Two of Southern California's biggest insurance companies are joining forces to create the state's largest auto insurer, at the same time throwing a financial lifeline to troubled insurance giant American International Group Inc.
AIG agreed to sell its 21st Century Insurance subsidiary for $1.9 billion to Farmers Insurance Group of Los Angeles, itself a unit of Zurich Financial Services of Switzerland.
The combined company -- announced Thursday and expected to be approved by state regulators this summer -- would cover about 1 in 6 of the state's 22.8 million registered private passenger vehicles. Nationally, the expanded company would rank third nationwide behind State Farm and Allstate Corp., Farmers said.
The two parts are expected to do business separately under their current names, with Farmers relying on its vast network of agents and 21st Century emphasizing telephone and Internet sales.
AIG, once the world's largest insurance company, almost collapsed last fall and was rescued with the help of a $182.5-billion bailout from the federal government. Since then, the company has been scrambling to sell several of its big subsidiaries, including 21st Century and an airplane-leasing unit, International Lease Finance Corp., based in Century City. Thursday's deal would be AIG's first major sale.
For Farmers, buying Woodland Hills-based 21st Century "represents the perfect strategic fit," said Chief Executive Robert Woudstra. The 81-year-old Farmers, which sells auto, home, life and other types of policies, would be able to harness 21st Century's business model of marketing auto insurance directly to customers via the Internet and the telephone.
"It's a bold and smart move," said Jim Rogers, an auto insurance consultant in Redwood City, Calif. "It's probably a perfect fit if they want to grow the business and compete with other multichannel companies," such as Progressive Corp. and Allstate, that use agents, central call centers and the Internet to do business.
The sale of 21st Century to Farmers shouldn't affect the premiums that the companies charge policyholders, said state Insurance Commissioner Steve Poizner. "I think the level of competition will stay the same as it is today," he said. What's more, the acquisition by "a strong, California-based company" eases concern that AIG might "try to pull assets out of" 21st Century, he said.
Consumer advocates largely agreed with the commissioner. "We don't have any concern," said Douglas Heller, executive director of Santa Monica-based Consumer Watchdog. "They'll jump to 14% or 15% of the market, but California is incredibly competitive."
The 21st Century brand also would allow Farmers to go head to head with Geico and Esurance, by offering competitive rates because it keeps costs down by selling mainly on the Internet, Woudstra said.
The Farmers-21st Century deal wasn't the only boost for AIG. On Thursday, AIG disclosed that it had completed the sale of its wealth management business to Aabar Investments of Abu Dhabi for about $253 million, plus $55 million in assumed debt. It is also trying to unload its vast Asian insurance business and has looked for a buyer for its retirement products unit -- Southern California-based SunAmerica Inc.
AIG CEO Edward M. Liddy said his company was "moving forward with discussions for several other transactions."
"What is very encouraging is that there are now buyers for these assets," said David Lutz, a trader and managing director of listed securities at Stifel, Nicolaus & Co. "Three months ago, there were no buyers. Everyone was hiding under their mattresses with their cash."
Lutz also noted that 21st Century was selling at the high end of the "chattered" price range of $1.5 billion to $2 billion.
"That shows not only that there's demand, but also decent if not great pricing" in the market now, he said.
AIG acquired 21st Century in September 2007 and was in the process of rebranding the company as Aigdirect.com when the financial tsunami hit last year. But with AIG pilloried publicly for its near-collapse and continuing payout of executive bonuses, the firm decided to restore the 21st Century brand in November.
The name change, though, apparently hasn't had the desired effect. 21st Century said this month that it would lay off 500 of its 6,500 workers amid a slump in sales of auto, home and other insurance lines. The company also said it would close four offices, including one in Long Beach.
Shares of AIG, which have plunged 96% over the last year, rose 8 cents, or 6%, to $1.69 on Thursday. Zurich Financial's U.S.-traded shares gained 12 cents, or 0.7%, to $17.40.
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Q&A for consumers
When will the sale take place?
It's expected to win approval from state regulators and be completed by the end of September.
How will this affect my policy?