International -- Finance: INSURANCE
HOW BEIJING IS ENSURING AIG'S SUCCESS (int'l edition)
For more than a year, American International Group Inc. had its eye on 10 stunning pagoda windows. Looted from Beijing's Summer Palace during the Boxer Rebellion, the windows had been hidden away for nearly 80 years until they suddenly surfaced in 1992. Alerted to their reappearance by an American collector, AIG Executive Vice-President Edmund Tse got the Starr Foundation, a charitable institution closely related to AIG and headed by its chairman, Maurice R. Greenberg, to write the Chinese government a check for $515,000 to buy the windows back from a Paris antique dealer.
The reason the giant insurance company's top executives wanted the bronze windows so badly: They would make a perfect gift for the Chinese government as a show of commitment to the country. They were right. "People always take things from China," a grateful Beijing official told Tse at a celebration marking the booty's return at the end of 1993. "This is the first time someone returned something."
Hyperbole? Perhaps. But it's such goodwill gestures that are paying big dividends for AIG. While rivals bang on the doors of the China market, the company is enjoying the view from within. In 1992, AIG became the first foreign insurer to open in Shanghai. This year, it got the go-ahead to set up shop in the thriving southern city of Guangzhou. That's just for starters. As its mainland insurance revenues start piling up, AIG is emerging as a key player in the local bond market and in infrastructure development, funneling cash from overseas investors into everything from power plants and highways to shopping centers. It will soon become the first foreign investor allowed to buy the "A" shares in locally listed Chinese companies formerly restricted to locals.
Indeed, Chinese government officials are counting on AIG to become the insurance-industry equivalent of other big foreign investors bringing sophistication to the Chinese market, such as Daimler Benz in carmaking, McDonnell Douglas in aircraft, and Morgan Stanley in investment banking. Beijing wants AIG to set up new businesses and act as a pacesetter for making the state-owned People's Insurance Co. of China (PICC) more competitive. Policymakers are also relying on the New York insurer to provide the technology and knowhow to help pull China's markets into the modern age.
But technology transfer must benefit both sides. For AIG, that means having first crack at China's insurance market, which has been growing nearly 40% a year since the early 1980s. By 2005, the country could be generating a robust $75 billion or more in revenues each year, figures Ian Lancaster of Chubb Corp., one ef many competitors trying to gain entry to China.
NEAR-BREAKDOWN. That AIG has the lead in China should be no surprise. The company was founded in Shanghai in 1919. And although China ousted AIG in 1950, Greenberg has spent decades courting Beijing in a bid to get back in. Much of his effort was concentrated in Shanghai, where Greenberg ran seminars for local officials such as Zhu Rongji, then mayor of the city and now a vice-premier and the country's economic czar.
The assiduous attention--and years of lobbying in Washington on Chinese economic and trade issues--paid off again in July, when the People's Bank of China approved AIG's Guangzhou franchise despite a near-breakdown in Sino-U.S. relations. But even as it gets going in Guangzhou, AIG is widening its lead in Shanghai. Industry observers expected AIG to benefit from no more than a one-year head start. Then, many thought, other foreign competitors would be let in. Three years later, no one else has been let in to sell life insurance. AIG has the field to itself--because the Chinese have decided it's better to watch one company closely than to let in a gaggle of competitors that will be harder to monitor. "We're continuing the experiment, rather than expanding to a much broader scope," says People's Bank Deputy Director Di Weiping.
Already, AIG has a long lead in its core business. Its 5,400 Chinese salespeople are now writing some 55,000 new policies a month. To generate such volume, brokers typically get an office boss to sign up for life and personal-accident coverage. Other staffers usually fall into line and buy their own insurance.
Most of these policies are small by world standards, bringing in annual premiums of $120 to $240. But the numbers add up. Tse expects the Shanghai operation to rake in about $50 million this year, up sixfold from 1994. In 1996, he figures on hitting $100 million, as AIG turns a profit in China for the first time.
RIVAL EFFORTS. By comparison, AIG's sole foreign competitor in China, Tokio Marine & Fire Insurance Co., has a branch in Shanghai with just 20 people who handle property and casualty policies, mostly for other Japanese companies. Tokio expects to book only $3 million this year. Other competitors can only toil to convince authorities that they, too, are ready for business. Classes are set to start before the end of the year at the Chubb School of Insurance at the Shanghai University of Finance & Economics, part of $1 million that the Warren (N.J.) insurer expects to invest in China over the next five years to overcome a shortage of trained professionals. And Aetna International Inc. plans to establish a business school at Shanghai's Jiao Tong University to train and build ties with local business leaders.
Despite these efforts, Canada's Manufacturers Life Insurance Co. is the favorite to win a license in the next round of approvals, say People's Bank officials. It expects to start writing life-insurance policies in the first half of next year. Still, any new entrant may have a hard time breaking in. In five years, Tse figures AIG could be generating $500 million to $1 billion a year in Chinese business, assuming the company wins permission to open branches in additional cities. That would leave AIG far behind People's Insurance, which accounted for three-quarters of the $6 billion Chinese insurance market last year.
But PICC's 120,000 employees are starting to feel the heat from AIG's high-energy sales force. One central-bank official has called a few AIG agents "a nuisance, because they were too aggressive" and suggests that they are poorly trained. AIG says it isn't aware of problems and that its Chinese agents meet its global standards. Nevertheless, all insurance agents in Shanghai are now required to pass an industry test. And People's Insurance is copying AIG's style, including giving agents commissions. "AIG introduced very modern sales methods in life insurance," says a PICC official. "We will learn some things from them."
While it revs up the domestic insurance business, AIG is also raising money from foreign investors to help develop everything from Chinese power plants to toll roads in the next few years. The $1.1 billion AIG Asian Infrastructure Fund, set up in 1994, plans to put 40% of its money into China. Donald C. Roth, a former World Bank treasurer whose Washington-based Emerging Markets Corp. runs the fund, says plans are afoot for a second fund of $2 billion to $2.5 billion.
REINCARNATION. AIG typically kicks in 10% of the assets of these funds. But the biggest investor in infrastructure is the government of Singapore: It put up $250 million in the first fund and is expected to pitch in for the second one as well. This fits into both partners' strategies: AIG profits from China's growth, while Singapore advances its aim of investing in industrial development throughout East Asia.
AIG is setting up two other funds, totaling $300 million, that will invest only in China. One will target companies in the booming Pearl River delta adjacent to Hong Kong. The other fund will focus on China's thriving retail sector. "We want to bring internationally known retailers to China," says Cesar C. Zalamea, president and managing director of AIG Investment Corp. (Asia).
All these investments help AIG's case when it comes to the insurance business. "They're not directly related," says a People's Bank of China official. But "in my personal view, it would have some impact." There seems to be no doubt that Beijing wants AIG to succeed. Given the auspicious birth AIG has had in its second incarnation in Shanghai, it's unlikely either the Chinese or AIG will be disappointed.
WHAT AIG WANTS TO ACHIEVE IN CHINA ...
-- Widen its role as preeminent foreign company in the Chinese insurance market, which could be worth $75 billion in annual premiums by 2005
-- Opportunity to invest in local equities previously closed to foreign investors
-- Inside track on choice infrastructure deals, from power plants to shopping centers
...AND WHAT CHINA STANDS TO GAIN IN RETURN
-- Increased competition that will prompt reforms at the sleepy, state-owned People's Insurance Co. of China
-- Technology transfer, as AIG helps develop stock and bond markets and builds a fund-management industry
-- More cash for major infrastructure deals, as AIG brings in big-name foreign investors
DATA: BUSINESS WEEKBy Mark L. Clifford in Hong Kong, with William Glasgall in Washington