U.S. Rescinds Federal Oversight of AIG -- Update

By Leslie Scism and Ryan Tracy Features Dow Jones Newswires

U.S. officials voted Friday to remove federal oversight of American International Group Inc., an insurance company now about half the size it was when it was on the brink of collapse and became a poster child of the global financial crisis.

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The Financial Stability Oversight Council, a group of senior financial regulators, voted 6-3 to rescind the global insurer's designation as a "systemically important financial institution," indicating they no longer view AIG as a threat to the broader economy.

The move frees the insurance company of stricter oversight by the federal government, such as tighter capital rules, federal approval for large mergers and placement of government examiners at the firm. Many of the rules for insurance companies have yet to be written.

The council applied the label to AIG in July 2013 and previously had affirmed its findings annually. This year, regulators appointed by President Donald Trump reversed course, pushed along by new leaders at AIG who were more aggressive about disputing the systemically important tag.

"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 said in a statement.

Two Obama-era appointees, Federal Reserve Chairwoman Janet Yellen and Roy Woodall, the council's insurance expert, joined four Trump appointees in approving the action. Three Obama appointees opposed the move. Securities and Exchange Commission Chairman Jay Clayton recused himself.

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Ms. Yellen declined to comment through a spokesman.

AIG "has changed dramatically since the start of the financial crisis," said National Credit Union Administration Chairman Mark McWatters, a council member who voted in favor of removing the label. "It's time to let them go back to traditional insurance regulators."

Freeing AIG of the label is steeped in significance. AIG received one of the government's biggest bailouts during the crisis as regulators feared its collapse would have far-reaching and unpredictable repercussions. It had extensive and complex financial dealings with big banks and other financial firms in the U.S. and Europe.

Its rescue package, which ultimately topped $182 billion, upset homeowners who were struggling to keep up mortgage payments. The missteps that brought AIG to the brink played heavily into lawmakers' decision to create the new oversight council in the 2010 Dodd-Frank financial regulatory law and give it the authority to pull in firms such as AIG for tougher regulation.

AIG fully repaid its bailout by the end of 2012 by selling off businesses and other assets to roughly halve its size. Months later, the oversight council determined AIG posed a risk to the economy and designated it as systemically important. It was the first time the council had used its main Dodd-Frank power.

Entering 2008, AIG had $1.048 trillion in assets on its books, though their true value was unknown at that point. Many government and insurance officials expected a liquidation.

As of June 30, 2017, the company had $499.76 billion of total assets. That makes it smaller than other insurers not labeled significantly important, including Warren Buffett's Berkshire Hathaway Inc., which has $666 billion in assets.

AIG remains one of the world's biggest sellers of property-casualty insurance to businesses worldwide and is also a major seller of life insurance and retirement-income products in the U.S., along with home and car insurance to wealthy households.

Removal of the label leaves Prudential Financial Inc. as the sole non-bank firm with the label, for now. Regulators rescinded it for General Electric Co.'s financing arm in June 2016.

Another insurer, MetLife Inc., successfully challenged its designation in federal court, though the matter was appealed and is now on hold while the Treasury Department reviews the designation process.

Some Wall Street analysts think Prudential will be freed of its label soon. Prudential said in a statement earlier in September that it doesn't meet the standard for the designation and that "flaws in the review process led to this outcome."

Analysts said AIG's share price in recent weeks has reflected a high probability that it would get out of the label. Still, action by regulators could give shares a lift "as it should help reduce regulatory costs and eliminate the potential annual 'black cloud' associated with" stress testing by the Fed, Thomas Gallagher of Evercore ISI said in an analyst note.

Write to Leslie Scism at leslie.scism@wsj.com and Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

September 29, 2017 18:44 ET (22:44 GMT)