This is the question on the minds of some commenters, some emailers, and a lot of people who don't read this blog, including a friend's father.
The answer is that most of you can relax. Your insurance policy and/or annuity will probably be fine.
The part of AIG that is insolvent is a holding company, which owns a bunch of subsidiaries--approximately one squillion at last count. The subsidiaries issue your life insurance policy, or the annuity you purchased for retirement. Those subsidiaries are mostly regulated by the states, which ensure that they have adequate capital to pay off their claims. That capital can't be tapped by the parent--though the State of New York, for some reason that I cannot fathom, is apparently prepared to let AIG take out a $20 billion loan from its New York subsidiary.
Of course, with markets in the state they're in, you may be asking yourself how long that capital will remain adequate. The good news is that each state has a guaranty company, which pays off the claims of insolvent insurance firms, at least up to a cap. That cap varies by state, but in no state is it lower than $100,000. Check your policy to find out what state it was issued in (I'm told it's not necessarily the state you live in, particularly if it's an annuity), and use google to find out what the guaranty cap is.
People with insurance policies or annuities with AIG can redeem those policies for the cash value of the policy, either with the company or with the guaranty institution. If I had my homeowner's insurance with AIG, I'd probably bite the bullet and buy a new policy elsewhere; ditto some massive asset. But in general, unless you're insured/annuitized for a huge amount and planning to die/retire in the next few months, don't worry. With the exception of wealthy folks who bought gigantic policies, you should be able to get at least most of your money back out.
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So federalism proves useful in containing the mess.
Worth remembering.
Mentioned this in another thread but they're not just taking $20 billion out of a subsidiary. They're trading assets with longer durations for assets with shorter durations. The longer duration assets can still be matched to the duration of potential claims (though I'm not an actuary so who knows), but the shorter term assets can be sold by the HoldCo to stave off bankruptcy. That's the idea.
All those assets backing those policies are likely to be bonds of one kind or another. In a debt deflation, those assets will fall in value, and I don't care if they are all rated AAA.
New York state requires a stand alone subsidiary (typically called Big Insurance Co of NY or something similar)in order to do insurance business in the state of New York. My understanding (and I haven't done in depth research on this but I'm fairly confident) is that the State is merely allowing the NY holding company to share funds with the parent holding company. All of the same protections would apply to NY state consumers.
TH has nailed it. They're not "loaning" the $20B, it's an asset swap, liquid for illiquid -- or as TH put it, short term for long term.
The idea being that the NY State subsidiary has less need of highly liquid assets than the holding company does at the moment. It's unlikely the state co. will have to come up with an unexpected several billion in the next, oh, I don't know, say 24 hours, whereas the holding company most def. will.
For the smaller, private risks, yes, Megan and others are correct: AIG is regulated at the state level and most states have fairly stringent capitlization requirements and reserve requirements etc. And AIG's insurance arm is plenty well capitalized. As a commenter on a prev. thread put it: we're not the part of AIG that's pissing away all these billions.
A bigger problem for AIG is that the longer they linger in limbo the more customers (no offense, but I'm not talking about you homeowners and private drivers, more multi-national corps.) will start trying to pull their policies and, at the very least, shy away from renewing. In short, the customer base can evaporate surprisingly quickly when your good name is on the edge like this.
And if the customers go, it won't much matter if a company with the name AIG survives, it won't be the same world-striding behometh that we know and love...
Oh yeah. The capitalization and reserves held for all the state requirements is, of course, subject to overall market pressures, as are all insurance companies' reserves.
If this is the start of a new great depression (potential tagline: "GD II: This time it's impersonal!"), then, yes, the reserves might not be there for AIG policy holders. But that would also be true no matter who wrote your business: it's not like there are insurers out there who know about the magic, market-immune investments.
commercial entities (manufacturers, contractors, transportation) buying $5M+ in limits may not have an empirical basis to panic but the larger ones with $20M + in limit requirements are panicking and AIG's competitors in the Excess&Surplus casualty markets are licking their chops. When big customers get antsy, both their retail agents and wholesale mortgage brokers catch the fever (eventually passing it on to the carrier).
AIG may have adequate reserves in all states but it does not have an adequate PR blitz to convince those buying full CGLs that it will service their accounts appropriately with the inevitable overhead reductions to come.
A.M. Best has downgraded all AIG insurance units outlook to A- and the outlook as negative.
national wholesalers (amwins, tri-city/chubb, swett, crc) are going to start offering competing carrier quotes for AIG renewals automatically, instead of going through market selection and actually comparing different terms. One has already started to do this.
I hate to sound like the slow student in class, but I have a very simple question, and perhaps Megan (or somebody) can answer in a fairly clear way.
What the heck went wrong? How did AIG find itself in this predicament. I mean, I think I understand what the problem was with Lehman -- it borrowed a lot of money to buy securities that aren't worth anything. Right?
But how does this happen to AIG?
And -- I guess this is another question -- are they insolvent or illiquid. That is, if the Magic Money Man loaned them $80 billion or whatever, would they be able to pay it back and be profitable at some future point in time?
A.M. Best has downgraded all AIG insurance units outlook to A- and the outlook as negative.
How are A.M. Best's financials? :-/
CI: They bought mortage-backed securities, and sold credit default swaps, apparently on both the securities and other firms who bought them. The collapse in value gutted their balance sheets.
Thanks for your answer Megan.
So are those mortgage-backed securities actually worthless, or just worthless because there is no market for them?
In my personal opinion, and I do not recommend that you actually trade on it, the securities are now undervalued. Defaults in the subprime market are not high enough to justify current valuations; what we're seeing is a massive premium for uncertainty.
Defaults in the subprime market are not high enough to justify current valuations
Can we please get past the subprime market, and realize that it's not the big problem? At least the subprime market has documented income and assets, despite having poor credit. The big problem is the Alt-A loans with no documented income or assets. Anybody with a decent credit score and a pulse (and sometimes no pulse) were able to get these loans. It also spread into Prime loans because banks stopped caring, and didn't verify income or assets for these loans either (even though they were supposed to).
"A.M. Best has downgraded all AIG insurance units outlook to A- and the outlook as negative.
How are A.M. Best's financials? :-/"
good point. It's still the gold (heh) standard for most E&S brokers attempting to avoid mushrooming E&O disasters in their book of business. Even now, as the Fed has bailed out the holding company, commercial clients are still attempting to grow their businesses and may not see AIG paper as reassuring to third parties (or even their own risk-management folks).
Lincoln General and Dallas National are still around but they did get kicked in the teeth.
Blame Spitzer. If he hadn't screwed AIG and Hank over, then Hank would have had this crap under control.
Hank has seen EVERYTHING in the insurance business and owns a ridiculously huge amount of the stock. He's been getting his teeth kicked in by the board and by an idiotic whoremongering NY AG (and the idiotic new AG whose even less worthy than his incompetent schmuck of a predecessor and his incompetent shmuck of a father).
AIG's collapse is SOLELY the responsibility of the NY Democratic Party.
My understanding (and I haven't done in depth research on this but I'm fairly confident) is that the State is merely allowing the NY holding company to share funds with the parent holding company. All of the same protections would apply to NY state consumers.
Right, but the point being that New York was willing to trade a chance of having to pony up more money for guaranties to New York policy holders in exchange for a chance of keeping the overall holding company in business. New York was willing to do so because the holding company is New York based. Other states were, understandably, somewhat less willing to put themselves on the line.