AIG, Prudential Submit ‘Living Wills’ to Federal Regulators Involving Hypothetical Failures
July 9, 2014 by Jeff Jeffrey
WASHINGTON – American International Group Inc. and Prudential Financial Inc. would rely on divestitures to resolve a hypothetical business failure, the two companies told regulators in “living will” plans filed with the Federal Reserve Board and the Federal Deposit Insurance Corporation.
According to the public portions of their plans, AIG and Prudential said if faced with a failure, they would liquidate non-insurance subsidiaries in Chapter 11 bankruptcy proceedings. Insurance subsidiaries would enter into run-off, in accordance with local requirements in states where their subsidiaries are domiciled, the companies said.
“In addition to the strategies proposed in the resolution plan, AIG believes that there are multiple alternatives for the orderly resolution of AIG’s material entities and core business lines that also would not pose systemic risk to the larger financial system,” AIG said in its filing. “Additionally, in an actual resolution scenario, the optimal resolution outcome may differ from the strategies proposed in the resolution plan. Nonetheless, AIG believes that it has developed an effective and feasible resolution plan.”
Prudential described its plan as involving “potential sales and dispositions of material assets, business lines, and legal entities and/or the run-off of certain businesses that could occur, as necessary, during the hypothetical resolution scenario.”
The plans were filed in order to comply with a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act that requires systemically important financial institutions to outline a plan for a “rapid and orderly resolution in the event of material financial distress or failure of the company.”
The resolution plans are part of the additional regulations placed on SIFIs under the Dodd-Frank Act. SIFIs must also meet additional capital standards, though there is an ongoing debate about what those standards should look like for insurance SIFIs.
Currently, AIG and Prudential are the only two insurance companies to be designated as SIFIs by the Financial Stability Oversight Council. Metropolitan Life Insurance Co., the largest life insurer in the United States, has reached Stage 3 of the FSOC’s SIFI evaluation process. But because it has not been officially designated as a SIFI, MetLife was not required to submit a resolution plan.
The resolution plans filed with federal regulators include portions that are not made public, presumably because they include sensitive information about individual companies. The Dodd-Frank Act allowed for confidential sections to be kept under seal.
The financial reform law requires insurance companies designated as SIFIs to submit updated resolution plans by July 1 each year. Banks with more than $50 billion in assets are also required to submit resolution plans. Smaller banks are able to submit their plans by Dec. 31 each year.
Last month, Treasury Secretary Jacob “Jack” Lew, who chairs the FSOC, drew fire from lawmakers on Capitol Hill for the council’s designation of Prudential as a SIFI. Lew appeared before the U.S. House Financial Services Committee to discuss the FSOC’s annual report (Best’s News Service, June 24, 2014).During the hearing, Rep. Randy Neugebauer, R-Texas, who chairs the House Subcommittee on Insurance, said the FSOC often “ignores” recommendations made by S. Roy Woodall Jr., who serves as FSOC’s independent insurance representative, on questions related to SIFI designations.
Woodall dissented from the FSOC’s decision to designate Prudential as a SIFI, saying the scenarios used by FSOC to determine whether the company could threaten the financial system did not accurately reflect the level of risk posed by the Prudential.
Neugebauer said the FSOC should have sided with Woodall because “the business of insurance does not pose a threat to the economy.”
Lew defended the decision, saying that the company did not appeal because “the insurance industry was part of the financial collapse” of 2008.
On the afternoon of July 8, shares of AIG (NYSE: AIG) were trading at $55.05, down 0.47% from the previous day’s closing price.
Shares of Prudential (NYSE: PRU) were trading at $89.77, down 0.81% from the previous closing price.
Subsidiaries of American International Group Inc. rated by A.M. Best currently have a Best’s Financial Strength Rating of A (Excellent).
Subsidiaries of Prudential Financial Inc. rated by A.M. Best currently have a Best’s Financial Strength Rating of A+ (Superior).
(By Jeff Jeffrey, Washington Bureau manager: jeff.jeffrey@ambest.com)
