AIG made a difficult call, rejecting a $30.4 billion offer from London's Prudential plc, perhaps its only hope as a white knight. In weighing consequences of a failed acquisition, AIG deemed an IPO a better option, based on valuation and market expectations. It was a decision fraught with risks.

AIA filed for a listing on the Hong Kong Stock Exchange in September when global markets were choppy. Enter Prudential. The London insurer had pitched a $35.5 billion cash-and-stock offer the previous March. But Pru shareholders raised an outcry, claiming the deal would be too expensive and risky, and forcing it to cut the bid to $30.4 billion, which AIG rejected.

Brian Schreiber, AIG executive vice president of treasury and capital markets, says Pru's initial offer, accompanied by financing commitments, "made sense" because it would have generated cash for AIG immediately without taking on much market risk. The shareholder votes would have been the bigger risk for Pru, adds Schreiber, who led AIG's restructuring and corporate development. Schreiber was part of the senior team that included CEO Robert Benmosche and advisers tasked with weighing Pru's offer versus an IPO.

Based on comparable valuations, the IPO seemed the optimal choice. The major concern was that a sizable offering almost certainly faced enormous market risks, besides the likelihood that an IPO would not generate as much cash as an outright sale. However, it was also understood, a source says, that no other company besides Pru was likely to emerge with a counteroffer.

While 2009 was "a very, very dark time" for IPO markets, AIG anticipated a rebound in 2010, fueled by Asia's growth-driven companies, says John Chirico, co-head of capital markets origination for Citigroup Inc., which acted as global coordinator alongside lead underwriters Goldman Sachs Group Inc., Morgan Stanley and Deutsche Bank AG. By the fourth quarter, market conditions were generally favorable.

Dan Dees, head of Goldman's financing group in Asia, who led the record-setting $22 billion IPO of Agricultural Bank of China Ltd. in July, was confident an offering the size AIA envisioned could succeed because of the depth of Hong Kong's market and demand for the asset. As the largest independent regional life insurer, with about $90 billion under management, 90-year-old AIA boasts dominant market positions in about half of the 15 countries in which it operates, including China. Given AIA's regional presence, "this is Asia in one bite for investors," says Dees.

But the lack of true peers in the region also made AIA harder to value, Schreiber says. Pru's bid provided a valuation reference. AIG and its advisers examined Chinese insurers' multiples and those of insurers focused on mature markets such as Hong Kong and Singapore. They ultimately arrived at a roughly 1.3 times multiple of an embedded value of $23.1 billion projected for November. (Embedded value multiples, commonly used in pricing Asian companies, are a combination of current book value and expected earnings over a company's life.)

Goldman played a key role in locking up cornerstone investors, a process that, says Dees, "allowed us to get out of the gates with real momentum." Cornerstone investors, comprising sovereign wealth funds and tycoons, committed about $1.9 billion, with Kuwait Investment Authority chipping in $1 billion.

It helped that former Pru head Mark Tucker was recruited as AIA's CEO. Tucker "brought in a huge amount of credibility," Schreiber says.

By then AIG was under no pressure to sell the unit in its entirety, having just divested American Life Insurance Co. for $16.2 billion and agreeing to sell its Japanese subsidiaries for $4.8 billion. These helped chip away at the $21 billion it still owed the Federal Reserve. As one source says, AIG didn't need to be "swimming in cash."

On Oct. 29, the IPO sailed nicely at HK$19.68 ($2.53) per share, raising $20.5 billion in proceeds. AIG retained roughly 41%, betting on the upside. The IPO worked out to 1.32 times embedded value, versus the 1.31-times multiple of Pru's reduced $30.4 billion offer.

In January AIG repaid the Fed in full, and the Treasury holds about 92% of AIG. Meanwhile, AIA's stock is up more than 10% since the IPO, a decent return on a high-stakes wager.