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 percent 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.”

 

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 $16 billion raised by Beijing-based Industrial & Commercial Bank of China Ltd. in 2006, data compiled by Bloomberg show.

 

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. The company’s holding in AIA would fall to 33% should the option to expand the IPO be used in full, terms 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.

 

The Kuwait Investment Authority will invest US$1 billion in AIA, terms for the sale show. Companies associated with Guoco Land will invest US$420 million, while Peter Woo, chairman of Wharf Holdings will buy US$200 million of stock. Kumpulan Wang Persaraan (Diperbadankan), a Malaysian state-owned retirement fund, will invest US$200 million, the terms show.

 

AIA’s offering would come after at least 97 companies worldwide postponed or withdrew IPOs this year amid concern that the global economic recovery is deteriorating, data compiled by Bloomberg show. Hong Kong’s benchmark stock index has advanced about 16 percent since June 1, more than twice the advance for the Standard & Poor’s 500 Index in the U.S., helping drive an increase in share sales.

 

Companies have raised US$20.2 billion through IPOs in Hong Kong so far this year, a 64 percent surge from the same period a year ago and the second fastest rate for share sales by newly listed companies since 1998, data compiled by Bloomberg show.

 

AIA had 24,500 employees and 23 million in-force policies in 15 Asian markets by May. Its in-force policies are worth US$13.9 billion, according to a Sept. 24 report by Goldman Sachs. The company will probably post pretax operating profit of at least US$2 billion in the 12 months ending Nov. 30, AIG said last month.

 

Benmosche hired Mark Tucker in July as chief of AIA. Tucker built up the Asia operations of Prudential over 15 years before becoming CEO of the London-based insurer in 2005. AIA last month hired Marc de Cure as chief financial officer. De Cure had previously been CFO of AMP, an Australian fund manager.