NEW YORK (Bloomberg) — American International Group Inc. agreed to sell its US auto insurance business to Zurich Financial Services AG for about $1.9 billion, the firm's biggest divestiture since being rescued by the government.

The purchase price matches the tangible book value of the business, Zurich said in a statement yesterday. Zurich becomes the third-largest auto insurer in the US, passing the Geico unit at Warren Buffett's Berkshire Hathaway Inc., according to 2008 data from the National Association of Insurance Commissioners.

AIG chief executive officer Edward Liddy is working to dismantle most of the New York-based company, once the world's biggest insurer, to help repay parts of a $182.5 billion government bailout. AIG had been in intermittent talks with Zurich over the auto unit, one of the most resilient parts of its insurance holdings, since last year. AIG had announced deals worth $2.4 billion before yesterday's agreement.

"It's the first deal of really any size they've been able to put together," said Robert Haines, an analyst at CreditSights Inc. "It's clearly a step in the right direction, but since auto insurers have held up better than life insurers, it will be much more difficult for them to unload their other businesses."

AIG said last month it will hand over its two largest non-US life insurance units into government trusts to cope with the global credit crisis that has hobbled potential buyers' ability to make qualifying bids. AIG said it owes about $46 billion of a $60 billion federal credit line as of April 2.

Zurich CEO James Schiro said in a January Bloomberg Television interview that he was interested in increasing revenue in "personal lines in the US". The company pulled out of the bidding for Royal Bank of Scotland Group Plc's insurance unit, which includes Direct Line and Churchill in the UK, last year and bought a 50 percent stake in Banco Sabadell's insurance units.

Zurich expects to sell $1.1 billion in shares to help pay for the deal. The insurer will assume $100 million of the unit's debt, AIG said.

Zurich said March 2 it will keep 3.75 million shares that it had repurchased to fund potential takeovers, instead of canceling the stock. Fitch Ratings that day lowered the outlook on Zurich Insurance Company, the main unit of Zurich Financial, to "negative" from "positive", citing concern about capital.

AIG's 21st Century unit, which is run by chief executive officer Anthony DeSantis in Wilmington, Delaware, and has offices in Woodland Hills, California, sells auto policies over the telephone and Internet, avoiding the expense of using agents. Zurich's Farmers Group Inc. unit, and rivals including Allstate Corp. and Travelers Cos., rely on agents for most of their sales.

Insurers expect Internet sales, the model used by Geico, to expand over the next 10 years and they should plan for changes in customer behaviour, said Jay Fishman, Travelers' CEO, in an interview in November.