This morning, March 2, 2009, American International Group, Inc. ("AIG") announced a loss of $61.7 billion for the fourth quarter of 2008, a total net loss for 2008 of $99.29 billion, and a major restructuring of its operations, including a new federal infusion of $30 billion, forgiveness of certain debts, and relaxation of prior bailout terms. For comparison purposes, all insured losses for all insurance companies (not just AIG) relating to Hurricane Katrina are estimated at slightly more than $40 billion.

Obviously, losses of more than $60 billion in a single quarter are massive, the largest of any company in history. Those losses are, according to AIG, largely attributable to "continued severe credit market deterioration, particularly in commercial mortgage backed securities." AIG reported losses on its general insurance operations, which the company attributed to asset write-downs, falling investment income and losses at United Guaranty Corp. Nevertheless, general insurance net premiums dropped 16 percent and commercial insurance net premiums dropped 22 percent from fourth quarter 2007 to fourth quarter 2008. AIG's earnings-release claims that renewal premiums for the property and casualty businesses "stabilized in early 2009 compared to early 2008," although the company did not provide detailed data. AIG also reported that the commercial insurance group of domestic insurance operating entities will report a "combined statutory capital base of $26 billion," as of Dec. 31, 2008.

Perhaps the biggest news of this latest round of the restructuring is the treatment of AIG's "crown jewels," the property and casualty insurance companies, which will be moved to a new holding company called AIU Holdings. AIG says it will attempt to create a "different brand" for its commercial insurance group, foreign general unit, and other property and casualty insurance companies under the AIU umbrella. AIG stated in its press release that it is "preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions."

In the federal government's most recent effort to rescue the beleaguered insurance and financial giant, the government, in exchange for the additional cash infusion of $30 billion and easing of existing debt terms, will receive preferred equity stakes in two international insurance companies: American International Assurance Company ("AIA") and American Life Insurance Company ("Alico"). For the time being, AIA and Alico will remain wholly owned subsidiaries of AIG. A recent auction to sell AIA drew no bidders. In contrast, AIG announced that it has received bids for Alico, which are being evaluated.

With AIG's stock now selling below 50 cents a share, the possibility of bankruptcy looms large. Many believe an AIG bankruptcy would be the biggest and most expensive in the history of the United States if it were permitted to occur. However, it appears that the government and AIG have embarked on a restructuring/dismantling of AIG outside of the bankruptcy process to allow the Department of Treasury and the Federal Reserve, rather than a federal bankruptcy judge, to make the critical decisions about AIG's fate. The joint releases from Treasury and the Fed states: "The long-term solution for the company, its customers, the U.S. taxpayer, and the financial system is the orderly restructuring and refocusing of the firm."

The deterioration in AIG's financial situation has raised concerns about the future of the AIG subsidiary insurance companies. While AIG Financial Products was primarily responsible for AIG's problems, and while AIG and the insurance regulators have been adamant that the insurance companies' surpluses will not be made available to prop up the parent company or AIG Financial Products, the stability of the insurance subsidiaries has been judged, at least in part, based on the performance of the parent. Historically, for example, A.M. Best relied on AIG's ability to contribute capital to its insurance company subsidiaries when evaluating their financial health. AIG's insurance company subsidiaries have been losing customers and talent because of the parent's financial woes. It is unclear how the creation of AIU Holdings will impact this trend.

While there are many less dire possibilities, one or more of the AIG insurance subsidiaries could eventually be liquidated, especially if policyholders move their business to other insurance companies in droves. A.M. Best, Standard & Poor's, Moody's and Fitch have signed off on this most recent deal, avoiding potentially catastrophic consequences of further downgrades of AIG's financial strength and credit ratings.

Although it is too early to tell the full extent to which the AIG insurance subsidiaries will be affected by the decline in the parent's fortunes, it is not too early to prepare (or continue to prepare, as the case may be). Policyholders should be working to protect any collateral being held by AIG and, given the unique circumstances and fluidity of the situation, should keep on top of developments and be prepared to address them through experienced insurance coverage professionals, including your lawyers and brokers.