American International Group Inc reported a quarterly loss of $8.9 billion, hurt by loss reserves and efforts to repay the U.S. government, as it struggles to find its feet more than a year after its $182.3 billion rescue.

AIG's general insurance unit, Chartis, and domestic life insurance and retirement services, SunAmerica Financial Group, showed improvement. But the market remained skeptical, and AIG shares fell 9.3 percent to $24.95 in Friday afternoon trading on the New York Stock Exchange.

It could have been a better result, said Bill Bergman, a senior analyst at Morningstar. We have seen improvement in housing finance and credit markets in ways that AIG might have benefited to a greater extent than what we saw today.

The loss shows the U.S. government, which owns nearly 80 percent of the insurer, still has a long wait before it gets back its direct investment in AIG, which includes about $25 billion outstanding under a Federal Reserve Bank of New York credit facility and roughly $45 billion in equity.

AIG reported a fourth-quarter adjusted loss of $7.2 billion, or $53.23 per share, compared with an adjusted loss of $38.5 billion, or $287.69 per share, a year earlier.

Analysts had been expecting a loss of $3.94 per share. It was not immediately clear whether the results were comparable with the estimates, according to Thomson Reuters I/B/E/S.

The net loss includes $6.2 billion related to paying back the New York Fed, $2.8 billion on the pending sale of Nan Shan Life Insurance Co, $2.3 billion in increased commercial insurance reserves, and a $2.7 billion valuation allowance charge for tax benefits not presently recognizable.

Bergman said the increase in its loss reserves made AIG an outlier in the industry. The fact that AIG is taking bigger hits on its underwriting is a little cause for pause, he said.

Chief Executive Robert Benmosche, who envisions a smaller AIG in the future, with global property-casualty and U.S. life and annuity operations at its core, struck a hopeful note.

While we are not out of the woods by any stretch, these numbers represent a substantial improvement from just one year ago, Benmosche said in a recorded message on Friday.

AIG also said Dennis Dammerman, who led the search for a new CEO last year that resulted in Benmosche's hiring, will resign from the board on Feb 28 for health-related reasons.

Separately, the New York Fed named Peter Langerman, CEO of the Mutual Series fund group of Franklin Templeton Investments, to the AIG Credit Facility Trust, replacing Douglas Foshee.

CHARTIS IMPROVES

Chartis' net premiums decreased 2.2 percent over the year-ago quarter but improved over the previous 2009 quarters.

They stopped the bleeding, it appears. Bergman said. But he added, That's on the surface. It is hard to know the quality of their business and what price they are writing.

Thomas Russo, a partner at Gardner Russo & Gardner, said implicit support from the U.S. government was an advantage for AIG in the marketplace.

Competitors will let you know that it is a difficult time to compete against an AIG business because they can go after business at terms that are probably not fairly reflecting the risk that an insurer might face, Russo said.

Benmosche also touted an operating profit at SunAmerica after a year-ago loss, and said it had regained the No. 1 position in selling fixed annuity products through banks.

Fixed annuity sales through banks accounted for only about a quarter of the overall market, said Clark Troy, a senior analyst at Aite Group. Having leadership in a very small pond is not material to the overall results of the company, he said.

AIG said it expects property and casualty market pricing to continue to decline in 2010. It expects modest premium growth this year, driven by foreign general insurance. In domestic life insurance, AIG expects sales and deposits to gradually recover in 2010-2011. It sees sales of foreign life investment-oriented products to continue to be lower than historic levels.

ASSET DISPOSALS

AIG has also decided not to use securitized U.S. life insurance policies to pay down its Fed credit facility.

It is also in talks to sell its American Life Insurance Co unit to MetLife Inc in what could be a $15 billion deal, but the sale has been delayed over a tax matter.

AIG is moving ahead with an initial public offering of American International Assurance, its Asian life insurance business, which could fetch more than $10 billion.

AIG also said it is exploring restructuring options for International Lease Finance Corp and American General Finance, but extended support to the units through February 28, 2011.

AIG reduced its headcount to about 96,000 employees by the end of last year, down 20,000 from 2008-end.

In a regulatory filing AIG warned, as it has done in previous filings, that it may need additional U.S. government support. But it also said it will have adequate liquidity to finance and operate AIG's businesses and continue as a going concern for at least the next twelve months.

(Editing by Gerald E. McCormick, John Wallace and Gunna Dickson)

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