NEW YORK—American International Group Inc.'s move to give the Federal Reserve Bank of New York preferred interests in two life insurance units in exchange for cutting AIG's debt by $25 billion is a logical strategy in light of market conditions, observers say.

Analysts say the step reflects the current difficulty that AIG faces in getting appropriate compensation for the two units—American International Assurance Co. Ltd and American Life Insurance Co.—either through an initial public offering of stock or a private transaction.

In March, AIG said it planned to establish special-purpose vehicles for subsidiaries American International Assurance, which includes AIG's foreign life insurance units, and American Life Insurance.

Under an agreement announced last week, the Federal Reserve will receive preferred interests in the AIA and ALICO SPVs of $16 billion and $9 billion, respectively. The move positions the units for IPOs, depending on market conditions, according to AIG.

The deal, which is expected to be finalized in the second half of this year, would reduce AIG's $40 billion outstanding balance under the Fed's credit facility by $25 billion. That credit facility is part of a roughly $180 billion rescue package for AIG.

Until then, AIA and ALICO will remain wholly owned subsidiaries of AIG.

On a related front Friday, ALICO Chairman and Chief Executive Officer Rodney O. Martin Jr. told employees in a letter that ALICO is combining its two Western European regions.

Cliff Gallant, an analyst at Keefe, Bruyette & Woods Inc. in New York, said AIG is “being very aggressive” in “ moving (the SPV plan) along. If they really are able to accomplish this in 2009, I would say that is ahead of what most people thought was possible.”

The move itself is an indication that “it's a very difficult market to sell assets in,” said Mark Rouck, Chicago-based senior director with Fitch Ratings.

Marc Steinberg, senior analyst at Oldwick, N.J.-based A.M. Best Co. Inc., said the move is prudent. “Obviously, there's some irrational pricing because of the market conditions,” so moving the operations into an SPV “just seems to make sense.”

John Wicher of John Wicher & Associates in San Francisco, said: “The life insurance operations are viewed as a real special asset...but the reality is, there's not a private transaction out there, given the size” of the business. This will position the units for an IPO, he said.

Bill Bergman, an analyst at Morningstar Inc. in Chicago, said, though, he questions “to what extent the government's getting fair value for reducing the debt that AIG has to the Federal Reserve Bank of New York. That's a tough call,” and will not be known until “ three or four years down the road.”

In other AIG-related developments:

c AIU Holdings, AIG's commercial property/casualty division, is close to settling on a new name as part of its review of the company's brands and its effort to distinguish itself from AIG. The new name is expected to be revealed next month, according to sources familiar with the project.

c AIU also named Robert S. Schimek as its global chief financial officer, a new position. Mr. Schimek, who joined AIG in 2005, most recently held the title of AIU's executive vp and chief financial officer, but in that position was in charge only of AIU's property/casualty business, a spokeswoman said.

c Alain Karaoglan, a former Banc of America Securities L.L.C. managing director, has been named senior vp-divestiture for AIG. He reports to Paula Rosput Reynolds, AIG vice chairman and chief restructuring officer. He succeeds Phillip Jacobs, who left AIG to join another company

c AIG agreed to sell its shares of its consumer financial operations in Mexico. AIG Universal, S.A. de C.V. SOFOM E.N.R. and Markcenter Services S. de R.L. de C.V. are being sold to Desarrollo de Negocios Integrados S.A. de C.V. and Inversiones DNI S.A. de C.V., respectively, for an undisclosed amount.