American International Group announced it is moving forward to make its property casualty unit, AIU Holdings, an independent entity by transferring the company to a special purpose vehicle.

The move sets up the possibility of another entity obtaining a minority stake in the business, which could also include a public stock offering, “depending on market conditions,” according to AIG. AIG announced March 2 that AIU Holdings will serve a the holding company for AIG’s Commercial Insurance, Foreign Insurance and Private Client Group units.

According to AIU Holdings, it has 500 products and services, serving 40 million commercial and individual customers worldwide.

Edward Liddy, AIG’s chairman and CEO, said placing AIU Holdings into a special purpose vehicle (SPV) “marks the latest significant step to position our strong insurance companies as independent businesses, which will benefit all stakeholders, including policyholders, employees, and distribution partners.”

AIG is in the process of selling its automobile insurance unit, 21st Century Insurance Group, to Farmers Group Inc., a subsidiary of Swiss insurer Zurich Financial Services, for $1.9 billion.

Under the SPV arrangement, AIG intends to contribute the equity of AIU Holdings into an SPV in exchange for preferred and common interests in the SPV. AIG also said it intends to purchase from AIU Holdings its equity interests in International Lease Finance Corp., United Guaranty Corp. and Transatlantic Holding Inc., in a move that further separates the property-casualty operations from AIG and its affiliates.

Kristian P. Moore, president of AIU Holdings, said all of the actions “accelerate the move of AIU Holdings toward greater independence.”

“Securing the value of these well capitalized insurance companies, which had net written premiums of about $36 billion in 2008 serving millions of clients around the world, is in the best interests of policyholders and the American taxpayer,” Moore said in a statement.

A.M. Best said the ratings and outlook of AIG’s property-casualty subsidiaries will remain unchanged following the announcement.  The ratings services noted that while capital and surplus remain unchanged, the quality of capital in the subsidiaries “is expected to improve as these investments in these AIG affiliates will be exchanged for high quality, liquid assets of equal value.”

A.M. Best added that it views the restructuring as a “positive first step” in positioning the commercial insurance business as an independent organization in preparation for a future public equity offering.