* Three potential bidders remain for AIA - sources
* Bank of China, HSBC dropped out
* Bids due on Friday; no formal offers yet (Adds detail on asset, auction, recasts)
By Michael Flaherty
HONG KONG, Feb 25 (Reuters) - Three potential bidders are still looking at buying a large stake in American International Group's (AIG.N) key Asian life insurance unit, people close to the matter said on Wednesday.
Canadian insurer Manulife (MFC.TO) and Singapore sovereign wealth fund Temasek Holdings [TEM.UL] are considering offers for the unit, the sources said, although no formal bids have been submitted.
U.K. insurer Prudential Plc (PRU.L) is mulling whether to bid, a source said, adding that it will not likely be able to make an offer by the Friday deadline but may make a bid later.
AIG spokesman David Monfried said he expects most bidders to meet the deadline, but the company is prepared to give more time to a bidder that needs it.
AIG needs the highest possible sale price to shore up its faltering capital position as losses mount. But with economies weak and funding markets tight globally, the highest possible sale price may not be as high as AIG would hope.
The unit, American International Assurance Co Ltd, is recorded on AIG's books at around $8 billion to $10 billion. But that is essentially its historical cost, which could be below the current market price. Analysts say the unit could fetch $15 billion to $20 billion in an auction. Potential buyers can bid for around half of the company or more.
Prudential declined to comment.
A Hong Kong-based spokesperson for Manulife did not return calls seeking comment. A Temasek spokeswoman said the company did not comment on market speculation.
Plans to sell a stake in AIA, considered AIG's crown jewel in Asia, were put in place last fall shortly after the U.S. government saved AIG from bankruptcy with a rescue that has since ballooned to $150 billion.
Prudential Plc has engaged Credit Suisse CSGN.VX to advise it on the matter, while Manulife has hired UBS AG UBSN.VX, the sources said.
UBS and Credit Suisse declined to comment. It was not clear who is advising Temasek, if in fact they have engaged a bank.
AIG has embarked on a series of asset sales to help pay back the U.S. government. In addition to auctioning off part of AIA, it is selling stakes in insurance divisions in Japan, the Philippines and other units in Asia.
The sale of AIG's American Life Insurance Co, a unit that generates more than half its revenue from Japan, could fetch more than $10 billion.
Bids for all AIG units under auction are due on Friday, sources say.
The auctions of Hong Kong-based AIA and other AIG assets have been hampered by AIG's worsening financial state and a drop in markets globally, which has limited the number of potential buyers.
Bank of China (601988.SS) dropped out of the process last month, dealing a big blow to the auction. AIG had hoped the cash-rich bank would submit an attractive offer and become a front-runner, according to sources.
Like any auction, deadlines could move, new bidders could emerge, or the auction could be canceled due to lack of offers or low valuations.
"We continue to work with the U.S. government to evaluate potential new alternatives for addressing AIG's financial challenges," said AIG's Hong Kong-based spokeswoman Patricia Chua. "We will provide a complete update when we report financial results in the near future."
AIG plans to ask the U.S. government for more aid and is bracing for a fourth-quarter loss of $60 billion, the largest quarterly loss in corporate history. [ID:nN23359818]
Reuters reported on Tuesday that AIG was willing to give up control of AIA to any buyer willing to pay the right price. [ID:nLO307447]
AIG hoped it could generate a quick chunk of cash by putting an AIA stake on the block, but the process has fallen victim to several factors, including the drop in Asia's economy since late last year.
Still, sources close to the matter say the auction is not dead yet, with all eyes on Friday's bidding deadline.
If the auction does not pan out, AIG would consider an IPO of AIA, the sources said.
AIA has more than 2 million policies in force, according to its website, with branches and affiliates in most major countries throughout Asia outside of Japan. It has 3,800 financial services consultants and 800 staff.
"AIA is very well managed and it has dominant market share in 10 of the 12 markets it's in," said a source close to the process, who estimated AIA's average annual operating profit at around $2 billion.
One of the remaining questions surrounding the auction is how a bidder is going to pay for such a large purchase. Most major banks have pulled back on lending. Prudential and Manulife's market capitalisations are $10 billion and $16 billion, respectively.
Money could be raised outside of bank loans, but in this market, a buyer faces major challenges for a deal this size.
As a sovereign wealth fund, Temasek faces less financing hurdles. (Additional reporting by Dan Wilchins in New York, Victoria Howley in London, Saeed Azhar in Singapore; Editing by Lincoln Feast, Hans Peters and John Wallace)