Global insurance giant AIG sold more than $10.8 billion worth of annuities in the second quarter of 2008—more than any other insurer—and Lehman Brothers’ Neuberger Berman mutual funds managed more than $250 billion.


So advisers and their clients who owned any of those assets had good reason to fret last week, as AIG was humbled into a government bailout and Lehman Bros. collapsed into conservatorship.


The good news is that—barring an unprecedented breach of the remaining financial levees—the creditors of AIG and Lehman can’t claim any of the assets in those insurance contracts or mutual funds.


“Virtually all VA companies hold the sub-accounts of their annuities outside the general assets of the insurance company, so [the stability of the] insurance company they have their clients’ VAs with—AIG, for instance—isn’t a concern,” said Phil Lubinski, CFP, of First Financial Strategies in Denver.


The sub-accounts are no different from mutual funds in that respect. The shares belong to the investor, not to the fund manager or his parent company. But the investor isn’t protected from market risk. The securities in the sub-account—shares of AIG or Lehman stock, say—can lose value.


Funds with the most exposure to Lehman stock (ranging from 5.27% to 1.82% of assets), according to Morningstar, are (starting with most exposure): Fidelity Select Brokerage, Morgan Stanley Financial Services, Legg Mason Partners Aggressive Growth, API Efficient Frontier Value C, Ehrenkrantz Growth, ING Legg Mason Partners Aggressive Growth, Saratoga Large Cap Value, Oppenheimer Quest Balanced, Osprey Conc large Cap Value Equity Institutional and Pioneer Select Growth A.


Neuberger Berman and Lehman Brothers Asset Management published a letter to that effect on Sept. 15, stating that they “continue to conduct business as usual and are not subject to the bankruptcy proceedings of their parent, Lehman Brothers Holdings Inc.”


On Sept. 19, the Securities Investor Protection Corp. (SIPC), which maintains a reserve fund to protect investors at failed brokerage firms, issued a statement saying that Lehman’s broker/dealer was in liquidation and the accounts were expected to be transferred to Barclays Capital Inc., another broker/dealer.


As for all those AIG annuities, if a client owns a fixed or variable annuity issued by one of the insurance companies that AIG owns, the National Association of Insurance Commissioners (NAIC) says that the underlying assets are secure.


“Throughout the AIG financial holding company’s liquidity crisis consumers remained protected by insurance regulatory rules that prevented the parent company from simply raiding capital from its profitable and well-capitalized insurance subsidiaries,” the NAIC said in a news release. “A coordinated effort by the nation’s insurance regulators ensured that no policyholder assets were used for any part of this transaction.”


In other words, there’s a firewall between AIG and its insurance subsidiaries. AIG might eventually have to sell those subsidiaries, but if it does, the fixed annuity assets would move intact to the new owner, an NAIC spokesperson said. Additionally, every state insures variable annuity owners (to $100,000 for non-qualified contracts, $250,000 for qualified) against the issuer going bankrupt.

Subscribe Now

Access to premium content including in-depth coverage of mutual funds, hedge funds, 401(K)s, 529 plans, and more.

3-Week Free Trial

Insight and analysis into the management, marketing, operations and technology of the asset management industry.