Updated from 6:30 a.m. EST

American International Group

(AIG) - Get Report

confirmed Monday the U.S. government has given the insurer a new bailout package that includes the purchase of $40 billion of newly issued AIG perpetual preferred shares and warrants under the Troubled Asset Relief Program.

The purchase will allow the

Federal Reserve

to reduce to $60 billion from $85 billion the total amount available under the credit facility established by the Federal Reserve Bank of New York in mid-September, the Fed and the Treasury said in a statement Monday.

The Fed said the interest rate on the facility will be reduced and the length of the facility will be extended to five years from two years.

"Today's actions send a strong signal to our policyholders, business partners and counterparties that AIG is on the road to recovery. Our comprehensive plan addresses the liquidity issues that threatened AIG, and gives us the financial flexibility to complete our restructuring process successfully for the benefit of all of our constituencies," said Edward Liddy, chairman and CEO, said Monday in a separate press release.

Neel Kashkari, the Treasury official spearheading the TARP, said Monday that "action was necessary to maintain the stability of our financial system."

"In return, AIG must comply with stringent limitations on executive compensation for its top executives, golden parachutes, its bonus pool, corporate expenses, and lobbying," Kashkari said in a statement. "We recognize that the financial system remains fragile and we continue to stand ready to prevent systemic failures. We worked with the Congress to ensure the TARP included sufficient flexibility to do just this."

The move could signal a new round of investments by the TARP into reeling

insurers

.

The Hartford Financial Services Group

(HIG) - Get Report

last month reported a $2.6 billion net loss driven by its

variable annuity

businesses.

Hartford

, which also received a $2.5 billion capital infusion from

Allianz

(AZ)

, last week said it had ample liquidity to continue doing business.

In September, the U.S. government loaned AIG $85 billion to help the giant insurer stave off bankruptcy. It loaned the company another $37.8 billion in October.

Liddy said Monday the $85 billion emergency bridge loan was "essential to prevent an AIG bankruptcy, which would have caused incalculable damage to AIG, our economy and the global financial system. Thanks to decisive action by Congress, Treasury and the Federal Reserve, there are now additional tools available to create a durable capital structure that will make possible an orderly disposition of certain of AIG's assets and a successful future for the company. "

The Fed also plans to create two financing entities capitalized with loans from AIG and the New York Fed that will purchase assets related to AIG's U.S. securities lending program and multi-sector collateralized debt obligations on which AIG has written credit default swaps, AIG said. The total of the two facilities is $52.5 billion, according to the Fed.

AIG also reported Monday a third-quarter loss of $24.47 billion, or $9.05 a share, compared with year-earlier net income of $3.09 billion, or $1.19 a share.

The adjusted loss in the third quarter was $9.24 billion, or $3.42 a share.

AIG said its third quarter was hurt by "financial dislocation in global markets, as well as catastrophe losses and charges related to ongoing restructuring-related activities.

AIG said insurance premiums and other considerations grew nearly 7%, despite these "challenging conditions."

In recent trading, AIG was trading up 12.3% to $2.37.

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