If you're an American International Group (NYSE: AIG ) investor, you're probably keenly aware of two things: 1) management has been shedding non-core operations ever since the company almost went belly-up in 2008, and 2) regulator scrutiny of insurers has been steadily increasing as we move forward from said near-collapse. Combine the two factors, and it's clear that AIG's exit from its banking operations is a wise decision for the insurer and its investors. But the timing of the firm's exit may tell you more about management than initially meets the eye.
A big withdrawal
As of Sept. 30, AIG will be closing all of its consumer bank accounts and returning the balances to its customers. The move comes on the heels of new declared regulatory limits on insurers with banking operations. The added regulations are targeted at proprietary trading and investments in hedge funds or private equity at insurers that take deposits.
AIG isn't the only insurer to make the timely exit, as Principal Financial Group (NYSE: PFG ) is also making a clean getaway prior to new rules being instated. MetLife (NYSE: MET ) , Allstate (NYSE: ALL ) , and Hartford Financial Services (NYSE: HIG ) have already sold their deposits to other firms or closed out accounts.
Since interest rate pressure has affected the profitability of insurers' investments, AIG and others have utilized alternative investments to boost investment income -- a major factor in their overall business model. As of June 30, AIG had over $19 billion invested in alternatives, which include hedge funds and private equity, and the success of such investments were buoying the company's investment income in the face of continued pressure on conventional investments. Needless to say, the less than $1 billion in savings and loan assets from AIG Federal Savings Bank were of far less importance.
Timing is everything
AIG's management team has not been shy about discussing an exit from the savings and loan operations. Last year, CEO Robert Benmosche noted that the company was weighing its options with AIG Federal Savings Bank, but it made no move toward the exit despite knowing the Volcker rule would eventually lead to added restrictions. It was during AIG's recent second-quarter earnings call that Benmosche finally disclosed the method to his madness.
With AIG's recent designation as a Systemically Important Financial Institution, the insurer will be facing tougher Federal Reserve regulations -- though such regulations are undetermined as of yet. Benmosche stated that the reason for keeping the Federal Savings Bank around was to prepare for future Fed scrutiny, as there was little doubt that a SIFI designation was in AIG's future.
By keeping the S&L operations intact, AIG has been able to establish a relationship with Fed regulators and solidify a process that they are comfortable with. "Not only do you have numbers that say you are OK, but you have a process that says that your numbers are OK," according to Benmosche on the call. So going forward to the time when AIG's capital reserves are being monitored, the company should be ahead of the field in terms of Fed confidence in its reporting standards.
Benmosche and the other members of AIG's management team have been diligently focused on returning the company to its core operations and preparing it for more regulator scrutiny. The exit from AIG Federal Savings Bank is just the latest example of how management is turning a necessary evil into a resounding win for the firm. By keeping itself in front of regulators longer than necessary, AIG's management may be preventing future headaches that come with its new SIFI title.
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