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.

Zurich had made an offer for the auto insurance business in February in the range of $2 billion to $2.5 billion, but market volatility kept a deal from coming together, a source familiar with the deal said.

US insurer MetLife Inc had been interested in the AIG business as well at one point, another source familiar with the matter said.

MetLife was not immediately available for comment. The sources did not want to be identified because the information was not public.

BROADER BASE

The business being sold includes the former AIG Direct and Agency Auto businesses. It operates in 49 states and Washington, D.C. In 2008, 21st Century reported total premiums of $3.6 billion.

The deal adds about 1.5 million direct auto customers and an estimated 500,000 new customers per year to Farmers' personal lines operations. It also broadens its geographic base, particularly in the eastern United States.

It also gives Farmers 21st Century's platform to sell insurance directly to people.

We realized that customer shopping behavior is changing and more people are starting to shop online, Hopkins said.

The deal excludes AIG's Private Client Group, which provides property and casualty insurance to high net worth individuals.

The transaction is expected to close by the third quarter.

U.S. taxpayers have taken a roughly 80 percent stake in AIG, once the world's largest insurer, in exchange for providing up to $180 billion in financial support.

The company is trying to ditch assets in a bid to pay back the government but has struggled to find buyers for big-ticket assets.

So far it has sold 12 businesses for more than $4 billion.

Banc of America Securities acted as financial adviser and Sidley Austin as legal counsel to AIG. Blackstone Advisory Services is advising AIG on its global restructuring program. Farmers Group was given financial advise by UBS. Willkie Farr & Gallagher was Farmers Group's legal counsel, while Skadden, Arps, Slate, Meagher & Flom advised UBS.

(Reporting by Paritosh Bansal and Megan Davies in New York, Victoria Howley in London, and Sven Egenter in Zurich; Editing by Andre Grenon, Gunna Dickson and John Wallace)

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