American International Group is reducing its stock buybacks to bulk up its capital as part of its efforts to transition to federal oversight as a systemically important financial institution (SIFI), president and CEO Robert Benmosche acknowledged today.
As part of that effort, AIG is supporting legislation proposed last week in both the House and Senate that would allow the Federal oversight to use current insurance accounting tools instead of “bank-centric metrics,” Benmosche said.
Benmosche’s comments were made in response to a question by Randy Binner, a stock analyst at FBR Capital Markets in Arlington, Va., during AIG’s quarterly call with analysts following the release of its first quarter earnings last night.
It came against the background of disclosure by the Federal Reserve Board last week that AIG and Prudential Financial, both of whom have been designated as SIFIs, and therefore subject to federal oversight, will receive such oversight through a “cross-disciplinary special unit” called the Large Institution Supervision Coordinating Committee (LISCC).
According to the Fed statement, AIG and Prudential are on a list of 15 U.S. and foreign financial firms that "may pose elevated risks to U.S. financial stability" and so will receive additional supervision.
The statement said the LISCC is a Federal Reserve System-wide committee, chaired by the director of the Fed's Division of Banking Supervision and Regulation, which is tasked with overseeing the supervision of the largest, most systemically important financial institutions in the United States.
The LISCC is comprised of senior officers representing various functions at the Board and Reserve Banks, bringing an interdisciplinary and cross-firm perspective to the supervision of these large financial institutions, the Fed said.
Benmosche made mention of this when he told Binner that AIG reduced its stock buybacks in the first quarter as part of its effort to prepare for federal regulation, which will begin next year, or the so-called “stress test,” or Comprehensive Capital Analysis and Review (CCAR), that large bank holding companies now undergo annually. AIG and Prudential will be subject to this test starting next year.
He said the buybacks have been reduced with an eye on coming Fed oversight. “We want to make sure that we satisfy, especially the coverage ratio, more than they’re asking us to do, and we’re in dialogue with them,” Benmosche said. He added that AIG will accelerate this process after it removes International Leasing Financing Corporation from its book when it completes sale of ILFC to AerCap Holdings, a foreign group, in the second quarter.
The primary sponsor of the legislation in the Senate is Sen. Susan Collins, R-Maine. It would clarify a provision of the Dodd-Frank Act that requires the Fed to provide consolidated supervision of insurance companies that also operate savings and loans. The industry’s concern is that the Fed interprets the amendment as requiring the Fed to use bank-centric metrics in overseeing insurance companies. The amendment would clarify that the Fed could use insurance-specific accounting tools in looking at insurance subsidiaries of insurance companies, and bank-centric metrics in looking at the thrift operations.
Benmosche said insurance companies' “liabilities are very different and the way they behave is very different as we begin to match the assets and liabilities.” Moreover, the goal of insurance companies “is really long-term solvency to make sure we live up to the promises that we make to our clients.
“That’s a big deal and not to say the banks have gone through that as well, but it’s a different business and a different structure,” Benmosche said. “We’re continuing to work with everybody to make sure that not only in the U.S. but around the world we are adhering to and part of the design of the appropriate regulation."
The Senate version, S. 2270, is expected to be added to legislation reauthorizing the Terrorism Risk Insurance Act that industry officials anticipate will be taken up this month in the Senate Banking Committee.
The bill clarifies Sec. 171 of the Dodd-Frank Act, which was sponsored by Collins. It requires the Fed to provide consolidated oversight to insurance companies that operate thrifts. It would also apply to Fed oversight of insurance companies as SIFIs.
A statement by House sponsors of the legislation says that their legislation “revises” Sec. 171, which “requires” the Federal Reserve to apply bank capital rules to insurance companies that it supervises.
S. 2270 and H.R. 4510 “clarifies” that the Fed can apply insurance-based capital standards to the insurance portion of the business, while still keeping banking capital standards for the banking portion of the business, the statement said.
The House and Senate bills also prevent the Fed from requiring mutual insurance companies such as State Farm from preparing financial statements in accordance with generally accepted accounting principles, when they are already preparing financial statements in accordance with state-based statutory accounting principles.