AIG moves to spin off 2 units, reduce gov't debt

[June 25, 2009]  NEW YORK (AP) -- American International Group Inc. said Wednesday it will reduce outstanding federal 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 Fed will receive preferred interests worth $16 billion in American International Assurance and $9 billion in American Life Insurance.

The stakes will cut AIG's outstanding debt owed to the Federal Reserve Bank of New York to $15 billion from $40 billion.

The government rescued New York-based AIG from the brink of collapse last fall as the credit crisis worsened. The government first extended AIG a loan package worth $85 billion in September. 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.

AIG was hurt not by its traditional insurance operations, but by its financial products business, which underwrote risky credit derivatives contracts known as credit default swaps. The swaps are essentially insurance contracts protecting an investor against default on an underlying investment, such as mortgage-backed securities.

The insurer is shedding assets, including some of its profitable insurance subsidiaries in an effort to repay the government debt.

AIG will continue to hold common and preferred stakes in the two SPV's. 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.

[Associated Press; By STEPHEN BERNARD]

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