American International Group Inc., the bailed-out insurer, is seeking as much as HK$115.3 billion ($19.6 billion) in an initial public offering of its Asia unit in Hong Kong, two people with knowledge of the matter said.

The company plans to sell as many as 5.9 billion shares of AIA Group at HK$18.38 to HK$19.68 each, said the people, who declined to be identified because the discussions are private. The offering represents a stake of about 49% of the company, the people said, which would value Hong Kong-based AIA at as much as US$30.6 billion ($40.3 billion).

 

AIG is taking advantage of a gain in Hong Kong stocks to attempt what may become the city’s biggest-ever IPO, moving the insurer closer to repaying its US$182.3 billion government bailout. The offering values AIA at a premium to European rivals, based on forecasts by the IPO arrangers.

 

Investors “are probably more tempted by a valuation closer to US$30 billion,” said Christopher Wong, Singapore senior investment manager at Aberdeen Asset Management Plc, which oversees US$267 billion. “The offering is already factoring in pretty aggressive growth rates in an uncertain global operating environment.”

 

New York-based AIG is taking the division public after Prudential Plc backed out of a deal in June to pay US$35.5 billion for AIA.

 

AIG has an option to sell more shares in AIA, taking the potential size of the IPO to US$20.5 billion, a term sheet for the transaction sent to fund managers showed. That would make it the largest ever in Hong Kong, overtaking the US$16 billion raised by Beijing-based Industrial & Commercial Bank of China Ltd. in 2006, data compiled by Bloomberg show.

 

AIA had an embedded value of US$22 billion at the end of May, according to an AIG filing with the U.S. Securities & Exchange Commission. Embedded value estimates a life insurer’s net worth excluding new business, using actuarial and investment return assumptions.

 

Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley of New York and Frankfurt-based Deutsche Bank AG are among the banks arranging the sale. The stock is scheduled to start trading on Oct. 29.

 

AIA’s embedded value may grow to US$25.8 billion next year, according to Sept. 24 reports by Goldman Sachs and Merrill Lynch & Co. The high end of the IPO price range values the company at 1.18 times its estimated 2011 embedded value.

 

China Life Insurance Co., the nation’s largest insurer, is valued at 2.1 times next year’s embedded value and European insurers trade at an average of 0.8 times, according to Merrill, which is also helping arrange the sale.

AIG, led by Chief Executive Officer Robert Benmosche, may use remaining shares in the company to help pay down obligations to the U.S. Treasury Department. Mark Herr, a spokesman for AIG, declined to comment.

 

Fairholme Capital Management, the biggest private investor in AIG, said it has provided a “firm indication of interest” in investing about US$1 billion in AIA’s IPO.

 

The company is a “household name” poised for expansion in some of the world’s fastest growing economies, Miami-based Fairholme’s founder Bruce Berkowitz said yesterday in a statement. Fairholme said last week that it invested more than US$1.8 billion in AIG stock and debt, and owns about 24% of AIG’s privately held common shares.