AIG Sale Of Hartford Steam Boiler To Munich Re Nets Loss Of $458 Million

As American International Group announced the sale of its Hartford Steam Boiler unit to Munich Re Group in a deal worth $742 million--$458 million less than the carrier paid for HSB back in 2000--AIG's top executive said nearly three-quarters of the company might have to be sold to repay its federal loan.

"We're the only company that's been helped by the federal government that has a plan to pay back every single penny that has either been loaned to us or invested in us," AIG Chairman and Chief Executive Officer Edward Liddy said in a Dec. 23 interview on CNBC's "Squawk Box."

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

Mr. Liddy hopes the loan could be repaid in 2009. "We are going to be one of the companies that distinguishes itself," he said. "One hundred and sixteen thousand people at AIG did not cause this problem. They are going to solve the problem and sell our assets....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--said that would depend on the direction in which the capital markets go. "If they stay where they are or get better, we'll be fine," he said. "But if the capital markets and credit markets were to continue to deteriorate, it's anybody's guess as to what would happen. But I like where we are and I think we can get done what we set out to do." He added that loosening of the capital markets would make the company's challenge "a whole lot easier."

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

AIG paid $1.2 billion for the company back in 2000, when its chairman at the time, Maurice Greenberg, explaining the rationale for the purchase, said: "The moon and the stars were in the right orbit."

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

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

The deal is expected to be completed near the end of the first quarter of 2009, according to Munich Re, which noted that regulatory approval in the United States, Canada and the United Kingdom is also required. Munich Re said it would buy HSB using 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 R?der, the 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 business model offered by HSB and similar specialty insurers helps reduce the volatility of Munich Re's traditional reinsurance business.

Munich Re said HSB will operate as a subsidiary of Munich Re America. The company plans to maintain HSB's business model, keep its brand and retain the carrier's 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 by selling specialized Munich Re products and growing the company's international business through the Munich Re global footprint.

"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 CEO of HSB Group. "With Munich Re's outstanding financial strength behind us, we can offer our clients the reassurance that they're looking for in today's uncertain market environment."

Richard H. Booth, chairman of HSB Group, said the deal is "a very good opportunity for HSB, its clients and employees. Munich's strong global capabilities provide a solid growth platform for HSB'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 Munich Reinsurance of America Inc.

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 say HSB's 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 to establish a "dominant position in the U.S. specialty business," the carrier said.

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

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

Bruce Ballentine, an analyst with Moody's Investors Service, called the sale 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. He called Munich Re a strong buyer that offers a good strategic fit for HSB.

Munich Re's financial strength rating is unaffected by its deal to purchase HSB, according to A.M. Best Company, which placed HSB under review with positive implications. The group and its subsidiaries 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 the deal is a further step in Munich Re's plan to expand in the United States. Munich Re has a Best financial strength rating of "A-plus" (superior) and issuer credit rating of "double-a-minus."