To determine the impact of an American International Group (AIG) bankruptcy on the broader insurance markets, you have to look at what lines of business they write, and where. It stands to reason their problems will have little impact in areas where they have little business. You also have to assess whether they’re really an insurance company, or not.

The biggest line item in their last quarterly filing — and I was amazed to find that they actually HAD a recent filing — so far as revenues is concerned was “general insurance,” and most of that is commercial and foreign. If their foreign general insurance is distributed the same way their foreign life insurance and retirement services are, that portion is mostly Asian and Japanese. These have not been killers from a profit perspective.

The next biggest item is life insurance and retirement services, and this has been horrible, especially in the States. Big money losers, lots of investment writedowns. They also have a mortgage guaranty line that has been killing them.

Financial services division, capital markets, is the major problem child, however. Some quotes:

Includes gains (losses) from hedging activities that did not qualify for hedge accounting treatment under FAS 133, including the related foreign exchange gains and losses. For the three month periods ended June 30, 2008 and 2007, the effect was $5 million and $(443) million, respectively. For the six-month periods ended June 30, 2008 and 2007, the effect was $(199) million and $(603) million, respectively. These amounts result primarily from interest rate and foreign currency derivatives that are effective economic hedges of investments and borrowings.

In the three- and six-month periods ended June 30, 2008, both revenues and operating income (loss) includes unrealized market valuation losses of $5.6 billion and $14.7 billion, respectively, on AIGFP’s super senior credit default swap portfolio.

They aren’t having problems as an insurance company; it’s the investment business that kicked their ass. Reading the section of their latest filing that concerns the “Litigation Relating to AIGFP’s Super Senior Credit Default Swap Portfolio” will be instructive.

Here in the States, they’re not a P&C player outside of Work Comp and Med Mal. They’re number 10 in Private Passenger, but I am thinking much of that is the nonstandard auto book written through IAs. I think the hole they leave will be filled pretty quickly, outside of the two commercial lines above. I don’t have any market share information for their foreign lines, but I would suspect that outside of Asia, it’ll be pretty much a whimper.

I’m more concerned about short-term market turmoil from the forced selling of their investment portfolio than I am about their absence in the insurance world.