NEW YORK (AP) — American International Group Inc. said yesterday 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 yesterday, 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.

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 Programme. 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. However, its assets are valued at just $94 billion to $122 billion, according to Credit Suisse.