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The End of AIG's Asian Era

Source: WSJ

Posted on 04 Mar 2010

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AIG is once again splashed over world headlines with the news that British insurer Prudential PLC will pay $35.5 billion for the Asian unit of the embattled insurance giant. Whatever the short-term merits of selling AIA, this deal still marks the end of one of the oldest business relationships a U.S. company has had with Asia.

The size of the Prudential deal is largely a result of the British firm's willingness to bet big on Asia, which is expected to drive 40% of global life-insurance premium growth over five years, according to a 2009 study by McKinsey & Co. Prudential is so confident of AIA's value that it will sell $20 billion in shares to raise money for the deal. AIG is also in negotiations with MetLife to sell ALICO, AIG's life insurance operation in 67 countries outside Asia, for $15 billion. While ALICO operates in many more countries, many are not as rich as Asia and these nations do not have the profit predictions AIA countries have.

But the decision to sell AIA to pay back U.S. taxpayers some of what they spent bailing out the company is going to make it harder for AIG to return to profitability. Last year, roughly 15% of AIG's revenue came from life insurance and retirement services in Asia. This is one of the reasons long-time chief executive Maurice R. "Hank" Greenberg argued against the sale. He believes over the long term, AIA would yield even more toward payment of AIG debts.

Current chief executive Robert Benmosche made a different calculation. The company is suffering from the terrible decisions made in a division completely unrelated to Asia—the U.S. unit that traded in complex credit derivatives. It was doubtful the U.S. government, which took ownership of nearly 80% of AIG in 2008 amid the global financial crisis, has the patience to wait long for repayment. Having waited to sell AIA until global markets have stabilized somewhat, he'll get more than $15 billion more for AIA than what Prudential and other firms offered a year ago. Mr. Benmosche is the first AIG chief executive since Mr. Greenberg with the smarts to engineer a deal like this, and is making the best of a bad situation.

This is a positive change from AIG's recent history. When U.S. Treasury Secretary Henry Paulson picked Edward Liddy to be AIG's chief after the government stepped in, Mr. Liddy seemed to be in a panic. He clearly wanted to sell assets as quickly as possible, with little concern for price. For example, in December 2008 he sold AIG's Hartford Steam Boiler Inspection and Insurance Company Unit (HSBGroup) to Munch Re for $458 million less than AIG had paid for it in October 2000. If Mr. Liddy had stayed at AIG, he would have sold off everything but would never have raised enough to pay back Washington for the approximately $80 billion in bailout funding the company owes.

Yet the deal nonetheless marks another tragic chapter in the AIG saga, especially in Asia. In 1919, C.V. Starr did something no American had ever done before: He started a company in China, which grew into a global giant. Starr's AAU (American Asiatic Underwriters) in Shanghai wrote general insurance on behalf of American companies. Before long, the company was insuring Chinese citizens even though the conventional wisdom at the time among foreigners was that you couldn't do business with the Chinese because they would cheat you.

Starr found success in Shanghai and in the 1940s he launched AIA in Hong Kong, which eventually grew into the largest life insurer in Asia and the only wholly foreign-owned insurer in China. Starr's successor, Mr. Greenberg, understood well the value of his firm's special relationship with China. Mr. Greenberg visited China several times a year throughout his tenure at AIG starting in the 1980s. At one point he directed the Starr Foundation to buy the original carved doors to Beijing's Summer Palace from a Paris dealer so that they could be returned to China.

So, what's next for AIG? Beyond Alico, it doesn't have too many other extremely valuable properties to divest. Mr. Benmosche has laid out a long-term business plan that will turn AIG into a world-wide property and casualty insurer with a domestic life insurance operation. AIG had to rename its global property and casualty insurance business Chartis in 2009 to distance itself from AIG's tarnished brand, and now Chartis by itself is one of the largest insurance companies in the world.

Everyone wants to know whether AIG will be able to pay back all of its bailout money. The answer is probably yes, and the Prudential deal may help. But as a former AIG executive who worked in China and watched AIA bring in huge profits, I'm sad to see one of AIG's most important Chinese connections disappearing.