AIG is selling its foreign life insurance unit to MetLife Inc for about $15.5 billion, its second major asset sale in a week as it raises funds to repay a $182.3 billion U.S. government bailout.

MetLife said on Monday that it would pay AIG $6.8 billion in cash and about $8.7 billion in equity for its American Life Insurance Co (Alico) unit, confirming an earlier Reuters report.

Founded in 1921, Alico sells life, accident and health insurance as well as retirement and wealth management products in more than 50 countries. The deal will help MetLife, already the largest life insurer in the United States and Mexico, diversify revenue by product, distribution and geography.

MetLife will get a boost in Japan, the world's second-largest life insurance market, which accounted for 70 percent of Alico's pre-tax operating income in fiscal year. Alico will also strengthen MetLife's position in Europe and move it into a top five market position in many emerging markets in Central and Eastern Europe, the Middle East and Latin America.

MetLife expects the deal to increase its 2011 operating earnings per share by 45 cents to 55 cents, excluding one-time expenses of 12 cents. It sees annualized post-tax cost savings of $50 million to $75 million.

Rarely does one come across a deal that has such a strong strategic fit and is also such a financially attractive proposition, MetLife Chief Executive Robert Henrikson said during a conference call.

Still, such a large deal comes with risks, said Clark Troy, a senior analyst at Aite Group.

Alico's strength in Japan also ties MetLife's fortunes to an aging society with a huge public debt overhang, he said.

If (Japan) falters or slips back into deflation, MetLife might face challenges growing revenue, Troy said in an e-mail late Sunday, before the deal was announced.

FED PAYDAY

The deal comes after AIG agreed to sell its Asian life unit, American International Assurance (AIA), to Britain's Prudential for $35.5 billion, the largest insurance sector deal ever.

The AIA and Alico deals will allow AIG to repay the U.S. government about $31.5 billion in cash, with more expected as the insurer sells Prudential and MetLife securities over time.

AIG will use the $6.8 billion in cash from the Alico deal to redeem part of the Federal Reserve Bank of New York's $9 billion preferred interest in a vehicle that holds the unit.

The proceeds from the two deals should help AIG pay down all of its Fed debt, but it will still leave the government holding roughly $47 billion in equity investments, including the amount drawn under a $30 billion equity line. The government will still have a nearly 80 percent stake in AIG.

To untangle itself from AIG, the government is likely to follow a strategy similar to what it has used with Citigroup Inc in a process that will probably take years.

The sale of Alico comes after months of negotiations and became possible after the New York Fed, advised by Morgan Stanley , agreed in March 2009 to swap its debt into equity in special purpose vehicles that AIG created to hold AIA and Alico.

Early last year, MetLife offered about $11 billion for the unit, but the price went up in the months after March 2009.

METLIFE STAKE

The equity portion of the price consists of 78.2 million shares of MetLife common stock valued at $3 billion, 6.9 million shares of contingent convertible preferred stock valued at $2.7 billion, and 40 million equity units with an aggregate stated value of $3 billion.

The common stock and equivalents would give AIG a 14 percent ownership in MetLife, MetLife Chief Financial Officer William Wheeler said.

The equity units are set to convert into common shares roughly three years after closing, Wheeler said. Taking those into account, AIG's ownership in MetLife would go above 20 percent, sources familiar with the matter said on Sunday.

But Wheeler said he expected AIG to start selling the shares as soon as it could under a lock-up agreement.

I am not sure how much shares they will own at any one time, but I suspect it won't get close to 20 percent, Wheeler said.

AIG must vote its shares in proportion to the way the rest of MetLife's outstanding shareholders do, Wheeler said.

MetLife expects to finance the cash portion of the deal with issuances of $3.1 billion in senior debt and $2 billion of common stock, as well as $1.75 billion in cash on hand.

Both boards have approved the transaction, which the companies expect to close by the end of 2010.

Credit Suisse was lead adviser to MetLife, which was also advised by Barclays Capital , Bank of America Merrill Lynch , Deutsche Bank and HSBC .

AIG is being advised by Citigroup, Goldman Sachs and Blackstone Group , according to several sources.

AIG shares were up 5.3 percent to $29.58, while MetLife was up 5.1 percent to $40.90, both during morning trading on the New York Stock Exchange.

(Reporting by Paritosh Bansal; Editing by Lisa Von Ahn, Dave Zimmerman and John Wallace)

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