The Financial Stability Oversight Council has classified both AIG and Prudential as 'too-big-too-fail.' That's too bad for customers. Here's why.
Being labeled “too big to fail” bodes well for shareholders of American International Group Inc. and Prudential Financial Inc. but customers could be facing higher costs.
The Financial Stability Oversight Council decided Monday that the two insurers ought to be subject to tougher standards and oversight from the Federal Reserve as mandated by the Dodd-Frank Act. The designation as a systemically important financial institution — or SIFI —would mean that the firms are large enough that their failure could place the entire financial system at risk. It also would subject them to risk-based capital requirements and leverage limits, as well as other rules.
The framework of requirements for nonbank insurer SIFIs hasn't been finalized yet. Further, there are potential obstacles to applying federal standards to insurers, which are state-regulated. Rep. Gary Miller, R-Calif., proposed a bill May 23 to permit carriers that are depository holding companies to comply with state insurance laws.
Analysts noted that in the immediate term, the news of SIFI status isn't a big deal for Prudential or AIG. But it's not insignificant, either.
“There are those who say that it hamstrings management in terms of growth; the company has to be careful about its solvency and capital ratios,” said Jim Ryan, an analyst with Morningstar Inc. “But there are also those who say that it puts a floor under the stock because the companies won't be able to go out of business. For shareholders, the designation also reduces some uncertainty.”
Customers, however, could be saddled with higher prices.
“Some products are already heavy capital users,” said Steven Schwartz, an analyst with Raymond James & Associates. “[These products] theoretically could be eliminated, but in general, the prices will be forced up.”
In order for companies to hold more capital in reserve, they'll need to get a decent return on equity, which they can do by making their insurance products more expensive. That, in turn, will hurt their ability to compete with other carriers that don't have the same SIFI tag.
“If an insurer doesn't need to have that capital, then it should be more competitive on its pricing,” Mr. Schwartz said.
Scot Hoffman, a spokesman for Prudential, declined to comment and instead referred to the company statement issued Monday, which noted that Prudential is evaluating whether it should ask for a nonpublic evidentiary hearing before the FSOC to contest the SIFI tag. The companies have 30 days to contest the designation.
A call to AIG spokesman Jon Diat was not immediately returned.
