CHARLOTTE (AP) — American International Group Inc. said yesterday that it will sell its Hartford Steam Boiler unit to German reinsurer Munich Re for $742 million as the embattled New York-based insurer divests itself of units to pay back a US government bailout loan.

The purchase price is considered well below HSB Group Inc.'s value — estimated at between $1 billion and $2 billion by the Financial Times.

Munich Re said it planned to complete the purchase in the first quarter of 2009, and will assume $76 million of HSB's outstanding capital securities.

HSB, based in Hartford, Connecticut, is a specialty unit focused on engineering insurance and inspection. It is the parent company of Hartford Steam Boiler Inspection and Insurance Co.

HSB had been rumoured to be next on the selling block as AIG sheds or sells some interest in units globally as a means to pay back the US government's $150 billion rescue package announced last month to help it pull through the credit crisis. The $150 billion package replaced an earlier loan of $85 billion after it became apparent the insurer needed more funds.

AIG said in October it would sell off a number of business units to repay the original $85 billion government loan.

The company has not specifically disclosed the assets it would sell or the expected prices from the sales. However, AIG has said it plans to retain its US property and casualty and foreign general insurance businesses, and plans to retain an ownership interest in its foreign life insurance operations.

As of December 5, AIG had already sold interests in three businesses, and two weeks ago was said to be in the final stages of selling its US personal lines business and one other operation.

An AIG spokesman could not be reached for immediate comment, but in a statement, HSB Group president and chief executive officer Douglas Elliot said the deal will "offer our clients the reassurance that they're looking for in today's uncertain market environment".

Meanwhile, AIG CEO Edward Liddy yesterday defended the New York-based insurer's retention bonuses amid the bailout, which have been sharply criticised by Democrat Rep. Elijah Cummings, a member of the House Committee on Oversight and Government Reform. Cummings has called several times for Liddy's resignation.

Liddy told CNBC that the bonuses are vital for retaining good executives, which is necessary for AIG to sell assets and survive. "If we don't do that, we will not be able to pay back the federal government," Liddy said.

Peter Roeder, a Munich Re board member responsible for US business, said HSB was an attractive, low-risk investment because of its specialised business.

"The acquisition of HSB is a perfect fit for our US strategy," Roeder said. "It is another step in developing our position in high return specialised niche segments."

"These are financial conditions that we wouldn't have dreamed of a short time ago," Munich Re chief financial officer Joerg Schneider told reporters in a conference call.

"The sales price is, considering the profitability of the acquired company, very low," he added.

Reinsurers sell back-up coverage to other insurers, spreading risk so the system can handle large or widespread losses. Munich Re also operates Ergo, one of Germany's biggest insurers, and Munich Reinsurance America Inc.

Shares of AIG rose one cent to close at $1.61 yesterday.