By Lavonne Kuykendall and Joan E. Solsman
   Of DOW JONES NEWSWIRES
  American International Group Inc.'s (AIG) third-quarter profit was
driven by higher investment income and gains in the market value of
its invested assets, while its core insurance operations struggled
with a weak economy and lingering negative perceptions in the
marketplace.
  But after two consecutive quarterly profits, the company Friday
suggested that turning a profit in the fourth quarter might be tough,
with an expected $5 billion charge connected with its special-purpose
vehicles and a $1.4 billion after-tax loss from its sale of Nan Shan
Life Insurance.
  The scant signs of progress helped push AIG shares down 9.67% to
close at $35.48. The stock, which has risen nearly sixfold from an all-
time low in March, is up 13% year to date.
  AIG is still leaning on the government for assistance. In the third
quarter, AIG drew down $2.1 billion from its U.S. Treasury Department
commitment and reported that interest and fees on its New York Federal
Reserve facility totaled $5.2 billion.
  AIG disclosed in a filing it intends to draw down another $2.1
billion from the Treasury, which it expects to receive Nov. 13. The
combined $4.2 billion drawdown is being used to purchase shares of
International Lease Finance Corp., the aircraft leasing unit of AIG,
in an intercompany purchase, and to restructure United Guaranty Corp.
AIG is also paying down ILFC debt with government funds.
  AIG shelved plans to sell ILFC to a consortium led by Onex Corp.
(ONEXF), though the Canadian private-equity group remains in talks to
back a partial buyout by the lessor's founder and chief executive,
Steve Hazy, according to people familiar with the situation.
  A deal with Hazy for around $5 billion in ILFC assets isn't expected
to be concluded before year end, these people said.
  Standard & Poor's Equity Research maintained its hold rating on the
stock. Analyst Catherine Seifert noted that the company's earnings
beat "was largely due to favorable credit spreads."
  The mortgage, credit and stock markets have all improved
significantly in the year since AIG's government bailout.
  AIG posted a profit of $455 million, or 68 cents a share, compared
with a year-earlier loss of $24.47 billion, or $181.02 a share. The
latest results included $1.8 billion in capital losses, while the
previous year's results included billions in write-downs from credit-
default swaps and $15.06 billion in capital losses.
  Excluding capital losses and hedging activities that don't qualify
for hedge-accounting treatment, the profit was $2.85 in the latest
quarter. A survey of analysts by Thomson Reuters predicted $1.98.
  AIG Financial Products reported an operating profit of $1.4 billion
for the quarter, up from an $8.2 billion operating loss last year. The
unit has made progress in unwinding its derivatives portfolio, though
notional value still stood at $1.1 trillion. It reported an unrealized
market value gain of $959 million on its troubled credit default swap
portfolio
  "I think the most important takeaway is that the swap book did not
blow up," CreditSights analyst Rob Haines said. "If that happens, then
all this could be moot."
  AIG's general and life and retirement insurance businesses both were
affected by the weak economic environment and lingering negative
perceptions of AIG.
  General Insurance reported operating income of $722 million, up from
$105 million in the quarter last year, driven mostly by investment
income, as premiums fell 13%.
  Profit at the life-insurance division more than doubled to $2.2
billion as assets under management rose in an improving market.
Premiums, deposits and other considerations dropped 38.6% from last
year, to $13.7 billion.
  The company expects to take a $5 billion charge in the fourth
quarter as it closes on the special-purpose vehicles connected to its
foreign life-insurance businesses AIA and ALICO, which will pay off
$25 billion of its New York Fed credit line.
  The outstanding balance of AIG's government bailout, including
government support of all types, stood at $120.6 billion at the
beginning of September, out of total authorized assistance of $182
billion.
  -By Lavonne Kuykendall and Joan E. Solsman, Dow Jones Newswires;
312-750-4141; lavonne.kuykend...@dowjones.com
  (Doug Cameron in Chicago and Ben Dummet in Toronto contributed to
this story.)
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  (END) Dow Jones Newswires
  November 06, 2009 18:08 ET (23:08 GMT)
  Copyright (c) 2009 Dow Jones & Company, Inc.- - 06 08 PM EST 11-06-09