A year ago, the so-called AIG effect wasn’t only about the public’s outrage over spending on incentive conferences. It was a symbol of the failure of the financial industry as a whole. AIG had betrayed customers’ trust, taken too much risk, and ended up saving its bacon with taxpayer money.

AIG was the world’s largest insurer as measured by assets back then. Now it has shrunk by about a fifth, according to a recent article at financial news Web site Bloomberg.com, which describes the company as “a smaller, healthier insurer.” With revenue stabilizing for its insurance units—the property/casualty division showed increases in three quarters in 2009 and sales from its life insurance and retirement division rose in the third quarter of 2009 for the first time since the bailout, according to the article—the company has made progress toward improving its performance and its image. Of course, it does still have $65 billion in bailout money to pay back. The company will release fourth-quarter results on March 3.

Meanwhile three recent reports show stability in the insurance industry as a whole, but with some uncertainty remaining. After crashing from a high of $38.3 billion in 2006 to a loss of $52 billion in 2008, total net income for all U.S. life/health and fraternal companies is back in positive territory for 2009. Revenue at year-end is estimated to have been $6.3 billion, according to A.M. Best Co., Oldwick, N.J., which just released “Best’s Special Report on the U.S. Life/Health Industry.”

But the rating agency still views the industry negatively, according to the report, which says “sustainability of operating performance, stabilization of investment portfolios, and growth in absolute capital levels” will be needed before the outlook improves.

Among A.M. Best’s concerns for the industry are an unemployment rate that remains high, the fact that some insurers’ investment losses have even now not been fully realized, and that the industry has shifted to less credit-worthy products. The bright spot in 2009 was found among large mutual companies, which won market share in the hard-hit individual life insurance arena. Tops in the category were: New York Life, State Farm Life, MassMutual Life, and Guardian Life. These companies also saw “strong gains in agent recruitment during 2009, another indication of the ‘flight to quality,’” as customers put their business with companies they believed to be most stable, the report said.

On the property/casualty front, insurance broker and risk adviser Marsh has just released its U.S. Insurance Market Report 2010. The report sees continued strength among property/casualty insurers, with strong competition keeping rates low. By the third quarter of 2009, the report states, the industry had recovered most of its capital lost in 2008. However, “we enter 2010 with guarded optimism,” says Melina Reed, senior vice president with the Marsh Market Information Group. “It is important to be aware that the investment world is extremely volatile, and that large-scale catastrophic events can change the outlook for the insurance industry both quickly and dramatically.”

Financial services firm Mesirow Financial, based in Chicago, takes a look at the financial industry as a whole in its Sixth Annual Investment Outlook, titled, “The Good, the Bad, and the Ugly.” Highlights of the report: While the extreme market volatility of the fourth quarter of 2009 has passed, the economy “is not out of the woods.” The uncertainties that remain are centered around healthcare reform and commercial real estate, the report states, with a continuing danger from weak consumer demand and high housing inventories. The report also takes a look at the regulatory environment, which continues to change and “will mandate increased scrutiny of securities sales and protection for the investing public.”