Insurer AIG posts large loss on bad mortgage bets

General insurance operating income fell 54 percent to $1.39 billion, reflecting a 28.3 percent decline in investment income primarily due to lower partnership and mutual fund income, and an increase of $440 million in operating losses at United Guaranty Corp.

The general insurance division wrote $12.22 billion in net premiums in the quarter, slightly more than last year's $12.14 billion.

"They may have taken a write down in the same vein as Merrill Lynch did," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion. "It looks like the new CEO took what I call a kitchen sink quarter," meaning all the bad news was out of the way.

AIG shares fell 7.7 percent in after-market trading to $26.84. The shares closed down 2.68 percent at $29.09 in the regular session on the New York Stock Exchange.

LIFE AND OTHER BUSINESS

Income from life insurance and retirement services fell 10 percent to $2.6 billion.

Premiums, deposits and other revenue were $25.55 billion, up 16.4 percent compared to a year ago. The company said they were favorably affected by foreign exchange.

AIG also has lending units, an asset management division and aircraft leasing.

Its financial services business reported a $5.88 billion loss for the quarter. But operating income for aircraft leasing, long one of AIG's most profitable units, rose 85.3 percent to $352 million compared to a year ago. The company said that was due to a larger fleet, higher lease rates, lower interest rates and more aircraft sales.

Consumer finance, a division that offered home mortgages, posted a $22 million operating loss compared to $58 million in operating income last year.

Equity research analyst Bill Fitzpatrick at Optique Capital in Milwaukee, Wisconsin, said the credit swap losses were "a little higher than we would have hoped for," but he said he expected AIG to benefit as market conditions improve.

"The thesis remains the same that these portfolios will ultimately be marked up," Fitzpatrick said.

(Additional reporting by Paritosh Bansal and Dan Wilchins; Editing by Andre Grenon)