updated 8/7/2009 3:40:18 PM ET 2009-08-07T19:40:18

American International Group Inc. said it had its first profitable quarter since 2007 — and warned that it still has plenty of repair work to do.

The troubled insurer said Friday it earned $1.82 billion in the April-June quarter as some of its soured assets regained value. But its core insurance business deteriorated sharply amid the recession. And AIG cautioned that unwinding its $1.3 trillion worth of derivatives will take a long time, and that future results will be volatile as it accounts for its restructuring.

Its big plan to pay back the government loan keeping it alive is to sell some of its businesses. But that plan has been revised "to take into account the deterioration of global market conditions," and it now plans to "maximize the value of its businesses over a longer time frame," the company wrote in a filing. AIG didn't give details, but the message was clear that it's not going to pull off any quick sales.

Investors appeared to focus on AIG's profit, which included $311 million, or $2.30 per share, for common shareholders. The government owns about 80 percent of the company because of the bailout.

The company said its profit for the quarter that ended June 30 was driven by the stabilizing value of some of its riskier investments, including in its AIG Financial Products Corp. portfolio, the division responsible for many of the transactions that prompted the government bailout last fall. It also got help from accounting changes. Total revenue rose 48 percent, to $29.53 billion from $19.93 billion a year earlier.

During the same period last year, AIG lost $5.4 billion, or $41.13 per share.

AIG has received a government loan package worth up to $182.5 billion. It said it expects proceeds of about $8 billion from sales of assets so far this year, giving it about $4.6 billion to begin repaying debts, including what it owes the government, according to a Friday filing with the Securities and Exchange Commission. It expects to reduce its debt by another $25 billion by selling two life insurance units.

Len Blum, managing director at Westwood Capital LLC, said investors are paying a "lottery premium" for shares of AIG and fellow bailout recipients Fannie Mae and Freddie Mac — bidding them up in hopes of a big payout if the companies actually pay off the government and begin earning profits for shareholders.

He said there's a chance that will happen, "but is it 20-something dollars worth? That's a real wild card. AIG still has a lot of exposure to subprime mortgages. That market is not recovering anytime soon."

AIG also disclosed in the filing that it intends to pay $249 million in employee retention bonuses through the rest of this year, as part of a total of $1.09 billion to be paid out under 2008 plans aimed at retaining high-performing workers. AIG was sharply criticized earlier this year when the total payout was revealed, although Friday was the first time it offered details on the size of the bonuses by business unit.

The biggest pool of money, $471 million being paid through the end of this year, is going to AIG's Financial Services segment, which includes the financial products subsidiary that hobbled the company. That segment also includes the cmpany's aircraft leasing business and consumer finance units. Most of that money has already been paid, although another $93 million remains to be paid this year. No payments are scheduled for next year or 2011, the company said.

AIG's near-collapse was due to risky contracts such as credit default swaps, which act as insurance to protect an investor against default on an investment such as a mortgage-backed security. The financial-products division was able to increase the value of remaining swaps on its books by $636 million during the quarter, thanks to improving credit markets. In the second quarter of 2008, AIG cut the value of those holdings by $5.57 billion.

AIG has been unwinding its derivatives, reducing the number it holds 36 percent to 22,500 as of the end of June. The value of those investments has been reduced by 13 percent to about $1.3 trillion, the company said. Still, many of the contracts are long-term so the company "expects that an orderly wind-down will take a substantial period of time," it said.

The company said operating income in its general insurance business, which includes property and casualty coverage, fell to $1 billion from $1.7 billion a year earlier, reflecting a 19.2 percent drop in premiums written, or new and renewed insurance contracts. Commercial insurance premiums written fell 18.2 percent.

AIG said its general insurance business was hurt by the recession and by higher payouts on catastrophic losses, as well as by negative publicity.

Its life insurance business had operating income of $1.8 billion, compared to a $2.4 billion loss a year earlier. AIG said it had fewer assets under management, the result of the huge drop in the stock market over the past year, but that the recovery in the markets was improving the performance of that part of the company.

AIG's subsidiary International Lease Finance Corp., which leases aircraft to airlines, saw its operating profit fall to $335 million, from $352 million during the same period last year. The decrease was despite an increase in lease money as its fleet grew.

Chairman and CEO Edward M. Liddy said in a prepared statement that company was still contending with the aftereffects of its near-collapse last fall. He said "performance trends stabilized from the first quarter," but added that AIG's financial results would continue to be volatile in future quarters, in part because of accounting charges related to its ongoing restructuring.

Liddy is stepping down amid the company's restructuring and management shuffle, with new President and CEO Robert Benmosche starting on Monday. AIG announced on Thursday that director Harvey Golub, the former chairman and CEO of American Express Co., will become non-executive chairman on Monday.

Liddy's departure was first announced in May, and at the time it was also announced the CEO and chairman roles would be split, similar to what many financial firms have done over the past year. The former CEO of Allstate Corp., Liddy has served as chairman and CEO of AIG since the government rescued the insurer in September.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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