A major investor in insurance giant American International Group is calling on the company to break itself up into three companies to get out from under its designation as one of only four systemically risky nonbanks.
Carl Icahn, founder and head of Icahn Capital LP, which holds a substantial stake in the insurance firm, said in an Oct. 28 letter to AIG chief executive Peter Hancock that the company's status as a "systemically important financial institution" is creating a drag on the company’s profitability. AIG was given the label by the Financial Stability Oversight Council, which subjects it to enhanced supervision.
Speaking on behalf of a number of other investors, Icahn called the firm "too big to succeed." The only responsible thing for the company to do, he said, is break itself up into three separate firms, none of which would be big enough to receive a SIFI designation.
"Despite definitive action on the part of Congress and regulators to encourage this company to become smaller and simpler by splitting up, you have shown no sign of urgency and have chosen a 'wait and see…for years' strategy void of decisive leadership," Icahn said. "We believe there is no more need for procrastination, the time to act is now."
AIG is one of the biggest insurance companies in the world, and is perhaps best known for its huge government bailout in 2008 and 2009 after its portfolio of credit default swaps nearly sank the company.
It is the parent company of private mortgage insurer United Guaranty Corp. Icahn's letter said one of the businesses AIG should separate out is mortgage insurance.
If AIG were to break up, it would not be the first nonbank SIFI to decide to downsize in order to shake its SIFI designation. GE Capital announced in April that it would unwind its financial assets in order to avoid the Financial Stability Oversight Council's designation and return to its core business interests. Another insurance firm, MetLife, has challenged its SIFI designation in court, and oral arguments for that case are scheduled for February. The final nonbank SIFI, insurance company Prudential, has not made any public statements about its SIFI designation.
Dodd-Frank specifically gave FSOC the authority to designate nonbanks as SIFIs subject to additional oversight by the Federal Reserve. The Fed issued a final rule in July laying out regulatory standards for GE Capital that effectively would subject the company to the same capital and stress testing requirements that it requires of banks with more than $50 billion in assets. Those rules are set to phase in, giving the company enough time to dispense with its financial assets and to give the FSOC enough time to rescind its SIFI designation.
The letter does not specify the size of Icahn's stake in AIG, but the insurer's shares shot up 4% in response to the news.