Nov. 6 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., posted its second straight profit as investment losses narrowed and catastrophe costs declined. Shares dropped in early trading as sales fell at life and property-casualty operations.

Third-quarter net income of $455 million, or 68 cents a share, compares with a net loss of $24.5 billion, or a reverse split-adjusted $181, a year earlier, New York-based AIG said today in a regulatory filing. Property-casualty premiums slipped 13 percent, and the life insurance decline was 16 percent.

“Even with the profit, AIG’s still a sick company,” said Robert Haines, an analyst at CreditSights Inc. in New York. “The trends of the underlying business units are ultimately more important to the company than a positive quarterly figure.”

Chief Executive Officer Robert Benmosche, who started in August, is seeking to halt the departure of customers and employees so he can rebuild units he needs to sell to repay loans included in AIG’s $182.3 billion bailout. Benmosche stopped auctions for an investment adviser and a pair of Japanese units because he said they were more valuable with AIG.

AIG, which was rescued last year after soured bets tied to mortgages pushed it to the brink of collapse, owes $44.5 billion on its Federal Reserve credit line, $3.2 billion more than three months earlier. The figure rose as the firm propped up its plane-leasing unit by extending $2 billion in credit and paid down a U.S. commercial paper facility.

Shares Decline

AIG fell $2.60, or 6.6 percent, to $36.68 at 8:02 a.m. in New York. The shares gained 25 percent this year through yesterday on the New York Stock Exchange.

Sales at property-casualty operations, which include coverage of commercial property, corporate boards and airplanes, fell to about $8.1 billion as clients scaled back coverage amid the recession and competitors poached AIG’s employees and customers.

Rates charged for U.S. commercial insurance slipped 5.8 percent in the third quarter, exceeding declines in the first half of the year, according to the Council of Insurance Agents and Brokers. Prices have fallen in every period since 2004 as insurers compete for business.

Catastrophe costs declined to $55 million from more than $1.3 billion a year earlier. This year’s third quarter yielded a single U.S. landfall, Tropical Storm Claudette, which struck Florida in August.

Variable Annuities

Life insurance premiums and other considerations dropped 16 percent to $7.85 billion.

U.S. variable annuity sales fell for a fifth straight time in the second quarter industrywide as insurers, weakened by the stock market slump last year, scaled back offerings of the equity-linked retirement products. Bailed-out insurers including AIG, Hartford Financial Services Group Inc. and Lincoln National Corp. have been losing market share to competitors that shunned U.S. aid such as MetLife Inc. and Prudential Financial Inc.

The asset manager’s operating loss widened to $1.1 billion from $28 million a year earlier on a $697 million goodwill impairment charge. The asset manager also reported capital losses of $1.2 billion from hedges and impairments on private equity investments.

Job Cuts

The insurer’s consumer lender, American General Finance Corp. posted an operating loss of $154 million in the quarter, compared with a $446 million loss a year earlier. The Evansville, Indiana-based lender slashed 900 jobs in the first half of the year and closed 145 branches as revenue plunged amid the recession, the company said in a filing in August.

AIG’s plane-leasing business, International Lease Finance Corp., posted a $365 million profit, a gain of 19 percent from a year earlier after the unit expanded its fleet and borrowing costs fell.

ILFC turned to AIG to finance contractual obligations after credit downgrades barred the plane unit from borrowing from the U.S. commercial paper program and the failure of Lehman Brothers Holdings Inc. dried up the funding market for its debt.

AIG’s operating earnings, which exclude some investment results, were $2.85 a share, beating the average $2.39 estimate of three analysts surveyed by Bloomberg. Shareholders’ equity, a measure of assets minus liabilities, rose 25 percent to $72.7 billion from $58 billion on June 30.

Credit-Default Swaps

Realized losses on investments narrowed to $1.8 billion from $15.1 billion a year earlier as the markets for corporate debt and mortgage-backed securities improved. The company’s derivatives business posted operating income of about $1.4 billion compared with a loss of $8.3 billion a year earlier, on gains in its credit-default swap portfolio.

Under Benmosche’s predecessor Edward Liddy, AIG announced a plan to dismantle itself to repay its government loans. The firm has secured agreements to raise more than $12 billion by selling operations including a U.S. auto insurer, an equipment guarantor and a Taiwan life unit.

AIG is skipping, for the second straight quarter, the investor conference call that accompanied earnings in the past. Liddy opted against a call in August, at the end of his tenure, after holding question-and-answer sessions in prior quarters. Former CEOs Robert Willumstad, Martin Sullivan and Maurice “Hank” Greenberg held calls with analysts.

The company is “in daily contact with our majority shareholder,” Christina Pretto, an AIG spokeswoman, said this week in an e-mail. The U.S. took a stake of almost 80 percent as part of the rescue.

Return to Profit

AIG posted net income of $1.82 billion in the second quarter, its first profit since 2007, on narrowing investment losses. Before that, AIG had reported more than $100 billion in net losses driven by declines on credit-default swaps and investments. The company has units that originate, insure and invest in home loans.

The insurer was rescued in September 2008 with a package that was revised three times to include a $60 billion Federal Reserve credit line, a Treasury Department investment of as much as $69.8 billion, and up to $52.5 billion to buy mortgage-linked assets owned or backed by the company.

AIG has placed its two biggest non-U.S. life insurance units, American International Assurance Co. and American Life Insurance Co., into special-purpose vehicles to pay down its debts to the Federal Reserve by $25 billion. The transactions, which AIG said would be completed by yearend, will cause a $5 billion pretax charge, the company said in August.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: November 6, 2009 08:10 EST