AIG Selling Hartford Steam Boiler To Munich Re At $458M Loss

BY MARK E. RUQUET
National Underwriter News
December 22, 2008


American International Group will sell Hartford Steam Boiler to Munich Re Group in a deal worth more than $700 million" close to $450 million less than the carrier paid for the company in 2000.

The New York-based insurer AIG said today it would sell HSB Group Inc, the parent company of The Hartford Steam Boiler Inspection and Insurance Company, to Munich, Germany-based Munich Re for $742 million in cash, including the assumption of $76 million of outstanding HSB capital securities.

The deal is $458 million less than the $1.2 billion AIG paid for the company back in 2000, when then Chairman Maurice Greenberg explained the rationale for the purchase as, "The moon and the stars were in the right orbit."

AIG is under pressure to sell off assets of the company to repay a more than $60 billion federal government bailout loan it agreed to in order to keep itself in business as it dealt with the fallout from the subprime crisis.

HSB, headquartered in Hartford, Conn., provides machinery and plant and equipment breakdown insurance, inspection, certification and engineering consulting services.

The deal is expected to be completed near the end of the first quarter of next year, Munich Re said, and is subject to regulatory approval in the United States, Canada and the United Kingdom.

Munich Re said it would purchase the company utilizing internal resources that do not affect the insurer's share buyback program.

"This acquisition of HSB is a perfect fit for our U.S. strategy," Peter Roder, Munich Re board member responsible for U.S. business, said in a statement. "It is another step in developing our position in high return specialized niche segments. This is one of the declared aims of our ‘Changing Gear' program for profitable growth."

He added that the specific business model offered by HSB and similar specialty insurers helps reduce the volatility of traditional reinsurance business.

"Munich Re offers HSB new opportunities to grow our business profitably and expand our offerings in North America globally," said Douglas G. Elliot, president and chief executive officer of HSB Group.

Paula R. Reynolds, vice chairman and chief restructuring officer for AIG, said the HSB sale indicates "AIG's restructuring effort is gaining momentum."

She added that the transition should be seamless for HSB agents, customers and employees.

In a presentation explaining the rationale for the deal, Munich Re called it an "ideal strategic fit," noting the risk management approach and product know-how of HSB closely relates to Munich Re's reinsurance business.

The company went on to explain that the specialty business is "a natural evolution" of its own business model, offering specialized products and services.

The deal also helps with Munich Re's U.S. market strategy to "develop client strategies and reinsurance solutions" and establish a "dominant position in the U.S. specialty business."

Other positives of the deal for Munich Re are HSB's continued top-line growth and its underwriting performance that has stood at an average of 73.8 combined ratio since 2003.

Munich Re said HSB will operate as a subsidiary of Munich Re America. The company plans to maintain HSB's business model, keeping its brand and retaining the management team.

Back-office functions previously carried out by AIG will now be assumed by Munich Re America, where the company expects the only cost savings in the deal.

The company also expects to expand HSB's business through selling specialized Munich Re products and growing the company's international business through the Munich Re footprint.

In an interview today on CNBC's "Squawk Box," Edward Liddy, AIG's chairman and CEO, said the entire deal would be worth around $825 million, but sidestepped the issue over whether the company was making less on the deal than it had originally paid for HSB saying "it's a lot more complicated than that."

Commenting on the deal, Bruce Ballentine, an analyst with Moody's Investors Service called it a "small step forward in the divestiture plan for AIG," noting that it is a difficult market for selling businesses based on the weak economy and the limited availability of credit for potential buyers of any business. He called Munich Re a strong buyer who brings a good strategic fit for HSB.

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