How does an insurance company lose $62 billion?

[Uzybone]

Are people defaulting on their payments? Are they insuring things that have no value? I don't understand how companies can be so mismanaged.

[hobbit709]

1. Euphemism

Transferring cash to offshore secret accounts.

[Soylent Brice]

14. holy shit that's what i was thinking!!!!!!

who's to say that those 25 or so asshats that are suing UBS to keep their identities secret (the fuckers with the tax evading bank accounts) aren't comprised of a few insurance industry giants...

[steelmania75]

2. I don't know, but AIG needs new management, and fast.

[kentuck]

3. I think they are deeply invested in 401K's and retirement accounts?

And they are trying to save people's retirements. It is probably postponing the inevitable?

[nbsmom]

15. They got sucked into the derivatives

Which is doubly odd, since they had been (and for all I know, continue to be) a rather successful insurance company. The insurance side of the company didn't create the problem. Apparently, however, someone in another business unit thought they had a really BIG idea that would make even more money than those old insurance policies and annuity products.

But yes, if AIG is allowed to fail, then a bunch of people's insurance policies and public and private pensions are suddenly not so healthy. I also remember reading something about AIG and CIA having some sort of connection elsewhere in this forum...

[RaleighNCDUer]

18. You really think they give a flying fuck about people's retirements?

Sad.
So sad.

[tangent90]

4. Creative use of commas and decimal points.

:shrug:

[remedy1]

5. They invest in and insure derivatives...

that they don't understand.

You haven't even seen the tip of the derivative disaster iceberg yet.

[Redbear]

6. It's my understandng they were insuring these huge, complicated

financial transactions like the huge bundles of mortgages, etc.

[Uzybone]

9. Man. Sometimes I think we should go back to using the abacus

If one has to insure a financial transaction; isn't that a hint that the transaction is a bad idea?

Basically we have a huge sector of our economy that is a house of cards.

I know I'm being very simplistic but this news is stunning to me.

[boobooday]

7. gambling and scamming n/t

[AngryAmish]

8. Credit default swaps

It is like insurance on bonds.

See all those foreclosed houses? Their mortgages were bundled up and sold as a security - a bond that was to pay x% interest over 30 years, then pay the principle. If there is not a large enough cash-flow from the bonds coming in they are in default.

So AIG sold these credit default swaps to investors (states, pension funds, any person who bought mortgage based investment bonds). They are coming due.

AIG never saw the systemic risk - they did not think many mortgages would default. They priced their insurance too low. So they are on the hook for a large percentage of the mortgage bonds defaulting.

IN OTHER WORDS, we, the American taxpayer, is subsidizing the bad insurance decisions of bondholders.

[sinkingfeeling]

10. AIG's life insurance business (American Life) and car insurance are OK. It's all of the hundreds of

other things they do/did that's gotten them in trouble. I think I read that they were heavy into CDSs.

[tjwash]

11. NO! They didn't lose anything. It's all our fault. Damn poor people and their housing needs.

Don't you listen to AM radio?

[cali]

12. 30 billion more for equity stakes, eh? Does that mean the U.S. taxpayer will own Stowe?

Could we please reduce the price of a freakin' lift ticket? It's now $89 for a weekend ticket. Ugh.

[Ohio Joe]

13. I spent more then 10 years at Nationwide

It does not come from insurance claims, they always make money there. Nationwide Auto is a monster cash cow. Money is lost through bad investments. Nationwide lost boatloads of money to mortgages and other investments.

[Still Sensible]

16. They have choked on derivatives and credit default swaps

they must have had a real load of CDSs they had to pay the lump sum claims on and stacks of derivatives they held themselves that are now collectively under water.

Basically their greed led them to bet the farm on the whole mess not tanking... and they were wrong.

[TreasonousBastard]

17. It was a London unit unrelated to...

their core insurance business that put them in the hole. There was a presumption in that office that either they would never have to pay a claim on the invisible mortgage insurance business, or that everyone involved with the underwriting would be long gone before the shit hit the fan. I'm not sure why AIG management let it go on without putting the breaks on it, but perhaps they never knew just how flaky the business was.

It's not the first time a rogue trader with a bright idea brought down a huge financial company-- used to be things like cocoa futures or currency trading but now there's all sorts of fun things people understand even less but can lose vastly more money.

[discount moralist]

19. London Unit

And the sad thing is it isn't even considered fraud because it's an unregulated market...

[Marrah_G]

20. It is not the personal insurance side of AIG that is in trouble.

The personal insurance side is profitable and stable.