American International Group Inc. said a U.S. panel told the insurer it’s under consideration to be labeled a potential risk to the financial system, the first non-bank to report such notification in a process that could lead to tighter capital rules.
The Financial Stability Oversight Council informed AIG of its status, the New York-based insurer said today in a statement. The council said last week that it voted to advance “certain” non-bank financial companies to a third stage of review for possible designation as a systemically important financial institution, without publicly identifying the firms.
The “tangible impact of being designated a SIFI, it’s expected, will be increased capital requirements,” said Howard Mills, chief adviser of Deloitte LLP’s insurance-industry group, and New York State’s former insurance regulator. “That’s less capital you can deploy.”
The council, led by Treasury Secretary Timothy F. Geithner, is evaluating which companies should be subject to Federal Reserve supervision including stress tests, higher capital levels and tougher liquidity requirements. U.S. watchdogs are seeking to prevent further taxpayer bailouts by making sure a firm’s failure wouldn’t jeopardize the financial system.
AIG became a “poster child” of a too-big-to-fail company after losses on derivative trades pushed the firm to a U.S. bailout that swelled to $182.3 billion, said Meyer Shields, an analyst at Stifel Nicolaus & Co., in a note today.
‘Seldom a Positive’
“Additional layers of regulation are seldom a positive,” Shields wrote, and if AIG is designated a potential risk, the immediate effect may be that “regulators would prefer more capital to less, likely limiting AIG’s share repurchase and eventual dividend-paying ability.”
MetLife Inc. and Prudential Financial Inc., the two largest U.S. life insurers, have questioned the need for increased U.S. oversight. Insurers are mostly overseen by regulators at the state level. The two companies have said that bank rules may not be a good fit for life insurers, which often retain policyholder funds for decades before paying benefits and may be less vulnerable to client withdrawals.
MetLife and Prudential, which were among the largest financial firms in the U.S. to avoid bailouts, “have an argument that they didn’t cause” the credit crisis, said Lawrence Kaplan, a bank regulatory attorney at Paul Hastings LLP in Washington. For regulators, “it’s not the last crisis, it’s the next crisis, and making sure someone is watching over.”
The federal designation could give smaller insurers an advantage against large companies that “would have to hold more capital and maintain higher liquidity levels,” William Wheeler, MetLife’s president of the Americas, told a Congressional committee in May. Proposed U.S. rules “would reduce returns on equity for shareholders and impose higher prices on customers.”
AIG has been preparing to be regulated by the Fed and isn’t concerned about the effect on its main businesses, the company has said. The firm said last month the Fed will become its regulator after U.S. ownership of the bailed-out insurer dropped below 50 percent. Increased supervision could limit some securities trading and derivative bets, the company has said.
“We’re putting an enormous amount of effort and cost to make sure that we are Fed-ready,” Chief Executive Officer Robert Benmosche said on an Aug. 3 conference call with analysts.
Benmosche’s firm climbed 0.6 percent to $33.47 at 4 p.m. in New York. The company has surged 44 percent this year as the U.S. lowered its stake to 16 percent through share sales.
AIG’s rescue, which was recouped last month, was among measures the U.S. government and central bank undertook to thwart the deepest financial crisis since the Great Depression. As much as $12.8 trillion was spent, lent or committed to bolster financial firms and automakers.
Hartford Financial Services Group Inc. and Lincoln National Corp. were other U.S. insurers to be rescued by taxpayers. Both repaid bailout funds in 2010.
For insurers to “suggest that their business model somehow renders them immune to another financial crisis is revisionist history,” said Neil Barofsky, former inspector general of the U.S. Troubled Asset Relief Program, in an e-mail today. “Given that three major insurance companies participated in the bailouts, and that one was effectively nationalized because of the perceived systemic harm that would result from its failure, today’s arguments will hopefully fall on deaf ears.”
The oversight council was created in the aftermath of the crisis under the Dodd-Frank law and evaluates leverage and derivative liabilities of firms with more than $50 billion in assets. A company under consideration as a SIFI can challenge the notice within 30 days.
Bank holding companies with more than $50 billion in assets -- including Bank of America Corp., JPMorgan Chase & Co., Morgan Stanley, Goldman Sachs Group Inc., Wells Fargo & Co. and Citigroup Inc. -- are automatically subject to heightened Fed supervision under Dodd-Frank. Non-banks designated systemically important would get Fed oversight similar to that of the large lenders.
Prudential has said it meets the council’s thresholds for further evaluation and GE Capital, the finance arm of General Electric Co., has said it expects to be named systemically important. Russell Wilkerson, a spokesman for the GE unit, declined to comment on the latest stage of the council’s review.
“The SIFI designation process involves a number of steps, and we will disclose our designation once the final decision has been made,” he said in an e-mail today. Bob DeFillippo, a Prudential spokesman, declined to comment.
MetLife has been regulated by the Fed because it owns a bank. The firm is seeking to exit banking to limit oversight, which has prevented the New York-based firm from boosting its dividend or repurchasing shares.