* 2nd-quarter operating earnings $1.12/share vs est $0.85
* Net income up 17 percent
* Announces quarterly dividend of $0.10 per share
* To repurchase $1 billion of its stock
* Shares rise 6 pct after the bell (Adds background, analyst comment, life insurance unit results; updates shares)
By Aman Shah
Aug 1 American International Group Inc announced its first capital return since its 2008 bailout, through a dividend and share buyback, sending its shares up 6 percent after the bell.
The insurer, which was almost wiped out by its derivative bets in the crash five years ago, reported a quarterly profit that handily beat Wall Street estimates, along with a quarterly divided of 10 cents and a share buy back of up to $1 billion.
"Return of the quarterly dividend as well as the buyback is a clear affirmation of the progress AIG has made since the mortgage crisis," Macquarie Equities Research analyst Amit Kumar said in an email to Reuters.
The company also reported strong growth at its property casualty insurance unit, indicating it was on track to improve profitability after a long-awaited turnaround.
The insurer has not paid dividends since receiving the first portion of a U.S. taxpayer-funded bailout in 2008 that eventually topped $180 billion. AIG finished paying back those funds early this year.
"AIG is a fundamentally different, simpler company than it was three years ago," Chief Executive Robert Benmosche said in a statement.
Insurers have had trouble raising prices in their property and casualty businesses for some time, and losses from weather events and other natural disasters have also hurt the business.
AIG has not reported an annual underwriting profit since 2007, but the first quarter seems to have been a turning point.
"Investors want to see that AIG is recovering and driving margins by transforming its property and casualty business," said Josh Stirling, an insurance analyst with Sanford C. Bernstein.
The company said that as of Thursday the sale of its aircraft leasing unit, International Lease Finance Corp (ILFC), has not yet been closed.
AIG has been trying to offload the business for years, as part of its post-crisis restructuring and capital-raising plans, but had trouble finding a buyer.
It agreed to sell a majority of ILFC to a consortium of investors at a value of $5.3 billion in December. The buyers have been in the process of getting loans to move forward with the deal, prodding AIG to extend the deadline for its completion.
Last quarter, the U.S. Federal Reserve formally designated AIG as a "systemically important financial institution," or SIFI.
The SIFI tag means the insurer would face tighter regulations and possibly an annual stress test similar to the one that large U.S. banks must go through before raising dividends, buying back stock or executing large acquisitions.
However, AIG said the capital returns were approved without assuming the pending sale.
"A lot of people thought that ILFC had to be sold first ... the capital plan was approved without the sale and that gives a lot of credence to the capital position," BMO Capital Markets analyst Charles Sebaski told Reuters.
PROFIT BEATS ESTIMATES
AIG's property casualty unit posted a 16 percent rise in operating income, even as the company swung back to an underwriting loss, hurt by higher disaster losses.
The business reported a combined ratio of 102.6 percent, up from 97.3 percent in the first quarter. A ratio below 100 means that an insurer is receiving more in premiums than it is paying out in claims.
AIG is the fifth-largest property and casualty insurer in the United States with a market share of 4.52 percent, according to the National Association of Insurance Commissioners (NAIC), a multi-state insurance regulatory body.
An unexpected spike in interest rates late in the quarter helped the company's life insurance business, which has been suffering from low rates for several years.
The business reported higher gains on the value of securities held in its investment portfolio, and returns on alternative assets rose. Its operating income increased 23 percent to $1.15 billion.
Long-term rates began rising in May after hitting near-historic lows, and in late-June rates spiked suddenly - but temporarily - after U.S. Federal Reserve Chairman Ben Bernanke indicated that the central bank may pull back from its monetary easing program earlier than expected.
AIG's net income rose to $2.73 billion, or $1.84 per share, in the second quarter, from $2.33 billion, or $1.33 per share, a year earlier.
On an operating basis, AIG earned $1.12 per share. Analysts on average had expected earnings of 85 cents per share, according to Thomson Reuters I/B/E/S.
AIG shares, which have risen about 30 percent so far this year, closed at $47.07 on the New York Stock Exchange on Thursday. They were at a two-year high of $49.90 in trading after the bell. (Additional reporting by Lauren Tara LaCapra; Editing by Maju Samuel)