Page last updated at 12:07 GMT, Wednesday, 17 September 2008 13:07 UK

Q&A: US bails out AIG

Worried AIG customers queue up in Singapore
Customers in Singapore have queued up to seek advice about their policies.

The US Federal Reserve has announced an $85bn (£48bn) rescue package for AIG, the country's biggest insurance company, to save it from bankruptcy.

AIG will get an $85bn loan, in return for an 80% public stake in the firm.

Why is AIG in trouble?

American International Group (AIG) has been hit hard by the credit crunch.

The company's main business is insurance, but not just household insurance for you and me.

The firm also provides insurance to large companies, and most importantly to banks.

If an investment bank did a big complex trade, AIG might be the company to insure them against the deal going wrong, through so-called credit default swaps.

AIG has been under financial pressure for some time after posting three quarterly losses in a row totalling $18.5bn (£10.3bn).

The losses were related to the problems afflicting housing and credit markets, with AIG playing a key role in insuring risk for financial institutions around the world.

AIG is a rich company, but its money is stuck in deals and investments that are either not easy to sell or difficult to value.

To survive, the company urgently needed cash, and the US Federal Reserve was the only organisation prepared to supply it.

I have an insurance policy with AIG. What should I do?

Nothing. The US government clearly believes that - unlike investment bank Lehman Brothers - AIG is too big to fail. AIG's insurance policies remain in force.

AIG's UK subsidiaries are regulated by the Financial Services Authority and AIG says they have a strong financial base.

If the company was allowed to go under, UK customers would have to arrange for new cover. They could then go to the Financial Services Compensation Scheme (FSCS), where they may get compensation for the premiums previously paid.

If you had a claim outstanding the FSCS would step in and pay 100% of the claim for compulsory insurance, such as third party motor cover, and 100% of the first £2,000 plus 90% of the remainder of the claim for non-compulsory insurance.

Why did the US government rescue AIG but not Lehman Brothers?

AIG has insured many of the financial assets that have corporate loans and prime residential mortgages that are on the balance sheets of banks, mostly European banks.

The banks have bought this insurance to protect themselves against the risk that these loans would go bad, that borrowers would default.

Their motive for doing so was to reassure their respective regulators - such as the FSA for UK banks - that these loans are of minimal risk.

And the benefit of doing that was that they could lend considerably more relative to their capital resources.

But if AIG is in trouble, then it is doubtful whether these deals are properly insured - and the financial industry around the world would then be in deep trouble.

How big is AIG in the UK?

In the UK, AIG is best known as a sponsor of Manchester United, but it also underwrites insurance sold by a number of High Street names including Boots and Argos.

AIG has two principal insurance companies, American Life Insurance Company and AIG UK Limited.

The former provides life insurance and the latter general insurance including consumer insurance. AIG employs about 3,000 staff in the UK and writes more than 12 million policies a year.

It also underwrites the guarantees on items purchased from John Lewis.


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