AIG's profits won't erase its problems

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NEW YORK (CNNMoney.com) -- AIG is expected to report its second profitable quarter in a row early Friday, but the troubled insurer still faces a large uphill battle in its attempt to return to solid footing.

Analysts surveyed by Thomson Reuters expect AIG to have earned $254 million, or $1.20 per share, for the third quarter ended Sept. 30. Analysts are forecasting AIG's revenue will total $23 billion. In August, AIG reported that it had returned to profitability after six straight losing quarters, logging a profit of $1.8 billion, or $2.30 per share, on revenue of $29.5 billion.

Another quarter in the black would be an encouraging sign for AIG, which will likely show some hefty restructuring charges for the past three months as it continued to sell off its assets to pay back the almost $90 billion it owes taxpayers.

Insurance experts say a profitable quarter would be partly a result of the housing market recovery that started during the past few months. As the mortgage market comes back, the value of the volatile credit-default swap insurance that AIG' wrote on mortgage-backed securities will continue to increase.

AIG's financial products division, which still holds more than $1 trillion in credit-default swaps, stands to gain about $2.5 billion from the recent housing market upturn, wrote Credit Suisse analyst Thomas Gallagher in a recent note to clients. With asset sales still slow-moving, that gain would likely more than offset the restructuring charges AIG faced in the quarter, he argued.

AIG isn't out of the water yet. The company has yet to follow through with its commitment to break off two enormous foreign life insurance units, which it said would be spun off before the end of the year. In the first half of the year, AIG sold just $2.6 billion worth of assets to pay down its sizeable debt to the government.

To get the ball rolling a bit faster, the company has agreed to sell stakes in the two subsidiaries to the government. In exchange, the Fed will forgive $25 billion of its roughly $45 billion loan to the insurer. AIG also still owes the Treasury $44.8 billion.

As a result, AIG has said that it won't likely string together a long run of profitable quarters, as it writes down the value of its sold-off assets. Analysts expect AIG to return to the red in the current quarter.

In addition to paying back the government, the company is also struggling to wind down its financial products division's sizeable credit-default swap portfolio. Last quarter, AIG said it had managed to reduce the portfolio by 17% in 2009, but it still stands at $1.3 trillion. Though the company likely benefited from those mortgage-backed assets in the past three months, housing market analysts expect a slow and bumpy recovery.

The company also still has to deal with $198 million in retention payments owed to its financial products unit. Though the troubled division nearly brought the company to its knees more than a year ago, AIG continues to insist that it pay those employees what's owed to them. The company has maintained that it needs those employees to wind down the division's portfolio to put the company in a better position to repay the government.

The Obama administration pay czar Kenneth Feinberg has told AIG the full $198 million should not be paid in full, but there has been no ultimate decision made by either party.

It may have been a good quarter for AIG, but new CEO Robert Benmosche still has his hands full.