(ED Note: This story originally appeared on our sister site LifeHealthPro.)
American International Group is on the verge of becoming the first insurance holding company ever regulated by the federal government.
In a statement, the Treasury Department said Sunday that it is launching a public offering of $18 billion of AIG stock. Simultaneously, AIG said it would purchase up to $5 billion of that stock.
AIG is expected to use cash on hand as well as more than $2 billion gained from the sale of some of its remaining holdings in American International Assurance, or AIA Group, its Hong Kong-based life insurance subsidiary. That sale took place Friday.
The decline of U.S. government ownership below 50% would trigger federal regulation, according to a bevy of securities analysts and industry lawyers, some of whom formerly worked at the Federal Reserve Board.
The government owns 53.4% of AIG, according to an investor’s note last week by John Nadel of Sterne Agee & Leach in New York. If the Treasury Department is able to sell all of the shares (it seeks to sell at around $34 a share), it would retain approximately 23% of the company.
Federal regulation of AIG cannot occur before the government’s stake in AIG drops below half because the government cannot regulate something in which it holds a majority interest, according to various industry lawyers, some of whom have worked for federal financial service regulatory agencies.
A spokesman for the Fed would not confirm or deny it.
Under an amendment to the Dodd-Frank financial services reform law, if AIG is regulated as a thrift holding company, it would be subject to consolidated regulation by the Federal Reserve Board.
In a note to investors on Aug. 31, Ray Schoen of Washington Analysis, a buy-side securities analytical group that advises hedge funds and institutional investors, said that, “In short, the company is poised to face real regulatory supervision of its noninsurance financial business for the first time in its history.”
Schoen said that, “While Treasury’s exit is certainly a long-term positive for AIG, investors should be aware that federal regulation presents a litany of new restrictions for the company, including minimum leverage and risk-based capital requirements, as well as restrictions on dividend payments and share buybacks.”
The National Underwriter published a story on Aug. 6 based on comments Robert Benmosche, AIG’s president and CEO, made on its Aug. 3 earnings conference call with analysts, where it was said that AIG is preparing for federal regulation in addition to state regulation.
In its comments to security analysts that day, Benmosche added, “in a way, we see it as a big positive.”
The U.S. needs to average about $28.73 on the sales to break even on the stake it acquired as part of a 2008 bailout, not including unpaid dividends and fees, according to a study last year by the Government Accountability Office. The first two offerings were priced at $29 a share and the second two at $30.50.