The Federal Reserve Board is on the case, and the days when insurance company officials can shoot first and then aim are going to end, AIG CEO Robert Benmosche subtly warned the insurance industry Tuesday.
He made his comments to Maria Bartiromo, anchor of the CNBC “Newsmakers” program, just 24 hours after the Financial Stability Oversight Council designated AIG as one of the first two insurance companies to be federally regulated.
Benmosche said AIG has been preparing for federal regulation for months, and “we’re well on our way.”
Benmosche said that, “… we’ve been preparing for it, as we’ve said, over the last year-and-a-half, so it’s not even the last few months. So this has been a long preparation time and the Fed has been with us now since September of last year …,” when government ownership of the AIG fell below 50 percent and the Fed began regulating its thrift, which is based in Wilton, Conn.
He also touched on other issues, saying regulators “have dramatically improved” their grasp of what is going on in the economy, but a “confidence issue on the part of corporate managers” is holding up investment and therefore private market growth.
And, as far as he is concerned, the deal to sell the leasing unit to a Chinese consortium is still on, although the group missed a deadline last week to come up with 10 percent earnest money.
“We’re working towards getting to that point, [i.e. sale of the company] we have not terminated, although we have a right to … in our agreement with them, we’re proceeding to work with them and negotiate through this period of time. So, that’s all I could say at this stage,” Benmosche said.
As to low interest rates, which he acknowledged is squeezing profit margins on life products, Benmosche said he had no idea when the Fed would move to hike interest rates and therefore improve margins.
“It’s the trillion-dollar question,” Benmosche said.
He warned that a hike in interest rates would create a disintermediation issue, “and people leaving one annuity, depending upon penalties, to go to another.
“Just like a CD, you leave the bank, you have a CD, your rates are going up, you may choose to pay the penalty and move your money,” Benmosche said.
“And so that’s where rates at some point in time could be a negative for the insurance company, but I think for the first 100 to 200 basis points, it’s going to be a big positive not only for AIG, which has a big fixed annuity block, a life insurance block, but it’s also going to help most insurance companies,” Benmosche said.
As to the timing, that will be “when the Fed decides the job creation’s there.”
Benmosche added that, “Look, one of the problems of job creation is you have many people who are eligible for or should have or normally would have required that are worried about outliving their income, and so they’re not giving up their jobs and that’s sort of holding back the openings that a lot of young people could fill.”
So, he said, “you’ve got to see that moving along a little bit better, see job creation and unemployment come down.”
In his remarks, Benmosche implied that federal oversight is a fait accompli for insurers in general, not just AIG.
“The Fed is going to put in a banking discipline, and that is they want things to be done exactly what your policies are, what your procedures are, how do you demonstrate you’re following your procedures,” Benmosche said.
“So, they’re going to bring us to a whole new level of discipline around policies, procedures and auditing what we do and accomplish,” he explained.
Benmosche said that the difference between banks and insurers is that “Banks are very particular about reconciling and balancing all the time, especially before they do things; insurance companies have a tendency to do things and reconcile after the fact.”
So, Benmosche said, “it’s a question of when you do your analysis, because insurance companies are traditionally used to more time.”
In other words, he explained, “The Fed is looking for banking discipline and the insurance industry is what they’re going to start moving towards,” although he did not say how the Fed would go about putting its discipline into effect at other insurers. It has taken federal agencies more than two years since the Dodd-Frank financial services reform law was enacted to get to the point of designating two insurers.
In his comments, Benmosche made three other major points.
First, he said the economy is not growing at an ideal pace because “we’re going through a huge psychological change” because people don’t have the confidence in the economy they should have, a confidence driven by the fact that rules are in place to prevent the kind of things that got AIG, and other companies, into big trouble four years ago.
He said that, “People are nervous about investing for the long haul, because the investors don’t want to wait for the long haul.
“You have regulators who are changing the ground rules who haven’t established ground rules yet, so that’s a concern for people,” he said.
“So, there’s a fear of getting caught — whatever caught means in terms of investors, the markets or the regulators. So, people are ultra-cautious; that’s what’s going to hurt the economy,” he said.
To get the economy moving again, Benmosche said that regulators and the people who are being regulated are going to have to “come to terms with the fact that, like it or not, we have dramatically improved the financial system in the last four years, and yet nobody — and you’ve heard me say this before — nobody wants to talk about how much confidence we should all have in companies like AIG.”
He explained, that “four years ago, if we did the testing that the Federal Reserve does now four years ago, AIG would’ve failed across the board.
“And so, therefore, we don’t fail today, we’re in great shape, because we’re running the test,” Benmosche said. “We’re being overseen in a very different way, and I wish we could talk more optimistically about a country that’s doing better than our dialogue is today.”
Another factor is that there is “still … a confidence issue.” He said corporate managers, CEOs, heads of businesses are sitting on cash, uncertain as far as what happens next.
“Why do you think that is, given the level of interest rates, given the fact that you’re looking at a corporate story, $4 trillion, $3.6 trillion estimated of cash on balance sheets, and yet we’re not seeing the kind of euphoria one would expect or vibrancy in business one would expect at this part of the cycle,” Benmosche said.