What AIG Policyholders Can Expect

Even though insurance giant American International Group (AIG) is scrambling to stay afloat, its policyholders have a little, well, insurance.

On the same day that AIG reported a mind-numbing $61.7 billion loss for the latest fourth quarter, it also received a promise from the U.S. government for a $30 billion infusion in new funding (marking the fourth time the government has come to the insurer's aid). The government also loosened the terms on the rescue funds it provided during its three earlier bailouts. Under the latest deal, AIG will provide equity stakes in foreign subsidiaries, American International Assurance Co. and American Life Insurance Co., in lieu of repaying the $38 billion it withdrew from a Federal Reserve credit line last fall. Also, the $40 billion in preferred nonvoting shares that offered a 10% dividend that the company issued the government will be exchanged for new shares that won't pay any dividend.

“What the government did should give consumers confidence,” says Birny Birnbaum, executive director for the Texas-based Center for Economic Justice, a nonprofit consumer advocate. “They’ve sent a clear message that they are not going to let AIG go under.”

What happens down the road, however, is a lot less apparent. “The infusions of government money are actually undermining the company’s ability to attract private investors,” says Richard Ebeling, a senior research fellow with think tank American Institute of Economic Research. Such cheap federal loans offer better terms than private investors are willing to pay, which could keep the ailing insurer languishing on the government’s dime.

Here are three possible scenarios and what policyholders should expect.

“AIG’s problems arose with its investments, not in its insurance units,” says Robert Hartwig, president of industry group, the Insurance Information Institute. In fact, most of the damage has occurred in units other than the insurance units, which have remained in fairly good health. Ratings agency AM Best puts AIG’s subsidiaries (including AIG Advantage Insurance Company and AIG Annuity Insurance Company at an A rating -- which means its financial security is “excellent,” while Standard & Poor’s ratings range from “strong” As to A+s. (Visit rating companies like AM Best, Standard & Poor’s or Fitch Ratings, among others, for current insurance ratings.)

AIG is also proposing a restructuring plan that would create a separate holding company – called AIU Holdings -- for its property and casualty divisions. Should that plan go through, policyholders will be even further insulated from the difficulties facing other divisions.

AIG has had mixed results putting some of its insurance divisions on the block. In December, Germany-based reinsurance company Munich Re Group purchased AIG commercial property insurer Hartford Steam Boiler for $742 million. Yet buyers have yet to be tempted by many of AIG's other divisions that are on the block.

Even if the division that handles your insurance gets acquired, however, few changes in your policy would take place immediately. State regulators heavily restrict changes in policy terms and conditions during takeovers, so current policyholders would see few changes until their policies go up for renewal.

If AIG's financial situation deteriorates further, state regulators would almost certainly step in to cover the insolvent insurer's outstanding claims, says Scott Simmonds, an independent insurance consultant based in Saco, Maine.

State-run guarantee funds provide coverage of up to $300,000 in most states. While that may be adequate for the bulk of claims, it's small comfort for life insurance policyholders or homeowners recovering from a total loss. Depending on the number of outstanding claims, policyholders might also have to wait months to receive the proceeds.

Also, these protections will only kick in for holders of policies through a so-called admitted carrier that is licensed by the state, says Simmonds. A nonadmitted policy typically covers riskier consumers who've been rejected by the state-licensed market. Check your policy to make sure you're covered.