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A Glimpse of The Post-Bailout AIG

AIG's core insurance businesses give an idea of what the firm will look like after it gets the government monkey off its back.



) -- The performance of

American International Group's

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core insurance businesses gives an idea of what the firm will look like after it gets the government monkey off its back -- but that's unlikely to happen any time soon.

Despite a quarterly loss -- largely attributable to special restructuring costs -- the businesses that AIG plans to retain turned in an operating profit of $2.2 billion when the company reported its second-quarter results late last week.

CEO Robert Benmosche, to whom

many credit the progress, said discussions have begun in recent weeks toward the end goal of wiping away all of AIG's debt to the government.

"AIG's continuing insurance operating results remain solid, while the company continues to execute on its restructuring plans and prepares for separation from the U.S. government," he said in a prepared statement.

Chartis, the company's main property and casualty business, provides perhaps the best example of AIG's turnaround. Chartis is one of the largest in the world and insures against the risk of damages from natural disasters, among other things.

During the three months ended June 30, there was an unlikely turn of events. Chartis faced exposure to Hurricane Alex, which killed 51 people during a devastating week-long run through the Caribbean and Western Gulf Coast. It also had to cover damage from what one report called

"freak spring" hailstorms in the Midwest, as well as a volcano in Iceland that erupted (and wouldn't stop spewing ash for a month). Finally, there was the devastating explosion of the Deepwater Horizon oil rig in the Gulf of Mexico, a weeks-long disaster that still hasn't completely been settled.

Yet Chartis posted operating income of $955 million for the June period, a smidge below the year-ago quarter's results. Its net premiums declined by 1.6%, but that's because of a change in risk-management policies and "price discipline" in areas where rates are weak.

In other words, Chartis is staying away from risky business and demanding better prices for its protection. Combined with weak demand from a still-troubled economic environment, its results may be considered subpar but its strategy appears sound.

Of course it will be a long road ahead for AIG to get from its current position -- saddled with one-time items and restructuring costs -- to a time when core results take center stage. It will take even longer for the company to be rid of the government's significant ownership stake.

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But nearly two years into one of U.S. taxpayers' biggest bailouts, AIG isn't looking so bad. It owes less than $70 billion to the government, down from a bailout-height of $182 billion, and a large chunk of the debt is slated to be paid off by year-end.

Though the company swung to a net loss of $2.7 billion last quarter, reversing a profitable trend for the previous few periods; only $538 million of the loss, or $3.96 per share, was attributable to common stockholders. Yet the loss largely resulted from AIG's plan to move forward. The company booked a giant one-time, non-cash charge because it's selling Alico, a non-core business, to


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and can no longer retain $3.3 billion in related "goodwill."

Operating income from AIG's U.S. life insurance and retirement business more than quadrupled to $1.1 billion, with assets under management climbing at a strong 10% clip. The foreign life and retirement division is messy because of asset divestitures, but new premiums grew by 29% to $170 million, with life-insurance, medical and annuity sales posting stronger results

AIG's mortgage-guaranty business reported $226 million in pre-tax income, vs. a loss of $488 million a year ago, because of lower delinquencies and better workout plans for troubled home loans.

Even the "toxic" financial services division was in the black to the tune of $42 million. AIG's airplane leasing division offset continued stress in AIG Financial Products, which is still

unwinding derivatives trades gone bad and dealing with capital markets woes. The Maiden Lane vehicles, which hold AIG's bad assets and are owned in partnership with the New York

Federal Reserve

, also continued to regain value from the dark days of 2008.

AIG is expected to close the Alico deal by year-end. It's also

planning an IPO for an Asian subsidiary called American International Assurance Co., or AIA. Once those deals are completed, AIG will have wiped out its debt with the Fed, and can move on to paying down its remaining $62 billion in debt owed to the Treasury Department. It's still a significant amount of money, but a long way from the $180 billion AIG once owed to taxpayers.

Benmosche was the first person involved in the AIG-government deals to indicate that AIG would make taxpayers whole, and that

shareholder value would be preserved. His comments in May were followed by Fed Chairman Ben Bernanke saying much the same thing before a congressional panel in June.

Ron Shelp, a former vice president at AIG who oversaw certain communications, still holds common stock that was granted to him via options decades ago. He believes the Treasury will simply convert its preferred stake into common stock, then sell its position over time, similar to what it has done with


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"I think they've got a game plan that they're pursuing -- a very clear game plan," says Shelp, who penned a book on his experience at AIG called

Fallen Giant

. "They're going to take the preferred shares, they're going to convert them to public shares in the company, they'll hold them a year or two, then they'll sell them.

"That's going to dilute shareholders like me, but first you get the government out of your business and you get the better situation where you can grow their business," he concluded.

As for how long the whole process could take, Shelp's a little more cautious than those predicting a near-term government exit. He believes the Treasury won't fully exit its stake til 2013.

As for the company that's left post-bailout, he says: "They're never going to be AIG again, but they could be a reasonably sized successful insurance company."

-- Written by Lauren Tara LaCapra in New York


Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.