American International Group Inc's quarterly results topped Wall Street's expectations on Friday, and the insurer said it had started talks on repaying one of the biggest U.S. taxpayer bailouts.

The company, which is nearly 80 percent-owned by the government after a $182.3 billion bailout, said that in recent weeks it had begun talks about a strategy to allow the government to exit its owner relationship.

AIG, once the world's largest insurer, nearly collapsed in September 2008 from credit default swaps that left it on the hook for tens of billions of dollars in payouts to some of the biggest U.S. and European banks.

After the government rescue, it has been divesting assets to repay taxpayers, who are still owed more than $100 billion.

Depending, of course, on market conditions, which could remain volatile, we expect to make meaningful progress in 2010 on repaying the Federal Reserve Bank of New York, and over time fully repaying all of our obligations to taxpayers, AIG Chief Executive Officer Robert Benmosche said in a recorded message. We are starting to see the light at the end of the tunnel.

AIG reported second-quarter earnings of $1.3 billion, or $1.99 per share, excluding special items, up from $1.1 billion, or $1.71 per share, a year earlier.

Analysts on average had expected 99 cents per share, according to Thomson Reuters I/B/E/S.

Things were pretty stable, Morningstar analyst Bill Bergman said. Stabilization doesn't mean growth and healthy growth, but it appears to be laying a basis for that.

AIG's shares were up 3.9 percent at $41.47 on the New York Stock Exchange, the top gainer in the S&P Insurance Index <.GSPINSC>. Through Thursday, the stock had risen 33 percent this year, outperforming a 7 percent gain in the sector index.

STABILITY IN CORE OPS

AIG reported a net loss to the company of $2.7 billion, or $3.96 per share, for the quarter, compared with a year-earlier net profit of $1.8 billion, or $2.30 per share.

The net loss was primarily due to a $3.3 billion noncash goodwill impairment charge from the pending sale of foreign life insurance unit American Life Insurance Co.

AIG's general insurance unit, Chartis, reported operating income of $955 million before net realized capital gains, down from $1 billion a year earlier.

Chartis incurred $287 million of catastrophe losses in the quarter, including from floods in the U.S. Southeast, the explosion at BP's Deepwater Horizon oil rig, and the Icelandic volcano.

There is healthy, stable operating income in the general insurance operations, Morningstar's Bergman said.

U.S. life insurance and retirement services, called SunAmerica Financial Group, reported operating income of $1.1 billion before net realized capital gains, up from $254 million a year earlier.

Benmosche sees a future for AIG with Chartis and SunAmerica forming its core.

UNIT RESULTS

AIG's Asian life insurance business posted pretax operating income of $604 million, up from $314 million a year earlier. American International Assurance, or AIA, generated most of those earnings, helped by higher net investment income.

AIA was slated to go public after a failed sale to Britain's Prudential Plc
, which paid AIG a termination fee of $228 million.

AIG said it now expected aircraft leasing unit International Lease Finance Corp to be able to meet obligations on its own for at least the next 12 months.

ILFC's pretax operating income fell to $182 million from $335 million. Last month the unit agreed to sell six aircraft to a third party.

American General Finance's operating loss narrowed to $11 million from $202 million. AIG said it was exploring strategic alternatives for the consumer finance unit, including a potential sale of all or most of its $2.4 billion investment in it.

AIG Financial Products, the unit behind the insurer's spectacular downfall in 2008, reduced the notional amount of its derivative portfolio to about $602.4 billion at June 30, down 36 percent from the end of last year.

Mortgage guaranty insurance unit United Guaranty Corp posted pretax income of $226 million, reversing a year-earlier loss of $488 million.

(Reporting by Paritosh Bansal; editing by John Wallace and Lisa Von Ahn)