American International Group (AIG) agreed to the sale of its Asian life insurance unit to Britain's Prudential for about $35.5 billion, in a deal that would help the US government get back billions of its bailout money, sources said.

The AIG board approved the sale of American International Assurance (AIA) to Britain's largest insurer, and the sides are working on finalizing the terms and financing for the deal, the sources said on Sunday.

An announcement for what would be AIG's largest asset sale since its September 2008 bailout could come as soon as Monday, said the sources, who declined to be named because the deal is not yet public.

Prudential, whose market capitalization is around $23 billion, will pay about $25 billion in cash and the rest in equity, two of the sources said.

Prudential plans a $20 billion rights offering, backstopped by Credit Suisse, JPMorgan Chase & Co and HSBC, to help finance the deal, the two sources said.

The $10.5 billion equity component of the deal will include convertible and preferred stock, as well as about $5.5 billion in common stock, these sources said.

AIA's purchase would be one of the largest overseas deals to date for a British firm and make Prudential one of the biggest insurers in Asia.

Hong Kong-based AIA is regarded as AIG's Asian crown jewel, a 90-year-old business that manages more than $60 billion of assets and provides coverage to about 20 million customers, or close to a third of AIG's total customer base.

Prudential already operates in 13 Asian markets where it has more than 11 million life customers. Asia, which accounted for 44 percent of its profits in 2008, is also seen as the engine of the group's future growth.

AIG, which is nearly 80 percent owned by the federal government after a $182.3 billion bailout, will pay the Federal Reserve Bank of New York $16 billion from the deal proceeds for the Fed's preferred interest in a special purpose vehicle that holds AIA, one of the sources said.

AIG is expected to use the rest of the money to further pay down the Federal Reserve's credit facility, the source said.

AIG's outstanding balance under the credit facility is about $25 billion. AIG must also repay roughly $45 billion the U.S. government has put into it in the form of equity.

Paying down more of AIG's debt would give a boost to Chief Executive Robert Benmosche, who since taking over in August last year has moved the insurer away from a wind-down mode to preserving and even growing its core franchises.

Benmosche envisions a smaller AIG in the future, with global property-casualty and U.S. life and annuity operations at its core. Although for now the insurer is still struggling to find its feet. AIG posted a quarterly loss of $8.9 billion on Friday.

AIG is being advised by Citigroup and Goldman Sachs on the AIA deal, while Blackstone Group is advising the board, one source said. Credit Suisse, Lazard, JPMorgan and HSBC are on Prudential's side, the source said.

Prudential, JPMorgan and Citigroup declined to comment. AIG and the other banks were not immediately available for comment.

Cash transaction

AIG had been planning an initial public offering for AIA in Hong Kong, in what was expected to fetch more than $10 billion, depending on the size of the stake sold.

A deal with Prudential will save AIG from the uncertainty of doing an IPO for the unit in what is becoming a tougher market amid falling share prices in the region and competition from other offerings.

Prudential, which has coveted AIA for a while, had been in talks with AIG on and off since at least January last year, but it picked up momentum this January after news of AIG's talks with MetLife for another large insurance unit leaked, according to the sources.

In the end, the amount of cash being offered under the Prudential deal proved to be very attractive to both AIG and the government, one source said.

At about $35.5 billion, the deal also prices AIA at more than the roughly $30 billion value that a Credit Suisse analyst arrived at in a research note earlier.

AIG is still in advanced talks to sell American Life Insurance Co (Alico) to MetLife in a roughly $15 billion deal. Those talks hinge on a tax issue that the two sides are trying to resolve.

The Fed has a $9 billion preferred interest in a special purpose vehicle that holds Alico.

AIA traces its roots back to 1919, when Cornelius Vander Starr started a small insurance agency in Shanghai that was to ultimately grow into AIG. Maurice 'Hank' Greenberg, who succeeded Starr in 1967 and ran AIG until 2005, has opposed a sale of AIA as well as Alico.

So far, AIG has announced more than two dozen deals to sell assets for over $11.9 billion.-Reuters