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AIG singled out for greater federal oversight

Insurer could face stricter capital rules, stress assessments

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AIG singled out for greater federal oversight

American International Group Inc. may be the only property/ casualty insurer to be considered a systemically important financial institution and subjected to greater federal oversight, experts say.

The possibility became clear last week when AIG said that it had received notice that it is under consideration by the Financial Stability Oversight Council “for a proposed determination that AIG is a systemically important financial institution pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act.”

The notice of consideration “states that it is intended to inform AIG that it will be reviewed in stage three of the process described in the council's interpretive guidance for nonbank financial company determinations and does not constitute notice of a proposed determination,” AIG said in the statement.

An AIG spokesman declined comment on the notice.

The FSOC did not disclose which nonbank financial institutions to which it sent the notices. No other property/casualty insurers indicated that they had received such a notice.

If AIG were to be designated a SIFI, it would be subject to capital plan and stress requirements to determine whether it has the capital necessary to absorb losses due to adverse economic conditions. It also would have to meet stricter prudential standards, including stricter requirements and limitations relating to risk-based capital, leverage liquidity and credit exposure, as well as overall risk management requirements. It also would become subject to a new early remediation process administered by the Federal Reserve Board.

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While individual insurers and their trade organizations have argued consistently that property/casualty insurers do not pose a systemic risk and should not be regulated under Dodd-Frank, AIG President and CEO Robert H. Benmosche has said he would welcome federal oversight.

“We want Federal Reserve regulation,” Mr. Benmosche said in an interview last month on CNBC. “We encourage federal regulation because we want our clients, for sure, to know that we're regulated; and when we make promises, somebody's watching over our shoulder making sure we don't do what we did before and cause these problems.”

The problems peaked in 2008 when the government bolstered AIG with $182 billion in financial assistance as the insurance giant approached collapse because of problems with noninsurance-related activities. While the government once controlled nearly 80% of AIG, the insurer and the Treasury Department last month said that AIG had repaid all of the federal assistance, although Treasury continues to hold 15.9% of AIG's common stock.

That AIG would receive a review notice did not surprise industry observers.

“I do not think that AIG is at all surprised,” Howard Mills, director and chief adviser at the insurance industry group at Deloitte & Touche USA L.L.P. in New York and a former New York superintendent of insurance, said in an email. “Mr. Benmosche has been vocal in saying that they expect to be considered for SIFI designation and they are well prepared.”

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“In our view from a political standpoint, AIG was the "too-big-to-fail' poster child at least partially responsible for the push to more heavily regulate nonbank systemically important financial institutions in the first place, so we think its progression in the FSOC's review process is expected and shouldn't surprise many investors,” Meyer Shields, Baltimore-based director at Stifel Nicolaus & Co., said in a research note.

Additional layers of regulation are “seldom a positive, and at least initially, if AIG receives the FSOC's nonbank SIFI designation, we'd anticipate that regulators would prefer more capital to less, likely limiting AIG's share repurchase and eventual dividend paying ability,” Mr. Shields said.

James Auden, an analyst at Fitch Ratings Inc. in Chicago, said AIG is “somewhat unique” as a property/casualty insurer, and that Fitch had not heard that others might be designated as such, although that could change.

“Compliance costs escalate as you're regulated by more bodies,” he said, and conflicting overlaps among regulations could emerge.

“We're not expecting any other pure property/casualty companies” to be considered for a SIFI designation, said Mark Dwelle, an insurance analyst at RBC Capital Markets, a unit of RBC Securities Inc. in Richmond, Va. He said that assessment is due partly because no property/casualty insurer came under increased federal scrutiny in the last financial crisis.

Minimum asset levels to determine whether a nonbank financial institution could be considered a SIFI “rule out a vast proportion of them,” Mr. Dwelle said. “Only a handful would make the asset tests.”

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“It's no real surprise that they could be so designated,” said John Lobert, a former senior insurance trade group executive and founder of Lobert Legislative & Regulatory Consulting in Lisle, Ill. “The taxpayers had to save the company from collapse.”

But he dismissed arguments that more extensive regulation could be a competitive advantage.

“While AIG has certainly recovered in the marketplace as well as otherwise, the marketplace's memory is not short-term; it will remember that AIG once engaged in risky business,” Mr. Lobert said. “I don't think it's going to hurt them or help them.”

“It's no surprise whatsoever that this announcement came out,” said John Ward, principal of Cincinnatus Partners L.L.C. in Loveland, Ohio. “There are pluses and minuses,” he said.