NEW YORK (Dow Jones Newswires) - Nontraditional insurance products that are used to hedge against earnings declines were a popular product offering by insurers in the late 1990s, but have cooled as the go-go stock market has slowed.

Using instruments originally developed for the bond market, these nontraditional products can be used to hedge balance sheet risk and, in some cases, smooth fluctuations in earnings.

"As a market, it's not as big as it had been in the past," said Robert DeRose, an A.M. Best financial analyst. "Following some of the Enron and Worldcom debacles of the past and increased scrutiny from the (Securities and Exchange Commission) and external auditors, it's not as much in vogue as it had been."

On Thursday, American International Group (AIG), without admitting or denying wrongdoing, agreed to pay a $10 million civil penalty to settle an investigation by the SEC into a non-traditional policy issued by one of its units to Brightpoint Inc. (CELL). The policy was finalised January 1999.

According to a complaint filed by the SEC, the policy was designed to "smooth" the impact of losses on Brightpoint's financial statement, similar to some financial guarantee policies written during the late 1990s.

However, the policy didn't transfer risk to AIG, so it wasn't an insurance policy, the SEC said.

As a result, Brightpoint overstated its actual net income before taxes by 61% in 1998, according to the complaint.

The settlement essentially ends the investigation of AIG, but the SEC said on Thursday that it plans to continue to look into products of this type at other insurers.

Financial guarantee insurance, which includes traditional bond insurance, accounted for about $1.84 billion in direct written premiums in the US in 2001, the most recent data available, according to the Insurance Information Institute.

That's out of about $353 billion in direct written premiums for all products in the US.

However, that number may be muted, given that financial guarantee isn't always labelled as such.

Some insurers have crafted those policies through surety or other underwriting vehicles.

Financial guarantee contracts are often tailored for a specific client's needs and usually guarantee the residual value of assets offered.

Robert Hartwig, chief economist at the Insurance Information Institute, said there was a lot of interest in the financial guarantee market and financial engineering during the bull market of the late 1990s.

The industry began scaling back in 2000 as some insurers and reinsurers determined they didn't like the potential exposure or returns from the business, particularly as markets soured.

However, the business, while more muted, doesn't appear to be going away, Hartwig said. Interest remains strong among corporations as they look for new ways to hedge risk through traditional and non-traditional financial tools, he added.

Shares of AIG are down 43 cents, or 0.71% to $60.15.