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Regulation and Compliance > Federal Regulation

AIG Sees Regulation as "Big Positive"

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American International Group officials said Friday they are preparing for regulation by the Federal Reserve Board in addition to state regulation.

Indeed, contrary to the views of most other insurance companies, Robert Benmosche, AIG president and CEO, said, “in a way, we see it as a big positive.”

The comments were obviously linked to the announcement after the market closed on Friday that the Treasury Department is selling 163,934,426 shares of its AIG common stock at $30.50 per share in a public offering.

AIG issued a simultaneous announcement that it has agreed to purchase 98,360,656 shares at the public offering price of $30.50. 

At the same time, Benmosche did not specifically say when Federal regulation would begin and analysts did not ask him.

That’s because the new IPO is unlikely to trigger immediate Federal regulation.

It is believed that AIG will come under Federal oversight as a “systemically significant” financial company under a provision of the Dodd-Frank financial services reform law once federal ownership of the company dips below 50 percent.

But, analysts believe that the new offering will still leave Treasury owning 54 percent of AIG stock, above the 50 percent threshold needed to trigger federal regulation of AIG as a so-called systemically significant financial company, or “SIFI.”

Benmosche brought the issue of federal regulation to the front burner by initiating the conference call Friday morning that followed AIG’s second quarter earnings announcement by saying, “We’re often asked about regulation.”

He said he views it that way because it would help AIG handle what he downplayed as the 2008 “bump in the night” that, in fact, triggered a federal rescue of massive proportions.

“We really don’t know when we will be regulated but we do believe we will be regulated by the Federal Reserve, probably.”

“That seems the most likely candidate and we’re putting an enormous amount of effort and cost to make sure that we are Fed-ready …”

The AIG purchase of its own shares from the Treasury is expected to cost $3 billion, money it has set aside to purchase the shares.

However, the final level of Treasury ownership that will remain depends on how much the Treasury gets for the remainder of the offering.

And, a further factor is that the Treasury has granted the underwriters a 30-day over-allotment option with respect to approximately 24.6 million additional shares of AIG common stock.

In his comments, Benmosche said AIG has made a comprehensive study of how it will be impacted by federal regulation, and that its only concern is whether it should divest itself of its Wilton, Conn.-based thrift.

He acknowledged that AIG “is  giving thought to whether we should now close the bank we have because we’re concerned about that aspect of it, and an insurance company invests very differently than a bank would …”

But aside from that issue, he said, “this is really about making sure we have a really good process and good controls, especially in the risk management arena, very good controls around how we determine we can handle a bump in the night that happened in 2008, for example.”

He explained to analysts that, “I don’t think there’s any concern we have about the businesses we have and so on.”

He said AIG has “discussed internally” the effects the Volcker Rule could have on us, and “so there is a little concern there.”

The Volcker rule, which is still being drafted, would severely limit the ability of financial firms to invest in private equity deals for their own account.

He added that the National Association of Insurance Commissioners, (“They do a very effective job in the U.S.”) and international regulators monitor other aspects of the business.

But, he said, the key is that insurance regulators have capital maintenance agreements as to how much capital subsidiaries they regulate must have, so, “The real question becomes the amount of money that we hold at the holding company above all of the regulated entities; and to the extent that we own these regulated entities, what requirements the Fed may have.”

For example, at AIG we have as you know the capital and maintenance agreements, which say that we can contribute money back into the insurance companies if risk-based capital is full.

“We’ve got to make sure that money is actually there and is available if, in fact, there is a crisis at an insurance company,” Benmosche said.

“And so having the Fed regulate that money and making sure that when we have a liquidity plan–we have one– that’s reassuring to the insurance regulators that are looking at AIG’s ability to live up to its commitment. So in a way, we see [Fed regulation] as a big positive.”

Currently, the Treasury Department holds 61% of AIG. The Treasury interest stems from federal intervention starting in September 2008 through the Federal Reserve Board. The Fed agreed to provide $182.3 billion in cash aid to AIG in return for 79.9 percent of its stock.

The Fed and the Treasury ultimately provided more aid through special purpose vehicles created by the Fed, guarantees on its commercial paper, and aid through the Troubled Asset Relief Program and other Treasury programs.

The Fed has since been paid off, either through sale of AIG assets contained in the SPVs, or through acquisition of AIG stock held by the Fed by the Treasury in return for cash that ended the Fed investment.

AIG has been working hard to bring down the government’s investment as soon as possible, hopefully by the fall, and Friday’s night announcement was part of that.

Other insurers, both property casualty and life, are also expected to designated “SIFI,” but they are fighting it tooth and nail, and enlisting the help of members of Congress to support their position.

They could be eligible for Fed regulation either by being designated SIFI or because they own thrift holding companies.

A number of insurers which operate thrifts are moving to either divest their thrifts or reduce their involvement with them.

These include Prudential Insurance Company, Massachusetts Mutual Insurance Company and W.R. Berkley.

But, Benmosche sees federal regulation as a positive. He explained to analysts that, “I don’t think there’s any concern we have about the businesses we have and so on.”

He said AIG has “discussed internally” the effects the Volcker Rule could have on us, and “so there is a little concern there.”

During the conference call, in answering an analysts’ question, Benmosche ran down the laundry list of anxieties businesses have over federal rules designed to tighten regulation of America companies this decade, for example, the so-called Sarbanes-Oxley Act.

“Look, a lot of us were frustrated with SOX 404 and so on,” Benmosche said. “It was a lot of form over substance, but the process itself made sure companies really thought through the controls they need to have to make sure that they issue numbers that are correct,” Benmosche said.

“And so we see [Fed regulation] as an enhancement to that process, and so it’s really about process, policies, and making sure we have really good controls over some of the assumptions around our liquidity and so on,” Benmosche said.

“So that’s really the major change is just how we do things,” he concluded.


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