AIG confirmed last night that it has been designatedsystemically significant by the Financial Stability OversightCouncil, paving the way for possible federal regulation at theholding-company level.

Prudential Financial and GE Capital were also designated at anafternoon meeting of FSOC members yesterday.

The decision is historic in that insurance, according to aCongressional Research Service official, has been state regulatedfor 150 years.

The vote could lead to regulation by the Federal Reserve, but ina different manner than thrift-holding-company insurers.

Non-banks deemed systemically significant will be federallyregulated at the holding-company level—so-called "consolidatedregulation"—and they must also comply with state regulations.

Moreover, expectations from stakeholders such asanalysts, shareholders and customers will be different, potentiallysetting these companies apart from their competitors.

The insurers also might be subject to strict Basel 3 minimumcapital requirements unless insurers are able to get a fix for aseemingly intractable part of Dodd-Frank statute Section 171.

Under the process for designating non-banks as systemicallyimportant financial institutions (SIFI), a two-thirds voteof the FSOC was required, in addition to support from the FSOCchairman, Treasury Secretary Jacob Lew.

If a company does not request a hearing contesting thedesignation, the FSOC has 10 days to make a finaldetermination.

AIG confirmed the proposed designation without comment onwhether it would seek a hearing, but the company had anticipateddecision. Robert Benmosche, president and CEO of AIG, said in anAugust earnings call with analysts that the company viewed thedesignation as a positive because it would help AIG handle what hedownplayed as the 2008 "bump in the night"—the circumstances thatled to a federal rescue of the insurance giant.

"We really don't know when we will be regulated but we dobelieve we will be regulated by the Federal Reserve probably,"Benmosche said then. "That seems the most likely candidate andwe're putting an enormous amount of effort and cost to make surethat we are Fed-ready…," he added.

Prudential Financial said in a statement that it is evaluatingwhether to contest the proposed designation.

Russell Wilkerson, a spokesman for GE Capital, said the firm hadreceived notice from the regulatory group and was "currentlyreviewing the details."

The FSOC decision was immediately criticized by a P&Cindustry official, J. Stephen (Stef) Zielezienski, senior vicepresident and general counsel for the American InsuranceAssociation, who contended that "property and casualty insurersengaged in regulated insurance activities do not pose a threat tofinancial stability and therefore should be screened out of theSIFI designation process."

Just a few minutes before AIG confirmed that it waspreliminarily designated as a SIFI, Standard & Poor's announcedthat AIG will join the S&P 100 index. In the S&Pannouncement, AIG replaced Baker Hughes Inc. (BHI).