Allianz, Zurich and Generali still in frame for purchase of insurance division.

AIG is not expected to bid for Royal Bank of Scotland’s insurance business after the US insurer reported nearly $8bn (£4.1bn) net losses for the first quarter of 2008.

AIG has previously been linked to NIG, the broker-only insurer owned by RBS. But a senior source said that AIG’s first quarter losses of $7.8bn coupled with a $12.5bn capital raising plan would make a bid for the insurer unlikely.

RBS chief executive Sir Fred Goodwin confirmed that the sale of RBS’s insurance business (RBSI) was to go ahead in a speech delivered to a banking conference in New York on Monday night. Goodwin said that a number of interested parties had made themselves known to the bank and would receive a sales memorandum shortly.

RBSI also includes Direct Line, Churchill and Privilege.

Insurers Allianz, Zurich and Generali have all been identified as likely bidders, as well as a number of private equity investors. RBS is thought to prefer the option of selling the whole division, which has been valued at around £8bn.

Meanwhile, the pressure on AIG chief executive Martin Sullivan mounted this week as the insurance giant’s former chief, Hank Greenberg, claimed that the company was in crisis.

In a letter to the AIG board, Greenberg, who left the company in 2005, urged the board to postpone its shareholder meeting which was scheduled for Wednesday this week. Greenberg said investors needed longer to discuss the company’s first quarter losses and the board’s response to the crisis.

“These events have led to a complete loss of credibility with the investment community and even further loss of value for shareholders,” Greenberg said in his letter, which was filed with the US Securities and Exchange Commission.

Greenberg is chairman of Starr International, AIG’s biggest shareholder.

A spokesman for AIG said the board would not postpone the shareholder meeting, and declined to comment on Greenberg’s allegations.

The $7.8bn first quarter loss is the biggest quarterly loss to date and the second consecutive quarter that the company has fallen into the red. AIG’s share price has lost nearly half its value in the last year.

Greenberg has been critical of AIG’s management since leaving the insurer in 2005 amid allegations of accounting irregularities. Greenberg denies any wrongdoing.

His comments will add to the pressure on Sullivan to take decisive action to turn AIG around. There have been calls for Sullivan to step aside and for a successor to break the company up into more manageable chunks.

Sullivan has argued that AIG’s results do not reflect the underlying strengths of the business, rather the extremely adverse external conditions affecting the US economy.

“We believe that our businesses provide an attractive foundation for growth for AIG over the long-term,” Sullivan said last week when announcing the first quarter results.