Sept. 17 (Bloomberg) -- Former Allstate Corp. Chief Executive Officer Edward Liddy was hired by the U.S. government to run American International Group Inc. as part of a plan to avert a collapse of the country's largest insurer.

Liddy, 62, helped oversee the spinoffs of Allstate, Discover Financial Services, real estate broker Coldwell Banker Corp. and securities brokerage Dean Witter when he was an executive at Sears Roebuck & Co. He replaces Robert Willumstad, who's leaving after the government took control of New York-based AIG.

At AIG, Liddy, who ran Allstate from 1999 until 2006, will need to stem record losses tied to mortgages and preside over the sale of units to raise cash to repay a federal loan of as much as $85 billion. AIG plummeted 97 percent this year in New York Stock Exchange trading, erasing more than $125 billion of market value.

Liddy, a partner at private-equity firm Clayton Dubilier & Rice Inc., is "a platinum-level insurance executive and the ideal appointment for a company that needs to evaluate the value of its core insurance operations,'' said New York Insurance Superintendent Eric Dinallo in an interview. "He has great financial services expertise.''

Treasury Secretary Henry Paulson made the decision to oust Willumstad, 63, who became AIG's CEO in June, and informed him of the news yesterday. Liddy was elected as a director of Goldman Sachs Group Inc. in 2003, when Paulson was CEO of the New York- based investment bank.

Hurricane Katrina

AIG spokesman Nicholas Ashooh declined to comment about the management change, and Liddy and Willumstad weren't available for comment. When Willumstad took control of AIG three months ago, he promised to complete a strategic review by Sept. 25. AIG unraveled before he was able to unveil his plan.

Liddy joined Allstate in 1994 from Sears to oversee the spinoff. He was named CEO five years later and led the insurer in 2005 when hurricanes Katrina, Rita and Wilma cost Allstate more than $5 billion combined.

Liddy began an effort that continued under current Allstate CEO Tom Wilson to scale back the coverage of homes in catastrophe-prone regions. In Louisiana, the insurer stopped covering wind damage in some parishes, restricted the sale of new policies, and bought extra reinsurance to protect itself against losses exceeding $500 million in the state.

Liddy is "a brilliant financial strategist,'' said Robert Pike, a retired chief administrative officer who reported to Liddy at Northbrook, Illinois-based Allstate, the largest publicly traded U.S. home and auto insurer. "He's able to take an extraordinary amount of data and synthesize it, probably better than anybody I ever met.''

Planes to Factories

Allstate sells home, auto and life insurance, almost exclusively in the U.S., and mostly to individual customers. AIG, which operates in more than 100 countries, competes with Allstate and also covers planes, shipping and factories, and protects commercial property owners against terrorist attacks. AIG sold financial guaranties on fixed-income investments that led to $25 billion of writedowns over the past year.

"Liddy is a respected insurance executive, whose experience and expertise will be tested given the challenging situation he has been given,'' said Tom Kersting, an analyst at Edward Jones in St. Louis.

Liddy does have experience in mortgage insurance, a business that lost money for AIG for four straight quarters and is expected to be unprofitable this year. He served as chairman of PMI Group Inc., the No. 2 U.S. mortgage insurer, about 14 years ago. Mortgage insurers reimburse lenders when borrowers fail to pay their debts.

Shaking Up Management

Shortly before Liddy took over as Allstate CEO, he told a meeting of 200 managers that a number of them wouldn't be around in a year, according to a May 2005 Crain's Chicago Business story that Pike confirmed. Liddy ended up ousting executives including the finance chief and investment officers.

"Ed looked around and picked those people he felt would add value and complement their culture, and I think he did pretty damn well,'' said Pike, who worked at Allstate for 35 years.

Allstate gained about 9.5 percent a year in New York trading under Liddy, beating the Standard & Poor's 500 Index during his tenure.

"Ed Liddy led Allstate from being a typical average performance subsidiary of Sears to becoming one of the best- capitalized and best-managed insurers in the U.S.,'' said Cliff Gallant, an analyst at KBW Inc. in New York. "He is known for integrity and strong leadership.''

Allstate ranks second to policyholder-owned State Farm Mutual Automobile Insurance Co. of Bloomington, Illinois, in the U.S. home and auto insurance market.

New Jersey Roots

Liddy grew up in New Jersey and worked at Ford Motor Co. before moving to Chicago in 1981 to join G.D. Searle & Co., where Donald Rumsfeld, later the secretary of defense, was CEO. He moved to Sears in 1988 to work under CEO Edward Brennan.

Liddy has an undergraduate degree from Catholic University of America and an M.B.A. from George Washington University, both in Washington, D.C. He was previously chairman of Northwestern Memorial Healthcare, which operates one of Chicago's largest hospital systems.

"Unlike a lot of CEOs, Ed doesn't take on a regal air and he's not pompous in any way,'' Pike said.

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