Updated from 9:38 a.m. EDT

American International Group

(AIG) - Get Report

on Thursday reported a 37% increase in second-quarter profits, as the firm is benefiting from higher premiums being passed on to businesses in the aftermath of the Sept. 11 terror attacks.

The insurer's reported net income of $1.80 billon, or 68 cents a share, compared to $1.31 billion, or 50 cents a share, in the year-ago quarter.

But Wall Street analysts were focusing on a somewhat different figure, a calculation of AIG's earnings that excludes restructuring charges and the impact of gains and losses on investments. On that basis, AIG, which earned $2.2 billion, of 84 cents a share, came in a penny under the consensus estimate of the analysts surveyed by Thomson Financial/First Call.

But investors didn't seem to mind the penny miss, as AIG shares rose $1.27, or 2.38%, to $54.65 in morning trading. It's possible investors are counting on even better profits in the future, since AIG executives say they expect insurance rates to keep rising through much of next year.

"Their fundamental results were very good," says Todd Bault, an insurance analyst with the stock research firm Sanford Bernstein.

By far the strongest area of AIG's many insurance lines was its services targeted to corporations. In the second quarter, it set a company record with $6.78 billion in net general insurance premiums, much of which comes from polices purchased by businesses. General insurance underwriting generated $1.10 billion in operating income, or an increase of 16% over the same time last year.

AIG's life insurance underwriting business also showed marked improvement over a year ago, but the gains were not as impressive. Net life insurance premiums tallied $13 billion, a nearly 10% year-over-year gain.

"AIG's diversified mix of business provides balance to our earnings stream even in a difficult environment," says AIG Chairman Maurice Greenberg.

After suffering through a long dry spell in which insurers found it difficult to raise premium rates, the climate towards rate hikes has become more favorable. The terror attacks have given the insurance industry, especially firms that underwrite property and casualty policies, a rationale for raising rates. And the attacks, in which damage claims could run as high as $60 billion, also are pushing insurers to boost their reserves to cover future payouts.

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Indeed, AIG, which reports earnings before most other big insurers, is not the only firm to be benefiting from higher rates. Earlier this month,

Allstate

(ALL) - Get Report

, the nation's second-largest auto and home insurer, reported its first year-over-year quarterly profit, largely due to premium hikes.

And the industry consensus is that the premium hikes should continue for a while longer. Bault says there's still enough uncertainty about future terror attacks and pricing discipline within the insurance industry to maintain the upward pressure on premiums. And while that's not good news to the buyers of insurance, it means more dollars to the companies that sell insurance.

"I view the outlook more favorable for the industry," says Bault.

Still, from a stock perspective, it's been a rough year for AIG. Shares of the insurer, which many consider the blue-chip stock of the insurance business, have fallen 33% this year and earlier this week it reached a new 52-week low before rallying back some.

The stock, based on actual first-half earnings and analyst estimates for the rest of the year, trades at a price-to-earnings multiple of 12. But it still trades at a rather lofty P/E of 25, based on actual earnings for the past 12 months.

Historically, AIG has traded at a premium to other insurance firms, in part because of its size and its diversified lines of business. Besides insurance, it also is involved in aircraft leasing, consumer financing and asset management.