NEW YORK_American International Group Inc. said Thursday it will reduce outstanding U.S. loans by $25 billion by giving the government a preferred stake in two units that will be spun off from the insurance giant.

Embattled insurer AIG is placing two life insurance subsidiaries _ American International Assurance Co. and American Life Insurance Co. _ into special purpose vehicles ahead of planned initial public offerings.

As part of the plan, the Federal Reserve Bank of New York will receive preferred interests in the SPV's, 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.

In an effort to repay the government, AIG is selling some assets and spinning off others.

AIG first discussed a possible spinoff or outright sale of the two divisions in March. At the time, AIG said it would place American Life Insurance, known as ALICO, and American International Assurance, known as AIA Group, into SPVs.

ALICO is an international life insurance firm that operates in more than 50 countries around the world offering life and health insurance. AIA Group is an Asian life insurer with more than 20 million customers.

AIG will continue to hold common and preferred stakes in the two SPVs. It will raise additional capital, which could be used to further reduce the government loans, once it sells common shares in the two life insurers. AIG said the timing for the public offerings would depend on market conditions.

AIG has previously said it also plans to spin off AIU Holdings, its property and casualty insurance business.

Shares of AIG rose 4 cents, or 2.8 percent, to $1.46 in premarket trading.