Tuesday, September 16, 2008

Thai arm AIA 'stronger than its US parent AIG'

Insurance regulators yesterday called on policyholders of industry giant American International Assurance (AIA) to remain calm amid the turmoil in the global financial markets.

American Insurance Group (AIG), the US parent of AIA and the world's largest insurer, is in crisis after its share price tumbled over 60% on Monday on reports that it needed emergency loans of up to US$70 billion to remain in business.

The company is in sharp need of funds to cover potential losses from derivatives and other securities hit by the global credit crunch and collapse of the sub-prime mortgage market.

New York insurance regulators announced yesterday it would allow AIG to use $20 billion in assets from its subsidiaries to raise cash and would hold talks with US government regulators about providing additional loans.

The turmoil abroad has led to frenzied calls to AIA from Thai customers uncertain about the long-term security of their insurance policies. AIA Thailand, founded in 1938, is by far the largest life insurer in the country, with a market share of over 50% and over 5.8 million policies outstanding.

Chantra Purnariksha, secretary-general of the Office of the Insurance Commission (OIC), said the situation was being ''monitored closely.''

''Policyholders should not act hastily and prematurely terminate their programmes as they may suffer losses,'' she said.

AIA is regulated under Thai law and as of July, had reserves of 286.67 billion baht, more than enough to cover its liabilities. Mrs Chantra said the reserves were separate from its parent AIG.

Total assets as of July for AIA were over 383.06 billion, with retained earnings of over 70 billion baht. Capital funds totalled 69.24 billion baht, or 1,107.67% of the legal capital minimum.

Mrs Chantra added that under Article 32 of the Life Insurance Act, any profits or fund transfers to shareholders, including any possible transfer from AIA to its overseas parent, must first be approved by local regulators.

The law also requires life insurance firms to maintain a major portion of investment assets in the country, predominantly in low-risk, long-term securities.

Finance Minister Surapong Suebwonglee said yesterday he did not expect the financial crisis at AIG to affect operations of AIA in Thailand.

''AIA, as I understand, has reserves many times that required by Thai law. In fact, it should be financially stronger than its US parent,'' Mr Surapong said.

But the lack of explicit state guarantees or protection for policyholders has raised concern among its clients.

AIA agents privately acknowledged that their customers were wondering whether they should continue to pay premiums on their policies, considering AIG's questionable status.

In Singapore, hundreds of anxious investors flocked to their AIG office to inquire about the status of their policies.

But AIA Thailand executives noted privately that most of the policies in Singapore were investment-related, in contrast to the local market where policies focused on life insurance and long-term savings features.

AIA executives declined to comment officially on the situation, saying only that a public statement would be made available today.

Securities experts meanwhile said a collapse of AIG, coming after the turmoil over the weekend, would only further increase fears of a full global recession and meltdown of the US financial markets.

The Thai stock exchange fell 2.78% yesterday as markets across the world continued to slide on the back of the problems in the US financial sector.

Voravan Tarapoom, president of the Association of Investment Management Companies, warned that a collapse of AIG could potentially affect AIA, which in turn would have huge ramifications for the Thai economy and public.

''Under the Insurance Act, there is no explicit guarantee given for policyholders. Customers might believe that their funds are 100% safe, but they are not,'' she said.

Mrs Voravan, also managing director of BBL Asset Management, said authorities need to have a clear contingency plan in place in case an event affected AIG and AIA.

Bank of Thailand officials meanwhile said the stability of AIG Retail Bank, a subsidiary of AIG, remained solid.

Sorasit Soontornkes, an assistant central bank governor, said AIG Retail Bank's finances were strong, with a capital ratio of 24%, which was well above the sector average of 15%.

''As AIG Bank is a juristic person registered in Thailand, its funds must be kept separate from its parent company,'' he said.

''The central bank affirms that the bank has sufficient financial liquidity. The public should not be too anxious.''

Mr Sorasit said the central bank and the OIC were monitoring the situation, and had contingency plans in place ''if the situation turned for the worse''. He did not elaborate.

The turmoil comes in what has been one of the worst weeks ever on Wall Street, as investment banking powerhouse Lehman Brothers was forced into bankruptcy after 158 years of operations and Merrill Lynch, another giant Wall Street bank, was forced to accept a $50 billion buyout by Bank of America.

US and global financial institutions have been suffering huge losses tied to the US sub-prime mortgage market and global credit markets, as the slowing US economy has caused housing prices to plummet.

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