The U.S. government will commit another $30 billion to prop up American International Group Inc as the embattled insurer prepares to report the biggest loss in history and struggles to sell assets.

AIG's board on Sunday approved a new rescue package that also includes more lenient terms on an existing government investment in its preferred shares and a lower interest rate on a government credit line, two sources familiar with the matter said.

This would be the third time the government has had to step up to save AIG, once the biggest insurer by market value whose global reach may have made it too big to fail.

The rejigged bailout, which changes the terms of an earlier $150 billion rescue, is also the latest example of how federal regulators are having to revamp aid for top financial institutions as the global financial crisis deepens.

Last week, the government agreed to boost its equity stake in Citigroup Inc to as much as 36 percent in a bid to bolster the bank, already the recipient of billions of dollars in taxpayer funds.

The government really does not have the option of letting AIG totally blow up, said Robert Haines, senior insurance analyst at CreditSights.

Hopefully, the third bailout will be the charm, he said. The counterparties on most of the book are (European) banks that would be hammered if the U.S. walked away.

DEBT TO EQUITY

Under the deal, the interest rate on AIG's credit line from the government would be cut to match the three-month London Interbank Offered Rate (Libor), now about 1.26 percent, a source with direct knowledge of the matter said.

This would save AIG about $1 billion a year.

AIG now pays 3 percentage points above three-month Libor on the $60 billion credit line.

The additional equity commitment would give AIG the ability to issue preferred stock to the government later, the sources said.

AIG will also give the U.S. Federal Reserve a preferred interest in its American Life Insurance Co (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, they said.

The government likely will get a 5 percent cumulative dividend on its ownership stake in Alico and AIA, said one source. AIG had been trying to sell Alico and part of AIA in a bid to raise money to pay back the government.

Sales of these assets are still a possibility, with some bids already received, said one person.

AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said.

The company may securitize up to $10 billion under that plan, one of the sources said.

The debt-to-equity swap would help AIG repay much of the roughly $38 billion it has drawn from its government credit line, the source said.

Last year, AIG said it planned to sell all assets except its U.S. property and casualty business, foreign general insurance and an ownership interest in some foreign life operations, to pay back the government.

While the company has announced some sales, it has found it difficult to find buyers and get a good price for assets amid the financial crisis. (For more on the status of the asset sales, click on [nN01335633])

The company now plans to spin off up to 20 percent of the property-casualty business in an initial public offering, said a person with direct knowledge of the plans.

The business would be renamed to differentiate it from AIG, and have its own board of directors.

To aid the auction of at least one major asset, the government could help potential buyers of aircraft lessor International Lease Finance Corp with financing, the sources said.

ILFC has some debt coming due in 2009 and, if needed, AIG could use its new equity commitment to help potential buyers with that, one of the sources said.

An AIG spokeswoman did not respond to requests for comment.

MASSIVE LOSS

The deal was reached as AIG prepared to report on Monday a loss of about $60 billion for the fourth-quarter, due largely to write-downs on certain tax assets and commercial mortgage-backed securities, the sources said.

The loss -- which works out to about $460,000 per minute -- is mostly non-cash, the source said.

The revised bailout would allow AIG to avoid a credit ratings downgrade that could have had serious ramifications for the insurer's liquidity and hurt its business.

Customers could, for instance, cancel their insurance policies if a minimum rating was no longer maintained.

Moody's Investors Service and Standard & Poor's both have AIG on review for downgrade from the seventh highest investment grade, and have said that the government's support was keeping the ratings from being cut to junk status.

AIG, which had 74 million customers at the end of 2007, has said it has also been losing business and finding it harder to win new clients since it was first rescued in September after bad mortgage bets left it on the verge of collapse.

The government stepped in at the time with an $85 billion bailout, and subsequently offered additional financing, bringing the support up to about $123 billion.

Then in November, the government had to revise its bailout package, raising its total aid to about $150 billion.

(Reporting by Paritosh Bansal, Lilla Zuill, Walden Siew and Kristina Cooke)

(Editing by Ted Kerr)

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