Will AIG keep out of the red?

AIG was back in profit in the second quarter of this year. Its net income was $1.8bn, a major turnaround compared with the $5.3bn it lost during the same quarter of last year. But will AIG continue to stay out of the red or will the government backed company need more cash?

AIG claims certain of its businesses have stabilized and that the company’s results reflect positive valuation changes. Ironically, AIG even made a $636m gain on its super senior credit default swap portfolio – the very assets that were nearly responsible for its downfall.

But analyst Ian Clark from Deloitte does not believe its back in the black for good and is surprised at what it achieved for this half of the year. “If you look at all the announcements and commentary around the recent results there were some pretty big one offs within there that are not repeatable levels of profit. The likelihood of that being sustainable at these kinds of levels is quite difficult.”

It may not need more cash if it’s able to successfully sell other parts of its businesses. But the drag on AIG’s future performance for the rest of this year and in 2010 will come from its attempts to restructure the business. “If you look at the excess and surplus lines market Lexington which is the largest player is an AIG owned company and the second largest player is Lloyd’s. If they are going to float that business as a separate entity then AIG is going to have is a lot less capital than it has at the moment. And in that kind of environment it’s not going to be able to write the kind of business that historically it has done.”

But AIG’s potential poor performance is not necessarily a bad thing for the rest of the market. Should AIG shrink its portfolio shedding businesses like Lexington, the winner in the long run will be Lloyd’s believes Clark.