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AIG’s (NYSE:AIG) two most important business divisions are the property & casualty insurance and investments businesses, which contribute around 47% and 41% respectively of the $27.50 Trefis price estimate for AIG. AIG’s property & casualty insurance business is branded Chartis and provides a variety of auto insurance, home insurance and commercial insurance including industrial property, excess liability and workers’ compensation. Income generated by the company from its investments in fixed income securities, equity securities, mortgage loans, real estate and other investments are included in its investments business. AIG mainly competes with The Hartford (NYSE:HIG), MetLife (NYSE:MET) and Prudential (NYSE:PRU) in the U.S. life insurance market.

Here we highlight three most important drivers for AIG’s business and the upside/downside risks posed for AIG’s stock based on these drivers.

Property & Casualty Insurance Market Share: This represents AIG’s market share in global property and casualty (P&C) insurance market (currently at 7.4%) in terms of the total premiums earned by the industry.

Property & Casualty Insurance Operating Margin: AIG’s margin on its property & casualty insurance business is -0.3% currently.

Fixed Maturity Securities Yield %: This represents the total income generated by AIG from its fixed maturity securities business as a percentage of the total fixed maturity asset base. The yield currently stands at 6.4%.

~40% Upside Scenario | $37.68 Trefis Price Estimate for AIG

Higher Growth in Market Share (+20%):

We forecast that AIG’s share of property & casualty insurance market will increase from 7.4% in 2010 to about 9% by the end of the Trefis forecast period. We expect AIG to leverage its vast experience and diversified product offering in the property and casualty insurance market to gain market share over its competitors.

As the company narrows its focus on core P&C insurance and life insurance businesses after selling many of its other businesses, its market share could increase to 13% by the end of our forecast period, leading to just about 20% upside.

Rebounding P&C Insurance Operating Margins (+15%):

We currently forecast P&C insurance operating margin to increase from -0.3% in 2010 to nearly 26% by the end of the Trefis forecast period. There could be 13% upside to our price estimate for AIG if the margin increases to 30% owing to reduced claims and low investment-related losses.

Stable Yield on Fixed Maturity Securities (+5%):

We expect AIG’s fixed maturity yield to decline slightly to 5.7% from its current level of 6.4% due to monetary easing by the government to boost the economy. However, higher inflation could lead to sustained high yield rates. There could be a 5% upside to Trefis price estimate if fixed maturity yield rates remain stable over our forecast period rather than decline as we forecast.

~30% Downside Scenario | $19.80 Trefis Price Estimate for AIG

Stagnant P&C Market Share (-7%):

AIG’s P&C insurance market share has declined from almost 10% in 2006 to just over 7% in 2010. Although we expect AIG’s market share to increase moving forward, high competition and a deterioration in AIG’s brand value could make it difficult for the company to gain market share. If AIG’s market share remains stable during our forecast period instead of increasing to 9% by 2017 as we forecast, there could be a 7% downside to our price estimate.

P&C Insurance Operating Margin Under Pressure (-15%):

Increase in claims due to natural disasters or high losses on investment assets could put pressure on AIG’s P&C operating margin. If the P&C operating margin grows to only about 17% by the end of Trefis forecast period instead of almost 26% that we currently forecast, this would result in 15% downside to Trefis price estimate.

Declining Fixed Maturity Yield (-6%):

AIG’s yield on fixed maturity securities was about 4.3% before the pre-crisis period and could eventually drop to that level from 6.4% currently. This would lead to 6% downside to our price estimate of AIG.

Disclosure: No positions

Source: Upside and Downside Scenarios for AIG's Stock