Here's a video, explaining why your insurance policies and annuities are still in force:

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I found another red flag at AIG that was waving long before this company teetered and fell.

It was in the, excuse my language here, super senior credit default swap portfolio.

Rolls off the tongue, doesn’t it?

It’s complicated.

But here’s the simple part: They caused huge losses that AIG underestimated until recently.

In December, AIG’s auditor Price Waterhouse Coopers said that it had issues with the way AIG was valuing these swaps. So AIG in February said it would change its ways.

The result was a ratcheting upward of the estimated losses.

Upward from an estimated loss of $352 million at the end of September 2007, according to a story on FinancialWeek.com. The estimated loss on its super senior credit default swap portfolio in August in its SEC filing: $5.6 billion.

So the loss was 16 times greater than what AIG estimated it to be last year.

And who knows if that’s really it?

Here’s a stab at defining what these super seniors are:

Credit default swaps are essentially insurance for a debt obligation. The debt consisted of a group of residential mortgages. The debt was divided up into categories, officially called tranches, that line up by who gets paid first, if the debt goes bad. The super senior category stands toward the front of the line.

But down there at the back of the line is a mortgage that may go bad. No one wants these swaps right now. The mortgages are going bad, the insurance has to pay off. The value of these swaps plummeted.

Months and months ago.

In public filings, for all to see.

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I wanted to see with my own eyes what AIG was telling the world in its last public report as a non-government-owned company.

I wanted to look because maybe I could get something out of there to tell the teacher who called me to find out if her annuity is safe.

She’s been putting money in for 20 years. She’s not expecting a lavish retirement. But she’s been prudent. She’s taken care of her future. And now she didn’t want to see it all taken away.

An $85 billion bailout all comes down to this:

Who is hurt? Taxpayers? The teacher? The shareholders?

So I spent some time this afternoon looking at what the giant insurance and financial services company knew, or said it knew, in August.

In discussion after discussion, the quarterly report noted the deteriorating condition of the housing and financial markets, the possibility that it would have to put up more collateral if its debt were downgraded, and even hinted it couldn’t accurately value some of its more complicated mortgage-backed securities.

It looks like AIG couldn’t predict what it might owe in the most dire of circumstances.

And that’s a pretty common problem right now.

After the announcement that the almost $65 billion Primary Fund, a money market fund that was part of The Reserve Fund, would no longer be able to pay off its investors at 100 cents on the dollar, it became clear the their investments, their holdings, were not worth what they thought. Or what anybody thinks.

“To a certain extent, nobody knows just how liquid much of these assets are,” said Keith Long, of the hedge fund Otter Creek Management, in West Palm Beach.

But AIG did throw out plenty of warning signs. Enough to make me wonder why this stock was still so widely held. Did mutual fund managers evaluate it once, when they bought it, and then forget it? Did anyone ever look back?

Back to the teacher. As far as I can tell, the advice that’s being given out by regulators seems to be right on: Keep paying the premiums, your assets are there, the insurance subsidiaries aren’t where the problems are. The problems were in the credit default swaps.

New York State Insurance Superintendent Eric Dinallo put it well this morning in an interview with CNBC.

He said, “There is a theory that diversification of financial services activities gets you risk management, but it is only true if you stay within your core competencies.”

AIG ‘s competency in insurance was formidable. The rest, well, it may have looked good once. But not now.

The National Association of Insurance Commissioners today made the point that under state regulation, the claims of policyholders come ahead of all others in the event an insurance company fails. And these insurance subsidiaries were solvent, NAIC said.. The foreign subsidiaries were doing gobs of business in China and other markets. I saw that in the filings.

The insurance companies were rocked by the bad markets, of course, because insurance companies are essentially investors. But there was little indication, at least in August, that investment losses were threatening.

Even if they did fail, the state guaranty associations would come into play. These are essentially agreements, backed by state law, that when one company goes under, other companies come in and replace the coverage.

The insurance commissioners seem to think that that it is the insurance parts of AIG that could be its salvation, as they are perhaps sold off to repay AIG’s obligations -- including the one to us, the taxpayers.

I certainly hope so.

Because I know there’s more than one teacher, clinging to her retirement savings, needing for this to work out the way regulators say it will.

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