AIG will use the proceeds to buy back up to $5 billion of its stock from the U.S. Treasury, helping to cut the U.S. government's holding in AIG to below 50 percent for the first time since a $182 billion bailout during the 2008 financial crisis.
The U.S. Treasury is yet to announce plans for a further stake sale in AIG, but a lockup on its next offering expired early this month. The Treasury on Thursday declined to comment.
Following the latest block sale, AIG will be left with 13.69 percent stake in AIA, valued at $5.9 billion. AIG is barred from selling any further shares till December 10.
The widely expected sale of AIA shares was covered "multiple times" a source familiar with the matter told Reuters. Block deals are normally sold at a discount to attract investors, but AIG sold the shares at HK$26.50 each, a 0.8 percent premium to Thursday's close.
AIA shares rose 5.3 percent to HK$27.65 on Friday as traders who had been shorting the stock in anticipation of a weaker price due to the sell-down were forced to buy back shares.
AIG did not disclose the buyers, but said the shares were purchased by institutional investors.
The shares were sold at a premium due to demand from institutions who would find it difficult to buy such a large block of AIA shares in the open market without disturbing the price, the source added.
The source declined to be identified as the details of the share placement was not confidential.
Since its listing in 2010, AIA's shares have soared about 41 percent and become a top choice of fund managers looking to benefit from growing wealth in Asia and booming demand for insurance and other financial products.
AIG SHARES SLIP
AIG shares fell 1.7 percent on Thursday, and one analyst said the news was "meaningfully below both our and consensus expectations".
AIG offloaded the AIA stake just two days after a lock-up period on such a sale expired, but it is only about a quarter of the $7.6 billion stake the U.S. insurer owned and could have sold. AIG sold $6 billion worth of AIA shares in March.
AIA, Asia's third-largest insurer, was spun out of its parent company in October 2010, when AIG Chief Executive Robert Benmosche oversaw the company's listing in Hong Kong after a failed takeover offer from Prudential Plc .
AIA has built a sprawling and successful business across the region, with an army of hundreds of thousands of agents. In July it reported better-than-expected first-half results, with net profit climbing 10 percent to $1.44 billion.
AIG said it sold 591.9 million shares, after offering them in a range of HK$25.75 to HK$26.75 each, equivalent to a discount of 2.1 percent and a premium of 1.7 percent to AIA's Thursday close of HK$26.3 ($3.39), a term sheet of the deal showed.
The partial sale surprised some Hong Kong bankers and investors, who expected the company to dispose of its entire stake. It was also unusual for AIG to offer the shares at a premium, when block trades normally come at a discount to attract investors.
"At the end of the day, this is small compared to AIG's overall holding, and so it doesn't remove much of the overhang," said Kenneth Yue, an analyst at CCB International in Hong Kong.
Benmosche said in May AIG would sell its shares in AIA in September, once the lockup expired, but early in August he told an analyst conference call he was looking for the right time and the right price to sell the stake.
The AIA transaction comes amid a slump in equity deals in Asia-Pacific, where volumes so far in 2012 are down 33 percent to $98.2 billion, according to Thomson Reuters data.
Deal-starved bankers in Hong Kong jostled for a role in the AIA sale, looking for a boost to their league table rankings. Deutsche Bank and Goldman Sachs were hired to jointly manage the $2 billion block sale, the term sheet showed.
AIG PUSHING BUYBACKS
Since a 2008 bailout that swelled to $182 billion, AIG has worked to shed business units and pay back the U.S. government.
The U.S. Treasury in August reduced its stake in AIG to 53 percent with the sale of nearly $6 billion worth of shares for $30.50 per share.
The shares fell 0.9 percent to $34.48 in late-afternoon trading, well off their morning lows. The stock is nearly 50 percent higher for the year.
In a statement, AIG said its board had authorized $5 billion in buybacks, solely from the Treasury, which replaces all other authorizations. The company noted there was no guarantee the government would conduct an offering.
"The sale of only a partial stake of AIA and only $5 (billion) of potential buybacks leaves us underwhelmed, and we expect the stock will come under considerable pressure given the much lower-than-expected buybacks from Treasury near-term," Sterne Agee analyst John Nadel said in a note to clients.
At current prices, assuming AIG used the entire $5 billion, the government's stake would be reduced to around 44 percent. After an early 2011 recapitalization, the Treasury held 92 percent of the company, a position it has reduced with four subsequent sales.
AIG is funding only part of the buyback with the AIA proceeds because of ample capital elsewhere to pay for the rest. In early August the company had more than $11 billion in parent company liquidity, which analysts expect to be largely devoted to buying the government out of the stock. ($1 = 7.7571 Hong Kong dollars)
(Additional reporting by Vikram Subhedar, Clare Baldwin, Kelvin Soh and Denny Thomas in Hong Kong and Ben Berkowitz in Boston; Editing by Michael Flaherty, Muralikumar Anantharaman, Sofina Mirza-Reid, Leslie Adler and Richard Pullin)