, "Met Life," the "Company," "we," "our" and "us" refer to MetLife, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates. Note Regarding Forward-Looking Statements This Annual Report on Form 10-K, including Management's Discussion and Analysis of Financial Condition and Results of Operations, may contain or incorporate by reference information that includes or is based upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with a discussion of future operating or financial performance. In particular, these include statements relating to future actions, prospective services or products, future performance or results of current and anticipated services or products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, trends in operations and financial results. Any or all forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks and uncertainties. Many such factors will be important in determining the actual future results of MetLife, Inc., its subsidiaries and affiliates. These statements are based on current expectations and the current economic environment. They involve a number of risks and uncertainties that are difficult to predict. These statements are not guarantees of future performance. Actual results could differ materially from those expressed or implied in the forward-looking statements. Risks, uncertainties, and other factors that might cause such differences include the risks, uncertainties and other factors identified in MetLife, Inc.'s filings with the U.S. Securities and Exchange Commission (the "SEC"). These factors include: (1) difficult conditions in the global capital markets; (2) concerns over U.S. fiscal policy and the trajectory of the national debt of the U.S., as well as rating agency downgrades of U.S. Treasury securities; (3) uncertainty about the effectiveness of governmental and regulatory actions to stabilize the financial system, the imposition of fees relating thereto, or the promulgation of additional regulations; (4) increased volatility and disruption of the capital and credit markets, which may affect our ability to seek financing or access our credit facilities; (5) impact of comprehensive fmancial services regulation reform on us; (6) economic, political, legal, currency and other risks relating to our international operations, including with respect to fluctuations of exchange rates; (7) exposure to financial and capital market risk, including as a result of the disruption in Europe and possible withdrawal of one or more countries from the Euro zone; (8) changes in general economic conditions, including the performance of fmancial markets and interest rates, which may affect our ability to raise capital, generate fee income and market-related revenue and finance statutory reserve requirements and may require us to pledge collateral or make payments related to declines in value of specified assets; (9) potential liquidity and other risks resulting from our participation in a securities lending program and other transactions; (10) investment losses and defaults, and changes to investment valuations; (11) impairments of goodwill and realized losses or market value impairments to illiquid assets; (12) defaults on our mortgage loans; (13) the defaults or deteriorating credit of other financial institutions that could adversely affect us; (14) our ability to address unforeseen liabilities, asset impairments, or rating actions arising from acquisitions or dispositions, including our acquisition of American Life Insurance Company and Delaware American Life Insurance Company (collectively, "ALICO") and to successfully integrate and manage the growth of acquired businesses with minimal disruption; (15) uncertainty with respect to the outcome of the closing agreement entered into with the United States Internal Revenue Service in connection with the acquisition of ALICO; (16) the dilutive impact on our stockholders resulting from the settlement of common equity units issued in connection with the acquisition of ALICO or otherwise; (17) MetLife, Inc.'s primary reliance, as a holding company, on dividends from its subsidiaries to meet debt payment obligations and the applicable regulatory restrictions on the ability of the subsidiaries to pay such dividends; (18) downgrades in our claims paying ability, financial strength or credit ratings; (19) ineffectiveness of risk management policies and procedures; (20) availability and effectiveness of reinsurance or indemnification arrangements, as well as default or failure of counterparties to perform; (21) discrepancies between actual claims experience and assumptions used in setting prices for our products and establishing the liabilities for our obligations for future policy benefits and claims; (22) catastrophe losses; (23) heightened competition, including
JA-2574 CONFIDENTIAL FSOC_00004374 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 166 of 190
Table of Contents
with respect to pricing, entry of new competitors, consolidation of distributors, the development of new products by new and existing competitors, distribution of amounts available under U.S. government programs, and for personnel; (24) unanticipated changes in industry trends; (25) changes in assumptions related to investment valuations, deferred policy acquisition costs, deferred sales inducements, value of business acquired or goodwill; (26) changes in accounting standards, practices and/or policies; (27) increased expenses relating to pension and postretirement benefit plans, as well as health care and other employee benefits; (28) exposure to losses related to variable annuity guarantee benefits, including from significant and sustained downturns or extreme volatility in equity markets, reduced interest rates, unanticipated policyholder behavior, mortality or longevity, and the adjustment for nonperformance risk; (29) deterioration in the experience of the "closed block" established in connection with the reorganization of Metropolitan Life Insurance Company; (30) adverse results or other consequences from litigation, arbitration or regulatory investigations; (31) inability to protect our intellectual property rights or claims of infringement of the intellectual property rights of others; (32) discrepancies between actual experience and assumptions used in establishing liabilities related to other contingencies or obligations; (33) regulatory, legislative or tax changes relating to our insurance, banking, international, or other operations that may affect the cost of, or demand for, our products or services, or increase the cost or administrative burdens of providing benefits to employees; (34) the effects of business disruption or economic contraction due to disasters such as terrorist attacks, cyberattacks, other hostilities, or natural catastrophes, including any related impact on our disaster recovery systems, cyber- or other information security systems and management continuity planning; (35) the effectiveness of our programs and practices in avoiding giving our associates incentives to take excessive risks; and (36) other risks and uncertainties described from time to time in MetLife, Inc.'s filings with the SEC.
MetLife, Inc. does not undertake any obligation to publicly correct or update any forward-looking statement if MetLife, Inc. later becomes aware that such statement is not likely to be achieved. Please consult any further disclosures MetLife, Inc. makes on related subjects in reports to the SEC. Note Regarding Reliance on Statements in Our Contracts See "Exhibit Index - Note Regarding Reliance on Statements in Our Contracts" for information regarding agreements included as exhibits to this Annual Report on Form 10-K.
JA-2575 CONFIDENTIAL FSOC_00004375 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 167 of 190
Table of Contents
Part I Item 1. Business
As used in this Form 10-K, "Met Life," the "Company," "we," "our" and "us" refer to Met Life, Inc., a Delaware corporation incorporated in 1999, its subsidiaries and affiliates.
With a more than 140-year history, we have grown to become a leading global provider of insurance, annuities and employee benefit programs, serving 90 million customers in over 50 countries. Through our subsidiaries and affiliates, we hold leading market positions in the United States, Japan, Latin America, Asia Pacific, Europe and the Middle East. Over the past several years, we have grown our core businesses, as well as successfully executed on our growth strategy. This has included completing a number of transactions that have resulted in the acquisition and, in some cases, divestiture of certain businesses while also further strengthening our balance sheet to position MetLife for continued growth. MetLife is organized into six segments: Insurance Products, Retirement Products, Corporate Benefit Funding and Auto & Home (collectively, "U.S. Business"), and Japan and Other International Regions (collectively, "International"). In addition, the Company reports certain of its results of operations in Corporate & Other, which includes MetLife Bank, National Association ("MetLife Bank") and other business activities. On November 21, 2011, MetLife, Inc. announced that it will be reorganizing its business into three broad geographic regions: The Americas; Europe, the Middle East and Africa ("EMEA"); and Asia, and creating a global employee benefits business to better reflect its global reach. While the Company has initiated certain changes in response to this announcement, including the appointment of certain executive leadership into some of the roles designed for the reorganized structure, management continued to evaluate the performance of the operating segments under the existing segment structure as of December 31, 2011. In addition, management continues to evaluate the Company's segment performance and allocated resources and may adjust such measurements in the future to better reflect segment profitability. In December 2011, MetLife Bank and MetLife, Inc. entered into a definitive agreement to sell most of the depository business of MetLife Bank. The transaction is expected to close in the second quarter of 2012, subject to certain regulatory approvals and other customary closing conditions. Additionally, in January 2012, MetLife, Inc. announced it is exiting the business of originating forward residential mortgages (together with MetLife Bank's pending actions to exit the depository business, including the aforementioned December 2011 agreement, the "MetLife Bank Events"). Once MetLife Bank has completely exited its depository business, MetLife, Inc. plans to terminate MetLife Bank's Federal Deposit Insurance Corporation ("FDIC") insurance, putting MetLife, Inc. in a position to be able to deregister as a bank holding company. See "- U.S. Regulation - Financial Holding Company Regulation." The Company continues to originate reverse mortgages and will continue to service its current mortgage customers. See Note 2 of the Notes to the Consolidated Financial Statements. In November 2011, the Company entered into an agreement to sell its insurance operations in the Caribbean region, Panama and Costa Rica (the "Caribbean Business"). The sale is expected to close in the second quarter of 2012 subject to regulatory approval and other customary closing conditions. See Note 2 of the Notes to the Consolidated Financial Statements.
On November 1, 2010 (the "Acquisition Date"), MetLife, Inc. completed the acquisition of American Life Insurance Company ("American Life") from AM Holdings LLC (formerly known as ALICO Holdings LLC) ("AM Holdings"), a subsidiary of American International Group, Inc. ("AIG"), and Delaware American Life Insurance Company ("DelAm") from AIG (American Life, together with DelAm, collectively, "ALICO") (the "Acquisition"). ALICO's fiscal year-end is November 30. Accordingly, the Company's consolidated financial statements reflect the assets and liabilities of ALICO as of November 30, 2011 and 2010, and the operating results of ALICO for the year ended November 30, 2011 and the one month ended November 30, 2010. The assets, liabilities and operating results relating to the Acquisition are included in the Japan and Other International Regions segments. Prior year results have been adjusted to conform to the current year presentation of segments. See Note 2 of the Notes to the Consolidated Financial Statements.
JA-2576 CONFIDENTIAL FSOC_00004376 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 168 of 190
Table of Contents
In the U.S., we provide a variety of insurance and financial services products - including life, dental, disability, auto and homeowners insurance, guaranteed interest and stable value products, and annuities - through both proprietary and independent retail distribution channels, as well as at the workplace. This business serves approximately 60,000 group customers, including over 90 of the top one hundred FORTUNE 500 1, companies, and provides protection and retirement solutions to millions of individuals.
Outside the U.S., we operate in Japan and over 50 countries within Latin America, Asia Pacific, Europe and the Middle East. MetLife is the largestlife insurer in Mexico and also holds leading market positions in Japan, Poland, Chile and Korea. This business provides life insurance, accident and health insurance, credit insurance, annuities, endowment and retirement & savings products to both individuals and groups. We believe our international operations will grow more quickly than our U.S. Business in the future.
Operating revenues derived from any customer did not exceed 10% of consolidated operating revenues in any of the last three years. Financial information, including revenues, expenses, operating earnings, and total assets by segment, is provided in Note 22 of the Notes to the Consolidated Financial Statements. Operating revenues and operating earnings are performance measures that are not based on accounting principles generally accepted in the United States of America ("GAAP"). See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for definitions of such measures. For financial information related to revenues, total assets, and goodwill balances by geographic region, see Note 7 and Note 22 of the Notes to the Consolidated Financial Statements.
We are one of the largest institutional investors in the U.S. with a $522 billion general account portfolio invested primarily in investment grade corporate bonds, structured finance securities, commercial and agricultural mortgage loans, U.S. Treasury and agency securities, as well as real estate and corporate equity. Over the past several years, we have taken a number of actions to further diversify and strengthen our general account portfolio.
Our well-recognized brand, leading market positions, competitive and innovative product offerings and financial strength and expertise should help drive future growth and enhance shareholder value, building on a long history of fairness, honesty and integrity. Over the course of the next several years, we will pursue the following objectives to achieve our goals:
Global Presence
Focus on targeted, disciplined global growth of our businesses
Leverage our broad and diverse set of distribution channels and products
Become a more customer-centric organization Brand
Extend the reach of our widely recognized brand to access customers in key markets Financial Strength Build on our strong risk management and investment expertise
Focus on margin improvement and return on equity expansion
Maintain balance between growth, profitability and risk
Focus on pursuing growth that will add value to the Company and achieve return on equity in excess of our long-term cost of capital
Take a portfolio view of the business and invest capital in core markets
JA-2577 CONFIDENTIAL FSOC_00004377 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 169 of 190
Table of Contents
Talent - Further our commitment to a diverse, high performance workplace U.S. Business
Overview Insurance Products
Our Insurance Products segment offers a broad range of protection products and services aimed at serving the financial needs of our customers throughout their lives. These products are sold to individuals and corporations, as well as other institutions and their respective employees. We have built a leading position in the U.S. group insurance market through long-standing relationships with many of the largest corporate employers in the U.S., and we are one of the largest issuers of individual life insurance products in the U.S. Our Insurance Products segment is organized into three distinct businesses: Group Life, Individual Life and Non-Medical Health. Our Group Life insurance products and services include variable life, universal life, and term life products. We offer group insurance products as employer-paid benefits or as voluntary benefits where all or a portion of the premiums are paid by the employee. These group products and services also include employee paid supplemental life and are offered as standard products or may be tailored to meet specific customer needs. Our Individual Life insurance products and services include variable life, universal life, term life and whole life products. Additionally, through our broker-dealer affiliates, we offer a full range of mutual funds and other securities products. The elimination of transactions from activity between the segments within U.S. Business occurs within Individual Life.
The major products within both Group Life and Individual Life are as follows:
Variable Life. Variable life products provide insurance coverage through a contract that gives the policyholder flexibility in investment choices and. depending on the product, in premium payments and coverage amounts, with certain guarantees. Most importantly, with variable life products, premiums and account balances can be directed by the policyholder into a variety of separate account investment options or directed to the Company's general account. In the separate account investment options, the policyholder bears the entire risk of the investment results. We collect specified fees for the management of the investment options. The policyholder's cash value reflects the investment return of the selected investment options, net of management fees and insurance-related and other charges. In some instances, third-party money management firms manage these investment options. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience. Universal Life. Universal life products provide insurance coverage on the same basis as variable life, except that premiums, and the resulting accumulated balances, are allocated only to the Company's general account. Universal life products may allow the insured to increase or decrease the amount of death benefit coverage over the term of the contract and the owner to adjust the frequency and amount of premium payments. We credit premiums to an account maintained for the policyholder. Premiums are credited net of specified expenses. Interest is credited to the policyholder's account at interest rates we determine, subject to specified minimums. Specific charges are made against the policyholder's account for the cost of insurance protection and for expenses. With some products, by maintaining a certain premium level, policyholders may have the advantage of various guarantees that may protect the death benefit from adverse investment experience.
Term Life. Term life products provide a guaranteed benefit upon the death of the insured for a specified time period in return for the periodicpayment of premiums. Specified coverage periods range from one year to
JA-2578 CONFIDENTIAL FSOC_00004378 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 170 of 190
Table of Contents
30 years, but in no event are they longer than the period over which premiums are paid. Death benefits may be level over the period or decreasing. Decreasing coverage is used principally to provide for loan repayment in the event of death. Premiums may be guaranteed at a level amount for the coverage period or may be non-level and non-guaranteed. Term insurance products are sometimes referred to as pure protection products, in that there are typically no savings or investment elements. Term contracts expire without value at the end of the coverage period when the insured party is still living.
Whole Life. Whole life products provide a guaranteed benefit upon the death of the insured in return for the periodic payment of a fixed premium over a predetermined period. Premium payments may be required for the entire life of the contract period, to a specified age or period, and may be level or change in accordance with a predetermined schedule. Whole life insurance includes policies that provide a participation feature in the form of dividends. Policyholders may receive dividends in cash or apply them to increase death benefits, increase cash values available upon surrender or reduce the premiums required to maintain the contract in-force. Because the use of dividends is specified by the policyholder, this group of products provides significant flexibility to individuals to tailor the product to suit their specific needs and circumstances, while at the same time providing guaranteed benefits. Our Non-Medical Health products and services include dental insurance, group short- and long-term disability, individual disability income, long-term care ("LTC"), critical illness and accidental death & dismemberment coverages. Other products and services include employer-sponsored auto and homeowners insurance provided through the Auto & Home segment and prepaid legal plans. We also sell administrative services-only ("ASO") arrangements to some employers. The major products in this area are:
Dental. Dental products provide insurance and ASO plans that assist employees, retirees and their families in maintaining oral health while reducing out-of-pocket expenses and providing superior customer service. Dental plans include the Preferred Dentist Program and the Dental Health Maintenance Organization.
Disability. Disability products provide a benefit in the event of the disability of the insured. In most instances, this benefit is in the form of monthly income paid until the insured reaches age 65. In addition to income replacement, the product may be used to provide for the payment of business overhead expenses for disabled business owners or mortgage payment protection. This is offered on both a group and individual basis. Long-term Care. LTC products provide protection against the potentially high costs of LTC services. They generally pay benefits to insureds who need assistance with activities of daily living or have a cognitive impairment. Although we discontinued the sale of these products in 2010, we continue to support our existing policyholders. Retirement Products
Our Retirement Products segment offers a variety of variable and fixed annuities that are primarily sold to individuals and employees of corporations and other institutions. The major products in this area are:
Variable Annuities. Variable annuities provide for both asset accumulation and asset distribution needs. Variable annuities allow the contractholder to make deposits into various investment options in a separate account, as determined by the contractholder. The risks associated with such investment options are borne entirely by the contractholder, except where guaranteed minimum benefits are involved. In certain variable annuity products, contractholders may also choose to allocate all or a portion of their account to the Company's general account and are credited with interest at rates we determine, subject to certain minimums. In addition, contractholders may also elect certain minimum death benefit and minimum living benefit guarantees for which additional fees are charged and where asset allocation restrictions may apply. Fixed Annuities. Fixed annuities provide for both asset accumulation and asset distribution needs. Fixed annuities do not allow the same investment flexibility provided by variable annuities, but provide guarantees
JA-2579 CONFIDENTIAL FSOC_00004379 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 171 of 190
Table of Contents
related to the preservation of principal and interest credited. Deposits made into deferred annuity contracts are allocated to the Company's general account and are credited with interest at rates we determine, subject to certain minimums. Credited interest rates are guaranteed not to change for certain limited periods of time, ranging from one to 10 years. Fixed income annuities provide a guaranteed monthly income for a specified period of years and/or for the life of the annuitant. Corporate Benefit Funding Our Corporate Benefit Funding segment includes an array of annuity and investment products, including guaranteed interest products and other stable value products, income annuities, and separate account contracts for the investment management of defined benefit and defmed contribution plan assets. This segment also includes certain products to fund postretirement benefits and company, bank or trust owned life insurance used to fmance non-qualified benefit programs for executives. The major products in this area are: Stable Value Products. We offer general account guaranteed interest contracts, separate account guaranteed interest contracts, and similar products used to support the stable value option of defined contribution plans. We also offer private floating rate funding agreements that are used for money market funds, securities lending cash collateral portfolios and short-term investment funds.
Pensions Closeouts. We offer general account and separate account annuity products, generally in connection with the termination of defined benefit pension plans, both in the U.S. and the United Kingdom ("U.K."). We also offer partial risk transfer solutions that allow for partial transfers of pension liabilities and annuity products that include single premium buyouts.
Torts and Settlements. We offer innovative strategies for complex litigation settlements, primarily structured settlement annuities. Capital Markets Investment Products. Products offered include funding agreements, Federal Home Loan Bank advances and funding agreement- backed commercial paper. Other Corporate Benefit Funding Products and Services. We offer specialized life insurance products designed specifically to provide solutions for non-qualified benefit and retiree benefit funding purposes. Auto & Home
Our Auto & Home segment includes personal lines property and casualty insurance offered directly to employees at their employer's worksite, as well as to individuals through a variety of retail distribution channels, including independent agents, property and casualty specialists, direct response marketing and the individual distribution sales group. Auto & Home primarily sells auto insurance, which represented 67% of Auto & Home's total net earned premiums in 2011. Homeowners and other insurance represented 33% of Auto & Home's total net earned premiums in 2011. The major products in this area are:
Auto Coverages. Auto insurance policies provide coverage for private passenger automobiles, utility automobiles and vans, motorcycles, motor homes, antique or classic automobiles and trailers. Auto & Home offers traditional coverage such as liability, uninsured motorist, no fault or personal injury protection, as well as collision and comprehensive. Homeowners and Other Coverages. Homeowners' insurance policies provide protection for homeowners, renters, condominium owners and residential landlords against losses arising out of damage to dwellings and contents from a wide variety of perils, as well as coverage for liability arising from ownership or occupancy. Other insurance includes personal excess liability (protection against losses in excess of amounts covered by other liability insurance policies), and coverage for recreational vehicles and boat owners. Most of Auto & Home's homeowners' policies are traditional insurance policies for dwellings, providing protection for loss on a "replacement cost" basis. These policies also provide additional coverage for reasonable, normal living expenses incurred by policyholders that have been displaced from their homes.
JA-2580 CONFIDENTIAL FSOC_00004380 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 172 of 190
Table of Contents
In 2011, Auto & Home's business was concentrated in New York, Massachusetts and Illinois, as measured by the percentage of total direct earned premiums, of 12%, 8% and 7%, respectively, followed by Florida with 6%, and Connecticut and Texas, each with 5%. Sales Distribution U.S. Business markets our products and services through various distribution groups. Our life insurance and retirement products targeted to individuals are sold via sales forces, comprised of MetLife employees, in addition to third-party organizations. Our group life, non-medical health and corporate benefit funding products are sold via sales forces primarily comprised of MetLife employees. Personal lines property and casualty insurance products are directly marketed to employees at their employer's worksite. Auto & Home products are also marketed and sold to individuals by independent agents and property and casualty specialists through a direct response channel and the individual distribution sales group. MetLife sales employees work with all distribution groups to better reach and service customers, brokers, consultants and other intermediaries. Individual Distribution
Our individual distribution sales group targets the large middle-income market, as well as affluent individuals, owners of small businesses and executives of small- to medium-sized companies. We have also been successful in selling our products in various multi-cultural markets.
Insurance Products are sold through our individual distribution sales group and also through various third-party organizations utilizing two models. In the coverage model, wholesalers sell to high net worth individuals and small- to medium-sized businesses through independent general agencies, financial advisors, consultants, brokerage general agencies and other independent marketing organizations under contractual arrangements. In the point of sale model, wholesalers sell through financial intermediaries, including regional broker-dealers, brokerage firms, financial planners and banks.
Retirement Products are sold through our individual distribution sales group and also through various third-party organizations such as regional broker- dealers, New York Stock Exchange ("NYSE") brokerage firms, financial planners and banks. The individual distribution sales group is comprised of three channels: the MetLife distribution channel, a career agency system, the New England financial distribution channel, a general agency system, and MetLife Resources, a career agency system.
The MetLife distribution channel had approximately 5,000 MetLife agents under contract in 50 agencies at December 31, 2011. The career agency sales force focuses on the large middle-income and affluent markets, including multi-cultural markets. We support our efforts in multi-cultural markets through targeted advertising, specially trained agents and sales literature written in various languages.
The New England Financial distribution channel included approximately 35 general agencies providing support to 2,100 general agents and a network of independent brokers throughout the U.S. at December 31, 2011. The New England Financial distribution channel targets high net worth individuals, owners of small businesses and executives of small- to medium-sized companies. MetLife Resources, a focused distribution channel of MetLife, markets retirement, annuity and other financial products on a national basis through approximately 540 MetLife agents and independent brokers at December 31, 2011. MetLife Resources targets the nonprofit, educational and healthcare markets. We market and sell Auto & Home products through independent agents, property and casualty specialists, a direct response channel and the individual distribution sales group. In recent years, we have increased the number of independent agents appointed to sell these products.
JA-2581 CONFIDENTIAL FSOC_00004381 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 173 of 190
Table of Contents
Group Distribution
Insurance Products distributes its group life and non-medical health products and services through a sales force that is segmented by the size of the target customer. Marketing representatives sell either directly to corporate and other group customers or through an intermediary, such as a broker or consultant. Voluntary products are sold through the same sales channels, as well as by specialists for these products. Employers have been emphasizing such voluntary products and, as a result, we have increased our focus on communicating and marketing to such employees in order to further foster sales of thoseproducts. At December 31, 2011, the group life and non-medical health sales channels had approximately 350 marketing representatives.
Retirement Products markets its retirement, savings, investment and payout annuity products and services to sponsors and advisors of benefit plans of all sizes. These products and services are offered to private and public pension plans, collective bargaining units, nonprofit organizations, recipients of structured settlements and the current and retired members of these and other institutions.
Corporate Benefit Funding products and services are distributed through dedicated sales teams and relationship managers located in 11 offices around the country. In addition, the retirement & benefits funding organization works with individual distribution and group life and non-medical health distribution areas to better reach and service customers, brokers, consultants and other intermediaries. Auto & Home is a leading provider of personal lines property and casualty insurance products offered to employees at their employer's worksite. At December 31, 2011, approximately 2,400 employers offered MetLife Auto & Home products to their employees. Group marketing representatives market personal lines property and casualty insurance products to employers through a variety of means, including broker referrals and cross-selling to group customers. Once permitted by the employer, MetLife commences marketing efforts to employees. Employees who are interested in the auto and homeowners products can call a toll-free number to request a quote to purchase coverage and to request payroll deduction over the telephone. Auto & Home has also developed proprietary software that permits an employee in most states to obtain a quote for auto insurance through Auto & Home's intemet website.
We have entered into several joint ventures and other arrangements with third parties to expand the marketing and distribution opportunities of group products and services. We also seek to sell our group products and services through sponsoring organizations and affinity groups. In addition, we also provide life and dental coverage to federal employees. International
Overview International provides life insurance, accident and health insurance, credit insurance, annuities, endowment and retirement & savings products to both individuals and groups. We focus on markets primarily within Japan, Latin America, Asia Pacific, Europe and the Middle East. We operate in international markets through subsidiaries and affiliates. See "Risk Factors - Fluctuations in Foreign Currency Exchange Rates Could Negatively Affect Our Profitability," "Risk Factors - Our International Operations face Political, Legal, Operational and Other Risks, Including Exposure to Local and Regional Economic Conditions, That Could Negatively Affect Those Operations or Our Profitability," "Risk Factors - Difficult Conditions in the Global Capital Markets and the Economy Generally May Materially Adversely Affect Our Business and Results of Operations and These Conditions May Not Improve in the Near Future," and "Quantitative and Qualitative Disclosures About Market Risk." Japan Our Japan operation is comprised of the business acquired in the Acquisition. Our Japan operation is among the largest foreign life insurers in Japan and ranks sixth in the Japanese life insurance industry measured by total
10
JA-2582 CONFIDENTIAL FSOC_00004382 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 174 of 190
Table of Contents
premiums according to the Statistics of Life Insurance in Japan 2010. It provides life insurance products which include whole life, term life, variable life and universal life products. Our Japan operation also provides accident and health insurance, fixed and variable annuities and endowment products. These products are offered to both individuals and groups. Its products are distributed through a multi-distribution platform consisting of captive agents, independent agents, brokers, bancassurance, and direct marketing ("DM"). Other International Regions Latin America. We operate in 22 countries in Latin America, with the largest operations in Mexico, Chile and Argentina. Our Mexican operation is the largest life insurance company in Mexico in both the individual and group businesses according to Asociacion Mexicana de Instituciones de Seguro, a Mexican industry trade group which provides rankings for insurance companies. Our Chilean operation is the largest annuity company in Chile, based on market share according to Superintendencia Valores y Seguros, the Chilean insurance regulator. Our Chilean operation also offers individual life insurance and group insurance products. We also actively market individual life insurance, group insurance products and credit life coverage in Argentina, but the nationalization of the pension system substantially reduced our presence in Argentina. The business environment in Argentina has been, and may continue to be, affected by governmental and legal actions which impact our results of operations. See Note 2 of the Notes to the Consolidated Financial Statements for additional information on the pending disposition of the Caribbean Business.
Asia Pacific. We operate in four countries in Asia Pacific with wholly-owned operations in Korea, Hong Kong and Australia. Our Korean operation has significant sales of variable universal life and annuity products. Our Hong Kong operation has significant sales of variable universal life and endowment products. Our Australia operation has significant sales of credit insurance and group life products. We also operate through a joint venture in China, the results of which are reflected in net investment income and are not consolidated in our financial results. As discussed in Note 2 of the Notes to the Consolidated Financial Statements, the Company sold its 50% interest in its former joint venture in Japan in the second quarter of 2011.
Europe and the Middle East. We operate in 35 countries in Europe and the Middle East with our largest operations in Poland, the U.K., France, and the United Arab Emirates, as well as through a consolidated joint venture in India. Our Poland operation is a leading provider of life insurance, accident and health insurance, and credit insurance. It is consistently ranked as a top three company in net profits according to "Rzeczpospolita" financial daily. Our U.K. operation provides life insurance, accident and health insurance and variable annuities in its home market and throughout Europe. Our operation in France provides life insurance, accident and health insurance and credit insurance. In the Middle East, we provide life insurance, accident and health insurance, credit insurance, annuities, endowment and retirement & savings products. Sales Distribution International markets its products and services through a multi-distribution strategy which varies by geographic region. The various distribution channels include: agency, bancassurance, DM, brokerage and e-commerce. In developing countries, agency covers the needs of the emerging middle class with primarily traditional products (e.g., endowment and accident and health). In more developed and mature markets, agents, while continuing to serve their existing customers to keep pace with their developing financial needs, also target upper middle class and high net worth customer bases with a more sophisticated product set including more investment-sensitive products, such as universal life, mutual fund and single premium deposits. In the bancassurance channel, International leverages partnerships that span all regions. In addition, DM has extensive and far reaching capabilities in all regions. The DM operations deploy both broadcast marketing approaches (e.g. direct response TV, web-based lead generation) and traditional DM techniques such as telemarketing. Japan represents our largest DM market.
11
JA-2583 CONFIDENTIAL FSOC_00004383 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 175 of 190
Table of Contents
Japan Japan's multi-channel distribution strategy consists of captive agents, independent agents, brokers, bancassurance, and DM. While face-to-face channels continue to be core to Japan's business, other channels, including bancassurance and DM, have become a critical part of Japan's distribution strategy. Our Japan operation has maintained its position in bancassurance due to its strong distribution relationship with Japan's mega banks, trust banks and various regional banks, as well as with the Japan Post. The DM channel is supported by an industry-leading marketing platform, state-of-the-art call center infrastructure and its own campaign management system.
Our Japan operation has approximately 5,500 captive agents, 10,500 independent agents, 100 bancassurance relationships, including Japan Post, and 200 DM sponsors. Other International Regions Latin America. Latin America's key distribution channels include captive agents, DM, bancassurance, large multinational brokers and small-and medium-sized brokers, direct and group sales forces (mostly for group policies without broker intermediation), and worksite marketing. The region has an exclusive and captive agency distribution network with more than 2,500 agents also selling a variety of individual life, accident and health, and pension products. In the DM channel, we work with more than 50 sponsors and have a network of more than 1,600 telesales representatives selling mainly accident and health and individual life products. We currently work with over 3,000 active brokers with registered sales of group and individual life, accident and health, group medical, dental and pension products. Worksite marketing in Mexico has over 2,200 agents.
Asia Pacific. Asia Pacific distribution strategies differ by country but generally utilize a combination of captive agents, bancassurance relationships and DM. Agency sales are achieved through a force of approximately 8,500 agents and managers (which includes approximately 1,700 agents and managers related to our joint venture in China) and a growing force of independent general agents. Bancassurance sales are currently reliant upon a significant regional strategic partnership along with a number of smaller partnerships in each market. Throughout the region, our Asia Pacific operation leverages its expertise in DM operations management to conduct its own campaigns and provide those DM capabilities to third-party sponsors.
While not a significant part of the region's overall business, sales of group life and pension business are primarily achieved through independent brokers and an employee sales force.
Europe and the Middle East. Our operation in Central and Eastern Europe ("CEE") has a multi-channel distribution strategy, which includes significant face to face channels, built on a strong captive agency force of more than 3,400 agents, and relationships with more than 90 active independent brokers and third-party multi-level agency networks. Our CEE operation also has a group/corporate business direct sales force of more than 70 and distribution relationships with more than 100 banks, and other financial and non-financial institutions, as well as a fast growing DM channel. The primary method of distribution is captive and third party agency and captive direct sales forces, with a growing presence in bank, other financial and non-financial institutions, and DM. Our operation in Western Europe also has a multi-channel distribution strategy, including DM, brokerage, banks and financial institutions. Our U.K. operation has built a strong position in the U.K. independent advisor sector and other third-party distributors with a focus on variable and fixed term annuities. Our U.K operation also has a growing group risk business serving small and medium sized enterprise employers and an agency sales force of approximately 600 agents which distributes accident and health and term life products. In the Middle East, our products are distributed via a variety of channels including approximately 17,700 agents, bancassurance, brokers and DM. Agency distribution is our primary distribution channel; we have the largest captive network in the Middle East. Bancassurance is a growing channel with approximately 90 relationships, and approximately 260 programs providing access to millions of bank customers.
12
JA-2584 CONFIDENTIAL FSOC_00004384 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 176 of 190
Table of Contents
Corporate & Other
Corporate & Other contains the excess capital not allocated to the segments, external integration costs, internal resource costs for associates committed to acquisitions, and various start-up and run-off entities. Additionally, Corporate & Other includes interest expense related to the majority of our outstanding debt, expenses associated with certain legal proceedings, the financial results of Met Life Bank and income tax audit issues. See Note 2 of the Notes to the Consolidated Financial Statements. Corporate & Other also includes the elimination of intersegment amounts, which generally relate to intersegment loans, which bear interest rates commensurate with related borrowings.
MetLife Bank is a member of the Federal Reserve System and the Federal Home Loan Bank of New York and is subject to regulation, examination and supervision primarily by the Office of the Comptroller of the Currency ("OCC"), and the Consumer Financial Protection Bureau ("CFPB"), and secondarily by the FDIC, the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the Federal Reserve Bank of New York (the "FRB of NY" and, collectively with the Federal Reserve Board, the " Federal Reserve"). Policyholder Liabilities We establish, and carry as liabilities, actuarially determined amounts that are calculated to meet our policy obligations when a policy matures or is surrendered, an insured dies or becomes disabled or upon the occurrence of other covered events, or to provide for future annuity payments. Amounts for actuarial liabilities are computed and reported in the consolidated financial statements in conformity with GAAP. For more details on Policyholder Liabilities see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Summary of Critical Accounting Estimates - Liability for Future Policy Benefits" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Policyholder Liabilities."
Pursuant to state insurance laws and country regulators, MetLife, Inc.'s insurance subsidiaries establish statutory reserves, reported as liabilities, to meet their obligations on their respective policies. These statutory reserves are established in amounts sufficient to meet policy and contract obligations, when taken together with expected future premiums and interest at assumed rates. Statutory reserves and actuarial liabilities for future policy benefits generally differ based on accounting guidance. The New York Insurance Law and regulations require certain MetLife entities to submit to the New York Superintendent of Insurance or other state insurance departments, with each annual report, an opinion and memorandum of a "qualified actuary" that the statutory reserves and related actuarial amounts recorded in support of specified policies and contracts, and the assets supporting such statutory reserves and related actuarial amounts, make adequate provision for their statutory liabilities with respect to these obligations. See "- U.S. Regulation - Insurance Regulation - Policy and Contract Reserve Adequacy Analysis."
Insurance regulators in many of the non-U.S. countries in which MetLife operates require certain MetLife entities to prepare a sufficiency analysis of the reserves posted in the locally required regulatory financial statements, and to submit that analysis to the regulatory authorities. See "- International Regulation." Underwriting and Pricing Underwriting
Underwriting generally involves an evaluation of applications for Insurance Products, Retirement Products, Corporate Benefit Funding, and Auto & Home by a professional staff of underwriters and actuaries, who determine the type and the amount of risk that we are willing to accept. International offers the products described above, with the exception of property and casualty insurance. They also offer credit insurance and accident and health products. We employ detailed underwriting policies, guidelines and procedures designed to assist the underwriter to properly assess and quantify risks before issuing policies to qualified applicants or groups, which are consistent for both the U.S. Business and International.
13
JA-2585 CONFIDENTIAL FSOC_00004385 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 177 of 190
Table of Contents
Insurance underwriting considers not only an applicant's medical history, but also other factors such as financial profile, foreign travel, vocations and alcohol, drug and tobacco use. Group underwriting generally evaluates the risk characteristics of each prospective insured group, although with certain voluntary products and for certain coverages, members of a group may be underwritten on an individual basis. We generally perform our own underwriting; however, certain policies are reviewed by intermediaries under guidelines established by us. Generally, we are not obligated to accept any risk or group of risks from, or to issue a policy or group of policies to, any employer or intermediary. Requests for coverage are reviewed on their merits and generally a policy is not issued unless the particular risk or group has been examined and approved by our underwriters.
The underwriting conducted by our remote underwriting offices and intermediaries, as well as our corporate underwriting office, are subject to periodic quality assurance reviews to maintain high-standards of underwriting and consistency. Such offices are also subject to periodic external audits by reinsurers with whom we do business.
We have established senior level oversight of the underwriting process that facilitates quality sales and serves the needs of our customers, while supporting our financial strength and business objectives. Our goal is to achieve the underwriting, mortality and morbidity levels reflected in the assumptions in our product pricing. This is accomplished by determining and establishing underwriting policies, guidelines, philosophies and strategies that are competitive and suitable for the customer, the agent and us. Auto & Home's underwriting function has six principal aspects: evaluating potential worksite marketing employer accounts and independent agencies; establishing guidelines for the binding of risks; reviewing coverage bound by agents; underwriting potential insureds, on a case by case basis, presented by agents outside the scope of their binding authority; pursuing information necessary in certain cases to enable Auto & Home to issue a policy within our guidelines; and ensuring that renewal policies continue to be written at rates commensurate with risk.
Subject to very few exceptions, agents in each of the U.S. Business distribution channels have binding authority for risks which fall within its published underwriting guidelines. Risks falling outside the underwriting guidelines may be submitted for approval to the underwriting department; alternatively, agents in such a situation may call the underwriting department to obtain authorization to bind the risk themselves. In most states, we generally have the rightwithin a specified period (usually the first 60 days) to cancel any policy. Pricing Pricing reflects our corporate underwriting standards, which are consistent for both U.S. Business and International. Product pricing is based on the expected payout of benefits calculated through the use of assumptions for mortality, morbidity, expenses, persistency and investment returns, as well as certain macroeconomic factors, such as inflation. Investment-oriented products are priced based on various factors, which may include investment return, expenses, persistency and optionality. For certain investment oriented products in the U.S. and certain business sold internationally, pricing may include prospective and retrospective experience rating features. Prospective experience rating involves the evaluation of past experience for the purpose of determining future premium rates and all prior year gains and losses are borne by us. Retrospective experience rating also involves the evaluation of past experience for the purpose of determining the actual cost of providing insurance for the customer, however, the contract includes certain features that allow us to recoup certain losses or distribute certain gains back to the policyholder based on actual prior years' experience. Rates for group life, non-medical health, and medical health products are based on anticipated results for the book of business being underwritten. Renewals are generally reevaluated annually or biannually and are repriced to reflect actual experience on such products. Products offered by Corporate Benefit Funding are priced frequently and are very responsive to bond yields, and such prices include additional margin in periods of market uncertainty. This business is predominantly illiquid, because a majority of the policyholders have no contractual rights to cash values and no options to change the form of the product's benefits.
14
JA-2586 CONFIDENTIAL FSOC_00004386 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 178 of 190
Table of Contents
Rates for individual life insurance products are highly regulated and must be approved by the regulators of the jurisdictions in which the product is sold. Generally such products are renewed annually and may include pricing terms that are guaranteed for a certain period of time. Fixed and variable annuity products are also highly regulated and approved by the respective regulators. Such products generally include penalties for early withdrawals and policyholder benefit elections to tailor the form of the product's benefits to the needs of the opting policyholder. We periodically reevaluate the costs associated with such options and will periodically adjust pricing levels on our guarantees. Further, from time to time, we may also reevaluate the type and level of guarantee features currently being offered.
Rates for Auto & Home's major lines of insurance are based on its proprietary database, rather than relying on rating bureaus. Auto & Home determines prices in part from a number of variables specific to each risk. The pricing of personal lines insurance products takes into account, among other things, the expected frequency and severity of losses, the costs of providing coverage (including the costs of acquiring policyholders and administering policy benefits and other administrative and overhead costs), competitive factors and profit considerations. The major pricing variables for personal lines insurance include characteristics of the insured property, such as age, make and model or construction type, as well as characteristics of the insureds, such as driving record and loss experience, and the insured's personal financial management. Auto & Home's ability to set and change rates is subject to regulatory oversight.
As a condition of our license to do business in each state, Auto & Home, like all other automobile insurers, is required to write or share the cost of private passenger automobile insurance for higher risk individuals who would otherwise be unable to obtain such insurance. This "involuntary" market, also called the "shared market," is governed by the applicable laws and regulations of each state, and policies written in this market are generally written at rates higher than standard rates. We continually review our underwriting and pricing guidelines so that our policies remain competitive and supportive of our marketing strategies and profitability goals. Management does not expect the current economic environment, with its volatility and uncertainty, to materially impact the pricing of our products. Reinsurance Activity We participate in reinsurance activities in order to limit losses, minimize exposure to significant risks, and provide additional capacity for future growth. We enter into various agreements with reinsurers that cover individual risks, group risks or defined blocks of business, primarily on a coinsurance, yearly renewable term, excess or catastrophe excess basis. These reinsurance agreements spread risk and minimize the effect of losses. The extent of each risk retained by us depends on our evaluation of the specific risk, subject, in certain circumstances, to maximum retention limits based on the characteristics of coverages. We also cede first dollar mortality risk under certain contracts. In addition to reinsuring mortality risk, we reinsure other risks, as well as specific coverages. We obtain reinsurance for capital requirement purposes and also when the economic impact of the reinsurance agreement makes it appropriate to do so.
Under the terms of the reinsurance agreements, the reinsurer agrees to reimburse us for the ceded amount in the event a claim is paid. Cessions under reinsurance agreements do not discharge our obligations as the primary insurer. In the event that reinsurers do not meet their obligations under the terms of the reinsurance agreements, reinsurance balances recoverable could become uncollectible. We reinsure our business through a diversified group of well-capitalized, highly rated reinsurers. We analyze recent trends in arbitration and litigation outcomes in disputes, if any, with our reinsurers. We monitor ratings and evaluate the financial strength of our reinsurers by analyzing their financial statements. In addition, the reinsurance recoverable balance due from each reinsurer is evaluated as part of the overall monitoring process. Recoverability of reinsurance recoverable balances is evaluated based on these analyses. We generally secure large reinsurance recoverable balances with various forms of collateral, including secured trusts, funds withheld accounts and irrevocable letters of credit.
15
JA-2587 CONFIDENTIAL FSOC_00004387 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 179 of 190
Table of Contents
U.S. Business For our individual life insurance products, we have historically reinsured the mortality risk primarily on an excess of retention basis or a quota share basis. We currently reinsure 90% of the mortality risk in excess of $1 million for most products and reinsure up to 90% of the mortality risk for certain other products. In addition to reinsuring mortality risk as described above, we reinsure other risks, as well as specific coverages. Placement of reinsurance is done primarily on an automatic basis and also on a facultative basis for risks with specified characteristics. On a case by case basis, we may retain up to $20 million per life and reinsure 100% of amounts in excess of the amount we retain. We evaluate our reinsurance programs routinely and may increase or decrease our retention at any time.
For other policies within the Insurance Products segment, we generally retain most of the risk and only cede particular risks on certain client arrangements.
Our Retirement Products segment reinsures a portion of the living and death benefit guarantees issued in connection with our variable annuities. Under these reinsurance agreements, we pay a reinsurance premium generally based on fees associated with the guarantees collected from policyholders, and receive reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations.
Our Corporate Benefit Funding segment has periodically engaged in reinsurance activities, as considered appropriate.
Our Auto & Home segment purchases reinsurance to manage its exposure to large losses (primarily catastrophe losses) and to protect statutory surplus. We cede to reinsurers a portion of losses and premiums based upon the exposure of the policies subject to reinsurance. To manage exposure to large propertyand casualty losses, we utilize property catastrophe, casualty and property per risk excess of loss agreements. International For certain of our life insurance products, we reinsure risks above the corporate retention limit of up to $5 million to external reinsurers on ayearly renewable term basis. We may also reinsure certain risks with external reinsurers depending upon the nature of the risk and local regulatory requirements.
For selected large corporate clients, International reinsures group employee benefits or credit insurance business with various client-affiliated reinsurance companies, covering policies issued to the employees or customers of the clients. Additionally, we cede and assume risk with other insurance companies when either company requires a business partner with the appropriate local licensing to issue certain types of policies in certain countries. In these cases, the assuming company typically underwrites the risks, develops the products and assumes most or all of the risk.
International also has reinsurance agreements in force that reinsure a portion of the living and death benefit guarantees issued in connection with variable annuity products. Under these agreements, we pay or receive reinsurance fees associated with the guarantees collected from policyholders, and pay or receive reimbursement for benefits paid or accrued in excess of account values, subject to certain limitations. Corporate & Other
We also reinsure through 100% quota share reinsurance agreements certain run-off LTC and workers' compensation business written by MetLife Insurance Company of Connecticut ("MICC"), a subsidiary of MetLife, Inc. Catastrophe Coverage We have exposure to catastrophes, which could contribute to significant fluctuations in our results of operations. We also use excess of retention and quota share reinsurance agreements to provide greater
16
JA-2588 CONFIDENTIAL FSOC_00004388 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 180 of 190
Table of Contents
diversification of risk and minimize exposure to larger risks. International currently purchases catastrophe coverage to insure risks within certain countries deemed by management to be exposed to the greatest catastrophic risks. Reinsurance Recoverables For information regarding ceded reinsurance recoverable balances, included in premiums, reinsurance and other receivables in the consolidated balance sheets, see Note 9 of the Notes to the Consolidated Financial Statements. U.S. Regulation Insurance Regulation In the United States, insurance is principally regulated by the states, with the federal government playing a limited role. Insurance regulation generally aims at supervising and regulating insurers individually rather than on a group-wide basis, with the goal of protecting policyholders and ensuring that each insurance company remains solvent. Each of MetLife's insurance subsidiaries operating in the United States is licensed and regulated in each U.S. jurisdiction where it conducts insurance business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects of insurers, including standards of solvency, statutory reserves, reinsurance and capital adequacy, and the business conduct of insurers. In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and certain other related materials and, for certain lines of insurance, the approval of rates. Such statutes and regulations also prescribe the permitted types and concentration of investments. See "Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth."
Each insurance subsidiary is required to file reports, generally including detailed annual financial statements, with insurance regulatory authorities in each of the jurisdictions in which it does business, and its operations and accounts are subject to periodic examination by such authorities. These subsidiaries must also file, and in many jurisdictions and in some lines of insurance obtain regulatory approval for, rules, rates and forms relating to the insurance written in the jurisdictions in which they operate.
State and federal insurance and securities regulatory authorities and other state law enforcement agencies and attorneys general from time to time make inquiries regarding compliance by MetLife, Inc. and its insurance subsidiaries with insurance, securities and other laws and regulations regarding the conduct of our insurance and securities businesses. We cooperate with such inquiries and take corrective action when warranted. See Note 16 of the Notes to the Consolidated Financial Statements. Holding Company Regulation. MetLife, Inc. and its U.S. insurance subsidiaries are subject to regulation under the insurance holding company laws of various U.S. jurisdictions. The insurance holding company laws and regulations vary from jurisdiction to jurisdiction, but generally require a controlled insurance company (insurers that are subsidiaries of insurance holding companies) to register with state regulatory authorities and to file with those authorities certain reports, including information concerning its capital structure, ownership, financial condition, certain intercompany transactions and general business operations.
State insurance statutes also typically place restrictions and limitations on the amount of dividends or other distributions payable by insurance company subsidiaries to their parent companies, as well as on transactions between an insurer and its affiliates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - MetLife, Inc. - Liquidity and Capital Sources - Dividends from Subsidiaries."
17
JA-2589 CONFIDENTIAL FSOC_00004389 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 181 of 190
Table of Contents
Guaranty Associations and Similar Arrangements. Most of the U.S. jurisdictions in which our insurance subsidiaries are admitted to transact business require life and property and casualty insurers doing business within the jurisdiction to participate in guaranty associations, which are organized to pay certain contractual insurance benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer is engaged. Some states permit member insurers to recover assessments paid through full or partial premium tax offsets. In the past five years, the aggregate assessments levied against MetLife have not been material. We have established liabilities for guaranty fund assessments that we consider adequate. See Note 16 of the Notes to the Consolidated Financial Statements for additional information on the insolvency assessments.
Statutory Insurance Examination. As part of their regulatory oversight process, state insurance departments conduct periodic detailed examinations of the books, records, accounts, and business practices of insurers domiciled in their states. State insurance departments also have the authority to conduct examinations of non-domiciliary insurers that are licensed in their states. During the three-year period ended December 31, 2011, MetLife has not received any material adverse findings resulting from state insurance department examinations of its insurance subsidiaries conducted during this three-year period. Regulatory authorities in a small number of states, Financial Industry Regulatory Authority ("FINRA") and, occasionally, the U.S. Securities and Exchange Commission ("SEC"), have had investigations or inquiries relating to sales of individual life insurance policies or annuities or other products by Metropolitan Life Insurance Company ("MLIC"), MetLife Securities, Inc., New England Life Insurance Company, New England Securities Corporation, General American Life Insurance Company, Walnut Street Securities, Inc., MICC and Tower Square Securities, Inc. These investigations often focus on the conduct of particular financial services representatives and the sale of unregistered or unsuitable products or the misuse of client assets. Over the past several years, these and a number of investigations by other regulatory authorities were resolved for monetary payments and certain other relief, including restitution payments. We may continue to resolve investigations in a similar manner. Policy and Contract Reserve Adequacy Analysis. Annually, our U.S. insurance subsidiaries are required to conduct an analysis of the sufficiency of all statutory reserves. In each case, a qualified actuary must submit an opinion which states that the statutory reserves, when considered in light of the assets held with respect to such reserves, make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. If such an opinion cannot be provided, the insurer must set up additional reserves by moving funds from surplus. Since inception of this requirement, our U.S. insurance subsidiaries which are required by their states of domicile to provide these opinions have provided such opinions without qualifications.
NAIC. The National Association of Insurance Commissioners ("NAIC") is an organization, the mandate of which is to benefit state insurance regulatory authorities and consumers by promulgating model insurance laws and regulations for adoption by the states. The NAIC provides standardized insurance industry accounting and reporting guidance through its Accounting Practices and Procedures Manual (the "Manual"). However, statutory accounting principles continue to be established by individual state laws, regulations and permitted practices. Changes to the Manual or modifications by the various state insurance departments may impact the statutory capital and surplus of MetLife, Inc.'s U.S. insurance subsidiaries. Surplus and Capital; Risk-Based Capital. Insurers are required to maintain their capital and surplus at or above minimum levels. Regulators have discretionary authority, in connection with the continued licensing of our U.S. insurance subsidiaries, to limit or prohibit an insurer's sales to policyholders if, in their judgment, the regulators determine that such insurer has not maintained the minimum surplus or capital or that the further transaction of business will be hazardous to policyholders. Most of our U.S. insurance subsidiaries are subject to risk-based capital ("RBC") requirements and report their RBC based on a formula calculated by applying factors
18
JA-2590 CONFIDENTIAL FSOC_00004390 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 182 of 190
Table of Contents
to various asset, premium and statutory reserve items, as well as taking into account the risk characteristics of the insurer. The major categories of risk involved are asset risk, insurance risk, interest rate risk, market risk and business risk. The formula is used as an early warning regulatory tool to identify possible inadequately capitalized insurers for purposes of initiating regulatory action, and not as a means to rank insurers generally. State insurance laws provide insurance regulators the authority to require various actions by, or take various actions against, insurers whose RBC ratio does not meet or exceed certain RBC levels. As of the date of the most recent annual statutory financial statements filed with insurance regulators, the RBC of each of these subsidiaries was in excess of each of those RBC levels. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources - The Company - Capital."
In late 2009, following rating agency downgrades of virtually all residential mortgage-backed securities ("RMBS") from certain vintages, the NAIC engaged PIMCO Advisory ("PIMCO"), a provider of investment advisory services, to analyze approximately 20,000 RMBS held by insurers and evaluate the likely loss that holders of those securities would suffer in the event of a default. PIMCO's analysis showed that the severity of expected losses on those securities evaluated that are held by our U.S. insurance companies was significantly less than would be implied by the rating agencies' ratings of such securities. The NAIC incorporated the results of PIMCO's analysis into the RBC charges assigned to the evaluated securities, with a beneficial impact on the RBC of our U.S. insurance subsidiaries. The NAIC utilized the solution again for 2010. The NAIC adopted a similar solution for 2010 for commercial mortgage-backed securities ("CMBS") by selecting BlackRock Solutions, a provider of investment advisory services, to assist in the RBC determination process. BlackRock Solutions served as a third-party modeler of the 7,000 CMBS holdings of U.S. insurance companies, including our U.S. insurance subsidiaries. The impact of the implementation for 2010 of the modeling solution for CMBS on our U.S. insurance subsidiaries was minimal. Any revisions to the modeling bases for 2011 are not anticipated to have a material impact on the RBC of our U.S. insurance subsidiaries.
In 2011, the NAIC adopted a proposal that permits RBC recognition for the risk mitigation value of the use of derivatives for hedging asset (fixed maturity and equity securities) risk. The adopted measure is effective December 31, 2011 and is anticipated to have a modest, positive impact on the RBC of our U.S. insurance subsidiaries.
Regulation of Each of our U.S. insurance subsidiaries is subject to state laws and regulations that require diversification of our investment portfolios and limit the amount of investments in certain asset categories, such as below investment grade fixed income securities, equity real estate, other equity investments, and derivatives. Failure to comply with these laws and regulations would cause investments exceeding regulatory limitations to be treated as non-admitted assets for purposes of measuring surplus and, in some instances, would require divestiture of such non-qualifying investments. We believe that the investments made by each of MetLife, Inc.'s U.S. insurance subsidiaries complied, in all material respects, with such regulations at December 31, 2011.
The Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") includes provisions that may impact the investments and investment activities of MetLife, Inc. and its subsidiaries, including the federal regulation of such activities. Until the various final regulations are promulgated pursuant to Dodd-Frank, and perhaps for some time thereafter, the full impact of Dodd-Frank on such activities will remain unclear. Such provisions and regulations include, but are not limited to, the regulation of the over-the-counter derivatives markets and prohibitions on covered banking entities engaging in proprietary trading and sponsoring or investing in hedge funds or private equity funds (commonly known as the Volcker Rule). See "- Dodd-Frank and Other Legislative and Regulatory Developments - Regulation of Over-the-Counter Derivatives" and "- Dodd-Frank and Other Legislative and Regulatory Developments - Volcker Rule." Federal Initiatives. Although the insurance business in the United States is primarily regulated by the states, federal initiatives often have an impact on our business in a variety of ways. From time to time, federal measures are proposed which may significantly affect the insurance business. These areas include financial services regulation, securities regulation, pension regulation, health care regulation, privacy, tort reform legislation and
19
JA-2591 CONFIDENTIAL FSOC_00004391 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 183 of 190
Table of Contents
taxation. In addition, various forms of direct and indirect federal regulation of insurance have been proposed from time to time, including proposals for the establishment of an optional federal charter for insurance companies. See "- Dodd-Frank and Other Legislative and Regulatory Developments." Financial Holding Company Regulation
Once MetLife Bank has completely exited its depository business, MetLife, Inc. plans to terminate MetLife Bank's FDIC insurance, putting MetLife, Inc. in a position to be able to deregister as a bank holding company. Upon completion of the foregoing, MetLife, Inc. will no longer be regulated as a bank holding company or subject to enhanced supervision and prudential standards as a bank holding company with assets of $50 billion or more. However, if, in the future, MetLife, Inc. is designated by the Financial Stability Oversight Council ("FSOC") as a non-bank systemically important financial institution (as discussed below), it could once again be subject to regulation by the Federal Reserve and enhanced supervision and prudential standards, such as Regulation YY (as discussed below).
The FSOC issued a notice of proposed rulemaking in October 2011, outlining the process it will follow and the criteria it will use to assesswhether a non- bank financial company should be subject to enhanced supervision by the Federal Reserve as a non-bank systemically important financial institution. If MetLife, Inc. meets the quantitative thresholds set forth in the proposal, the FSOC will continue with a further analysis using qualitative and quantitative factors.
In April 2011, the Federal Reserve Board and the FDIC proposed a rule regarding the implementation of the Dodd-Frank requirement that (i) each non-bank financial company designated by the FSOC for enhanced supervision by the Federal Reserve Board (a "non-bank systemically important financial institution" or "non-bank SIFI") and each bank holding company with assets of $50 billion or more report periodically to the Federal Reserve Board, the FDIC and the FSOC the plan of such company for rapid and orderly resolution in the event of material financial distress or failure, and (ii) that each such company report on the nature and extent of credit exposures of such company to significant bank holding companies and significant non-bank financial companies and the nature and extent of credit exposures of significant bank holding companies and significant non-bank financial companies to such covered company. In November 2011, the Federal Reserve Board and the FDIC adopted a final rule implementing the resolution plan requirement, effective November 30, 2011, but deferred finalizing the credit exposure reporting requirement until a later date. If MetLife, Inc. remains a bank holding company on July 1, 2012, or if, in the future, it is designated by the FSOC as a non-bank SIF1, it would be required to submit a resolution plan. See "- Dodd-Frank and Other Legislative and Regulatory Developments - Orderly Liquidation Authority." In December 2011, the Federal Reserve Board issued a release proposing the adoption of enhanced prudential standards required by Dodd-Frank ("Regulation YY"). Regulation YY would apply to bank holding companies with assets of $50 billion or more and non-bank systemically important financial institutions. Regulation YY would impose (i) enhanced RBC requirements, (ii) leverage limits, (iii) liquidity requirements, (iv) single counterparty exposure limits, (v) governance requirements for risk management, (vi) stress test requirements, and (vii) special debt-to-equity limits for certain companies, and would establish a procedure for early remediation based on the failure to comply with these requirements. The Federal Reserve Board invited comment on, among other things, whether and how to apply these standards to non-bank systemically important financial institutions. For further information regarding enhanced prudential standards and Regulation YY, see "- Dodd-Frank and Other Legislative and Regulatory Developments - Enhanced Prudential Standards." Regulatory Agencies. Currently, as the owner of a federally-chartered bank, MetLife, Inc. remains a bank holding company and financial holding company. As such, MetLife, Inc continues to be subject to regulation under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), andto inspection, examination, and supervision by the Federal Reserve. In addition, MetLife Bank is subject to regulation and examination primarily by the OCC and the CFPB and secondarily by the Federal Reserve and the FDIC, as described below under "- Banking Regulation."
20
JA-2592 CONFIDENTIAL FSOC_00004392 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 184 of 190
Table of Contents
Financial Holding Company Activities. As a financial holding company, Met Life, Inc.'s activities and investments are restricted by the BHC Act, as amended by the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), to those that are "financial" in nature or "incidental" or "complementary" to such financial activities. Activities that are financial in nature include securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking and activities that the Federal Reserve Board has determined to be closely related to banking. In addition, under the insurance company investment portfolio provision of the GLB Act, financial holding companies are authorized to make investments in other financial and non-financial companies, through their insurance subsidiaries, that are in the ordinary course of business and in accordance with state insurance law, provided the financial holding company does not routinely manage or operate such companies except as may be necessary to obtain a reasonable return on investment. Capital. MetLife, Inc. and MetLife Bank are subject to risk-based and leverage capital guidelines issued by the federal banking regulatory agencies for banks and financial holding companies. The federal banking regulatory agencies are required by law to take specific prompt corrective actions with respect to institutions that do not meet minimum capital standards. MetLife, Inc. may become required to comply with further requirements relating to the calculation of capital, commonly referred to as "Basel II," which could require significant investment by the Company, including software. In addition, in December 2010, the Basel Committee on Banking Supervision (the "Basel Committee") published its final rules for increased capital and liquidity requirements (commonly referred to as "Basel III") for bank holding companies, such as MetLife, Inc. Assuming these requirements are endorsed and adopted by the U.S., they are to be phased in beginning January 1, 2013. It is possible that even more stringent capital and liquidity requirements could be imposed under Basel III andDodd- Frank as long as MetLife, Inc. remains a bank holding company or if, in the future, it is designated by the FSOC as a non-bank systemically important financial institution. Certain of our international operations could also be affected by Solvency II, a new capital adequacy regime for the European insurance industry. See "- International Regulation." The ability of MetLife Bank and MetLife, Inc. to pay dividends, repurchase common stock or other securities or engage in other transactions that could affect its capital or need for capital would be affected by any additional capital requirements that might be imposed as a result of the enactment of Dodd-Frank, Regulation YY and the endorsement and adoption by the U.S. of Basel III. See "- Dodd-Frank and Other Legislative and Regulatory Developments - Enhanced Prudential Standards" and "Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth." At December 31, 2011, MetLife, Inc. and MetLife Bank were in compliance with applicable requirements currently in effect. The Federal Reserve's capital plan rule requires all bank holding companies with assets of more than $50 billion, including MetLife, Inc., to submit annual capital plans which include projections of the company's capital levels under baseline and stress scenarios over a nine-quarter period. The Federal Reserve will approve or object to a company's proposed capital actions, such as dividends and stock repurchases, based on the results of those capital plans and the Federal Reserve's assessment of the robustness of the company's capital planning processes. In addition, in recent years, the Federal Reserve has conducted its own assessment of large bank holding companies' internal capital planning processes, capital adequacy and proposed capital distributions. In 2011, the Federal Reserve conducted the Comprehensive Capital Analysis and Review of the 19 largest bank holding companies ("CCAR 2011"), including MetLife, Inc. See "Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth." In January 2012, MetLife submitted to the Federal Reserve a comprehensive capital plan, as mandated by the capital plans rule, and additional information required by the 2012 Comprehensive Capital Analysis and Review ("CCAR 2012"). The capital plan projects MetLife's capital levels to the end of 2013 under baseline and stress scenarios, including a stress scenario developed and provided by the Federal Reserve as part of CCAR 2012. MetLife's capital plan was created in accordance with MetLife's capital policy which addresses capital management objectives, measurement and assessment of capital adequacy, and capital governance and other approval processes for distributions and other uses of capital. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources Capital Management" and "Quantitative and Qualitative Disclosures About Market Risk - Risk Management." The Federal Reserve has stated that it will consider the results of the
21
JA-2593 CONFIDENTIAL FSOC_00004393 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 185 of 190
Table of Contents
capital plan exercise and CCAR 2012 in evaluating proposed capital actions by participating bank holding companies, such as common stock dividend increases and stock repurchases, and that it will provide its assessment of participating institutions' capital plans in mid-March 2012. Consumer Protection Laws. Numerous other federal and state laws also affect MetLife, Inc.'s and MetLife Bank's earnings and activities, including federal and state consumer protection laws. The GLB Act included consumer privacy provisions that, among other things, require disclosure of a financial institution's privacy policy to customers. In addition, these provisions permit states to adopt more extensive privacy protections through legislation or regulation. As part of Dodd-Frank, Congress established the CFPB to supervise and regulate institutions that provide certain financial products and services to consumers. Although the consumer financial services subject to the CFPB's jurisdiction generally exclude insurance business of the kind in which we engage, the CFPB does have authority to regulate consumer services provided by MetLife Bank and non-insurance consumer services provided elsewhere throughout MetLife. See "- Dodd-Frank and Other Legislative and Regulatory Developments - Consumer Protection Laws." Change of Control and Restrictions on Mergers and Acquisitions. Because MetLife, Inc. is a financial holding company and bank holding company, no person may acquire control of MetLife, Inc. without the prior approval of the Federal Reserve Board. A change of control is conclusively presumed upon acquisition of 25% or more of any class of voting securities and rebuttably presumed upon acquisition of 10% or more of any class of voting securities. Further, as a result of MetLife, Inc.'s ownership of MetLife Bank, approval from the OCC would be required in connection with a change of control (generally presumed upon the acquisition of 10% or more of any class of voting securities) of MetLife, Inc. As a result of Dodd-Frank, Federal Reserve approval is required for any acquisition of a non-bank firm by a bank holding company having more than $10 billion of assets, such as MetLife, Inc. Further, as a bank holding company with assets of $50 billion or more, MetLife, Inc. will be required to provide prior notice to the Federal Reserve before acquiring control of voting shares of a company engaged in financial activities that has $10 billion or more of consolidated assets. Banking Regulation As a federally chartered national banking association, MetLife Bank is subject to a wide variety of banking laws, regulations and guidelines. Federal banking and consumer financial protection laws regulate most aspects of the business of MetLife Bank, but certain state laws may apply as well. MetLife Bank is principally regulated by the OCC and the CFPB and secondarily by the Federal Reserve and the FDIC. Federal banking laws and regulations address various aspects of MetLife Bank's business and operations with respect to, among other things, chartering to carry on business as a bank; the permissibility of certain activities; maintaining minimum capital ratios; capital management in relation to the bank's assets; dividend payments and repurchases of securities, including common stock; safety and soundness standards; loan loss and other related liabilities; liquidity; financial reporting and disclosure standards; counterparty credit concentration; restrictions on related party and affiliate transactions; lending limits; payment of interest; unfair or deceptive acts or practices; privacy; and relationships with MetLife, Inc. in its capacity as a bank holding company and potentially with other investors in connection with a change of control of MetLife Bank. Dodd-Frank established a statutory standard for Federal preemption of state consumer financial protection laws, which standard will require national banks to comply with many state consumer financial protection laws that previously were considered preempted by Federal law. The FDIC has the right to assess FDIC-insured banks for funds to help pay the obligations of insolvent banks to depositors. In addition, Dodd- Frank resulted in increased assessments for MetLife Bank, as a bank with assets of $10 billion or more. Federal and state banking regulators regularly re- examine existing laws and regulations applicable to banks and their products. Changes in these laws and regulations, or in interpretations thereof, are often made for the benefit of the consumer at the expense of the bank. Securities, Broker-Dealer and Investment Adviser Regulation Some of our subsidiaries and their activities in offering and selling variable insurance products are subject to extensive regulation under the federal securities laws administered by the SEC. These subsidiaries issue variable
22
JA-2594 CONFIDENTIAL FSOC_00004394 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 186 of 190
Table of Contents
annuity contracts and variable life insurance policies through separate accounts that are registered with the SEC as investment companies under the Investment Company Act of 1940, as amended (the "Investment Company Act"). Each registered separate account is generally divided into sub-accounts, each of which invests in an underlying mutual fund which is itself a registered investment company under the Investment Company Act. In addition, the variable annuity contracts and variable life insurance policies issued by these registered separate accounts are registered with the SEC under the Securities Act of 1933, as amended (the "Securities Act"). Other subsidiaries are registered with the SEC as broker-dealers under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and are members of, and subject to regulation by, FINRA. Further, some of our subsidiaries are registered as investment advisers with the SEC under the Investment Advisers Act of 1940, as amended (the "Investment Advisers Act"), and are also registered as investment advisers in various states, as applicable. Certain variable contract separate accounts sponsored by our subsidiaries are exempt from registration, but may be subject to other provisions of the federal securities laws.
Federal and state securities regulatory authorities and FINRA from time to time make inquiries and conduct examinations regarding compliance by MetLife, Inc. and its subsidiaries with securities and other laws and regulations. We cooperate with such inquiries and examinations and take corrective action when warranted.
Federal and state securities laws and regulations are primarily intended to protect investors in the securities markets and generally grant regulatory agencies broad rulemaking and enforcement powers, including the power to limit or restrict the conduct of business for failure to comply with such laws and regulations. See "- Dodd-Frank and Other Legislative and Regulatory Developments - Regulation of Brokers and Dealers." We may also be subject to similar laws and regulations in the foreign countries in which we provide investment advisory services, offer products similar to those described above, or conduct other activities. Environmental Considerations As an owner and operator of real property, we are subject to extensive federal, state and local environmental laws and regulations. Inherent in such ownership and operation is also the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities. We routinely have environmental assessments performed with respect to real estate being acquired for investment and real property to be acquired through foreclosure. We cannot provide assurance that unexpected environmental liabilities will not arise. However, based on information currently available to us, we believe that any costs associated with compliance with environmental laws and regulations or any remediation of such properties will not have a material adverse effect on our business, results of operations or financial condition. Employee Retirement Income Security Act of 1974 ("ERISA") Considerations We provide products and services to certain employee benefit plans that are subject to ERISA, or the Internal Revenue Code of 1986, as amended (the "Code"). As such, our activities are subject to the restrictions imposed by ERISA and the Code, including the requirement under ERISA that fiduciaries must perform their duties solely in the interests of ERISA plan participants and beneficiaries and the requirement under ERISA and the Code that fiduciaries may not cause a covered plan to engage in prohibited transactions with persons who have certain relationships with respect to such plans. The applicable provisions of ERISA and the Code are subject to enforcement by the Department of Labor ("DOL"), the Internal Revenue Service ("IRS") and the Pension Benefit Guaranty Corporation. In John Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank (1993), the U.S. Supreme Court held that certain assets in excess of amounts necessary to satisfy guaranteed obligations under a participating group annuity general account contract are "plan assets." Therefore, these assets are subject to certain fiduciary obligations under ERISA, which requires fiduciaries to perform their duties solely in the interest of ERISA plan participants and beneficiaries. On January 5, 2000, the Secretary of Labor issued final regulations indicating, in cases where an insurer has issued a policy backed by the insurer's general account to or for an
23
JA-2595 CONFIDENTIAL FSOC_00004395 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 187 of 190
Table of Contents
employee benefit plan, the extent to which assets of the insurer constitute plan assets for purposes of ERISA and the Code. The regulations apply only with respect to a policy issued by an insurer on or before December 31, 1998 ("Transition Policy"). No person will generally be liable under ERISA or the Code for conduct occurring prior to July 5, 2001, where the basis of a claim is that insurance company general account assets constitute plan assets. An insurer issuing a new policy that is backed by its general account and is issued to or for an employee benefit plan after December 31, 1998 will generally be subject to fiduciary obligations under ERISA, unless the policy is a guaranteed benefit policy.
The regulations indicate the requirements that must be met so that assets supporting a Transition Policy will not be considered plan assets for purposes of ERISA and the Code. These requirements include detailed disclosures to be made to the employee benefits plan and the requirement that the insurer must permit the policyholder to terminate the policy on 90 day notice and receive without penalty, at the policyholder's option, either (i) the unallocated accumulated fund balance (which may be subject to market value adjustment) or (ii) a book value payment of such amount in annual installments with interest. We have taken and continue to take steps designed to ensure compliance with these regulations. Dodd-Frank and Other Legislative and Regulatory Developments
Dodd-Frank effected the most far-reaching overhaul of financial regulation in the U.S. in decades. The full impact of Dodd-Frank on us will depend on the numerous rulemaking initiatives required or permitted by Dodd-Frank and the various studies mandated by Dodd-Frank, which are scheduled to be completed over the next few years. See "Risk Factors - Various Aspects of Dodd-Frank Could Impact Our Business Operations, Capital Requirements and Profitability and Limit Our Growth." Federal Regulation. Dodd-Frank established the Federal Insurance Office within the Department of the Treasury, which has the authority to participate in the negotiations of international insurance agreements with foreign regulators for the U.S., as well as to collect information about the insurance industry and recommend prudential standards. While not having a general supervisory or regulatory authority over the business of insurance, the director of this office will perform various functions with respect to insurance, including serving as a non-voting member of the FSOC and making recommendations to the FSOC regarding insurers to be designated for more stringent regulation. The director is also required to submit a report to Congress regarding how to modernize and improve the system of insurance regulation in the United States, including by increasing national uniformity through either a federal charter or effective action by the states. Enhanced Prudential Standards. As a large, interconnected bank holding company with assets of $50 billion or more or, if designated as such by the FSOC, a non-bank systemically important financial institution, MetLife, Inc. will be subject to enhanced prudential standards imposed on such companies. The FSOC has proposed rules governing the process of how it would designate non-bank financial companies that would be subject to enhanced supervision by the Federal Reserve, but these rules have not become final and no non-bank financial companies have been so designated.
As proposed, Regulation YY would subject non-bank systemically important financial institutions to the same enhanced standards as large bank holding companies. Regulation YY would impose (i) enhanced RBC requirements, (ii) leverage limits, (iii) liquidity requirements, (iv) single counterparty exposure limits, (v) governance requirements for risk management, (vi) stress test requirements, and (vii) special debt-to-equity limits for certain companies, and would establish a procedure for early remediation based on the failure to comply with these requirements. The Federal Reserve Board invited comment on, among other things, whether and how to apply these standards to non-bank systemically important financial institutions.
In addition, if it were determined that MetLife, Inc. posed a substantial threat to U.S. financial stability, the applicable federal regulators would have the right to require it to take one or more other mitigating actions to reduce that risk, including limiting its ability to merge with or acquire another company, terminating activities, restricting its ability to offer financial products or requiring it to sell assets or off-balance sheet items to
24
JA-2596 CONFIDENTIAL FSOC_00004396 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 188 of 190
Table of Contents
unaffiliated entities. Enhanced standards would also permit, but not require, regulators to establish requirements with respect to contingent capital, enhanced public disclosures and short-term debt limits. These standards are described as being more stringent than those otherwise imposed on bank holding companies; however, the Federal Reserve Board is permitted to apply them on an institution-by-institution basis, depending on its determination of the institution's riskiness.
MetLife, Inc., as a bank holding company, will have to meet minimum leverage ratio and RBC requirements on a consolidated basis to be established by the Federal Reserve Board that are not less than those applicable to insured depository institutions under so-called prompt corrective action regulations as in effect on the date of the enactment of Dodd-Frank. One consequence of these new rules will ultimately be the inability of bank holding companies to include trust-preferred securities as part of their Tier 1 capital. Because of the phase-in period for these new rules, they should have little practical effect onMetLife's ability to treat its currently outstanding trust-preferred securities as part of its Tier 1 capital, but they do prevent MetLife, Inc. from treating the common equity units issued originally as part of the consideration for the Acquisition (and since re-sold to the public) as Tier I capital, since the new rules apply immediately to instruments issued after May 19, 2010. See Note 14 of the Notes to the Consolidated Financial Statements for information on these common equity units.
Under Dodd-Frank, all bank holding companies that have elected to be treated as financial holding companies, such as MetLife, Inc., are required to be "well capitalized" and "well managed" as defined by the Federal Reserve Board, on a consolidated basis, and not just at their depository institution(s), a higher standard than was applicable to financial holding companies before Dodd-Frank. If we are unable to meet these standards, we could be subject to activity restrictions, ultimately be required to divest certain operations and be restricted in our ability to pay dividends, repurchase common stock or other securities or engage in transactions that could affect our capital or need for capital. See "Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth." Regulation of Over-the-Counter Derivatives. Dodd-Frank also includes a new framework of regulation of the over-the-counter ("OTC") derivatives markets which will require clearing of certain types of transactions currently traded OTC and could potentially impose additional costs, including new capital, reporting and margin requirements and additional regulation on the Company. Increased margin requirements on MetLife, Inc.'s part, combined with restrictions on securities that will qualify as eligible collateral, could reduce its liquidity and require an increase in its holdings of cash and government securities with lower yields causing a reduction in income. MetLife, Inc. uses derivatives to mitigate a wide range of risks in connection with its businesses, including the impact of increased benefit exposures from our annuity products that offer guaranteed benefits. The derivative clearing requirements of Dodd- Frank could increase the cost of our risk mitigation and expose us to the risk of a default by a clearinghouse with respect to MetLife, Inc.'s cleared derivative transactions. In addition, we have always been subject to the risk that hedging and other management procedures might prove ineffective in reducing the risks to which insurance policies expose us or that unanticipated policyholder behavior or mortality, combined with adverse market events, produces economic losses beyond the scope of the risk management techniques employed. Any such losses could be increased by higher costs of writing derivatives (including customized derivatives) and the reduced availability of customized derivatives that might result from the enactment of Dodd-Frank. Volcker Rule. Dodd-Frank restricts the ability of insured depository institutions and of companies, such as MetLife, Inc., that control an insured depository institution, and their affiliates, to engage in proprietary trading and to sponsor or invest in funds (hedge funds and private equity funds) that rely on certain exemptions from the Investment Company Act. Dodd-Frank provides an exemption for investment activity by a regulated insurance company or its affiliate solely for the general account of such insurance company if such activity is in compliance with the insurance company investment laws of the state or jurisdiction in which such company is domiciled and the appropriate Federal regulators after consultation with relevant insurance commissioners have not jointly determined such laws to be insufficient to protect the safety and soundness of the institution or the financial stability of the U.S. Other exemptions, including, but not limited to, activities for risk-mitigating
25
JA-2597 CONFIDENTIAL FSOC_00004397 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 189 of 190
Table of Contents
hedging and activities on behalf of customers, may be available for the general account or separate account activities of insurance companies. Notwithstanding the foregoing, the appropriate Federal regulatory authorities are permitted under the legislation to impose, as part of rulemaking, additional capital requirements and other restrictions on any exempted activity. Dodd-Frank provides for a period of rulemaking during which the effects of the statutory language may be clarified. Among other things, one task of the rulemaking is to appropriately accommodate the business of insurance within an insurance company subject to regulation in accordance with relevant insurance company investments laws. Until the rulemaking is complete, including the scope of the statutory exemptions to be applied to insurance companies for each of the prohibitions on proprietary trading and fund sponsoring or investing, it is unclear whether MetLife, Inc. may have to alter any of its future activities to comply, including continuing to invest in private investment funds for its general accounts or to issue certain insurance products backed by its separate accounts. See "Risk Factors - Various Aspects of Dodd-Frank Could Impact Our Business Operations, Capital Requirements and Profitability and Limit Our Growth." Consumer Protection Laws. Dodd-Frank established the CFPB that supervises and regulates institutions providing certain financial products and services to consumers. Although the consumer fmancial services to which this legislation applies exclude insurance business of the kind in which we engage, the CFPB has authority to regulate consumer services provided by MetLife Bank and non-insurance consumer services provided elsewhere throughout MetLife. Dodd-Frank established a statutory standard for Federal preemption of state consumer financial protection laws, which standard may require national banks to comply with many state consumer financial protection laws that previously were considered preempted by Federal law. The scope of this new standard is currently the matter of some dispute between the Comptroller of the Currency and some state attorneys general, and there have been judicial decisions holding that Dodd-Frank did not change the pre-existing preemption standard as established in earlier judicial decisions. As a result of the new standard, whatever its scope is finally determined to be, the regulatory and compliance burden on MetLife Bank may increase, which could adversely affect its business and results of operations. Dodd-Frank also includes provisions on mortgage lending, anti-predatory lending and other regulatory and supervisory provisions that could also impact the business and operations of MetLife Bank. Orderly Liquidation Authority. Under the provisions of Dodd-Frank relating to the resolution or liquidation of certain types of financial institutions, including bank holding companies, if MetLife, Inc. were to become insolvent or were in danger of defaulting on its obligations, it could be compelled to undergo liquidation with the FDIC as receiver. For this new regime to be applicable, a number of determinations would have to be made, including that a default by the affected company would have serious adverse effects on financial stability in the U.S. If the FDIC were to be appointed as thereceiver for such a company, the liquidation of that company would occur under the provisions of the new liquidation authority, and not under the Bankruptcy Code. In such a liquidation, the holders of such company's debt could in certain respects be treated differently than under the Bankruptcy Code. In particular, unsecured creditors and shareholders are intended to bear the losses of the company being liquidated. As required by Dodd-Frank, the FDIC has established rules relating to the priority of creditors' claims and the potentially dissimilar treatment of similarly situated creditors. These provisions could apply to some financial institutions whose outstanding debt securities we hold in our investment portfolios. Dodd-Frank also provides for the assessment of bank holding companies with assets of $50 billion or more, non-bank SIFIs, and other financial companies with assets of $50 billion or more to cover the costs ofliquidating any financial company subject to the new liquidation authority. In addition, regulations have been issued by the FDIC and the Federal Reserve Board regarding the advance preparation of resolution plans by all non-bank SIFIs and bank holding companies with $50 billion or more of assets. The largest institutions will have to submit resolution plans by July 1, 2012. Under the rule, if MetLife, Inc. remains a bank holding company on this date, or if, in the future, it is designated by the FSOC as a non-bank systemically important financial institution, it would be required to submit a resolution plan. Resolution plans would have to be resubmitted annually and promptly following any event, occurrence, change in conditions or circumstances, or other change that results in, or could reasonably be foreseen to have, a material effect on the resolution plan. A failure to submit a "credible" resolution plan could result in the imposition a variety of measures, including additional capital, leverage, or liquidity requirements, and forced divestiture of assets or operations.
26
JA-2598 CONFIDENTIAL FSOC_00004398 Case 1:15-cv-00045-RMC Document 100-4 Filed 01/27/16 Page 190 of 190
Table of Contents
Regulation of Brokers and Dealers. Dodd-Frank also authorizes the SEC to establish a standard of conduct applicable to brokers and dealers when providing personalized investment advice to retail and other customers. This standard of conduct would be to act in the best interest of the customer without regard to the financial or other interest of the broker or dealer providing the advice.
Source of Strength. Dodd-Frank statutorily imposes the requirement that MetLife, Inc. serve as a source of strength for MetLife Bank.
We cannot predict what other proposals may be made, what legislation may be introduced or enacted or the impact of any such legislation on ourbusiness, results of operations and financial condition. International Regulation
Our international operations are regulated in the jurisdictions in which they are located or operate. This regulation includes minimum capital, solvency and operational requirements. The authority of our international operations to conduct business is subject to licensing requirements, permits and approvals, and these authorizations are subject to modification and revocation. Periodic examinations of insurance company books and records, financial reporting requirements, market conduct examinations and policy filing requirements are among the techniques used by regulators to supervise our non-U.S. insurance businesses. We also have investment and pension companies in certain foreign jurisdictions that provide mutual fund, pension and other financial products and services. Those entities are subject to securities, investment, pension and other laws and regulations, and oversight by the relevant securities, pension and other authorities of the countries in which the companies operate. In some jurisdictions, some of our insurance products are considered "securities" under local law and may be subject to local securities regulations and oversight by local securities regulators.
Our international operations are exposed to increased political, legal, financial, operational and other risks. Our international operations may be materially adversely affected by the actions and decisions of foreign authorities and regulators, such as through nationalization or expropriation of assets, the imposition of limits on foreign ownership of local companies, changes in laws (including tax laws and regulations), their application or interpretation, political instability, dividend limitations, price controls, currency exchange controls or other restrictions that prevent us from transferring funds from these operations out of the countries in which they operate or converting local currencies we hold into U.S. dollars or other currencies, as well as other adverse actions by foreign governmental authorities and regulators. Such actions may negatively affect our business in these jurisdictions. See "Risk Factors - Our International Operations face Political, Legal, Operational and Other Risks, Including Exposure to Local and Regional Economic Conditions, That Could Negatively Affect Those Operations or Our Profitability" and "Risk Factors - Our Insurance, Brokerage and Banking Businesses Are Highly Regulated, and Changes in Regulation and in Supervisory and Enforcement Policies May Reduce Our Profitability and Limit Our Growth." Certain of our international insurance operations may be subject to assessments, generally based on their proportionate share of business written in the relevant jurisdiction, for certain obligations to policyholders and claimants resulting from the insolvency of insurance companies. We cannot predict the timing and scope of any assessments that may be made in the future, which may materially affect the results of operations of our international insurance operations in particular quarterly or annual periods.
Annually, many of our international insurance operations are required to conduct an analysis of the sufficiency of all statutory reserves. In most of those cases, a locally qualified actuary must submit an analysis of the likelihood that the reserves make good and sufficient provision for the associated contractual obligations and related expenses of the insurer. Local regulatory and actuarial standards for this vary widely; the required implied certainty of the signing actuary's opinion varies equally widely.
We are also subject to the evolving Solvency II insurance regulatory directive for each of our insurance operations throughout the European Economic Area. The European Insurance and Occupational Pensions Authority ("EIOPA") established Solvency II as a new capital adequacy regime for the European insurance
27
JA-2599 CONFIDENTIAL FSOC_00004399