The ongoing credit crisis has changed the normal market chatter. Instead of discussions of which stocks are poised to outperform, there are grimmer discussions about which financial institutions are likely to go under. Like other once-well-regarded financial firms including Citigroup (NYSE:C) and Bear Stearns, insurance giant American International Group (NYSE:AIG) has found itself in the crosshairs of an ugly market environment and unprecedented credit cycle.

AIG's Problems All Too Real
Sometimes the stock market will mark down the price of a quality company for no good reason. That's not the case with AIG today. There are a host of very valid reasons for investors to step aside and speculators to pile on the short side.

AIG has already taken billions of dollars in impairment charges and could see billions more of losses in the CDS book. On top of that, AIG still has over $16 billion in subprime mortgages and another $16 billion in Alt-A investments (out of a total of over $460 billion in investments). Compared with other insurers like Allstate (NYSE:ALL), CNA Financial (NYSE:CNA), and Berkshire Hathaway (NYSE:BRK.A), that's a hefty total. (From lenders to buyers to hedge funds, it appears that everyone has blood on their hands. To learn more, read Who Is To Blame For The Subprime Crisis? .)

Apart from the loss of capital, AIG certainly faces some ongoing business risks from its credit troubles. If the perception of risk around the company gets too bad, other life insurers like MetLife (NYSE:MET) and Prudential (NYSE:PRU) may be able to exploit this and take market share for themselves (ignoring the minor detail that these two companies are not scott-free yet, either).

On top of the credit issues, and under-reported because of all of the attention given to the housing market and banking crisis, there are some actual problems afoot in the P&C industry. Premiums are not terribly strong and investment income is being hurt by the overall market conditions. On top of that, AIG seems to have some more company-specific issues with higher loss ratios and rising expense ratios.

The Bright Spots
To be sure, there's bad news regarding AIG's business and balance sheet these days. But that's not the whole of the story, and there are some positive factors that investors need to consider.

AIG has a global franchise, footholds in faster-growing emerging markets, and a respected (if tarnished) brand, and those are not trivial details in the world of insurance. What's more, it is possible that the company's unrealized losses will exceed the actual economic losses (in other words, some securities that AIG owns may not see as bad of a performance as current prices would suggest). On top of that, the P&C industry is cyclical and should recover as it has in the past. (For more on this topic, read Cyclical Versus Non-Cyclical Stocks.)

Said differently, AIG is going to leave this mess with a black eye, but black eyes heal and this company should resume posting solid growth and returns on equity.

What To Do
If I were in charge at AIG, I'd be looking to de-risk, de-leverage, de-complicate the business. After all, AIG built a stellar reputation for itself as an insurance company, not as a financial alchemist.

I don't believe the question is really about whether AIG survives; in my view, if AIG ultimately goes down, we'll all be looking at such an ugly market and economy that we'll have other, bigger, problems to worry about. The risk today, however, is whether an investor will get a chance to buy AIG's shares at a cheaper price. If there were a case study of a stock where you might want to buy 30-50% of a position today and the rest over a period of months or quarters, this is it.

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