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AIG details improvement plan amid calls for strong action

Posted On: Jan. 31, 2016 12:00 AM CST

Is there an “urgent” need for American International Group Inc. to shed its designation as a systemically important financial institution, or are calls to break up the insurer merely a “red herring”?

Both arguments were made last week as AIG President and CEO Peter Hancock outlined a plan to improve the insurer's performance.

The plan includes strengthening AIG's property/casualty reserves, offering up to 19.9% of its United Guaranty Corp. mortgage insurance operation in a stock offering later this year as the first step toward divestment and selling its broker-dealer group for an undisclosed sum.

AIG is one of three insurers — the others being MetLife Inc. and Prudential Insurance Co. — on which the Financial Stability Oversight Council has imposed SIFI status. According to the council, it can make such a designation if it “determines that material financial distress at the nonbank financial company or the nature, scope, size, scale, concentration, interconnectedness or mix of the activities of the nonbank financial company could pose a threat to the financial stability of the United States.”

SIFIs are subject to heightened supervision by the Federal Reserve.

Activist investor Carl Icahn first raised AIG's SIFI status in late October in calling for breaking AIG up into three companies — property/casualty, mortgage and life insurance —to enhance shareholder value.

“The regulators have made clear that the best outcome is for SIFIs to shrink and "reduce their systemic footprint,'” Mr. Icahn wrote in an Oct. 28 letter to Mr. Hancock. “If nothing is done, returns and AIG's competitive position will continue to suffer as the SIFI regulation, including its costs and capital requirements, is fully implemented.”

Mr. Icahn has repeated that call since then, most recently in a Jan. 19 letter to the company's board in which he said there “is only one sensible path for AIG to follow: become a smaller, simpler company with a path to de-SIFI.”

AIG has rejected the idea, and during a webcast last week, Mr. Hancock addressed the SIFI issue directly: The designation, he said, has “provided little to no additional expense” with compliance costs of $100 million to $150 million a year. Being designated a SIFI “has not prevented the return of capital” to shareholders, Mr. Hancock said.

While changing conditions could lead AIG to “consider an exit route” in the future, “worrying about a SIFI designation today is a distraction to the important actions we have just announced,” Mr. Hancock said.

During last week's webcast, Mr. Hancock also called concerns about the designation a “complete red herring.”

Observers split on how the SIFI designation has affected AIG.

“I'm pretty firmly of the view that at this point the SIFI designation is not preventing them from doing anything they want to do or need to do,” said Mark Dwelle, an insurance analyst at RBC Capital Markets Inc. in Richmond, Virginia. “I think the designation for nonbank companies is as much political as financial — (FSOC) have not established any capital requirements and they have not established an off ramp, so there's no way of knowing whether what they're doing would get them any closer to losing that designation or not.”

“I think any of AIG's capital needs stemming from SIFI status are masked by the capital needs of its status as a weak (property/ casualty) underwriter,” said Meyer Shields, a managing director at Keefe, Bruyette & Woods Inc. in Baltimore. “If it's successfully addressed, the reserve issues and overall profitability improves, then SIFI status could start to matter, but right now, I don't think it does.”

But Josh Stirling, a senior analyst at Sanford C. Bernstein & Co. L.L.C. in New York, took a different view.

“We think pursuing a path to de-SIFI must be an urgent strategic priority for the firm, but with no apparent plans to de-SIFI, clearly the company disagrees,” Mr. Stirling said in a research note last week.

“We struggle to understand this posture from the company, since we believe that being a SIFI adds substantial direct costs if fully loaded (technology, audit, modeling, consulting, etc.), capital (we believe stress testing leads to capital held at AIG of 30% or more) and a huge tax in the form of a major strategic and operational distraction for this already overly complicated and challenged firm,” he wrote. “Practically none of their competitors have to face similar hurdles.”

Mr. Stirling added that he believes time is of the essence. “It appears the de-SIFI window may be open,” he said in the note.

Looking solely at the issue from a regulatory angle, an insurance attorney said AIG can handle the technical aspects of the designation.

“AIG has a lot of skilled people including people who interact with regulators,” said Tom Dawson, a partner in the New York office of Drinker Biddle & Reath L.L.P. and co-head of the firm's insurance transactional and regulatory team. “I would have felt that AIG had this well and truly buttoned up in terms of the reports that are required by various regulators, and they cope with it. I believe it is a bit of a red herring.”