American International Group is reducing its stock buybacks tobulk up its capital as part of its efforts to transition to federaloversight as a systemically significant financial institution,President and CEO Robert Benmosche acknowledged today.

As part of that effort, AIG is supporting legislation proposedlast week in the Senate and House that would allow the FederalOversight to use current insurance accounting tools instead of"bank-centric metrics," Benmosche said. 

Benmosche's comments were made in response to a question byRandy Binner, a stock analyst at FBR Capital Markets in Arlington,Va.. during AIG's quarterly call with analysts following release ofits first-quarter earnings last night.

It came against the background of disclosure by the FederalReserve Board last week that AIG and Prudential Financial, both ofwhom have been designated as Systemically Important FinancialInstitutions and therefore subject to federal oversight, willreceive such oversight through a "cross-disciplinary special unit"called the Large Institution Supervision Coordinating Committee(LISCC).

According to the Fed statement, AIG and Pru are on a list of 15U.S. and foreign financial firms that "may pose elevated risks toU.S. financial stability" and so will receive additionalsupervision.

The statement said the LISCC is a Federal Reserve System-widecommittee, chaired by the director of the Fed's Division of BankingSupervision and Regulation, which is tasked with overseeing thesupervision of the largest, most systemically important financialinstitutions in the United States. 

The LISCC is comprised of senior officers representing variousfunctions at the Board and Reserve Banks, bringing aninterdisciplinary and cross-firm perspective to the supervision ofthese large, systemically important financial institutions, the Fedsaid. 

Benmosche made mention of this when he told Binner that AIGreduced its stock buybacks in the first quarter as part of itseffort to prepare to federal regulation, which will begin nextyear, or the so-called "stress test," or Comprehensive CapitalAnalysis and Review (CCAR),  that large bank holdingcompanies now undergo annually.  

AIG and Pru will be subject to this test starting next year.

Benmosche said the buybacks have been reduced with an eye oncoming Fed oversight. "We want to make sure that we satisfy,especially the coverage ratio more than as they're asking us to do,and we're in dialogue with them," Benmosche said. He added that AIGwill accelerate this process after it removes in the InternationalLeasing Financing Corporation from its book when it completes thesale of ILFC to AerCap Holdings in the secondquarter. 

As to the Collins Act legislation Benmosche is supporting, hesaid it allows the Fed to examine insurance companies through theircurrent accounting processes, helping the Fed to "clearly take alook at what we do here at the insurance companies."

He said insurance companies' "liabilities are very different andthe way they behave is very different as we begin to match theassets and liabilities." Moreover, the goal of insurance companies"is really long-term solvency to make sure we live up to thepromises that we make to our clients.

"That's a big deal, and not to say the banks haven't gonethrough that as well, but it's a different business and a differentstructure," Benmosche said. "We're continuing to work witheverybody to make sure that, not only in the U.S. but around theworld, we are adhering to and are part of the design of theappropriate regulation," he said.

The Senate version, S. 2270, is expected to be added tolegislation reauthorizing the Terrorism Risk Insurance Act thatindustry officials anticipate will be taken up this month in theSenate Banking Committee.

S. 2270 and H.R. 4510 "clarifies" that the Fed can applyinsurance-based capital standards to the insurance portion of thebusiness, while still keeping banking capital standards for thebanking portion of the business. 

The House and Senate bills also prevent the Fed from requiringmutual insurance companies such as State Farm from preparingfinancial statements in accordance with generally acceptedaccounting principles, when they are already preparing financialstatements in accordance with state-based statutory accountingprinciples.