AIG moves to spin off 2 units to reduce debt to U.S.

NEW YORK -- AIG is placing two life insurance subsidiaries — American International Assurance and American Life Insurance — into special purpose vehicles (SPVs) ahead of planned initial public offerings.

As part of the plan, the Federal Reserve Bank of New York will receive preferred interests in the SPVs, which will eventually be independent companies once a public offering is completed.

The Federal Reserve Bank of New York will receive preferred interests worth $16 billion in American International Assurance and $9 billion in American Life Insurance. The preferred interests represent an undisclosed percentage of the estimated market value of the two companies, AIG said.

The stakes will cut AIG's outstanding debt owed on a credit facility with the Federal Reserve Bank of New York to $15 billion from $40 billion. It will also reduce the size of the credit facility available to AIG from the bank to $35 billion from $60 billion. That facility and the new stakes in the SPVs are part of a group of taxpayer-funded investments the government has made to help keep AIG from collapsing.

The government rescued New York-based AIG last fall as the credit crisis worsened. The government first extended AIG a loan package worth $85 billion in September. AIG was hurt not by its traditional insurance operations, but by its financial products business, which underwrote risky credit derivatives contracts.

As market conditions worsened and losses piled up at the insurer, the government revised and expanded its loan package several times. AIG now has up to $182.5 billion in funding available to it from the government.

Aside from the credit facility from the Federal Reserve Bank of New York, AIG's loan package includes $40 billion it received from the Treasury Department last fall as part of the government's $700 billion Troubled Asset Relief Program. Another $30 billion in funding through TARP had not been drawn upon as of the end of the first quarter.