Nov. 6 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., fell the most in two months in New York trading after posting sales declines at its property-casualty and life insurance divisions.

The insurer slipped $3.80, or 9.7 percent, to $35.48 at 4:15 p.m. in New York Stock Exchange composite trading. Third quarter property-casualty premiums dropped 13 percent, and life insurance sales plunged 16 percent, New York-based AIG said today in a statement. Net income of $455 million compares with a net loss of $24.5 billion a year earlier on fewer writedowns.

“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 that will be sold 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.

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

Commercial Coverage

Rates charged for U.S. commercial insurance slipped 5.8 percent in the third quarter industrywide, 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.

AIG raised its estimate for the amount it will need to pay property-casualty claims from prior quarters, saying it spent 105.2 cents of every premium dollar on claims and expenses compared with 104.5 a year earlier.

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. AIG said sales of retirement products “remained challenged” because of negative publicity earlier this year. Sales were stabilizing when compared with the first half of this year, AIG said.

“You’re seeing their core franchises eroding in value, which puts repaying their government loans in jeopardy,” said Haag Sherman, who helps oversee $7.5 billion as chief investment officer of Houston-based Salient Partners. “As long as you have this big overhang in the government ownership, I think you’ll see a continued erosion.”

U.S. variable annuity sales fell for a fifth straight time in the second quarter industrywide, according to trade group LIMRA International, as insurers, weakened by the stock market slump last year, scaled back offerings of the equity-linked retirement products. The group hasn’t released third-quarter results.

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.

Asset Manager

The loss at the AIG asset manager widened to $1.1 billion from $28 million a year earlier on a $697 million goodwill impairment charge. The unit also reported capital losses of $1.2 billion from hedges and impairments on private equity holdings.

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., reported 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.

Corporate Debt

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.

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 on asset gains. Unrealized gains on bonds available for sale were $143 million, erasing a $19 billion loss at the end of the second quarter. Net unrealized gains on corporate debt holdings were $5.46 billion, compared with an unrealized loss of $6.31 billion three months earlier.

Bailed Out

A gain in the value of holdings may boost the insurer’s ability to repay government loans. State regulators and rating firms that monitor the insurer’s claims-paying ability forced the company to hold proceeds from some of its biggest asset sales rather than forward the funds to the U.S. Unrealized gains and losses usually don’t count toward earnings.

AIG’s so-called partnership investments, which include private-equity and hedge fund holdings, posted their first gain in five quarters. Buyout funds earned $33 million and hedge funds gained $253 million. AIG had $18.9 billion in partnership assets as of Sept. 30, compared with $19 billion on June 30.

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.

Management is seeking to enhance the value of assets before they are sold “and expects to accomplish this over a longer time frame than originally contemplated,” the company said in the statement. AIG had about 20,000 trades at is derivatives unit as of Sept. 30, compared with 22,500 in June and 35,000 at the end of 2008.

European Swaps

AIG’s maximum risk on a book of swaps sold to European banks narrowed to $171.7 billion as of Sept. 30, compared with $177.5 billion at the end of the second quarter. The insurer said in June that declines in the value of assets tied to the swaps could have a “material adverse effect” on results and that the risk of losses on the derivatives may last “longer than anticipated.”

The average weighted length of the swaps protecting residential loans is more than 23 years, while the span tied to corporate loans is almost 7 years.

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.

Government Rescue

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 16:47 EST