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AIG Finds ‘Safer Harbor’ After Years of Retrenchment, Regulation

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The U.S. government and American International Group Inc. have parted ways again, and for the insurer it’s the end of a nine-year journey of retrenchment and reinvention.

Friday’s announcement by the Financial Stability Oversight Council (FSOC) that it canceled AIG’s designation as a systemically important financial institution is a milestone in the company’s history. The New York-based insurer emerges from tight federal oversight as a far leaner operation than it was in 2008, when a tangled web of botched investments led to a $182.3 billion government rescue.

“It’s more of a traditional insurance company now,” Randy Binner, an analyst at FBR & Co., said in a phone interview. “A clean de-designation puts you in a safer harbor.”

(Related: AIG Sheds Too-Big-to-Fail Label in Victory for CEO, Carl Icahn)

The company had to do a lot of cleanup work to get to this point. Headcount tumbled to 56,400 at the end of last year, after surpassing 110,000 in 2008. Nearly $100 billion worth of assets were sold off around the world, ranging from an aircraft-leasing venture, ski operations at Vermont’s Stowe Mountain and a stake in a London airport. Major international life units were sold to a fierce rival, MetLife Inc. Meanwhile, AIG’s executive pay has been among the weakest in the industry when compared to revenue.

“Today, they are a much smaller, much less complex and much less interconnected financial institution,” said Jim Millstein, the former restructuring chief at the Treasury Department who helped steer AIG’s bailout and now runs his own firm.

All that helped the firm repay its bailout by 2012, and the U.S. actually earned a profit on the deal as the nation and its markets bounced back after the credit crisis.

“It was complicated,” Millstein said. “Once I understood the company and the value of its assets, I was reasonably confident that we would get all of our money back, but that depended on the recovery of the financial markets.”

Still, the SIFI designation was imposed in 2013 by the FSOC, a creation of the Dodd-Frank Act that was drafted to guard the financial system against excessive risk. AIG continued its remodeling, and is now dwarfed by other financial institutions by market cap. With a $55 billion market value, it’s a sixth of the size of JPMorgan Chase & Co., and a fifth of the size of Bank of America Corp.

The process was painful. The insurer has had seven different CEOs since 2005 and in recent years paid tens of millions in severance to the departing executives and their deputies. Brian Duperreault, 70, took the top job in May and has been widely seen as a stable candidate to steer the firm and expand it.

Duperreault has taken a different tack than his predecessor, Peter Hancock, who worked to shrink the firm. The new CEO said in August that he would consider acquisitions, and a de-designation by FSOC could help him achieve that goal, analysts have said.

AIG used to dabble in three distinct insurance businesses, which included property-casualty, life, and mortgage coverage. That shrunk to two when Hancock sold the mortgage guarantor to Arch Capital Group Ltd. last year for more than $3 billion. Then Duperreault rearranged the company. One segment will focus on general insurance, another will comprise the life and retirement businesses, including annuities, and the third will focus on technology.

AIG’s escape from SIFI isn’t just about scale. New FSOC appointees by President Donald Trump helped, even as Federal Reserve Chair Janet Yellen voted in the insurer’s favor. FSOC is comprised of leaders including Treasury Secretary Steven Mnuchin, who chairs the committee.

AIG has less of a dependency on other large financial institutions, and has taken steps to buy up securities that more adequately back insurance liabilities to be less risky by FSOC’s standards, two of the people said.

“The council’s decision reflects the substantial and successful de-risking that AIG’s employees have achieved since 2008,” Duperreault said Friday in a statement. “The company is committed to continued vigilant risk management.”

—With assistance from Jesse Hamilton.

— Read Prudential Is Said to Plot Its Escape From Fed’s Tough Oversight on ThinkAdvisor.

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