Zurich FINALLY Buys 21st Century

After a lot of speculation and rumors, the worst-kept secret in insurance land finally came to pass. Today, Zurich Financial announced that it is buying AIG's auto insurance subsidiaries for $1.9 billion. The main asset in this transaction is 21st Century Insurance Company, but Zurich also gets the former AIG Direct business and the AIG Agency Auto business (which sells through independent agents.)

Now, the transaction isn't that cut-and-dried. Zurich isn't keeping these companies directly under its umbrella. It is turning around and selling them to Farmers Insurance Exchange for $1.4 billion. Why is Zurich doing this? Zurich doesn't actually own Farmers (it is structured as a reciprocal insurance exchange, which is owned by its policyholders) but it owns the company that manages Farmers (for a nominal fee, or course...) This way, Zurich gets more fee revenues from Farmers, while, Farmers gets...what do they get, anyway?

Well, Farmers's management thinks that its captive agent force (similar to State Farm, Nationwide and Allstate) will be able to cross-sell homeowners insurance and related products to 21st Century customers, since 21st Century only sells auto insurance. Sounds a little farfetched to me, but hey, what do I know? Do 21st Century customers - who chose to buy their policy over the phone or internet - really want to get calls from Farmers agents? I'll let you be the judge of that.

What Farmers (and therefore Zurich) will get is a very strong presence in California. Farmers is based in Los Angeles, and 21st Century also has a large market share in the state.

What about AIG? Well, the $1.9 billion will help, but it still has a lot of work to do to pay down the $80 billion or so it owes to the government. It's still trying to combine all of its remaining property casualty subsidiaries into "AIU," which it hopes to spin off someday (with the government's help) leaving AIG Financial Products (which caused the mess in the first place) less able to spread its troubles to the "real" insurance companies.