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

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

The latest credit arrangement is separate from the $85 billion loan authorization that AIG secured from the Fed last month in exchange for giving the government a 79.9 percent interest in the firm.

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

Both New York and Pennsylvania are members of the AIG Special Task Force of the NAIC, which formed when the firm went into fiscal crisis

During the fall NAIC meeting last month, regulators discussed a request sent to companies by New York asking for information on securities lending programs.

And, in a July 21 circular letter (No. 16), the New York department wrote that "some insurers engaged in securities lending activity have experienced significant losses in the last six to twelve months. Specifically, cash received as collateral was reinvested into securities whose value has significantly declined. As we see increased volumes in securities lending activity, we are concerned that some insurers may not be maintaining adequate collateral and effectively managing the risks associated with the securities lending function.

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

Mr. Neustadt explained that insurers lend out securities such as their bonds and use the cash they obtain to make other investments.

In the case of AIG, the Fed, if necessary, is agreeing to step in and take the place of the third party borrowing the securities in the event that that third party does not have the liquidity to provide cash collateral.

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NAIC To Examine Insurers' Securities Lending

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