Rescued insurance giant AIG has moved to cut its debt to the US Government by $US25 billion ($27 billion) through two debt-for-equity swap transactions with the Federal Reserve.

AIG says it has transferred ownership of parts of two international subsidiaries, American Life Insurance Company (ALICO) and American International Assurance Company (AIA) to the Federal Reserve Bank of New York.

The Fed has a liquidation preference in AIA worth $US16 billion ($17.3 billion) and in ALICO worth $US9 billion ($9.7 billion).

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

The two transactions reduce AIG’s outstanding principal balance to the central bank to $US17 billion ($18.3 billion), excluding interest and fees.

AIG CEO Robert Benmosche says the debt reduction sends a clear message to taxpayers that AIG “continues to make good on its commitment to pay the American people back”.

AIG was the largest single recipient of US bailouts during the global financial crisis, with the US Government pumping in about $US182.3 billion ($196.7 billion) in a rescue package to keep the firm afloat and taking an 80% stake in AIG in the process.

It has been moving to sell off a number of assets and streamline operations in an effort to repay its debt. Following these transactions, AIG’s outstanding debt will now be reduced to under $US100 billion ($109 billion).

“We continue to focus on stabilising 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,” Mr Benmosche said.

The New York Times says an independent analysis of the insurance industry’s reserves versus claims estimates show that AIG has a shortfall of $US11.9 billion ($13 billion) in its property and casualty business.