Advertisement

FINANCIAL SYSTEM IN CRISIS : INSURANCE

AIG's stunning fall has global ripple effects

The firm has deep roots in China, where customers are worried.

September 24, 2008|Don Lee | Times Staff Writer

SHANGHAI — AIG's roots go deep here, all the way back to 1919 when a young and restless Californian arrived in a booming semi-colonial city that was teeming with bankers, industrialists and opium merchants.

Cornelius Vander Starr had sold auto insurance in San Francisco before serving as an infantry sergeant during the Great War. But the Fort Bragg native wasn't commissioned overseas, so when the war ended, he ventured off by himself to Asia's commercial hub at age 26.

Before long, he opened an office on Nanking Road with two Chinese clerks, underwriting ordinary life insurance policies as well as coverage for cargo ships carrying refugees from Russia's Vladivostok to Europe.

And so was born the company that would become American International Group Inc., the biggest insurance firm in the world.

Since then, AIG has had a special place in the hearts of many Chinese, who regarded the company as among the best of international brands. But after the U.S. government's $85-billion rescue of the troubled conglomerate last week, its stellar reputation has been tarnished, and at least a few customers are canceling their policies.

"It probably won't have any problems, but I don't know. I just don't feel comfortable leaving it there," said Wang Qiang, 54, an administrator for a construction company who rushed to AIG's branch in the southern city of Guangzhou as soon as he learned about the government's intervention. Despite AIG's assurances that its customers were protected, Wang didn't hesitate to cash out his $12,000 whole life policy.

Like Wang, most Chinese understand little of the turmoil that has engulfed AIG and caused it to lose $18 billion over the last three quarters -- primarily from its extensive exposure to the tottering U.S. housing and mortgage industries. But its stunning fall has hardly gone unnoticed here, illustrating the global ripple effects of the American financial crisis.

AIG has 3.7 million customers in China, according to an analyst's estimate, and millions more elsewhere in Asia -- a legacy of Starr's aggressive expansion in the region in the 1920s. About half of AIG's global workforce of 116,000 is in Asia.

The New York-based company manages $115 billion in assets in Asia and has tens of billions invested in roads and development projects from the Philippines to South Korea. AIG's operations in mainland China are more limited, mainly life, property and casualty insurance lines, reflecting the nation's tight restrictions on foreign financial service firms.

AIG spokespersons in China would not comment on how many customers had canceled policies in recent days, although interviews with AIG salespeople and policyholders suggest the numbers are small.

On Tuesday, the company said it had completed the deal under which the U.S. government would lend AIG as much as $85 billion for roughly 80% of the company. The insurance giant is expected to sell assets to repay the federal loan.

Analysts and former China executives of AIG believe the corporation will hold on to AIG's businesses in China, given the future potential. Overall, income from insurance premiums totaled about $100 billion last year, more than double the amount in 2002, according to government figures. Only about a fifth of China's 1.3 billion citizens have insurance policies, mostly in urban areas.

AIG's life insurance company, called AIA in China, generated about $115 million in premium income last year, up 19.5% from 2006, according to a report by PricewaterhouseCoopers. AIG's property & casualty line in China has grown by an average of 25% annually in the last 15 years, said David Peng, a former board director of AIG's property and casualty company in China.

"They may sell the most valuable assets to get cash, but that's not good for AIG in the long run," said Peng, a 13-year veteran who last month resigned to build a brokerage in Beijing. He described AIG's international operations, including those in China, as the "most beautiful" of all the corporation's holdings.

"AIG can be back to where it all started," he said. "They're good at international markets."

Although AIG is tiny in China compared with domestic players, it ranks No. 1 in almost all categories of insurance products among foreign firms in China. That's in no small part because of its long connections to the country.

Stories abound of Starr's affection for China and his Chinese employees. In 1945, shortly after V-J Day, Starr chartered a plane for Shanghai, bringing with him a suitcase full of dollars to go back into business, according to an official biography of Starr.

When the communists came to power in 1949, Starr closed AIG's operations in China, moving the base to New York. In 1967, a year before his death, Starr passed the baton to his protege, Maurice "Hank" Greenberg.

Greenberg made frequent trips to China, endearing himself to government officials by helping fund a children's hospital in Shanghai. In another grand gesture, he paid a Paris antiques dealer $5 million for 10 copper windows that had been removed from Beijing's Summer Palace and gave them to China as a gift. In 1992, AIG became the first foreign insurer allowed to do business in contemporary China.

"No other insurance company can compare the kinship AIG has with China," said Zheng Wei, vice chairman of the Department of Risk Management and Insurance at Peking University.

More recently, he said, "customers believed that even if AIG's Shanghai branch or Guangzhou branch had problems, it still had a strong headquarters in the U.S. to back it up. But right now, the financial situation of its headquarters has become AIG China's biggest challenge."

--

don.lee@latimes.com

Cao Jun in The Times' Shanghai bureau contributed to this report.

Advertisement
Los Angeles Times Articles
|
|
|