AIG's Troubles Raise Worries In Asia

Angela Chan had been lying awake at night after hearing that New York–based insurance giant American International Group was on the brink of collapse. The 59-year-old retired Hong Kong accountant has two policies with AIG, a disability insurance plan and a medical plan. For almost a decade she has been forking over about $2,000 a year in premiums — confident in the stability of the global company that was founded nearly 90 years ago. "I bought AIG because I thought it was safe and represented the financial strength of America," Chan tells Institutional Investor .

Her fears eased on September 16, when the U.S. Federal Reserve Board extended up to $85 billion in loans to AIG in exchange for a 79.9 percent stake in the company. "The bailout is good news," Chan says.

It remains to be seen, though, whether the action can save AIG’s reputation in Asia. In Hong Kong some 2,000 policyholders have terminated their policies with the company, according to Derek Yung, a senior vice president and the general manager of American International Assurance Co., AIG’s Hong Kong–based Asia subsidiary. The figure could be substantially higher for the wider region. AIA is Asia’s largest foreign insurer, and the region generated 18 percent of AIG’s $110 billion in revenue in 2007.

The insurance company’s near-demise unleashed widespread concern across Asia. Stock markets fell sharply on September 15 on news that Lehman Brothers had collapsed, Merrill Lynch & Co. had sold itself to Bank of America Corp. and AIG was tottering on the brink. Alarmed by the potential fallout, China’s central bank that day reduced its key short-term interest rate by 27 basis points, to 7.2 percent, the first rate cut in six years.

AIG, which was founded in Shanghai in 1919 by Cornelius Vander Starr, has 3 million policyholders in mainland China and 2.2 million in Hong Kong. The company was kicked out of China after the Communist takeover in 1949, and was the first foreign insurer allowed back into the country, in 1980. Its door-to-door sales methods took local competitors by surprise, and AIG claimed 20 percent of the market by 1995. Although its share had declined to 1.7 percent in 2006 as rivals built up their business, the company still had 6.9 billion yuan ($1 billion) in premiums that year, half of all premiums gathered by foreign insurers in the country, according to the China Insurance Regulatory Commission.

Edward Liddy, AIG’s new government-appointed CEO, will need to sell assets to repay the Fed loan, and the company’s Asian operations are among its most valuable businesses. Local regulators are keeping a close eye on them. In Hong Kong, Financial Secretary John Tsang told the press that the government will monitor AIG to make sure that executives get regulatory approval before transferring any of the $30 billion in assets the insurer has in the region. In Beijing the CIRC held a special conference on September 18 to discuss the ramifications of AIG’s bailout, but officials declined to provide details. CIRC vice chairman Li Kemu told reporters that he hasn’t received any bids from local insurers seeking to buy assets from AIG. (Such deals would require regulatory approval.)

AIA’s Yung says the company is working hard to try to regain the 2,000 Hong Kong policyholders who left: "If the customers decide to come back to us in the coming two weeks, we will waive the requirement for them to provide proof of their health conditions."