AIG Fallout on Structured Settlements

Medicare Set-Aside Blog on September 17, 2008 | Posted by

This week, AIG has been teetering on the verge of bankruptcy and sending shockwaves through the financial system. Last night, with the announcement of an $85 billion credit facility, the Federal Reserve with explicit backing from the Treasury, stepped in to prevent the insurance giant’s collapse. Market analysts agree that Wall Street has been changed forever.

Here on main street, clients began removing American General from their annuity approved lists fearing that AIG’s collapse would spill over into American General. We think this is probably an overreaction for several reasons. American General is a separately capitalized and regulated life insurance company. Mismanagement in one arm of AIG (insurance contracts on complex derivatives) has no bearing on the financial strength of American General. Furthermore, American General often has the best rates and rated ages of anyone in the business. Are carriers willing to pay $5,000 to $100,000 or more for a Medicare Set-Aside or Custodial Medical Account to protect against an unlikely default by American General? Removing American General is going to cost firms millions of dollars in higher annuity premiums to solve a problem that probably doesn’t exist.

However, even though we don’t like to see the removal of American General from the marketplace, it is probably the only decision that our client’s could make. How does the average broker or claim representative explain that they are placing an annuity (supposedly one of the safest and most secure investments available) with a firm that has AIG in its name? In financial markets, perception is reality and the reality is that AIG/American General will have to wait until the dust settles before being able to write structured settlement business. We hope that they can quickly extricate themselves from this mess because there is no finer group of people in the industry.

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