Credit Rally Likely Buoyed AIG's Results .By SERENA NG

Like a rising tide that lifts all boats, this year's credit-market rally will give a boost to American International Group's third-quarter results.

The giant government-controlled insurer is expected to report on Friday morning that it had a second profitable quarter in a row, helped by improvements in its investment portfolios and write-ups at the financial-products division whose trades nearly sank AIG last year.

Since AIG was rescued from the brink of collapse a year ago, it has been hard for analysts to forecast its quarterly earnings with precision. Even now, results could surprise. But new data emerged last week that hint at how AIG performed.

In the third quarter, a portfolio of mortgage-linked securities previously insured by AIG rose 14% in value, according to Federal Reserve data on an entity called Maiden Lane III, which bought the securities last year using money from the Federal Reserve Bank of New York and AIG.

That same mortgage-market recovery could have helped AIG's financial-products unit log a $2.5 billion write-up for the period, mainly from credit-default swaps that are still on its books, Credit Suisse analysts said this week. In addition, the trend likely brought some cash back to AIG, as banks are expected to have returned billions in collateral on the swaps to the insurer.

Beyond AIG's net income, which analysts expect to exceed this year's second-quarter profit of $1.8 billion, investors will be looking for signs of stabilization at the company's main operating insurance units, such as how much new business they are writing. A customer survey cited in an October report from UBS Investment Research said AIG's market-share losses in its main property-and-casualty insurance unit are moderating.

Also closely watched will be the progress of AIG's financial-products unit in unwinding its huge book of outstanding derivatives.

"This is still an unhealthy company, but AIG has made progress in some asset sales and its flexibility has vastly improved from six months ago," says Rob Haines, an analyst with debt-research firm CreditSights.

Now AIG needs to capitalize on the changing tides by improving -- or selling -- assets, while markets and momentum are on its side.