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AIG's Three Most Attractive Assets

Three subsidiaries stand out and probably will get the best prices and most enthusiastic buyers.

Under the terms of an $85 billion government bailout,

American International Group

(AIG) - Get American International Group, Inc. Report

AIG must sell off assets to pay back the loan over two years. A few of

AIG's

71 insurance subsidiaries stand out and likely will garner the best prices and most enthusiastic buyers. Three of them, all multibillion-dollar divisions, are the pick of the litter, according to a review of capitalization, earnings and investment portfolios.

Lexington Insurance Co. is domiciled in Delaware and primarily sells fire insurance but also offers allied lines coverage, inland marine, liability, medical malpractice and homeowners. With $15 billion in assets, $4.7 billion in capital and $6.6 billion in annual premiums, the company has a very strong regulatory risk-based capital ratio of 4.91 -- more than twice of what is required.

The company's investment portfolio is clean, with only $454 million in mortgage-backed securities and no junk bonds as of year-end. It earned $1 billion on its underwriting business in 2007 and another $278 million in the first quarter. Likewise, its investment portfolio earned it $552 million in 2007 and another $81 million in the first quarter. With a B- (Good) TheStreet.com Financial Strength Rating, Lexington is an asset for which AIG could easily find a buyer.

National Union Fire Insurance Co. of Pittsburgh sells primarily liability coverage but also offers health, commercial auto, workers comp and inland marine for total annual premiums of $5.5 billion. It is very well capitalized, with a regulatory risk-based capital ratio of 4.04. It has $34 billion in assets and $12 billion in capital.

Holdings in mortgage-backed securities at year-end were $1 billion, representing only 8.3% of capital and asset-valuation reserves. Although it lost $82 million in its underwriting business in the first quarter, National Union was profitable in both its underwriting and investment portfolio in 2007, earning $1.3 billion for the year. Commercial insurance, a cyclical business, is in the midst of a soft market

driving underwriting profits

across the entire industry.

National Union Fire has a B (Good) TheStreet.com Financial Strength Rating.

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American Home Assurance Co. has a B- (Good) Financial Strength Rating and is domiciled in New York state, doing business throughout the U.S. It sells workers comp coverage, liability, inland marine, ocean marine, health and several smaller lines. With $28 billion in assets, $7 billion in capital and $6.7 billion in annual premiums, the company has a regulatory risk-based capital ratio of 4.39.

Seventy-one percent of the company's invested assets are in high-quality bonds -- U.S. government bonds or AAA-, AA-, or A-rated corporate bonds. It has $506 million in mortgage-backed securities, representing only 7 percent of capital and asset reserves. The company is profitable in both its underwriting business and investment portfolio, earning a total of $1.3 billion in 2007 and another $10.6 million in the first quarter.

Largest Subsidiary Not Necessarily the Best

American Life Insurance is AIG's largest insurance subsidiary, which suggests it would garner the biggest asking price. It has $100 billion in assets, $6.6 billion in capital, $34 billion in annual premiums and a regulatory risk-based capital ratio of only 1.79.

As of year-end, the company held $8.4 billion in mortgage-backed securities, representing 108% of capital and asset valuation reserves. It lost $1.7 billion on its underwriting business in 2007 and another $393 million in the first quarter, although it continued to get positive results on its investments. The company's largest block of business is individual life insurance but also has substantial dealings in health insurance and annuities. With such a large exposure to mortgage-backed securities, a potential suitor may want to steer clear, at worst, or demand concessions, at best.

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. In addition, the Financial Strength Ratings for 4,000 life, health, annuity, and property/casualty insurers are available on the

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Melissa Gannon is director of insurance and bank ratings for TheStreet.com Ratings, formerly Weiss Ratings, where she directs the operations of the company's insurance and bank ratings division.

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