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The proposed sale of the two units, which were put on sale last year in October, may yield more than $3 billion. Prudential is reportedly bidding through its Japanese subsidiary Gibraltar Life Insurance Co. Ltd. According to reports earlier, other bidders in the fray were Germany's Allianz SE (AZ), Dutch insurer Aegon NV (AEG), Japan's Nippon Life Insurance Co., Tokio Marine Holdings Inc. and T&D Holdings Inc.

Canadian financial services group Manulife Financial Corp. (MFC, MFC.TO), a rival bidder, is no longer under active discussion for the purchase of the two units. AIG and Prudential were not available for comments on the proposed deal. However, Newark, New Jersey-based Prudential and AIG aren't close to reaching an agreement on a deal, and the talks could fall apart, the report said.

AIG Star Life Insurance took over Chiyoda Mutual Life Insurance Co, which collapsed in 2000, while AIG Edison Life Insurance took over Toho Mutual Life Insurance Co, which went bankrupt in 1999. AIG Star Life Insurance and AIG Edison Life Insurance are AIG whole subsidiaries.

AIG also has two nonlife insurance companies in Japan, AIU Insurance Co. and American Home Assurance Co. that concentrate its business on home and other types of insurance. AIG has no intention of selling its non-life insurance operations in Japan. AIG's five Japan-based companies have a combined total of about 26,000 employees, the largest among foreign insurance companies.

In October 2008, AIG had put for sale its three life insurance companies in Japan, Alico Japan, AIG Edison Life and AIG Star Life as a sign of withdrawal by AIG from the life insurance business in Japan. AIG had earlier considered the Japanese life insurance market its largest after the U.S.

AIG, which was once the world's largest insurer, almost collapsed last September after rating downgrades forced the company to post collateral on credit default swaps, which banks bought from the insurer. AIG was subsequently bailed out by the U.S. government with a $85 billion initial credit line. The bailout amount rose to $182.5 billion in March with its fourth bailout, and the U.S. government now owns 79.9% of the company. The insurer has been deemed be the government as too important to fail, as the collapse of the company could wreak havoc on the entire financial system and be disastrous for the U.S. Economy.

AIG was pushed into a liquidity crisis in September 2008 after severe valuation losses on the super senior multi-sector CDS portfolio of AIG Financial Products Corp. or AIGFP triggered collateral provisions in the swap contracts. AIG, which until last September was the world's largest insurer, was saved from going bankrupt after receiving an initial $85 billion U.S. government bailout package.

AIG is presently in the process of consolidation by selling assets and spinning off some subsidiaries to repay bailout loans received from the federal government. Since it was rescued by the government in September, the company has disclosed deals raising about $6.7 billion. The sale of the Japanese businesses could represent the biggest transaction since the firm almost collapsed last year, with the $1.9 billion sale of a U.S. auto insurer to Zurich Financial Services AG being the largest so far.

AIG closed Wednesday's regular trading session at $14.22, down $0.10 or 0.70% on a volume of 28.91 million shares, sharply higher than the three-month average volume of 10.74 million shares. In the past 52-week period, the stock has been trading in a broad range of $6.60 to $621.80.

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