Insurance giant American Insurance Group (AIG) has been all over the news lately because of its continuing losses and because the federal government is pouring billions more into the company to shore up its security. Many consumers and small business owners have life insurance with AIG, but the average consumer (myself included) doesn’t understand how many subsidiary companies AIG has to handle all of its various lines of business — so many of us are worried about the implications of the company’s troubles for the AIG policies we hold.
First a little background. AIG is clearly in trouble, but not from losses suffered in the life insurance or consumer property and casualty portion of its business. The company writes home, auto, life, commercial, and many other consumer life insurance products in the U.S. Nearly all of those companies are their own separate legal entities to protect their ability to pay claims and because of various state regulations in all 50 states.
The portion of AIG that has gotten into trouble is not their life or casualty companies; rather it is one or more of its companies that insured large portfolios of sub-prime mortgages that were sold to investors. When a home sub-prime mortgage was originated, it might have been pooled with other sub-prime mortgages in a process known as securitization. These large portfolios were combined with those of other lenders and sold by companies like Merrill Lynch to investors all over the world. In order to protect the buyer of the mortgage backed securities and make the investment safer for the buyer, one of AIG’s subsidiary companies insured some or all of the security against loss. Now those securities are being deemed worthless by the investors that bought them and wanting AIG to pay up. AIG set aside reserves for loss, but never anticipated such huge payouts and therefore doesn’t have the reserves to pay all of the losses incurred by investors.
AIG’s life insurance companies, including American General that writes life insurance in the
All AIG’s insurance subsidiaries are individually capitalized and as of today maintain high ratings by A.M. Best, an insurance rating company.
So what’s in store for the AIG branches that impact regular consumers?
My best guess about AIG is it will have to break up and the company will have to sell its most profitable subsidiaries. As of February 13, 2009, AIG had sold all or portions of nine of its companies. According to Bloomberg, on February 24 the second largest life insurer in the country, MetLife, made an offer to buy American Life Insurance, AIG’s
There are a number of other profitable subsidiary companies of AIG and the company is looking at selling them too. According to life insurance professionals I have spoken with in the last several days, the most common prediction is that an announcement will be made in the next few days that MetLife will acquire AIG’s insurance portfolio.
According to Reuters in an article dated February 14, 2009, “A.M. Best Co. has placed the financial strength rating (FSR) of A (Superior) and issuer credit ratings (ICR) of ‘aa’ of the domestic life and retirement services subsidiaries of American International Group (AIG) (New York) (NYSE: AIG) under review with negative implications…”
If you have questions about your comfort in your AIG life insurance, contact your insurance agent. He or she will have the most up-to-date news on the status of the situation. In the meantime, don’t be overly concerned.