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AIG Looks Poised for Second-Straight Profit

American International Group shares were higher ahead of its third-quarter report Friday which analysts expect to yield a second straight profitable performance.

Updated for latest share price.



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American International Group

(AIG) - Get Free Report

is set to report its third-quarter results before Friday's opening bell, and while the headline profit number could get a lift from asset mark-ups, investors should likely pay more attention to the insight the company offers on the state of its balance sheet.

The stock gaining steam towards the close. It was recently changing hands at $39.23, up 8.4% for the session, pulling back slightly after running as high $39.95 before shying away from breaking through $40. Still, the advance is a healthy rebound after the shares slumped below $34 earlier in the week. Even at $40, the stock would still be more than 10% below its forays above $45 in late September. Volume crested 26 million with less than 30 minutes of trading left, well below the issue's 30-day daily average churn of 45.2 million.

The current average estimate of analysts polled by Thomson Financial is for a profit of $1.20 a share in the September period on revenue of $23.billion but given the many moving parts in AIG's portfolio, it can be difficult to predict results. For example, Wall Street's consensus estimate for the second quarter ended in June was for a profit of $1.67 a share but AIG reported earnings of $2.57 a share, marking its first quarter in the black since mid-2007.

Credit Suisse recently previewed the quarter, and the note was indicative of how tough it is to assess the company's prospects in its current state. On the one hand, the firm boosted its earnings estimate for the quarter to $4.50 a share from $1.40, citing expectations for big mark-to-market gains because of strength in the fixed income markets, including $2.5 billion write-up in the value of AIG's Financial Products portfolio likely to stem from improvements in those pesky credit default swaps on mortgage-backed securities.

But Credit Suisse left its underperform rating on the stock intact, saying it still sees "minimal equity value" in the current capital structure. Specifically, the firm doesn't anticipate the U.S. government -- owner of an 80% stake in the company - has AIG common shareholders high on its list of priorities.

"While it is possible the government may restructure its loan to AIG especiallyconsidering the terms have already been changed two times since the initialbailout, we would be surprised if it is done in a way to materially transferwealth to AIG common shareholders," Credit Suisse said in its note on Nov. 2.

The firm expects book value per share to jump as previous unrealized losses on certain assets are reversed -- possibly going as high as $38 per share from $22 in the second quarter -- but believes this metric will come under pressure beyond the third quarter as it sees charges from asset sales, including a $1.4 billion one forecast by the company related to its recent sale of Taiwanese life insurer Nan Shan, taking a toll, as well as areas on the balance sheet that may be ripe for writedowns, such as $6.4 billion of goodwill impairment.

As of early September, AIG had an outstanding balance of $120.7 billion on available government assistance of $182.3 billion, according to a report from the Government Accountability Office. The company's outstanding debt and equity balance requiring repayment was $83.6 billion with the rest of the balance due from the Maiden Lane investment vehicles set up by the government to purchase toxic assets from AIG.

The breakdown of the government's investment is complicated, so much so that the company was promoted to issue a press release on Oct. 1 in an attempt to alleviate any confusion. Among the many components is $41.2 billion in preferred stock coming through the TARP program, and a commitment to provide up to an additional $29.84 billion through the issuance of more TARP-related equity. AIG said it has drawn down $3.2 billion under that commitment. Another element is a five-year loan of up to $60 billion from the Federal Reserve Bank of New York under which AIG owed $38.8 billion as of Sept. 2.

Asset sales are still seen as the most viable way for the company to reconfigure itself, especially considering the heavy constraints of such prominent government ownership and the corresponding heavy debt load, but last week AIG reportedly dropped plans to sell two Japanese insurance units, an indication that it may feel confident enough to be a bit picky about the prices its assets fetch. The relative resurgence in the IPO market in 2009 could also provide an outlet for the company to spin out some assets at better valuations.

Written by Michael Baron in New York