The transaction, AIG said, excludes its AIG Private Client Group, which provides insurance to high-net-worth individuals.

"We are very pleased to reach agreement on a $2 billion transaction, especially in this market environment," said AIG's chairman and chief executive officer, Edward Liddy.

He noted that the company–which also announced the sale last week of its wealth management arm, AIG Private Bank Ltd., to Aabar Investments PJSC of Abu Dhabi for $308 million–is "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."

Zurich CEO James J. Schiro, in a statement explaining the purchase, said that expansion of U.S. personal lines capabilities at Farmers has "always been one of our strategic priorities." Beefing up Farmers, he added, "reduces the overall volatility of our portfolio of businesses, while continuing our focus on profitable growth through customer, product and distribution excellence."

He said that despite the present economic climate, "financial discipline" can position Zurich to capitalize on market opportunities–"provided they meet our strategic objectives and financial hurdle rates."

The purchase of 21st Century, Zurich said, gives Farmers opportunities to achieve benefits of scale, as well as to leverage talent and technical capabilities.

"Both 21st Century and Farmers are strong companies, providing policyholders with exceptional levels of service and personalized coverage," said Anthony J. DeSantis, 21st Century's president and CEO. "This is an excellent fit, and we look forward to a smooth integration that will be seamless to our customers."

F. Robert Woudstra, CEO of Farmers Group Inc., said the deal positions Farmers as "the fastest growing personal and small-business insurer in America," giving his company an expanded agency force and "one of the most successful direct distribution platforms within one of the fastest growing distribution channels in the U.S." Farmers said its direct sales distribution channel grew from 7.7 percent to 18 percent of the total U.S. auto insurance market from 1997 to 2006.

IN OTHER NEWS

Meanwhile, a pair of insurer trade groups urged Congress to dismiss any concerns that an AIG bankruptcy might pose a "systemic risk" to the property-casualty industry, the National Underwriter has learned.

"There is no basis to believe that consumers would suffer any significant or long-term adverse consequences in the event any of AIG's p-c operations exited the marketplace," according to a letter obtained by NU and an accompanying PowerPoint presentation produced by the American Insurance Association and the Property Casualty Insurers Association of America.

The presentation to the leadership of congressional financial services committees came in response to a document provided to the Treasury Department and Federal Reserve Board by AIG to justify an infusion of additional funds to the company as it reported a $61.7 billion loss on March 2.

The documents were given to the majority and minority staffs of the Senate Banking Committee and House Financial Services Committee on April 8 by officials of AIA and PCI.

Specifically, the letter accompanying the presentation said that "if AIG's p-c companies ceased operations, there is available capacity, existing competition and institutional readiness within the remaining members in the industry to meet the needs of the insuring public."

Moreover, the letter added, "our message is straightforward–the traditional P&C industry does not today pose a systemic risk like other financial segments. We are competitive, well-capitalized and able to respond to policyholder needs, as we have demonstrated in the past, when a competitor of any size leaves the market."

The Treasury and Fed used the document to revise their policy on how to recover funds the government has advanced to AIG–from one of repaying the government through the sale of its life insurance businesses, to one of giving the government a stake in some of its operating businesses as collateral for the government loans.

AIG, in its justification for additional aid, argued that "AIG continues to pose a systemic risk" and requires immediate additional federal assistance, warning that "otherwise [AIG's] failure would cause multiple and potentially catastrophic unforeseen consequences."

The document noted up front that AIG's systemic risk derives primarily from its Financial Products subsidiary–which traded credit default swaps on subprime mortgage-backed securities–adding that with respect to insurance, "the systemic risk is principally centered in the 'life insurance' business."

The property-casualty groups said in their April 8 presentation that they "recognize there may be systemic issues with respect to AIG's non-insurance operations, and we do not speak on behalf of the life insurance industry."

In related news, a House committee is demanding information on whether AIG used government money to hire outside public relations firms to wage campaigns against critics of the government bailout.

Rep. Edolphus Towns, D-N.Y., chair of the House Committee on Oversight and Government Reform, sent a letter to AIG last week demanding detailed data on whether public funds were used to conduct the campaign.

The letter was sent after the committee received information that outside PR firms were being used by AIG to discount the criticism of Maurice "Hank" Greenberg, the company's former chairman and chief executive, who testified at a hearing earlier this month by Rep. Towns' committee concerning facts surrounding AIG's troubled financial situation.

Rep. Towns' letter, addressed to Mr. Liddy, demanded copies of any contracts between AIG and two public relations firms–Burston-Marsteller and Hill & Knowlton–and specifically asked whether a paper titled "The Greenberg Legacy" was "authored and circulated by, or at the behest of, AIG."

The letter said Rep. Towns "would be extremely disappointed to learn that any of the billions of taxpayer dollars invested to support AIG may have been diverted to finance a public relations campaign against critics of the AIG bailout. In my view, these allegations warrant further inquiry to ensure that federal funds are not being misused."