NU Online News Service, Dec. 1, 12:19 p.m.EST

American International Group, Inc. announced it had completedtwo previously announced transactions to reduce the debt AIG owesthe Federal Reserve Bank of New York by $25 billion.

The announcement followed a drop in the company stock yesterdayof nearly 15 percent after a Sanford C. Bernstein analyst said thecompany's property and casualty business had an $11.9 billionreserve deficiency.

AIG's positive statement today included a caution that it faces"continued volatility" ahead. In morning trading, the company'sstock gained more than $3 on the New York Stock Exchange.

Its debt reduction announcement said FRBNY reduced the amountthe company owed after taking preferred equity interests in twonewly formed life insurance subsidiaries.

The company said it is positioning American InternationalAssurance Company, Limited (AIA) and American Life InsuranceCompany (ALICO), for initial public offerings or third-party sale,depending on market conditions and regulatory approvals.

According to company spokesperson Christina Pretto, thegovernment would have a liquidation preference stake of $16 billionin AIA and $9 billion in ALICO. The exact percentage of thegovernment's stake in the fair market value of the companies hasnot been disclosed, she said.

AIG said the $25 billion debt reduction, AIG's outstandingprincipal balance under the FRBNY credit facility is nowapproximately $17 billion, down from approximately $42 billion,excluding interest and fees and the total amount available underthe credit facility loan arrangement has been cut from $60 billionto $35 billion.

Bob Benmosche, AIG chief executive officer, said in a statementthat the announcement "sends a clear message to taxpayers: AIGcontinues to make good on its commitment to pay the American peopleback."

"Moreover, these transactions position AIA and ALICO, twoterrific, unique international life insurance businesses, for thefuture," he commented.

Mr. Benmosche noted that AIG would take an incremental chargerelated to its prepaid commitment asset (the recorded value of thecredit facility on its balance sheet) in the fourth quarter inconnection with the reduction in the total amount available underthe FRBNY credit facility resulting from the closing of the AIA andALICO transactions.

The prepaid commitment asset was booked as $23 billion on Sept.16, 2008 to represent the value to AIG of the initial $85 billionof credit provided by the FRBNY in exchange for a 79.9 percenttaxpayer interest in the company.

Since the inception of the FRBNY credit facility and throughSept. 30, AIG has recognized a total of $11.7 billion ofamortization expense, and expects to recognize an additional amountof $5.7 billion in the fourth quarter, including $5.2 billion ofaccelerated amortization related to these transactions, the companysaid.

The charges, it explained, reflect the reduction of thecompany's debt from the initial amount of $85 billion to $35billion as well as periodic amortization.

It was noted that after the FRBNY facility is fully repaid, thegovernment with its preferred stock holding in the company willcontinue to hold a preferred voting interest, now at approximately79.8 percent.

"We continue to focus on stabilizing and strengthening ourbusinesses, but expect continued volatility in reported results inthe coming quarters, due in part to charges related to ongoingrestructuring activities, such as the previously announced lossthat we expect to recognize in the upcoming quarter related to ourannounced agreement to sell our Taiwan-based life insurer NanShan," Mr. Benmosche said.

The AIA and ALICO transactions involve AIG contributing theequity of each of AIA and ALICO to separate special purposevehicles (SPVs) in exchange for interests in the SPVs.

Under the terms of the transactions, the FRBNY receivespreferred interests with a liquidation preference in the AIA SPV of$16 billion and with a liquidation preference in the ALICO SPV of$9 billion.

The liquidation preference of the preferred interests representsa percentage of the estimated fair market value of AIA andALICO.

AIG holds all of the common interests in the AIA and ALICO SPVsand will benefit from the fair market value of AIA and ALICO inexcess of the value of the preferred interests as the SPVs monetizetheir stakes in these companies in the future.

Until AIG divests a majority of its common interests in AIA andALICO, AIA and ALICO will continue to be consolidated in AIG'sfinancial statements, the company said.