The financial correction of 2008 is undoubtedly one of the most noticable events in U.S. history. Several companies fell at that time, including financial giants AIG and Lehman Bros. We all know the story of how the credit lines of these companies were extended by the federal stimulus, which came to over $800 billion up front.
Most people think companies like AIG fell because of financial insolvency. This was not the case at all. AIG fell because of the risky securities side of the business that was offering products like mortgage-backed securities and betting on whether or not they would fail.
Since the mortgage-backed securities were based on leveraged assets, those losses got too big too quickly. It was the financial collapse of these toxic assets that sent AIG scrambling to pay off losses. In order to help pay off the losses, the federal government extended AIG’s credit line on two separate occasions.
However, the insurance sector of AIG (outside of the securities division) was very profitable. Insurance products like annuities and life insurance were major contributors to AIG’s profits prior to the collapse. This is because these products are based on a concept of absolute protection; a concept that provides financial protection while being able to take advantage of a moderate return.
When the federal government extended the first round of bailouts to AIG, state regulators knew they had the law on their side to protect the policy owner in times of financial distress. Because laws are put into place by the state to govern and guide the insurance industry, the state regulators protected the policy owner’s by reviewing the financial solvency of the parent company and easing the sale of any insurance line. These methods are put into place in order to ensure that total financial security is in force in spite of of the actions, or fate, of the parent company.
In fact, if need be, the state regulators can take over management of the distressed company if they have reasonable cause to believe that the financial security of the policy owners is in jeopardy. This is known as receivership.
Today, the money within the insurance sector of AIG is nevertheless protected. Not one policy owner lost a penny of money in any fixed AIG account, already when AIG needed billions of dollars of financial assistance from the federal government.
The protection from the insurance industry is truly unmatched from any other industry. The events at AIG have proven that the policy owner’s money is truly protected, already amidst a financial collapse that required the aid of federal stimulus.
A protective measure of one’s money is an issue that will soon take center stage. As volatility continues over the next several years, investors will breathe easier knowing that their money has total protection. When you add in other benefits, such as tax deferral and indexing crediting methods, these vehicles will become a much desired safe haven for uneasy investors.