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Earnings Preview: Rough Market Seen Hurting AIG's Second Quarter

Source: AP

Posted on 01 Aug 2012 by Neilson

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AIGAmerican International Group (AIG) is expected to report a drop in earnings in the second quarter because of lower investment income.

Insurers, like AIG, usually collect premiums from their customers and invest that money in bonds, or stocks. The stock market has had a rough patch in the second quarter and the yields from bonds were dismal as interest rates hovered at record low levels.

AIG will report earnings on Thursday after the market closes.

WHAT TO WATCH FOR: Much of the AIG story since the financial crisis has revolved around the company's ability to pay back the U.S. government. In 2008 and 2009, the government stepped in with a $182.5 billion bailout package to rescue AIG from collapse, making it the largest bailout in history.

Since then, the company has been selling off divisions and raising money to repay the money. AIG today is about half the size of its former self. It has also been profitable the last two years.

Gloria Vogel, analyst at Drexel Hamilton, likes the company's efforts. She says in a recent report that AIG is shifting its insurance business into areas that have higher payoffs, such as aviation. Vogel says that AIG is raising its insurance rates and making the right investments in technology that help it process claims better and also detect fraud.

In the second quarter, AIG received $5 billion from a fund set up by the Federal Reserve during the crisis to soak up its toxic assets.

Paul Newsome, an analyst at Sandler O'Neill, is going to watch out for management's guidance on how much of that money will be used to repurchase shares.

The Treasury Department still owns a little over 60 percent of AIG's common stock and has been selling its shares in chunks. Treasury has recovered $38 billion of the $68 billion it gave to AIG.

WHY IT MATTERS: AIG has vowed to not only make American taxpayers whole, but return the money back with a profit. It is important for the insurer to continue to put forth a healthy performance to be able to meet its promise.

WHAT'S EXPECTED: Analysts, on average, expect net income of $1.1 billion, or 58 cents per share on revenue of $9.2 billion, according to FactSet.

LAST YEAR'S QUARTER: AIG's net income was $1.8 billion, or $1 per share. Operating income was 69 cents per share. Revenue was $13.98 billion.