Tuesday, September 16, 2008

AIG's money shuffle

As word of financial giant American International Group Inc.'s desperate efforts to stay afloat spread yesterday, customers were calling the company and their agents with concerns about the safety of their life- and property-insurance policies and annuities.

Alan Sirota of Mansfield, Mass., said he has about $90,000 locked up in AIG Individual Retirement Annuities for himself and his wife. After reading about the company's losses, he tried to surrender the deferred annuities on Monday, but said he couldn't get through to anyone at the company. "I'm worried that the entire investment could be forfeited, could be lost," he said.

"My plan was to liquidate the annuity, no matter what the penalty was going to be because it just doesn't sound good," the 60-year-old psychologist said. "I just don't know what the worst-case scenario could be." For cashing in early, policyholders could face surrender charges and tax penalties.

Bailing out of an AIG annuity or life-insurance policy may offer psychological comfort, but may not make financial sense, some experts say. Monday evening, ratings agency A.M. Best downgraded the financial strength ratings of American International Group and many of its domestic- and life-insurance subsidiaries, and property-casualty subsidiaries to "excellent," from "superior."

For now, AIG's subsidiaries, such as AIG American General, one of the country's leading insurers, appeared to have adequate financial reserves and should be able to pay claims from people who hold its annuities, homeowner, commercial and life-insurance policies.

Moreover, the insurance industry and its regulators long have had rules in place to protect investors. State guaranty associations exist to pay claims in the event that insurance companies fail. The associations are in all states and are funded by insurers in each state.

"There is a procedure for insolvencies, and it involves trying to settle the liabilities of the company to the maximum extent possible. To the extent they can't be met, there are guaranty funds in every state that cover certain types of insurance," said Robert Hartwig, president of the Insurance Information Institute, a nonprofit industry group.

AIG scrambled Monday to reassure worried insurance clients. "Insurance policies written by AIG companies are direct obligations of our regulated insurance companies around the world. These companies are well capitalized and meet or exceed local regulatory capital requirements," said Peter Tulupman, a company spokesman in an emailed statement.


Yesterday, Governor Patterson allowed AIG to shift $20 billion from it's subsidiaries:

Scrambling to prevent another meltdown in the financial system, government officials in New York and Washington were trying to buy insurer AIG more time today and line up private loans of as much as $75 billion to rescue the troubled giant.

New York's governor said his state will allow AIG, the nation's largest insurer, to use $20 billion from its own insurance subsidiaries to ease a financial crunch.

By posting the assets as collateral, AIG can borrow money to run its day-to-day operations, Gov. David A. Paterson (D) said at a news conference. The move required special dispensation from the state regulator responsible for protecting the stability of AIG subsidiaries in New York and their policyholders.

Isn't that Wall Street? Take money from the people's policyholders to pay Credit Default Swaps on Wall Street. And then, if AIG runs out of money, let the insurance funds from the state make up the difference.

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