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AIG set for growth after losing ‘too big to fail’ tag

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The rescission of American International Group Inc.’s “too big to fail” designation should pave the way for the insurer to fully engage in mergers and acquisition opportunities and concentrate on AIG President and CEO Brian Duperreault’s stated goal of growing the company, observers say.

By a 6-3 vote on Friday, the Financial Stability Oversight Council rescinded AIG’s designation as a systemically important financial institution, which subjected the insurer to stricter oversight and stricter capital requirements. Since the 2008 financial crisis, the FSOC has held the responsibility of evaluating companies and had designated four nonbank institutions, including AIG, as SIFIs.

The decision comes nine years after the government injected more than $180 billion into the insurer to prevent its collapse amid the financial crisis. AIG was a key player in the credit default swap market and officials feared its collapse would cause spiraling problems with other financial institutions.

“They didn’t just have the designation,” said Cynthia Borrelli, a principal and head of the insurance law practice of Bressler, Amery & Ross P.C. in Florham Park, New Jersey. “They were the root cause of federal financial regulation geared toward eliminating risk in the insurance industry. They really wore the scarlet letter so the fact that they have done enough in terms of de-risking, shedding a lot of their diverse operations to limit the risk to the enterprise successfully in less than 10 years, it’s pretty amazing.”

The designation prevented them from diversifying their operations, she said. 

“They had to focus on insurance operations and profitability,” Ms. Borrelli said. “Now that they don’t have the label, it means they’re not subject to the same capital restrictions.”

Analysts say the move will lower AIG’s compliance costs and possibly give it more financial flexibility.

“There was definitely a big compliance effort required and there was a significant cost to that,” said James Auden, managing director at Fitch Ratings Inc., in Chicago.

In a note released on Sunday, Keefe, Bruyette & Woods Inc. analyst Meyer Shields noted that AIG CFO Sid Sankaran had estimated AIG’s annual SIFI-related compliance costs at between $100 million and $150 million.

AIG has undergone significant changes since the financial crisis, Mr. Auden said.

“The company, since they were named a SIFI, has changed considerably and now they are not that different from other multinational property/casualty companies anymore,” he said. “The financial products, credit default swaps and other investments have been gone for some time.”

The removal of the SIFI designation also means the removal of uncertainty surrounding the potential imposition of more stringent capital requirements for SIFIs, Mr. Auden said. “I think the company now has a plan to shift towards a growth mode and some of that uncertainty being removed may be helpful as they pursue new business opportunities in their insurance business.”

“In theory, the SIFI designation removal probably increases AIG’s capital flexibility, but we don't think the designation had actually impeded AIG’s past aggressive share repurchases and we also think current management is more focused on M&A,” Mr. Shields said in his note.

“It is an important milestone in AIG’s history after the government bailout during the financial crisis. We think the near-term financial benefit is limited. However, the de-designation could provide the company with greater capital flexibility,” Morgan Stanley said in a research note Monday.

Standard & Poor’s Global Inc. said in a note Monday that it’s A+ financial strength rating for AIG will not be affected by the decision and that the insurer remains strongly capitalized.

“We continue to believe that AIG will hold very strong capital according to our capital model,” S&P said in its note,

AIG may also look to increase its M&A activity, analysts said.

“We think AIG’s biggest benefit is the removal of potential SIFI-related regulatory friction, both in general and to whatever extent it could have impeded large acquisitions,” Mr. Shields said his note. “We still think AIG is likely to buy a domestic small- to mid-sized commercial account insurer, with that strategy likely running parallel to its current efforts at improving its current large commercial account’s underwriting underperformance through improved risk selection.”

The lifting of the designation will facilitate Mr. Duperreault’s ability to implement his vision for the insurer, including attracting the right talent to “build the new AIG,” said Elliott Kroll, a New York-based partner with Arent Fox L.L.P.

“He’s going to make AIG a more strategic player in the market in a constructive and positive fashion,” he said.

Following Friday’s decision, Newark, New Jersey-based Prudential Financial Inc. is the only nonbank entity still tagged as “too big to fail” – a decision the insurer hopes will be rescinded.  

“We are encouraged by the FSOC decision and will consider our options while contesting our designation through the review process,” the insurer said in a statement on Friday. “Prudential has long maintained that we do not meet the standard for designation. With (Friday’s) action, now only one company is subjected to duplicative oversight – creating an unbalanced playing field and illustrating the arbitrary nature of individual designations. This underscores the need for FSOC to reexamine its process and rescind our designation.”

For some observers, the AIG rescission could portend a shift away from federal oversight of the insurance sector.

“I hope it means that the feds will stay in their own backyard and that they’ll leave the regulation of the business of insurance to the states,” Ms. Borrelli said. “I am a huge believer in the state system. I don’t see there’s going to be an active role for the feds. The federal efforts were needed to react to the financial crisis, but another layer of regulation was time consuming, costly and it diverted the attention of all the insurers from the business of insurance.”