As American International Group announced the sale of itsHartford Steam Boiler unit to Munich Re Group in a deal worth $742million--$458 million less than the carrier paid for HSB back in2000--AIG's top executive said nearly three-quarters of the companymight have to be sold to repay its federal loan.

"We're the only company that's been helped by the federalgovernment that has a plan to pay back every single penny that haseither been loaned to us or invested in us," AIG Chairman and ChiefExecutive Officer Edward Liddy said in a Dec. 23 interview onCNBC's "Squawk Box."

"To do that, we have to sell 70 percent of our company," headded, noting that "about 75,000 of our employees will end upworking for someone else."

Mr. Liddy hopes the loan could be repaid in 2009. "We are goingto be one of the companies that distinguishes itself," he said."One hundred and sixteen thousand people at AIG did not cause thisproblem. They are going to solve the problem and sell ourassets....That's our goal."

When asked if the company would need to borrow any more money,Mr. Liddy--put in place after the federal loan was granted--saidthat would depend on the direction in which the capital markets go."If they stay where they are or get better, we'll be fine," hesaid. "But if the capital markets and credit markets were tocontinue to deteriorate, it's anybody's guess as to what wouldhappen. But I like where we are and I think we can get done what weset out to do." He added that loosening of the capital marketswould make the company's challenge "a whole lot easier."

Meanwhile, on Dec. 22, AIG said it would sell HSB GroupInc.--parent company of The Hartford Steam Boiler Inspection andInsurance Company--to Germany"s Munich Re for $742 million in cash,including the assumption of $76 million of outstanding HSB capitalsecurities.

AIG paid $1.2 billion for the company back in 2000, when itschairman at the time, Maurice Greenberg, explaining the rationalefor the purchase, said: "The moon and the stars were in the rightorbit."

HSB, headquartered in Hartford, Conn., provides machinery andplant and equipment breakdown insurance, as well as inspection,certification, risk management and engineering services.

Paula R. Reynolds, vice chair and chief restructuring officerfor AIG, said the HSB sale indicates that "AIG's restructuringeffort is gaining momentum." She added that the transition shouldbe seamless for HSB agents, customers and employees.

The deal is expected to be completed near the end of the firstquarter of 2009, according to Munich Re, which noted thatregulatory approval in the United States, Canada and the UnitedKingdom is also required. Munich Re said it would buy HSB usinginternal resources that do not affect the insurer's share buybackprogram.

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

He added that the business model offered by HSB and similarspecialty insurers helps reduce the volatility of Munich Re'straditional reinsurance business.

Munich Re said HSB will operate as a subsidiary of Munich ReAmerica. The company plans to maintain HSB's business model, keepits brand and retain the carrier's management team. Back-officefunctions previously carried out by AIG will now be assumed byMunich Re America, where the company expects the only cost savingsin the deal.

The company also expects to expand HSB's business by sellingspecialized Munich Re products and growing the company'sinternational business through the Munich Re global footprint.

"Munich Re offers HSB new opportunities to grow our businessprofitably and expand our offerings in North America globally,"said Douglas G. Elliot, president and CEO of HSB Group. "WithMunich Re's outstanding financial strength behind us, we can offerour clients the reassurance that they're looking for in today'suncertain market environment."

Richard H. Booth, chairman of HSB Group, said the deal is "avery good opportunity for HSB, its clients and employees. Munich'sstrong global capabilities provide a solid growth platform forHSB's products and services."

Mr. Elliot and his senior management team will remain with HSB.He will report to Anthony J. Kuczinski, president and CEO of MunichReinsurance of America Inc.

In a presentation explaining the rationale for the deal, MunichRe called it an "ideal strategic fit," noting the risk managementapproach and product know-how of HSB closely relates to Munich Re'sreinsurance business. The company went on to say HSB's specialtybusiness 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 toestablish a "dominant position in the U.S. specialty business," thecarrier said.

Other positives cited by Munich Re are HSB's continued top-linegrowth and its underwriting performance, with an average 73.8combined ratio since 2003.

In his "Squawk Box" interview, Mr. Liddy said the deal wouldultimately be worth around $825 million for AIG but sidestepped theissue over whether the company was making less on the sale than ithad originally paid for HSB, saying "it's a lot more complicatedthan that."

Bruce Ballentine, an analyst with Moody's Investors Service,called the sale a "small step forward in the divestiture plan forAIG," noting that it is a difficult market for selling businessesbased on the weak economy and the limited availability of creditfor potential buyers. He called Munich Re a strong buyer thatoffers a good strategic fit for HSB.

Munich Re's financial strength rating is unaffected by its dealto purchase HSB, according to A.M. Best Company, which placed HSBunder review with positive implications. The group and itssubsidiaries have a financial strength rating of "A" (excellent)and issuer credit rating of "a."

In a statement, the Oldwick, N.J.-based rating service said thedeal is a further step in Munich Re's plan to expand in the UnitedStates. Munich Re has a Best financial strength rating of "A-plus"(superior) and issuer credit rating of "double-a-minus."