(Bloomberg) – Now that American International Group Inc. is no longer too big to fail, it has a goal: Get bigger.
The U.S. freed the New York-based insurer from enhanced regulation, removing the scarlet letter it wore since the 2008 financial crisis. That may allow new Chief Executive Officer Brian Duperreault to pursue the takeovers he's said he's wanted to do.
"It's just one less level of oversight concerning the acquisitions he might pursue," said Elyse Greenspan, an analyst at Wells Fargo & Co.
No longer a SIFI
The Financial Stability Oversight Council declared that AIG is no longer a systemically important financial institution, or SIFI, ending the threat of tighter capital rules. Duperreault, who has announced his intent to expand through mergers and acquisitions, is the first AIG chief since the crisis with the opportunity to seek out deals, Ryan Tunis, an analyst at Credit Suisse Group AG, said by phone before the announcement.
"This action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability," Treasury Secretary Steven Mnuchin, a member of the FSOC, said in the statement.
"AIG has shrunk enough that it's now time for them to figure out something different to do with capital," Tunis said. "At this point, there's an argument to be made for the company improving in a business mix standpoint. The way you improve your mix is adding, not by subtracting."
Duperreault is poised to expand AIG's reach after years of contraction since the crisis. The insurer, recipient of a $182.3 billion U.S. rescue, managed to pay back the bailout — and the government booked a profit on the deal. The insurer's workforce tumbled by around half at the end of last year compared with 2008 as the firm sold nearly $100 billion of assets.
"I welcome the decision by the Financial Stability Oversight Council to rescind AIG's SIFI designation. The Council's decision reflects the substantial and successful de-risking that AIG's employees have achieved since 2008. The company is committed to continued vigilant risk management and to working closely with our numerous regulators to enable a strong AIG to continue to serve our clients," said AIG President and Chief Executive Officer Brian Duperreault in a statement released late Friday.
Prudential now sole non-bank SIFI
Prudential Financial Inc., which has been expanding steadily since 2008, is now the sole non-bank SIFI. MetLife Inc. won a legal battle in early 2016 that struck down its designation as too big to fail, a move that sent shares climbing 5.4 percent the day it was announced. FSOC has appealed that decision.
Escaping the label was a boon for MetLife investors. Steven Kandarian, the CEO, previously took a more cautious approach to buybacks because of uncertainty about capital rules. After the legal victory, he tripled the amount his company would allow for share repurchases, saying he would buy back $3 billion in stock, MetLife's largest authorization ever.
AIG had been pursuing buybacks to appease investors including billionaire activist Carl Icahn, who in late 2015 sought a break up of the insurer in order to escape the SIFI label. Duperreault earlier this year advised investors not to count on aggressive share repurchases as the insurer had done in the past because he needed flexibility for priorities including acquisitions — a plan that Icahn blessed, people familiar with his thinking said in June.
Seeking deals
"We've done an enormous amount of share buybacks already," Duperreault, 70, said after AIG's annual meeting on June 28. "I'm saying, 'That's great, but let's use the capital intelligently,' and if it means not buying back shares, because there's another acquisition I could do, or some other application of that capital, I'm going to do it."
The CEO said that AIG has "lots of potential" for international growth through deals or organic expansion. The firm is looking for targets that are " strategically complementary," he said in a conference call with analysts two months later. That includes transactions in personal lines, life insurance and the U.S. market for small- to middle-sized companies, he said.
Removal of the SIFI label would "certainly facilitate growth," said Tom Russo, AIG's former general counsel. Earlier, the Federal Reserve played a significant role in helping AIG overhaul its finance and risk management systems, but the cost has started to outweigh the benefit, he said.
"There's an incredible amount of regulation from the states and AIG is much smaller than it was at the outset," Russo said. "By any standard, and objectively speaking, it is simply not systemically important."
AIG repaid government bailout
The decision frees the New York-based insurer from the threat of more-stringent capital rules. The firm was at the center of the crisis, when its investing blunders led to a government bailout of $182.3 billion. AIG repaid the rescue, turning away from its infamous derivatives portfolio that contributed to the carnage.
The ruling for AIG was a win for activist investor Carl Icahn, who has pushed for ending the designation since taking a stake in the insurer two years ago, and for Brian Duperreault, who took over as chief executive officer in May. Icahn announced his departure as a special regulatory adviser to President Donald Trump in August after questions were raised about potential conflicts of interest with his business dealings.
AIG has privately told the FSOC that it's not a SIFI, partly because the unit with soured investments wasn't an insurance entity, people familiar with the discussions said. Duperreault has been working to reshape the company, and said in August that AIG didn't deserve the SIFI tag after years of slimming down.
The stance was a departure from that of former CEO Peter Hancock, Duperreault's predecessor, who had said getting out from under the SIFI designation wasn't among his top 10 priorities. The insurer didn't publicly fight the risk tag under Hancock partly because of perception, and because executives acknowledged that the firm really was a sprawling operation, the people said.
Duperreault's view aligned with Icahn's
Duperreault's view aligned with Icahn's, who called the regulation a "tax on size." In 2015, Icahn urged Hancock to break up the company, arguing that AIG's businesses would be more valuable if they weren't part of a too-big-to-fail insurer. Icahn, 81, is the fourth-largest shareholder in AIG, according to data compiled by Bloomberg.
AIG was named a SIFI in 2013 in a step by U.S. regulators to protect the financial system from companies seen as posing a potential risk. The designation brought an extra layer of scrutiny and compliance requirements for a company already overseen by myriad state regulators.
Trump's impact
The oversight council is led by Mnuchin and its members, including Federal Reserve Chair Janet Yellen, are a mix of Trump's appointees and holdovers from former President Barack Obama's administration. Trump directed Mnuchin in April to review the designation process.
AIG is the third non-bank SIFI to lose the tag. General Electric Co.'s finance arm asked regulators to drop it from the list after the industrial giant sold more than $200 billion in lending assets. The panel agreed in 2016. MetLife Inc. won a court case last year in which the presiding judge struck down its designation. The government is appealing, in a case that was put on hold while the Treasury Department works on a report.
Prudential Financial Inc., the largest U.S. life insurer by assets, is also deemed too big to fail. The company is laying the groundwork to escape the label, people familiar with the matter said in August.
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