Moody’s Investor Service (MCO) analysts said on Monday that American International Group Inc. (AIG) will probably have the ability to fully repay the bailout money and buy back much of the government’s stake in the company as it continues to stabilize its core insurance operations and progress on its restructuring plan.

AIG, which received about $180 billion of federal bailout including more than $80 billion in loans, has also been working for the last several quarters to sell assets and streamline its operations in an effort to repay the bailout money. U.S. taxpayers now own 80% of the company.

During the third quarter, AIG remained profitable for the second consecutive quarter. The company’s third-quarter operating earnings of $1.9 billion ($2.85 per share) were substantially ahead of the Zacks Consensus Estimate of $1.20. This also compares favorably with the operating loss of $9.2 billion or $68.36 per share in the prior-year quarter. The upside came primarily from recovery in the value of its investments offsetting declines in operating revenue at its insurance businesses.

The rating agency affirmed AIG’s long-term credit rating of “A3″ (seventh-highest investment grade), with a “negative” outlook.

AIG is the leading U.S.-based international insurance and financial services organization and among the largest writers of commercial, industrial, and life coverage in the U.S. The company’s business and investment portfolio are more exposed to sub-prime than other P&C insurers, and earnings are more dependent on partnership income.

We expect AIG to report additional unrealized market valuation losses and impairment charges in the upcoming quarters as the market turmoil is expected to persist for awhile.

Though AIG has been able to head off collapse by getting government bailout, it continues to face significant threat to its business model, customer base and distribution network as a result of the ongoing financial crisis. We are also concerned about the company’s significant exposure to residential and commercial mortgage backed securities.

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