AIG Sells Auto Unit to Zurich in Biggest Deal Since Bailout

By Hugh Son, Zachary R. Mider and Erik Holm
Bloomberg News
April 16, 2009

April 16 (Bloomberg) -- American International Group Inc. agreed to sell its U.S. auto insurance business to Zurich Financial Services AG for about $1.9 billion, the firm's biggest divestiture since being rescued by the government.

The purchase price matches the tangible book value of the business, Zurich said in a statement today. Zurich expects to sell $1.1 billion in shares to help pay for the deal.

AIG Chief Executive Officer Edward Liddy is working to dismantle most of the company, once the world's biggest insurer, to help repay parts of a $182.5 billion government bailout. AIG has been in intermittent talks with Zurich over the auto unit, one of the most resilient parts of its insurance holdings, since last year. The company has announced deals worth $2.4 billion before today's agreement.

AIG said last month it will hand over its two largest non- U.S. life insurance units into government trusts to cope with the global credit crisis that has hobbled potential buyers' ability to make qualifying bids. AIG said it owes about $46 billion of a $60 billion federal credit line as of April 2.

Zurich CEO James Schiro said in a January Bloomberg Television interview that he was interested in increasing revenue in "personal lines in the U.S." The company pulled out of the bidding for Royal Bank of Scotland Group Plc's insurance unit, which includes Direct Line and Churchill in the U.K., last year and bought a 50 percent stake in Banco Sabadell SA's insurance units.

Zurich said March 2 it will keep 3.75 million shares that it had repurchased to fund potential takeovers, instead of canceling the stock. Fitch Ratings that day lowered the outlook on Zurich Insurance Company, the main unit of Zurich Financial, to "negative" from "positive," citing concern about capital.

California Sales

AIG's 21st Century, which is run by Chief Executive Officer Anthony DeSantis in Wilmington, Delaware, and has offices in Woodland Hills, California, sells auto policies over the telephone and Internet, avoiding the expense of using agents. Zurich's Farmers Group Inc. unit, and rivals including Allstate Corp. and Travelers Cos., rely on agents for most of their sales.

Insurers expect Internet sales, the model used by the Geico unit at Warren Buffett's Berkshire Hathaway Inc., to expand over the next 10 years and they should plan for changes in customer behavior, said Jay Fishman, Travelers' CEO, in an interview in November.

The combination would make Zurich, including the Farmers unit, the largest auto insurer in California, according to 2007 data from the National Association of Insurance Commissioners.

AIG acquired part of 21st Century in 1994 and got a majority stake in 1998. It bought the remaining portion in 2007 for $22 a share, valuing the entire company at $1.9 billion.

The unit was renamed, then the 21st Century moniker came back after AIG was rescued from collapse by the government last year.

21st Century has been for sale since before Oct. 3, when Liddy confirmed on a conference call that it was on the block.

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