AIG to take a big hit

NEW YORK (CNNMoney.com) -- After two straight profitable quarters, AIG is expected to report a substantial loss for the fourth quarter when the troubled insurer announces its latest financial results Friday morning.

The company has previously said it expected to take a financial hit of about $5 billion for restructuring costs in the fourth quarter. Analysts surveyed by Thomson Reuters estimate AIG will report a loss of $1.5 billion for the quarter on revenue of $23.3 billion.

Most of the losses are expected to relate to AIG's sales of large stakes in two of its foreign life insurance businesses to the U.S. government. In exchange for those transactions, the Federal Reserve reduced the amount AIG has to repay taxpayers by $25 billion. The insurer has received a bailout worth up to $181 billion from the Fed and the Treasury.

Other losses at AIG will likely stem from its continued sale of non-core assets, which have surpassed $10 billion since the company was bailed out in September 2008. AIG is also winding down its aircraft leasing unit and the controversial derivatives business that nearly brought the company to collapse.

AIG has said that these restructuring moves would make its financial results act like a roller coaster in the near term, but that they would ultimately help stabilize the company's finances. Eventually, AIG anticipates its asset sales will help it pay back its debt to the taxpayers.

But as the stock market has come back to life, AIG has also made some riskier moves that it says will allow it to repay the government faster. Last week, AIG said it no longer planned to fully unwind its derivatives portfolio, and will keep about $300 billion worth of those assets. In the past few months, AIG has also said it will slow the pace of its asset sales and retain its property and casualty business, which has made a recent turnaround.

AIG said the improved economic outlook has enabled it to make these latest business decisions, and government regulators have given the moves their blessing. But analysts say the problem with AIG's risky moves is that the economic recovery is still unstable, and AIG is setting itself up for another potential bust if the market starts to lose traction.

"If the economy takes a turn again, then they're exposed," said Bill Bergman, senior equity analyst Morningstar. "AIG is still connected to housing to a large extent. Taxpayers have an uncertain bet with AIG."

Still, AIG claims that it is in the process of completely de-risking its derivatives portfolio. Its insurance business has also made a remarkable turnaround in the first three quarters of 2009, posting a profit for three straight quarters. Insurance analysts say AIG has been able to attract new customers and has done a good job at retaining old ones, despite its troubles.

Investors are pleased too. AIG's (AIG, Fortune 500) stock rose 7% on Monday and nearly 5% on Wednesday. Shares were up 1% on Thursday.

What shouldn't go unnoticed is that AIG's bets have largely paid off. But the company isn't playing it safe anymore, and a turn in the economy may hurt taxpayers chances of getting their money back.