Zurich to buy AIG auto unit for $1.9 billion

By Paritosh Bansal

NEW YORK (Reuters) - American International Group Inc agreed to sell its U.S. auto insurance business to Zurich Financial Services for $1.9 billion, marking the largest asset sale by the insurer since its September rescue.

Separately, Zurich said on Thursday that it expects first-quarter results will be materially in line with recent quarters and its regulatory solvency ratio will remain strong, following a finalized year-end 2008 figure of 160 percent.

Zurich had a business operating profit of $1.0 billion and net income after tax attributable to shareholders of $205 million in the fourth quarter.

It said the deal with AIG would boost its earnings per share immediately, and create the third-largest U.S. personal lines insurer. But the company wants to increase its market share in the business further and would look at other operations, said Paul Hopkins, chief executive of Zurich Americas.

Hopkins did not rule out other deals with AIG and more acquisitions in general.

"We look at AIG as an excellent insurance company," he told Reuters in an interview. "So if there were other assets that met our strategic and financial thresholds that were run by AIG or any other group, we would certainly look at them positively."

Zurich shares, which are down 15 percent this year, closed 3.4 percent higher on Thursday at 198.70 Swiss francs. AIG shares closed up 9 cents, or 5.6 percent, at $1.69 on the New York Stock Exchange.

DEAL TERMS

Zurich's Farmers Group Inc will acquire AIG's 21st Century Insurance Group in exchange for $1.5 billion cash and $400 million in notes backed by Zurich Insurance Co.

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

Zurich plans to immediately sell the regulated insurance entities for $1.4 billion in cash to Farmers Exchanges, which it manages but does not own.

Farmers Exchanges are three reciprocal insurers, which are owned by their policy holders. Zurich manages them through Farmers Group, a management and holding company.

Zurich will also provide increased underwriting capacity to the Farmers Exchanges.

Zurich, the fourth-largest European insurer, will sell ordinary shares to raise $1.1 billion to help meet increased capital needs to support the acquisition and the additional business assumed. It said it will immediately launch the sale of shares to a limited number of institutional investors.

AIG bought out the minority shareholders in 21st Century in 2007 in a deal that valued the business, at that time, at about $2 billion.