NEW YORK (Reuters) -- American International Group Inc, the world's largest insurer based on market capitalisation, yesterday reported higher second-quarter profits, boosted by strength in its non-life insurance business.

New York-based AIG, which has the Bermuda subsidiary AIG Co. Ltd., said net income rose 18.7 percent to $1.28 billion, or $1.01 per diluted share.

Operating income, which excludes realised capital gains, also was $1.01 a share compared with Wall Street's consensus of 99 cents and 85 cents reported for the year-ago quarter.

Revenues in the second quarter rose 16.6 percent to $10.20 billion.

Shares of AIG rose 56 cents to $119.50 in early afternoon trading on the New York Stock Exchange.

"What made this quarter what it was were the results in the PC (property-casualty) area were better than expected -- underwriting driven,'' said SBC Warburg Dillon Read analyst Michael Lewis.

"The life results were good, in line with expectations,'' he said. But, "to me it was the property-casualty results,'' Lewis said.

Net premiums written in AIG's worldwide property-casualty business rose 15.9 percent to $4.19 billion in the second quarter, including the consolidation of Transatlantic Holdings Inc and 20th Century Industries.

Income before realised capital gains rose 28 percent to $842.2 million.

But AIG said the US commercial property insurance market remains competitive.

"Although competition remains keen in commodity lines, where we have purposely reduced our business, pricing in many of the specialty classes in which we focus continues to improve,'' AIG Chairman Maurice R "Hank'' Greenberg said.

AIG said it cancelled about $100 million of business in the quarter that failed to meet its underwriting or pricing standards.

Greenberg said the company has lost some of its business to competitors that are willing to take the business on terms it is unwilling to accept.

"However, the current environment is improved over the same period a year ago,'' he said.

AIG said total paid claims exceeded the amount it added to its loss reserves by about $31 million in the second quarter, as a result of claim payments for previously reported catastrophe losses and the settlement of some large claims.

Analysts said this was unusual for AIG, describing it was a one-time event rather than part of a troubling trend.

At June 30, AIG said its general insurance net loss and loss adjustment reserves totaled $24.7 billion.

Meanwhile, AIG's smaller personal property insurance business showed robust growth, with net premiums written, excluding the effect of the consolidation with 20th Century, up 37.2 percent.

AIG's large life insurance business also turned in a strong performance, helped by the performance of its newly acquired Sun-America operation and improving economic conditions in Asia.

In its worldwide life insurance business, AIG said pretax income before realised capital losses rose 25.2 percent to $764.2 million in the second quarter.

Life insurance premium income rose 14.1 percent to $2.98 billion in the second quarter.

"Results were very strong in Japan, as well as in virtually all of our Southeast Asian markets,'' Greenberg said. "Our large life business in Taiwan also had a very good quarter,'' he said.

AIG, which gained a major position in the US annuity and life insurance market with the acquisition of SunAmerica last year, said its US life insurance business posted a 42.7 percent increase in operating income in the second quarter.

AIG said SunAmerica had an outstanding second quarter with a 50.9 percent gain in operating income.

"Life insurance was better than expected, due to both SunAmerica where earnings were up 50 percent and also AIG's Asian business is gaining momentum,'' Merrill Lynch analyst Jay Cohen said.

AIG said it now reports Sunamerica's operations in its Life and Asset Management segments.

Operating income in the Asset Management segment rose 49.7 percent to $73.1 million.

This segment comprises the investment management businesses of AIG and SunAmerica, including third-party institutional, retail and fund assets on a global basis, as well as real estate investment management and a newly acquired majority interest in John McStay Investment Counsel, which closed at the end of the second quarter.

Operating income in the Financial Services Group rose 24.9 percent to $255 million.

`Results were very strong in Japan' -- AIG Chariman Maurice R. Greenberg.