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Wednesday, October 04, 2017 3:08 PM ET

Market Watchers: Feds Will Soon Remove SIFI Designation From Prudential, End ‘Hotel California’ Regs

 

WASHINGTON - Prudential Financial Inc., the lone remaining insurer designated as a systemically important financial institution, will soon shed that designation as federal regulators turn away from a set of “Hotel California,” regulations that previously provided no exit ramp, market watchers said.

“I expect that Prudential will be de-designated and I don’t anticipate any more nonbank SIFI de designations,” Grace Vandecruze, managing director of Grace Global Capital, a boutique investment banking firm, told Best's News Service.

Prudential is the last SIFI standing after the Financial Stability Oversight Council on Sept. 29 voted 6-3 to remove the designation from American International Group Inc. The council declared AIG was no longer a threat to the U.S. economy (Best’s News Service, Oct. 1, 2017).

“I think the industry has found the exit ramp for this Hotel California that the FSOC has set up

through the Dodd-Frank Act,” Vandecruze said. “It is not surprising. The Trump administration

has promised to deregulate the industry, and the SIFI designation was a target of that

deregulation.”

Removing the SIFI designation should provide an economic boost to AIG and eventually Prudential. 

“This was an overhang on the stock prices of the SIFI-designated companies and you are going to see a lift in stock prices,” Vandecruze said. “Investors hate uncertainty.”

In the wake of the financial crisis, the council declared three insurers — AIG, Prudential and MetLife Inc. — as potential sources of theoretical financial calamity. MetLife, which shed its designation through litigation, argued the SIFI designation was tilting the playing field in favor of undesignated competitors.

“There were added costs in compliance and it added to uncertainty and confusion,” Vandecruze

said. “It will be seen as a textbook case of regulation gone wrong.”

In a statement released after the AIG vote, Prudential made the same point.

Tuesday, May 25, 2017 5:48 PM ET

Life Insurance Stocks Gain Despite DOL's Surprise Fiduciary Rule Move

 

Fidelity & Guaranty Life's shares advanced nearly 9% on May 24 on a more than 60-fold jump in trading volume after CF Corp. announced its agreement to buy the insurer for $31.10 per share in cash. Fidelity & Guaranty's shares had closed at $28.70 prior to the announcement. Trading volume surged after the deal was announced, to more than 14.9 million shares from just shy of 233,000 on May 23.

The two sides reached an agreement a month after Anbang Insurance Group Co. Ltd.'s bid for Fidelity & Guaranty came apart over a regulatory problem. But potential acquirers from China will not be discouraged, Grace Vandecruze, an insurance M&A adviser, said in an interview.

"I do believe the appetite for Chinese investors acquiring insurance companies in the United States is still strong," Vandecruze said.

Labor Secretary Alexander Acosta said his department had no principled legal basis upon which to delay the rule change further. Many in the life insurance and asset management industries have opposed the proposal vehemently for its expected effect on sales of variable-rate annuities and the possibility that more financial advisers would face litigation over the investment advice they give.

The move threw cold water on expectations that the Trump administration would usher in a time of deregulation, said Vandecruze.

"We underestimated the risk of continued regulation," Vandecruze said. The result will be continued pressure on earnings and increased compliance costs for companies in the space, she said.

Thursday, July 07, 2016 6:14 PM ET

Life Insurers' Values Slide Amid Concerns Over Investment Income

 

Insurance M&A adviser Grace Vandecruze thinks the darkened outlook that followed the U.K.'s vote to exit the European Union could pressure interest rates downward and force U.S. life insurance companies to reformulate their portfolio mix for investment income.

 

"The industry could have to do a drastic recalibration of their investment models as companies continue to search for yield and navigate this unchartered rate territory," Vandecruze, founder of Grace Global Capital, said in an interview. "Those waters could lead to hazardous straits of zero and even subzero interest rates with further quantitative easing," Vandecruze said. "Several nations have seen interest rates dip below zero, and the world has become more economically uncertain," she added.

 

"The path to economic recovery has become more and more difficult to foresee, and coupled with geopolitical risk, the Feds may have to continue easing," she said.

& MORE