NU Online News Service

American International Group Inc. and Zurich Financial Services Group announced a $1.9 billion deal today for the sale of AIG's auto unit, 21st Century Insurance Group, to Zurich's Farmers Group Inc. subsidiary.

Under the terms of the transaction, AIG said Farmers Group will pay $1.9 billion, consisting of $1.5 billion in cash and $400 million in face amount of subordinated, euro-denominated capital notes backed by Zurich Insurance Company--Zurich's principal operating unit.

In addition, Farmers will also assume 21st Century's outstanding debt of $100 million.

Based in Wilmington, Del., 21st Century includes the former AIG Direct and Agency Auto business, and employs 6,000 people.

AIG said the personal auto insurer now operates in 49 states and Washington, D.C., with 2008 premiums of $3.6 billion--including $2.7 billion in direct sales and $900 million through independent agents.

The transaction, AIG said, excludes the AIG Private Client Group, which provides property and casualty insurance to high net worth individuals.

"We are very pleased to reach agreement on a $2 billion transaction, especially in this market environment," said AIG's chairman and chief executive officer, Edward Liddy.

He noted that the company--which also announced the sale today of its wealth management arm, AIG Private Bank Ltd., to Aabar Investments PJSC of Abu Dhabi for $308 million--is "moving forward with discussions for several other transactions, and we continue to evaluate how best to assure the continued strength and success of all of AIG's businesses."

Zurich CEO James J. Schiro, in a statement explaining the purchase, said that expansion of U.S. personal lines capabilities at Farmers "has always been one of our strategic priorities."

Beefing up Farmers, he said, "reduces the overall volatility of our portfolio of businesses, while continuing our focus on profitable growth through customer, product and distribution excellence."

He said that despite the present economic climate, "financial discipline" can position Zurich to capitalize on market opportunities--"provided they meet our strategic objectives and financial hurdle rates."

The purchase of 21st Century, Zurich said, gives Farmers opportunities to achieve benefits of scale, as well as to leverage talent and technical capabilities.

"Both 21st Century and Farmers are strong companies, providing policyholders with exceptional levels of service and personalized coverage," said Anthony J. DeSantis, 21st Century's president and CEO. "This is an excellent fit, and we look forward to a smooth integration that will be seamless to our customers."

AIG, which has now arranged to sell off 11 different units, has been dealing off assets to pay back more than $150 billion in government loans and other financial supports that total $182.5 billion.

The financially-troubled company secured taxpayer support last September after credit default swaps traded by its Financial Products unit left AIG in distress. In exchange for a federal bailout, AIG gave the government a 79.9 percent interest in the company.

Zurich said that as part of the transaction, Farmers Group Inc. will immediately sell the portion of the acquired business that is comprised of regulated insurance businesses to the Farmers Exchanges, which Zurich manages but does not own.

F. Robert Woudstra, CEO of Farmers Group Inc., said the deal positions Farmers as "the fastest growing personal and small-business insurer in America," and gives his company an expanded agency force and "one of the most successful direct distribution platforms within one of the fastest growing distribution channels in the U.S."

Farmers said its direct sales distribution channel grew from 7.7 percent to 18 percent of the total U.S. auto insurance market from 1997 to 2006.

Acquiring 21st Century, according to Farmers, adds approximately 1.5 million direct auto customers, plus an estimated 500,000 new customers per year to Farmers' personal lines operations. AIG's U.S. Personal Auto Group in 2008 had gross written premiums of $3.6 billion.

Banc of America Securities LLC acted as financial advisor and Sidley Austin LLP acted as legal counsel to AIG on this transaction. Blackstone Advisory Services provided financial advice to AIG in connection with AIG's global restructuring program.

Reacting to the sale announcement, Fitch Ratings in Chicago said it has revised its Rating Watch on the insurer financial strength ratings of American International Group, Inc. auto subsidiaries to "negative" from "evolving."

It noted that Zurich's insurer financial strength rating is 'A-plus' and the companies' rating outlook is "negative."

Fitch placed the AIG subsidiaries' ratings on Rating Watch-Evolving on Sept. 17, 2008, when U.S. financial assistance to AIG was announced and AIG's plans to divest these specific companies began emerging.

Fitch said its expectation is that the majority of the proceeds from the sales will be retained in AIG's insurance operating subsidiaries and that the effect on these subsidiaries' capital positions will be modest.

The AIG subsidiaries' current insurer financial strength ratings are "double-A-minus," reflecting benefits from being part of the AIG organization and the benefits of recent government support, said Fitch.

Fitch advised that when the deal closes it expects that the auto insurance companies' financial strength ratings will likely be downgraded "to a level more commensurate with that of Zurich's."

NU Online News Service, April 16, 2:56 p.m. EDT

Special Reports /

AIG Sells Auto Group for $1.9 Billion to Zurich's Farmers Unit

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