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Insurance giants may no longer be 'too big to fail'

AIG
Chris Ratcliffe | Bloomberg | Getty Images

Insurance stocks rose sharply Thursday as a memo circulated by Rep. Jeb Hensarling, R-Texas, said proposed legislation would no longer deem those companies "too big to fail."

In the years after the financial crisis, the Financial Stability Oversight Council, a consortium of regulators, labeled AIG, MetLife and Prudential as "systemically important" to the economy – meaning a failure of one of those companies would have far-reaching effects.

But Hensarling's memo, obtained by CNBC, listed among other things a commitment to "remove remaining nonbank SIFI references."

Large banks, it appears, will still fall into that category, which carries hefty regulatory costs, strict government oversight and the need to carry excess capital in order to avoid being bailed out in a crisis.

Companies hardly consider the designation a badge of honor. MetLife sued the government to have the title removed, and General Electric sold off its GE Capital unit to shed the affiliation.

Draft legislation that Hensarling proposed last year — called "Financial Choice Act 1.0" — sought to rescind FSOC's power to decide which firms are systemically important.

It's unclear what provisions laid out by Hensarling will survive the Senate and avoid the cutting-room floor, but the memo crystallized for investors a priority — for now — to give these three insurers a boost.

Correction: The picture for this article has been changed since it was first published after the wrong company was originally featured.