American International Group plans to conduct initial public offerings for two of its international life insurance franchises in hopes of using the proceeds – an estimated $25 billion – to reimburse some of the money it owes the Federal Reserve Bank of New York.

AIG will contribute the equity of the two subsidiaries, American International Assurance Co. (AIA) and American Life Insurance Co. (ALICO), to separate special purpose vehicles (SPVs) in exchange for preferred and common interests in the SPVs, under terms of the deal announced today (June 25).

The Federal Reserve will receive preferred interests in the AIA SPV of $16 billion and the ALICO SPV of $9 billion in the arrangement.

AIG officials said the face value of the preferred interests represents a percentage of the estimated fair market value of AIA and ALICO. AIG will hold the common interests in the AIA and ALICO SPVs and will benefit from the fair market value of AIA and ALICO in excess of the value of the preferred interests as the SPVs monetize their stakes in these companies in the future, the insurer said.

AIG has an outstanding balance of $40 billion under a Federal Reserve credit facility, the company said.

Since September 2008, the Federal Reserve and U.S. government have provided AIG with more than $170 billion in aid to keep it from collapsing. Officials have maintained that ultimately the company’s financially sound insurance operations would be used to pay off the debts caused by failures in its Financial Products unit.

Edward Liddy

The transactions should close later this year, if regulatory approvals are received. Until that time, the companies will remain wholly owned subsidiaries of AIG.

“Placing AIA and ALICO into SPVs represents a major step toward repaying taxpayers and preserving the value of AIA and ALICO, two terrific life insurance businesses with great futures,” said Edward Liddy, chairman and CEO of AIG, in a statement. “Operating AIA’s and ALICO’s successful business models in the SPV format will enhance the value of these franchises as we move forward with our global restructuring.”

The Federal Reserve said in a statement 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. The exchange of senior secured debt for preferred equity interests reduces AIG’s financial leverage and facilitates the independence of these two key subsidiaries.”