Monday, October 21, 2013 No. 4: Metlife's Incomplete Explanation about Runs Steven A. Kandarian is chairman, president, and chief executive officer of MetLife, Inc. (NYSE:MET). On August 1, 2013, during the firm's second quarter earnings conference call, he explained why he thinks the company should not be designated a "systemically important financial institution." I am not suggesting whether or not the company should be so designated, but I think his explanation was incomplete.
Mr. Kandarian said the long-term nature of a life insurance company's liabilities "protects against bank-like runs and the need to sell assets quickly." Regarding products with a savings component, he said "there are strong disincentives to surrender and cash out." He mentioned surrender charges, tax penalties, and the fact that new policies need to be underwritten. He also said insurance regulators "have the ability to halt surrenders in the event of financial distress, and have typically done so."
Everything Mr. Kandarian said is accurate, but there are at least two important points he did not mention. First, policy loans are important, as evidenced by the potentially fatal runs experienced by several large companies because of low fixed policy loan interest rates when market interest rates spiked in 1981. New policies issued today usually have variab
Monday, October 21, 2013
ReplyDeleteNo. 4: Metlife's Incomplete Explanation about Runs
Steven A. Kandarian is chairman, president, and chief executive officer of MetLife, Inc. (NYSE:MET). On August 1, 2013, during the firm's second quarter earnings conference call, he explained why he thinks the company should not be designated a "systemically important financial institution." I am not suggesting whether or not the company should be so designated, but I think his explanation was incomplete.
Mr. Kandarian said the long-term nature of a life insurance company's liabilities "protects against bank-like runs and the need to sell assets quickly." Regarding products with a savings component, he said "there are strong disincentives to surrender and cash out." He mentioned surrender charges, tax penalties, and the fact that new policies need to be underwritten. He also said insurance regulators "have the ability to halt surrenders in the event of financial distress, and have typically done so."
Everything Mr. Kandarian said is accurate, but there are at least two important points he did not mention. First, policy loans are important, as evidenced by the potentially fatal runs experienced by several large companies because of low fixed policy loan interest rates when market interest rates spiked in 1981. New policies issued today usually have variab