Text Insurance regulators will be looking into the practice ofinsurers lending securities to third parties, said New YorkInsurance Department spokesman David Neustadt.

His comments came after AIG yesterday secured $37.8 billion fromthe Fed for AIG to borrow overnight to meet liquidity needs of lifeinsurance units. The additional borrowings will be collateralizedby investment-grade, fixed-income securities held by AIG's lifeinsurance subsidiaries.

The latest credit arrangement is separate from the $85 billionloan authorization that AIG secured from the Fed last month inexchange for giving the government a 79.9 percent interest in thefirm.

Joel Ario, Pennsylvania insurance commissioner said it is likelythat other states will be reviewing the practice of life insurerslending their own securities to third parties,

Both New York and Pennsylvania are members of the AIG SpecialTask Force of the NAIC, which formed when the firm went into fiscalcrisis

During the fall NAIC meeting last month, regulators discussed arequest sent to companies by New York asking for information onsecurities lending programs.

And, in a July 21 circular letter (No. 16), the New Yorkdepartment wrote that "some insurers engaged in securities lendingactivity have experienced significant losses in the last six totwelve months. Specifically, cash received as collateral wasreinvested into securities whose value has significantly declined.As we see increased volumes in securities lending activity, we areconcerned that some insurers may not be maintaining adequatecollateral and effectively managing the risks associated with thesecurities lending function.

"Insurers engaged in securities lending should ensure that theyhave identified all risks and have controls in place to managethose risks. The Department will place more emphasis on securitieslending activity by evaluating how well insurers are managing theserisks in upcoming examinations and inquiries."

Mr. Neustadt explained that insurers lend out securities such astheir bonds and use the cash they obtain to make otherinvestments.

In the case of AIG, the Fed, if necessary, is agreeing to stepin and take the place of the third party borrowing the securitiesin the event that that third party does not have the liquidity toprovide cash collateral.