Filed Under:Markets, Affluent

AIG on the Verge of Federal Regulation

(AP Photos/Mark Lennihan)
(AP Photos/Mark Lennihan)

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 last night 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 Ltd., its Hong Kong-based life insurance subsidiary.

That sale took place Friday.

The decline of U.S. ownership below 50 percent would trigger federal regulation, according to a bevy of securities analysts and industry lawyers, some of whom formerly worked at the Federal Reserve Board.

Federal regulation of AIG cannot occur before the government’s stake in AIG drops below 50 percent 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. 

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 which advises hedge funds and institutional investors, said that, “In short, the company is poised to face real regulatory supervision of its non-insurance 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 at 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.”

Currently, the government owns 53.4 percent 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 percent of AIG.

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 apiece.

According to Benmosche and the analysts, AIG will be subject to federal regulation both because it owns a savings and loan holding company based in Wilton, Conn. now regulated by the Fed, and/or through its designation by the Financial Stability Oversight Council as systemically significant.

AIG’s thrift was formerly regulated by the Office of Thrift Supervision (OTS), and its non-insurance financial activities were supposedly under OTS oversight.

But, the OTS was shut down and its authority to charter and oversee insurance companies shifted to the Office of the Comptroller of the Currency and the Fed through the Dodd-Frank financial services reform law.

The Fed was barred from regulating insurance holding companies through a provision of the 1999 Gramm-Leach-Bliley Act.

That provision was removed through the Dodd-Frank Act.

However, according to an industry lawyer who asked not to be named, the Fed is expected to be a much sterner overseer of thrift holding companies than the OTS was.  

In his note to investors, Schoen said that as a savings and loan holding company, AIG will be subject to the examination, enforcement and supervisory authority of the Fed. 

Under Dodd-Frank, savings and loan holding companies are subject to the same minimum leverage and risk-based capital requirements required of bank holding companies. 

Rules to this effect are currently under development by the Fed, OCC and FDIC.

In a May 2 story, the National Underwriter disclosed that under the supervision of the Fed Board of Governors in Washington, Fed banks in Chicago and Boston are examining the books of insurance companies and their holding companies in order to establish metrics that can be used to evaluate their management and solvency.

In his note, Schoen said AIG may also be required to place its financial activities in a holding company separate from its non-financial activities, with new restrictions between the two entities. 

“Going forward, we expect that AIG will need approval from the Fed before paying dividends,” Schoen said.

As to the offering, Treasury said that besides the initial $18 billion in AIG stock, there will also be grant to the underwriters in offering a 30-day option to purchase up to an additional $2.7 billion in common stock from Treasury to cover over-allotments, if any. 

Citigroup, Deutsche Bank Securities Inc., Goldman, Sachs & Co., and J.P. Morgan Securities LLC have been retained as joint global coordinators for the offering. 

Merrill Lynch, Pierce, Fenner & Smith, Barclays Capital Inc., Morgan Stanley & Co. LLC, RBC Capital Markets, LLC, UBS Securities LLC, Wells Fargo Securities, LLC, Credit Suisse Securities (USA) LLC and Macquarie Capital (USA) Inc. have been retained as joint book-runners for the offering.

Elizabeth Festa also contributed to this story.

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