Dec. 22 (Bloomberg) -- Munich Re, the world’s biggest reinsurer, agreed to buy American International Group Inc.’s Hartford Steam Boiler unit for $742 million, about a third less than the U.S. insurer paid for it eight years ago.

Munich Re will fund the cash purchase of HSB Group Inc. entirely from “existing resources,” the Munich-based company said in a statement today. HSB’s chief executive officer, Douglas Elliot, will stay on to run the unit.

AIG’s CEO Edward Liddy is dismantling what was once the world’s biggest insurer to repay loans tied to the company’s $152.5 billion government rescue. AIG has also put its airplane- leasing subsidiary and global life insurance businesses up for sale. The New York-based insurer bought Hartford Steam Boiler for $1.2 billion in stock in 2000. Munich Re said the takeover will help it to expand in the U.S. and add to earnings next year.

“It’s not expensive as AIG had to sell,” said Konrad Becker, a Munich-based analyst at Merck Finck & Co. with a hold recommendation on the German reinsurer’s stock. “The conditions are advantageous for Munich Re.”

Munich Re climbed 44 euro cents, or 0.4 percent, to 106.81 euros as of 2:50 p.m. in Frankfurt electronic trading. The stock has fallen about 20 percent this year. AIG climbed 3.8 percent in German trading to $1.66.

Hartford Steam Boiler, based in the Connecticut city of the same name and founded in 1866, helps insure factories and power plants for companies such as General Electric Co. The company is easy to detach from AIG because it isn’t fully integrated with the parent, Paul Newsome, an analyst at Sandler O’Neill & Partners in Chicago, said in October.

‘Perfect Fit’

For Munich Re, the takeover will add to earnings-per-share in 2009 and won’t have an impact on the reinsurer’s share buyback program, Chief Financial Officer Joerg Schneider said on a conference call with reporters today. HSB’s net income rose 8 percent to $158 million in 2007, according to Munich Re.

“The acquisition of HSB is a perfect fit for our U.S. strategy,” said Peter Roeder, Munich Re’s board member responsible for the U.S. business. “It is another step in developing our position in high return specialized niche segments.”

Munich Re will assume about $76 million of HSB debt as part of the purchase price, company spokeswoman Johanna Weber said today by telephone. The deal is expected to be completed at the end of the first quarter of 2009, subject to regulatory approval.

Life Insurance Interest

Munich Re sees “growth potential” for HSB in the U.S. and internationally, helped by the German company’s global franchise, Roeder said in a Bloomberg Television interview today. He said he doesn’t expect significant job cuts because the takeover is “complementary” to Munich Re’s operations.

AIG has already agreed to sell AIG Private Bank, a unit catering to wealthy clients in Asia and the Middle East, to Abu Dhabi-based Aabar Investments PJSC for 307 million Swiss francs ($279 million). It is also selling a stake in an insurance joint venture in Brazil for $820 million.

Munich Re is also interested in AIG’s Asian and eastern European life insurance operations, Roeder said, reiterating earlier comments from the company.

To contact the reporter on this story: Jann Bettinga in Frankfurt at jbettinga@bloomberg.net

Last Updated: December 22, 2008 08:51 EST