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Business columns: AIG’s mess might get much worse

It has now become clear that AIG&rsquo;s problems &ldquo;extend across most of its business lines, including its massive life insurance and retirement services operations," said<strong> </strong>Ralph Vartabedian and To

Ralph Vartabedian and Tom HamburgerLos Angeles Times

AIG is usually described as a reckless hedge fund grafted onto a fundamentally sound insurance company, said Ralph Vartabedian and Tom Hamburger. But it has now become clear that AIG’s problems “extend across most of its business lines, including its massive life insurance and retirement services operations, which reported a staggering $18 billion quarterly loss this month.” That’s roughly as much as the company lost on those credit default swaps.

The insurance and retirement losses are largely the result of the steep fall in stock prices, which clobbered the value of the investments that support AIG’s insurance policies. It also caused hefty losses in the retirement annuity business. Annuity holders are promised a certain return, which in good years AIG pays out of its stock market gains. But when the market is down, AIG has to pay the return anyway, digging deep into its reserves to do so.

So far the company has been able to honor its promises to the holders of its insurance policies and annuities, thanks to the billions in federal bailout money it has received. But if the stock market stress continues, “a second financial crisis is looming.”

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