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Progress at AIG, But Far From Prosperity

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A return to profitability does not make the trouble insurance giant whole again.

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American International Group (AIG), 80% owned by you and the rest of America, reported its first quarterly profit since the third quarter of 2007. The troubled firm beat Wall Street's forecasts and investors responded, sending the stock sky-rocketing up 20% in morning trading.

For the second quarter ended June 30, AIG reported net income of $1.8 billion, or $2.30 per share, a big improvement over last year's net loss of $5.4 billion, or $41.13 a share in the same period.

Excluding certain capital gains and losses, the company earned $2.57 per share. Analysts had expected $1.67 per share, according to Thomson Reuters.

In a statement, AIG head honcho Edward Liddy said: "While our insurance companies' operating results remain challenged, largely driven by weak economic conditions and the lingering effect of negative AIG events in the year, performance trends stabilized from the first quarter."

But not everyone sees reasons to pop the champagne just yet.

Cathy Seifert, a research analyst at S&P who covers AIG, remains a dedicated skeptic. She's telling her clients to steer clear of the stock.

"I think there is obvious evidence that some of the areas that were in crisis have stabilized," Seifert told Minyanville. "But if you look at the core, underlying businesses, they are still very challenged: the 40% decline in premiums and deposits at the life insurance space; the 42% decline in operating profits at the property casualty group. My conclusion is that this is still a very challenged organization."

Seifert maintains a "Sell" rating on AIG. "The risk/reward for common shareholder is not attractive," she says. "By the time you get to that end of the capital structure there isn't enough value left to justify the risk inherent in holding AIG."

The stock of AIG has enjoyed a rip-roaring run lately, up more than 90% just in the last five days. "I think it was probably short covering ahead of an earnings release that was going to show recovery in some assets and that was indeed what we saw this morning," Seifert said.

During the second quarter of 2009, the company said its financial products unit reduced its derivative portfolio by 13%. The portfolio has been reduced by 17% since December 2008. AIG's general insurance results in the second quarter included operating income before net realized capital gains of $1.0 billon versus $1.7 billion in the second quarter of 2008.

Between 1970 and 2000, AIG enjoyed good times, growing at a rapid clip and producing spectacular returns for investors, writes Morningstar analyst Bill Bergman. But the company was then nailed by the housing finance meltdown.

"AIG originated mortgage loans, insured mortgages, wrote credit default swaps backing securities based on mortgage debt, and invested in mortgage and other asset-backed securities," writes Bergman. "It did so in a big way, and it lost."

Separately, AIG announced yesterday that its Board of Directors elected AIG Director Harvey Golub Non-Executive Chairman of the Board. Golub will assume his new role on August 10, taking over from a retiring Liddy.

Said S&P's Seifert: "I think to the extent that we can get some stability at the C-level [top level] that helps the company, but the die has been cast: they need to spin off assets to repay the government."
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