Financial crisis spares AIG Ukraine, despite parent company’s lack of liquidity
October 22, 2008 at 22:31 | Yulia GolubAndriy Pikula serves as board chairman of ALICO AIG Life Ukraine, a subsidiary of the international insurance giant American Insurance Group, AIG. Pikula has more than 13 years of experience in the financial business sector and was the director of ALICO AIG Life in Slovakia.
AIG was hit hard by the ongoing financial crisis. Last month, its shares fell 95 percent from a 52-week high of just over $70 to $1.25 a share. The U.S. government bailed out the company with two loans, one for $85 billion, the second for $37.9 billion.
Although AIG is an insurance company, its problems were caused by the same sub-prime mortgage crisis that has engulfed the banking sector. AIG sold insurance contracts to investors seeking mortgage default protection. When home foreclosures reached their peak last summer, the company did not have the assets to make good on insurance guarantees.
In a Kyiv Post interview, Pikula discusses the development of life insurance in Ukraine and dismisses buy-out rumors.
KP: Compared to other Eastern European countries and Russia, what is Ukraine’s life insurance market like?
AP: The markets in Poland and Russia are more advanced and developed than in Ukraine. The market here is quite young. For instance, we have been in the market for only six years. The life insurance business is a unique sector which requires time to develop and requires a long-term outlook. But if we want to see higher growth in the Ukrainian life insurance market, fundamental changes are needed in the whole Ukrainian economy.
KP: What kind of changes?
AP: Life insurance companies have a different financial task than banks.
Banks serve short- and medium-term purposes, while insurance companies, particularly life insurance companies, serve long-term purposes. But, in Ukraine, life-insurance companies have to compete with the banks, and we cannot compete with banking interest rates.
The country’s insurance laws need to be modernized to reflect the pace of market growth. For example, according to Ukrainian law, we cannot sell accidental death policies. We also cannot sell personal injury and hospital care policies. These restrictions should be lifted.
KP: Do Ukrainians understand the value of life insurance?
AP: Ukrainians are very superstitious. Traditionally they believe that they are immortal. So, apart from competing with the banks and the real estate market, we need to overcome the local mentality. In ideal terms, life insurance companies occupy their own niche, and only compete among themselves. At this point in the country’s life insurance market development, every company can have its own “piece of cake.”
Today, about 4 percent of Ukrainians (about two million people) have life-insurance policies. There is room to grow.
KP: Has the world financial crisis affected your company’s plans in Ukraine?
AP: Only in terms of advertising and public opinion. People and clients read the papers and Internet news. They watch TV and, subsequently, have started asking us questions about our financial situation. Everyone is talking about us. Everyone wants to estimate the market price of ALICO AIG Life Ukraine.
In reality, the crisis is related to bad mortgages and financial instruments, not the life insurance business.
We have sufficient reserves in Ukraine. The bottom line is that we place money locally. We sell life insurance policies and we guarantee a 4 percent yield for our customers when we collect premiums.
The premiums are invested domestically in government bills, bonds and bank deposits. We do not invest in Wall Street, nor do we invest money in the United States.
KP: How rapidly is your portfolio growing?
AP: I can say it is growing 40-50 percent per year. Primarily, our clients are private individuals. The most popular products are savings, death and disability policies. Overall, in the last six years we have sold over 200,000 life insurance policies in Ukraine.
KP: There are rumors that PZU, Generali Garant and TAS are interested in buying your Ukraine operations. Is there any substance to this?
AP: I can say that our market competitors are trying to analyze our position, which is fine. But my question to the state-owned companies like PZU is: haven’t you heard that the U.S. Federal Reserve has provided an $85 billon loan in exchange for a 79.9 percent stake in the company? So, do they want to compete with the United States?
This analysis was launched by a journalist and our market competitors are trying to use this information to make opinions. But our figures show different things. As of Aug. 31, ALICO AIG Life Ukraine had reserves totaling nearly $60 million and assets worth nearly $65 million.