Crippled insurer AIG has sold its Asian life insurance portfolio as the repayment of US Government debt continues.

AIG announced last week a deal had been struck with Prudential for the prized Asian life insurance unit, AIA, in a $US35.5 billion ($39.2 billion) cash and scrip deal.

AIA claims to sell 10% of the life insurance policies sold in Australia.

Prudential is understood to have no assets in Australia, having sold its local financial services business to the Colonial group in 1998. Two years later Colonial became part of the Commonwealth Bank group.

The deal includes $US25 billion ($27.6 billion) in cash, $US8.5 billion ($9.4 billion) in equity and $US2 billion ($2.2 billion) in Prudential stock.

AIG says the money will be used to repay the Federal Reserve Bank of New York, which at October last year was owed more than $US90 billion ($99.5 billion) by the insurer.

AIG CEO Robert Benmosche says the sale of AIA was the fastest option to repay its debts.

“This transaction, the most significant milestone to date in our ongoing effort to repay taxpayers, also gives us greater flexibility to move forward with AIG’s restructuring and focus on enhancing the value of our key industry businesses,” he said.

The deal follows the sale of AIG’s asset management business for $US500 million ($553.2 million) to Pacific Century Group in September.