NEW YORK (Bloomberg)—American International Group Inc.'s planned $2.15 billion sale of its Taiwan life insurance unit was blocked by local regulators, setting back the U.S. insurer's effort to repay its $182.3 billion government bailout.

A group led by Primus Financial Holdings Ltd. failed to convince the Financial Supervisory Commission it has the financial capability and long-term commitment to operate the business, Wu Tang-chieh, vice chairman of the regulator, said at a briefing in Taipei Tuesday. AIG agreed in October to sell its almost 98% stake in Nan Shan Life Insurance Co. to Primus Financial and China Strategic Holdings Ltd.

The rejection deals a blow to AIG, which has been trying for more than a year to complete its second-biggest disposal since the September 2008 U.S. government bailout. It paves the way for Chinatrust Financial Holding Co. to bid for Nan Shan, Taiwan's third-largest insurer by premiums.

“Chinatrust has experience in insurance and may have a long-term interest in the industry, so it may have a greater chance of getting approval,” said Monika Yang, who helps oversee $2 billion at Hamon Asset Management Ltd. in Hong Kong.

Primus can appeal to the cabinet within 30 days after receiving the official rejection, vice economics minister Hwang Jung-chiou said at an earlier briefing. Beatrice Lin at Compass PR, AIG's public-relations firm in Taiwan, had no immediate comment. Primus Financial Chairman Robert Morse declined to comment when reached on his mobile phone.

Funding concern

Nan Shan would have marked the first deal for the former Citigroup Inc. Asia investment banking chief since he started Primus Financial 17 months ago.

Mr. Hwang said checks by the economics ministry's investment commission showed Primus Financial's bid wasn't backed by funds from China. The application was deemed a foreign investment and vetted as such, he said.

Regulators earlier expressed concern that the bid had Chinese funding. Chinese investors aren't allowed to purchase control of Taiwanese financial companies.

The Primus-led group failed to convince the regulator it had the financial capability “to ensure future capital expansion and a long-term commitment to operate the business,” Mr. Wu said. The regulator hopes AIG will continue to operate Nan Shan Life after the sale's rejection, Mr. Wu said. He said he doesn't know whether AIG will cut jobs at the insurer.

Chinatrust bid?

Chinatrust Financial, Taiwan's third-largest financial company by market value, said Aug. 11 it was still interested in buying Nan Shan if regulators rejected the Primus Financial deal. Chinatrust failed in a bid for Nan Shan in October. Vanney Cho, a spokesman at Chinatrust, on Tuesday declined to comment on whether the company will approach AIG.

New York-based AIG has secured agreement to sell almost $30 billion of assets so far. The company announced Aug. 11 it will sell a majority stake in American General Finance Inc., AIG's consumer lender, to Fortress Investment Group L.L.C., getting rid of a business that posted about $1.7 billion in operating losses since 2008 and accumulated more than $17 billion in debt.

AIG's previous disposals include a majority stake in reinsurer Transatlantic Holdings Inc., a Tokyo office tower and an equipment insurer.

Unprofitable policies

AIG CEO Robert Benmosche, 66, also is divesting AIA Group Ltd. and American Life Insurance Co., known as ALICO, the non-U.S. life insurance divisions. AIG is planning an initial public offering for AIA in November after the collapse of a $35.5 billion agreement to sell the division to Prudential P.L.C. AIG struck a deal in March to sell ALICO to MetLife Inc. for about $15.5 billion.

Primus Financial was set up in April 2009 after raising $1.2 billion. China Strategic would own 80% of the group buying Nan Shan, and Primus would own the remainder under their plan.

Nan Shan is burdened with unprofitable guaranteed-return policies it sold in the 1990s when interest rates were higher, raising concerns that a buyer may need to inject more capital.

Nan Shan, based in Taipei, Taiwan, was set up in July 1963 and was bought by American International Underwriters Ltd., the property and general insurance unit of AIG, in January 1970, according to Nan Shan’s website.

It has 4 million policyholders and is the third-largest insurer in Taiwan by total premiums, with a network of 24 branches and 480 agency offices, according to the website.

Deutsche Bank AG advised Primus Financial on the acquisition. Blackstone Group LP and Morgan Stanley advised AIG on the sale.

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