MetLife Inc. beat back a U.S. attempt to label it too big to fail, which would’ve put America’s biggest life insurer under tougher government scrutiny and could have forced it to put more money in reserves.

A federal judge in Washington struck down the designation on Wednesday, rejecting the Financial Stability Oversight Council’s rationale for classifying the company as a systemically important financial institution. The reasons for the ruling were sealed by the judge.

The ruling undercuts the foundation of the Obama administration’s plan to more heavily regulate four non-bank businesses it determined had the potential to destabilize the American financial system. MetLife had called the designation arbitrary and unjustified. Chief Executive Officer Steve Kandarian said earlier this year that his New York-based company will shed much of its domestic retail business because SIFI put it at a “significant competitive disadvantage.”

“Most in the market would have had MET not prevailing in this case. This should probably send the stock ripping,” David Havens, a debt analyst at Imperial Capital, wrote in a note. “As for the bonds, the story is more neutral, to actually marginally negative. An extra layer of capital blubber and oversight has appeal to credit investors.”

Shares Jump

MetLife jumped 4.6 percent to $44.40 at 11:28 a.m. in New York trading. Prudential Financial Inc., which is the second-largest U.S. life insurer and was also named a non-bank SIFI, advanced 3 percent to $73.66.

Randy Clerihue, a spokesman for New York-based MetLife, didn’t immediately respond to a message seeking comment. Prudential spokesman Scot Hoffman declined to comment. American International Group Inc. spokesman Jon Diat also declined to comment.

Filed last year, the MetLife suit is the biggest challenge yet to the council that includes Federal Reserve Chair Janet Yellen and Treasury Secretary Jacob Lew. Other non-banks bearing its SIFI designation are American International Group and Prudential, neither of which have brought challenges. General Electric Co. has agreed to sell more than $160 billion of assets since April under a plan to shed the bulk of its GE Capital finance operations. GE has said it intends to submit an application to regulators this quarter to drop the label.

At a February hearing, U.S. District Judge Rosemary Collyer sharply questioned Justice Department attorney Eric Beckenhauer, asking why the council said it would conduct a “vulnerability analysis” of MetLife before making its determination, then failed to do so.

FSOC Questioned

She also asked the government’s lawyer why FSOC assumed that MetLife would be at the brink of collapse. in the event of a fiscal crisis.

“That’s not risk analysis,” she said. “That’s assuming the worst of the worst of the worst.”

Beckenhauer said it’s the nature of such crises to be unanticipated. MetLife is asking her to override the “considered judgment” of the heads of nine major financial regulators, he said.

The government lawyer also said the council was acting upon its congressionally granted authority to assess which nonbank financial companies pose a possible risk to the broader economy. He focused on MetLife’s ties to other firms around the world -- its interconnectedness -- a factor that was crucial in the 2008 financial crisis.

MetLife’s lawyer, Eugene Scalia, son of the late Supreme Court Justice Antonin Scalia, said his client isn’t a financial institution that should be subject to such oversight. He also said the methods used by the council to arrive at its conclusions violated federal administrative procedure law and the company’s right to due process.

“Clouded in Mystery”

The designation process, he said, was “clouded in mystery.” Collyer expressed sympathy for his assertion that the FSOC had said it would conduct a study on MetLife’s risks, or vulnerabilities, but failed to do.

Scalia, a partner at Gibson Dunn & Crutcher LLP who has filed several cases seeking to overturn Dodd-Frank regulations, said companies hit with the FSOC designation were trying to restructure themselves to avoid the extra oversight and associated costs.MetLife has said the FSOC relied on “unsubstantiated speculation” and that it poses no risk to the financial system.

In January, Kandarian announced MetLife plans to pursue a spinoff, sale or public offering of much of its U.S. retail business, which sells variable annuities and life insurance policies and could be subjected to higher capital rules although they’ve not yet been finalized.

While the insurer hasn’t outlined a precise plan, it struck a deal in February to sell a distribution network with 4,000 financial advisers to Massachusetts Mutual Life Insurance Co.

The case is MetLife Inc. v. Financial Stability Oversight Council, 15-cv-00045, U.S. District Court, District of Columbia (Washington).