(New throughout, adds details, analyst comment, proposed settlement of litigation)
Aug 4 (Reuters) - Insurer American International Group Inc reported a better-than-expected 12.5 percent rise in quarterly profit, helped by strong performance across its major businesses and the sale of its former aircraft leasing unit.
AIG noted that it bought back about $1.1 billion of shares during the second quarter, part of the $2 billion in share buybacks it authorized in June. The company also declared a dividend of 12.5 cents per share.
AIG shares rose 2.4 percent in extended trading.
In commercial underwriting, AIG earned net premiums of $5.27 billion, up about 4 percent from a year earlier. The combined ratio improved to 95.4 from 101.7. In consumer underwriting, AIG earned net premiums of $3.25 billion, down slightly from a year earlier. The combined ratio fell to 98 from 100.1.
A combined ratio below 100 indicates an underwriting profit, meaning an insurer is receiving more in premiums than it is paying out in claims.
"The combined ratio was finally below 100 percent," said Gloria Vogel, an analyst with Drexel Hamilton in New York. "However, the accident year combined ratio was slightly worse than a year ago, and the expense ratio remains high."
Separately, AIG said it agreed to pay $960 million in cash to resolve litigation brought in 2008 and 2009 by investors who accused the insurer of misleading them about its finances ahead of the financial crisis that necessitated a government bailout.
The parties on July 15 accepted a mediator's proposal to resolve the dispute, AIG said in a regulatory filing.
The quarter's results also included sale of AIG's aircraft leasing unit to AerCap Ireland Limited. That meant a $1.4 billion after-tax gain on the sale of International Lease Finance Corp, (ILFC), AIG's last noncore business.
AIG is in the middle of a turnaround after almost collapsing during the financial crisis under the weight of sour derivative bets. It has repaid the $180 billion bailout funds from 2008 and has focused on its core insurance business.
Net income, which included a $1.4 billion after-tax gain on the sale of ILFC, rose to $3.07 billion, or $2.10 per share, in the second quarter ended June 30 from $2.73 billion, or $1.84 per share, a year earlier.
On an operating basis, AIG earned $1.83 billion, or $1.25 per share. That was up from $1.12 per share a year earlier and exceeded the average analyst estimate of $1.05 per share, according to Thomson Reuters I/B/E/S.
"Overall, our businesses demonstrated our continued discipline and resilience, underscoring our focus on improving the results of our core insurance businesses," outgoing Chief Executive Robert Benmosche said in a statement.
In June, AIG said Peter Hancock, head of the company's property-casualty business, would succeed Benmosche as chief executive and president, effective Sept. 1.
AIG shares were $53.95 after the bell, up 2.4 percent from the closing price of $52.66.
(Reporting by Luciana Lopez in New York and Avik Das in Bangalore; Editing by Sriraj Kalluvila)