During the past month, American International Group (AIG) experienced a near 10% drop in its stock price after announcing that the federal government would sell down some of its stake in the insurance giant. The company issued and sold 100 million shares, and another 200 million were sold by the Department of Treasury for a total of $8.7 billion. AIG didn't receive any of the proceeds from that sale.

The Treasury's ownership in the company has declined from 92% to 77%, but it still has around 1.5 billion shares available to sell over the next couple of years -- in other words, whenever it can. This will continue to weigh on shares going forward as investors know their upside is capped as large sales await on the other side. AIG is one of the largest insurance companies in the U.S. and competes with MetLife (MET), Hartford Financial (HIG), Prudential Financial and others.

We have a price estimate of $27.50 on AIG's stock which is almost the same as the current market price. Below we look at its property & casualty and aircraft leasing businesses.




Property & Casualty Insurance Operating Margin under Pressure

This year, the U.S. has witnessed some of the largest and most destructive tornadoes in recent history, which could have an adverse impact on the operating margin of AIG's property & casualty division. The company maintained a healthy margin of over 20% during 2006 and 2007, but heavy investment losses caused margins to drop to -7% in 2008. Since then, high competition and slow market recovery have hampered AIG's operating margin growth, which recovered only to -0.3% in 2010. High levels of property and casualty claims in 2011 will continue to pressure AIG's operating margin, and we don't expect margins to reach 20% level before 2013.





Lower Aircraft Leasing Revenues

AIG's aircraft leasing business is controlled by its subsidiary, International Lease Finance Corp., one of the world's largest aircraft lessors. The rising cost of fuel has caused many airlines to ground their older and less fuel-efficient aircraft, and this directly affects the leasing rate for ILFC.

We expect AIG's aircraft leasing revenues to decline by 5% in 2011 as the cash crunch currently faced by the company will restrict its ability to purchase new aircraft in the immediate future.

See our full analysis of AIG

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