* AIG confirms $500 mln investment in PICC Hong Kong IPO
* China life insurance venture seeks to benefit from market growth
* AIG may sell entire PICC stake if JV documents not signed by May 2013
HONG KONG, Nov 22 (Reuters) - American International Group (AIG) has signed an accord with Chinese state-owned insurer PICC Group to sell life insurance in the world's second-largest economy, as the U.S insurer increases its bets in an underdeveloped market.
The non-binding agreement announced on Thursday brings AIG closer to its roots in China, where the company's predecessor was founded more than 90 years ago, and is part of AIG's plan to invest $500 million in PICC's planned Hong Kong initial public offering.
People's Insurance Company (Group) of China (PICC) is seeking to raise up to $3.6 billion through the IPO, with AIG and other investors agreeing to buy nearly 50 percent of the shares.
To demonstrate its commitment, AIG agreed not to sell more than 25 percent of its stake in PICC for a period of five years after the IPO. But it may offload the entire stake if final legal documentation for the proposed venture with PICC isn't completed by May 2013, the U.S. company said in a statement.
AIG plans to step up in presence in China, by setting up a joint venture with PICC Life, a unit of the Chinese insurer, to distribute life insurance and other products primarily in large cities.
AIG's current Aian exposure includes a 13.7 percent stake in its former Asian unit AIA Group Ltd and a 9.9 percent stake in PICC Property and Casualty Co Ltd 2328.HK>, a unit of PICC Group.
AIG was forced to spin off two-thirds of AIA in 2010 as part of a package of asset sales to help repay $182 billion in bailout funds it received from the U.S. government during the 2008 global financial crsis.
China had the fifth largest life insurance market in the world in 2011 with $134.5 billion in total written premium, PICC said in its preliminary IPO prospectus, citing figures from the Sigma Report compiled by Swiss Re. Life insurance penetration in China reached 1.8 percent at the end of 2011, compared with 8.8 percent in Japan and 3.6 percent in the United States, it added.
PICC Life ranked third among life insurers in China in the six months ended June 2012, with 57.2 billion yuan ($9.2 billion) in total written premium in the period, the company said. It has a life and health insurance distribution network of about 2,200 branches.
PICC's life insurance business accounted for about 29 percent of its gross written premium of 149.2 billion yuan in the six months ended June 2012.
The company had 51.4 million life insurance customers at the end of June, up 18 percent from six months earlier.
AIG's predecessor was founded in Shanghai in 1919 by U.S. entrepreneur C.V. Starr. Twenty years later, Starr temporarily relocated to the United States to avoid political instability in Asia and, following World War II, decided to run his U.S. businesses from New York. They came to be known as AIG, whose shares began trading in New York in 1984.