The shares of battered insurer American International Group Inc rose strongly on Wednesday ahead of the release of second-quarter earnings, which are expected to stabilize for the first time in five quarters.

The shares surged about 57 percent in afternoon trading on the New York Stock Exchange, ahead of AIG's next quarterly earnings report on Friday and as a new CEO prepares to take up the company's reins on Monday.

Short sellers were scrambling to cover positions, helping to fuel the rally in AIG's share price, said William Lefkowitz, option strategist at brokerage firm vFinance Investments in New York.

With the potential of good news looming in AIG, investors who are short AIG are being forced to cover their positions today. That has created a short-covering rally, he said.

In late afternoon trade, option traders had exchanged about 298,000 contracts in AIG, four times the average daily volume, according to option analytics firm Trade Alert. The turnover was dominated by 184,000 calls, which grant investors the right to buy AIG shares at a fixed price and time.

American International Group Inc is seen on average reporting second-quarter operating earnings of $1.31 a share, according to a Reuters poll of analysts.

There is also optimism around the company's appointment of a new chief executive. Next Monday, Robert Benmosche becomes the fourth person in the last 14 months to assume the insurer's leadership. In doing so, Benmosche, a seasoned veteran who retired from No. 1 U.S. life insurer MetLife Inc three years ago, takes on the daunting task of running a company now 80 percent owned by taxpayers, many angry at the $180 billion price tag of the AIG rescue.

AIG, once the world's largest insurer, recorded $99 billion in net losses in 2008 and last reported a profit in the third quarter of 2007.

To be sure, even should AIG reports a profit for the latest quarter on an operating basis, it could still remain in the red on a net basis. Operating earnings exclude realized gains and losses, and none of the analysts polled by Reuters expect the company to emerge with a net profit in the second quarter.

AIG's problems have stemmed largely from guarantees it wrote on derivatives linked to subprime mortgages and it would have collapsed were it not for federal support.

While the company's future is still a long way from assured, it is expected to benefit in the latest quarter from significant unrealized investment gains, as the value of assets it wrote down in previous periods improves.

Todd Bault, an analyst with Bernstein Research, has forecast that such gains could boost AIG's net worth, or the book value of its equity, by as much as 55 percent.

However, AIG's investors may put more stock in any steps the new chief takes to turn the company around. Outgoing Chief Executive Ed Liddy warned investors at the company's annual meeting in June that the value of the stock might never recover and the company might also never completely emerge from government ownership.

The U.S. government took a nearly 80 percent ownership stake in AIG in exchange for putting up as much as $180 billion for its rescue, including more than $80 billion in loans.

The company's stock, which has lost more than 90 percent of its value in the past year, was up 57 percent to $21.19 in late afternoon trade. The stock price reflects a 1-for-20 reverse stock split last month.

(Reporting by Lilla Zuill; Additional reporting by Doris Frankel in Chicago; editing by Andre Grenon and Gerald E. McCormick)