An insurance analyst called the meltdown of American International Group, New York, a “staggering development, noting that the Federal Reserve Board statement that AIG will pay off its loan from the sale of businesses suggests that the majority of the company may be sold off in pieces.

Specifically, said Thomas Gallagher and Michael Zaremski of Credit Suisse research in New York in an investment note, it implies “that the formerly largest global insurance company will potentially be unwound through a 1 to 2 year auction process.”

Moreover, AIG’s problems means that there will be plenty of “high quality businesses for sale, notably international life insurance, foreign general, and the domestic retirement business sold through the Variable Annuity Life Insurance Company (VALIC), a unit of the American General unit of AIG, Gallagher and Zaremski said.

“We suspect that some of the big foreign players (Chinese, Canadian, European, and Australian insurers) may be interested buyers along with the usual large cap suspects domestically on both the life and P&C sides,” they added.

They also foresee a “fairly swift execution of sales of businesses,” because that will be important to avoid substantial erosion of franchise value, since customer lapse rates and withdrawals should remain elevated following the publicized difficulties at the company.”

They added that book value is likely to be hit hard by “both bigger asset impairments and DAC charges associated with AIG likely moving to liquidation based valuation methodologies vs. the prior going concern asset valuations.”

At the same time, Gallagher and Zaremski as well as Joshua Shanker of Citi research, New York, said the decision of the Fed to provide the bridge loan is likely to stabilize AIG’s market share because competitors had been using the turmoil over the liquidity problems of AIG’s parent to grab market share in both the property-casualty and life businesses.

“This obviously has the potential to improve [AIG's] competitive landscape in several markets, notably in commercial P&C, several foreign life insurance markets (including Japan), and domestic life insurance, where AIG has been among the largest players for years,” Gallagher and Zaremski said.

Shanker added that, “Tuesday, we argued that many insurers would benefit from AIG’s turmoil.

“To some extent, its withdrawal from the marketplace has been foreshortened,” he said. “However, we expect the government will not aim to give AIG marketplace advantages.

“Nevertheless, the implicit government association likely carries the seal of protection,” Shanker suggested. “We would expect the strong outperformance of the p-c sector to retrace some of Tuesday’s gains.”

State insurance regulators will also play a major role in overseeing the company going forward.

New York Insurance Superintendent Eric Dinallo will oversee a National Association of Insurance Commissioner’s task force created to expedite approvals of sale of AIG assets.

Creation of the task force, by the NAIC, Kansas City, Mo., was approved by commissioners in a 5 p.m. conference call Sept. 16 as federal and state regulators worked with the Treasury Department to design a solution to AIG’s liquidity crisis, according to David Neustadt, an Insurance Department spokesman.

That implied, as it is with Lehman, that prompt action to sell the AIG assets and pay off the government bridge loan is necessary in order to get best value for the government and shareholders.

That appeared to be an imperative as AIG’s stock price continued to plunge as the stock market continued to decline in the wake of the federal action on the night of Sept. 16 to bail out AIG.

The stock was selling at $2.06 at 11:10 a.m. on Sept. 17, down 45% from Sept. 16′s close. AIG stock had been selling in the mid-20s last week.

At the same time, in an appearance on the morning of Sept. 17 on CNBC’s squawk box, Dinallo lauded state regulators for the way they dealt with AIG’s problems as the company became engulfed in a financial tsunami linked to the plunging value of housing assets.

He also voiced confidence in his decision to approve the appointment of Edward Liddy, former CEO of Allstate, as the new CEO of AIG.

“A sterling insurance executive with great competency” to oversee AIG and the sale of the assets needed to pay off the government loan, Dinallo said.

Dinallo spoke as former Securities and Exchange Commission chairman Arthur Leavitt described the $85 billion government loan to AIG in return for 79.9% of its stock as a “controlled bankruptcy.”

Mr. Dinallo confirmed during the CNBC interview that a Chapter XI bankruptcy filing would normally have been an appropriate way to deal with problems, since it was the lack of liquidity in the holding company, rather than the insolvency in AIG’s operating insurance operations, that were causing the problems.

But, he said, such an action was ruled out because regulators were concerned “it would have created a perception in the eye of the public of problems,” in other words a lack of confidence, that could have prompted frantic sale of AIG products by consumers, as well as a decision by commercial customers to switch their accounts to other insurers.

That would have eroded the value AIG would have received for its viable assets, he explained during the CNBC interview, and would have reduced the price that could be negotiated for its assets through an orderly sale–the purpose of the government bridge loan.

Dinallo also criticized insurance executives. “They have gotten away from their core competence” by getting involved in acquisition of the speculative financial derivatives that laid AIG low. “They have to get better at focusing on their core competence,” he said.

Moreover, he said, the lesson of AIG’s problems is that more capital is needed at the holding company levels, as well as in the operating insurance companies.

He also praised the Federal Reserve Board because it acted in such a way as to protect insurance policyholders by not mandating the collateralizing of assets and surplus in insurance subsidiaries in order to secure the loan.

Under the terms of the loan, entire affiliates, not their underlying cash assets, are securing the loan.

He disclosed that the reason a private solution, i.e., a loan from a consortium of banks collateralized by AIG assets, could not be completed was that some of the insurance subsidiary assets were “given low evaluations” by the bankers as they perused AIG’s books.