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 spinoff or sale of a unit to separate its operations from the parent firm. As part of the plan, the Federal Reserve Bank of New York will receive preferred interests in the SPVs that will eventually be independent companies.