June 25 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S. government, agreed to hand over stakes in two overseas units to the Federal Reserve Bank of New York to reduce its central-bank debt by $25 billion.

AIG will place its largest non-U.S. life insurance businesses -- American International Assurance Co. and American Life Insurance Co. -- into special-purpose vehicles to eventually sell shares to the public, the New York-based insurer said today in a statement. The transactions, first disclosed in March amid the company’s third revised rescue, will close in the second half of the year, AIG said.

“It helps them move forward, and helps them exit their position with the government,” said David Havens, managing director at investment bank Hexagon Securities LLC. “There still remains a serious question about whether AIG will be able to do enough to get out from under the government entirely.”

Chief Executive Officer Edward Liddy has been forced to scale back his original plan to sell entire units to buyers as the recession eroded the value of insurance assets and made financing costlier for potential buyers. The company, which owes about $40 billion on its $60 billion Fed credit line, has disclosed deals raising about $6.7 billion so far.

The New York Fed will get $16 billion of preferred shares in AIA and $9 billion in Alico, AIG said. The insurer will hold common shares in the units and benefit from any value beyond the $25 billion promised to the Fed after share sales.

‘Major Step’

The transaction “represents a major step toward repaying taxpayers and preserving the value of AIA and Alico,” Liddy said in the statement.

AIG gained 4 cents, or 2.8 percent, to $1.46 in composite trading on the New York Stock Exchange at 4:01 p.m. The shares have lost 95 percent of their value in the past year.

AIA operates in China, India, Korea, Australia, Singapore, Malaysia, Thailand, Vietnam and Indonesia. The unit has more than 20 million customers and more than $60 billion of assets.

Alico operates in more than 50 countries, including parts of Europe, Latin America, the Caribbean, the Middle East and Japan. Japan is Alico’s biggest market.

The insurer suspended talks to sell Alico to two unidentified buyers after getting its rescue package revised in March. MetLife Inc. made a preliminary offer of $11.2 billion for Alico and Axa SA put in a bid that excluded Japanese operations, three people familiar with the matter said in February.

Market Conditions

The company plans to sell shares of AIA and Alico in initial public offerings “depending on market conditions,” it said in the statement.

AIG plans to transfer its businesses in the Philippines and the Alico operations in Taiwan into AIA, the company said in a statement on May 18.

The insurer’s bailout is valued at $182.5 billion, which includes the $60 billion Fed credit line, a $70 billion investment from Treasury and $52.5 billion to fund two vehicles to retire credit-default swaps and the insurer’s securities- lending program.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net

Last Updated: June 25, 2009 16:08 EDT