NEW YORK - AMERICAN International Group said on Thursday it will reduce outstanding US loans by US$25 billion (S$37.5 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 and American Life Insurance - 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 US$16 billion in American International Assurance and US$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 US$15 billion from US$40 billion.

It will also reduce the size of the credit facility available to AIG from the bank to US$35 billion from US$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.

Aside from the credit facility from the Federal Reserve Bank of New York, AIG's loan package includes US$40 billion it received from the Treasury Department last fall as part of the government's US$700 billion Troubled Asset Relief Program.

Another US$30 billion in funding through Tarp had not been drawn upon as of the end of the first quarter.

AIG now has up to US$182.5 billion in funding available to it from the government.

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