NEW YORK—American International Group Inc. has closed two transactions with the Federal Reserve Bank of New York and reduced its debt to the government by $25 billion, the insurer said Tuesday.

The debt-for-equity swap transactions also position the two AIG life insurance units for sale or spinoff, AIG said.

As it said it would do previously, AIG has placed the equity of the two New York-based units—American International Assurance Co. Ltd. and American Life Insurance Co.—into separate special-purpose vehicles in exchange for the Federal Reserve Bank acquiring preferred equity interests in the recently formed subsidiaries.

The Federal Reserve Bank has a liquidation preference in the AIA vehicle worth $16 billion and in the ALICO vehicle worth $9 billion.

AIG said the move positions the subsidiaries for initial public offerings or a sale, depending on market conditions.

In a separate announcement Tuesday, AIG said it was moving forward with the separation of ALICO.

AIG said its outstanding debt with the FRBNY now stands at roughly $17 billion, down from $42 billion.

AIG, which has been working for the past year to sell assets and streamline operations in an effort to repay what it has drawn from its $180 billion government loan facility, last month said its outstanding debt stood at roughly $122.31 billion, and that it expected these transactions to reduce this by $25 billion.

“We continue to focus on stabilizing and strengthening our business, but expect continued volatility in reported results in the coming quarters, due in part to charges related to ongoing restructuring activities,” AIG Chief Executive Officer Robert H. Benmosche said in a statement.

AIG also said the move will result in a fourth-quarter charge of $5.7 billion.