AIG sells auto insurer for $2 billion

CEO Ed Liddy notched the first big divestiture of his restructuring-focused tenure Thursday.

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NEW YORK (Fortune) -- AIG made the first big dent Thursday in its mountain of IOUs to taxpayers.

The New York-based insurer agreed to sell its U.S. car insurance business to a unit of Zurich Financial Services for $2 billion in cash, notes and debt assumption. The sale, which is subject to regulatory approval, is expected to close later this year, an AIG spokesman said.

The sale of 21st Century Insurance to Farmers Group comes just a month after AIG (AIG, Fortune 500) -- which has received federal assistance exceeding $182 billion since its derivatives-fueled implosion last fall -- had the terms of its federal lifeline restructured for the third time.

The company is trying to sell assets to raise cash to whittle down its gigantic obligations to the Treasury and the Federal Reserve Bank of New York. But progress has been slow. Financing for would-be buyers has been hard to come by, and Congress has been extremely critical of the ever-rising price tag of AIG's bailout.

"We are very pleased to reach agreement on a $2 billion transaction, especially in this market environment," said CEO Edward Liddy. "In addition, we are 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."

Liddy was installed last September after the government took a 79% stake in AIG in exchange for what started out as an $85 billion emergency loan. In return, AIG pledged to sell assets to raise cash that would be used to repay taxpayers.

Since then, with the financial markets remaining deeply stressed, AIG's need for cash has grown. As a result, the task of breaking up the company, which looked difficult when Liddy started in September, now appears to verge on the impossible.

In October, the company got a $37 billion loan from the New York Fed to help unwind its securities lending business, which like certain other parts of AIG got entangled in ill-advised investments in subprime mortgage-backed securities. That agreement boosted the company's debt to taxpayers to $122 billion.

A month later, the government restructured the terms of the deal, converting part of the Fed loans into a $40 billion Treasury equity investment and reducing the interest rate on the remaining debt. The government also set up two programs aimed at extricating AIG from the most toxic part of its derivatives business. Those efforts brought the tab to $152 billion.

And in March, another restructuring gave the government stakes in two foreign life insurance companies and a share of cash flows from some domestic insurers. In exchange, the Treasury created a $30 billion credit line for AIG, which as yet is undrawn.

While the government has been busy writing checks to the company, the deals AIG has done so far have generally have been small.

The 21st Century sale will bring AIG $1.5 billion in cash -- more than what the company had received in publicly disclosed divestitures up until now.

Also Thursday, AIG sold its private bank unit to Aabar Investments of Abu Dhabi for $308 million in cash and loan assumption.

Earlier this month, the company sold its Thai banking operations in exchange for $45 million in cash and debt repayment of $495 million; dealt its Canadian life insurance operations to Bank of Montreal for $263 million; and dispatched its Hartford Steam Boiler industrial insurer to Munich Re for $739 million, plus $76 million of debt assumption.

All told, the deals announced Thursday bring the cash AIG has raised during April to $2.8 billion.