AIG moves to spin off 2 units, reduce debt

NEW YORK — American International Group Inc. said Thursday 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.

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. SPVs are entities sometimes set up ahead of the spin-off or sale of a unit to separate its operations from the parent company.

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 government rescued New York-based AIG last fall as the credit crisis worsened, giving the insurer $182.5 billion in loans and taking an 80 percent stake in the insurer. AIG, once the world's biggest insurer, was crippled by its financial products business, which underwrote risky credit derivatives contracts.

Under the plan announced Thursday, 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.

"Presumably they've quietly been trying to sell off the blocks of business," but AIG executives felt the bids were insufficient and that a public offering would bring in more money, said Robert E. Wright, a professor of economics at New York University's Stern School of Business.

The role of the government in these offerings will be to ensure they receive as much money as possible for the taxpayers, said Len Blum, managing partner at investment bank Westwood Capital.

That means that when shares are sold, any money raised goes toward repaying the government, Blum said. Alternatively, if the money raised through the stock offerings remains at the companies, the government must ensure there are enough common shares issued to absorb any potential future losses. That will help protect the government's preferred interests since common stock takes losses before preferred shares, Blum noted.