US--AIG-Spinoff

By Brady Dennis

June 26, 2009 12 AM PT

American International Group Inc. said Thursday that it had reached a deal to reduce its debt to the Federal Reserve Bank of New York by $25 billion.

The insurance giant, which has received multiple federal bailouts since September, said it would give the New York Fed preferred stakes in two of the company’s crown jewels -- Asia-based American International Assurance, or AIA, and American Life Insurance Co., or Alico, which operates in more than 50 countries.

Under the agreement, AIG will split off AIA and Alico into separate company-owned entities called “special purpose vehicles.” The New York Fed will receive preferred shares valued at $25 billion -- $16 billion of AIA and $9 billion in Alico -- and in exchange will forgive an equal amount of AIG debt.

Even after the transactions, which AIG said it expected to close during the second half of this year, the company will owe the New York Fed about $15 billion. AIA and Alico would remain wholly-owned subsidiaries of AIG, and the insurance giant would continue to operate them.

AIG Chief Executive Edward M. Liddy said in a statement that the agreement “represents a major step toward repaying taxpayers and preserving the value of AIA and Alico.”

The New York Fed said the agreements “further the goals of enabling AIG to fully repay the assistance that it has received from U.S. taxpayers and advancing the company’s global restructuring process.”

AIG has continued to shed assets to help raise money to pay back the government. In recent months, it has announced the sale of consumer finance operations in Mexico and Argentina, as well as much of its stake in a global reinsurance operation. It also has sold some real estate, including its headquarters in Manhattan.

As it seeks to become a smaller, more viable company, AIG also faces an imminent shake-up among its top leaders. Last month, Liddy, who took the reins after the government’s bailout last fall, said he would step down as chairman and chief executive.

Also, a majority of directors on AIG’s board are likely to be replaced Tuesday when the insurer holds its annual shareholder meeting.

Dennis writes for the Washington Post.