AIG Case Study II

7/29/2019 AIG Case Study II

1/21

CASE STUDY IICASE STUDY II

FAIRHOLME

Ignore the crowd.


2/21

This presentation uses American International Group as a case study to illustrate Fairholme Capital Managements investment strategy for the

Fairholme Fund. In the pages that follow, we show Fairholme Fund shareholders why we Ignore the crowd with regard to our portfolio

positions that are currently out of favor in the market.

However, nothing in this presentation should be taken as a recommendation to anyone to buy, hold, or sell certain securities or any other

investment mentioned herein. Our opinion of a companys prospects should not be considered a guarantee of future events. Investors are

reminded that there can be no assurance that past performance will continue, and that a mutual funds current and future portfolio

holdings always are subject to risk. As with all mutual funds, investing in the Fairholme Fund involves risk including potential loss of

principal. Opinions expressed are those of the author and/or Fairholme Capital Management, L.L.C. and should not be considered a forecast

of future events, a guarantee of future results, nor investment advice.

The Fairholme Funds holdings and sector weightings are subject to change. As of February 29, 2012, American International Group securities

comprised 32.2% of the Fairholme Funds total net assets. The Fairholme Funds portfolio holdings are generally disclosed as required by law

or regulation on a quarterly basis through reports to shareholders or filings with the SEC within 60 days after quarter end. A complete list of

the Fairholme Funds top ten holdings is available on our website at www.fairholmefunds.com.

The Fairholme Fund is nondiversified, which means that it invests in a smaller number of securities when compared to more diversified

funds. Therefore, the Fairholme Fund is exposed to greater individual security volatility than diversified funds. The Fairholme Fund can invest

in foreign securities which may involve greater volatility and political, economic, and currency risks and differences in accounting methods.

The Fairholme Fund may also invest in special situations to achieve its objectives. These strategies may involve greater risks than other

fund strategies. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longerterm

debt securities. Lowerrated and nonrated securities present greater loss to principal than higherrated securities.

The Fairholme Funds investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus

contains this and other important information about the Fairholme Fund, and may be obtained by calling shareholder services at (866)

2022263 or by visiting our website atwww.fairholmefunds.com. Read it carefully before investing.

FAIRHOLME Ignore the crowd.


3/21

Tradesatlessthanonehalftangiblebookvalue*

Deriskedbalancesheet1

Shareholderequitytoassetsratioof15%*

Repurchasingcommon

stock

Leaderinglobalpropertyandcasualtyinsurance

DominantU.S.lifeinsuranceandretirementservicesprovider

86millioncustomerandclientrelationshipsworldwide

CURRENT INVESTMENT OPPORTUNITYWehaveidentifiedapubliccompany:

Soundinteresting?

FAIRHOLME Ignore the crowd.1 PeterD.Hancock,May31,2012.

*Seelastpagefordefinitionsofterms.


4/21

Wecertainly

think

so.

Insurance is critical to the smooth functioning of the world economy.Businesses cannot operate without coverage against the unexpected andmost capital transactions cannot be financed without insurance.

BruceR.Berkowitz

OutstandingInvestorDigest

YearEnd2001Edition



5/21


6/21

$

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Price

Price BookValuepershare

Experiencedwith

insurance

companies

Favorableearningspower

InvestinginourCircleofCompetence*

ImprovedFundamentals

Availableatattractiveprices

Dateofreversesplit:07/01/2009

Initiatedpurchaseafter

thefinancialcrisis.


*BruceR.Berkowitzhasbeeninvestinginfinancialstocksforover20years. AninterviewwithMr.Berkowitzin

OutstandingInvestorDigestdatedNovember25,1992,isavailableonwww.fairholmefunds.com.


7/21

Theseedsofgreatperformanceareusuallysown

in

times

of

intense

fear

after

a

disaster. BruceR.Berkowitz,LettertoClients,October2011



8/21

$0

$10

$20

$30

$40

$50

$60

Price

Price BookValuepershare

Whenarecoveringicontradesathalfofourunderstandingofintrinsic

valuefor

areason

that

has

nothing

to

do

with

its

prospects,

we

swing

big.

BruceR.Berkowitz,LettertoClients,June30,2011

AsthegapbetweenAIGsstock

priceandbookvaluewidenedin

2011,weincreasedourstake.

WithAIGspricesignificantly

belowbookvalue,weinitiated

ourinvestment.



9/21

AIGscrisis

is

overall

the

fundamentals

of

running

this

company

are

moving

in

the

rightdirection.Wecanlookforwardandfocusonoperatingresults.Itsallabouthow

tocreatethebestshareholdervaluegoingforward.

RobertH.Benmosche,PresidentandChiefExecutiveOfficer,AIG,August5,2011

isBack*

#1GlobalPropertyandCasualtyInsurer,ServingCustomersinmorethan130Countries

REGION

#1WesternEurope

#1LatinAmerica

#2

North

America #2Asia

#2Central&EasternEurope

CATEGORY

#1GeneralP&C

#1D&OLiability

#1

Marine

and

Fire #1MedicalandLife

#2Catastrophe

EUROMONEY INSURANCE SURVEY

BESTINSURER OVERALL GLOBAL


*AIGPressRelease,February23,2012.


10/21

KeyFranchisesUnscathedbyCrisis,

RevenuesHave

Grown

World

leader

in

global

property

and

casualtyinsurance.

U.S.lifeinsuranceandretirement

servicesleader.

45,000employees

70millionworldwideclients

#1GlobalInsurer(Euromoney)

$27,482$30,273

$10,147

$11,317

YTD2010* YTD2011**

Chartis SunAmerica

13,000employees

16millioncustomers

RecognizedleaderinU.S.market

$37,629

$41,590

+10%+10%

RevenuesbyReportableSegments

(inmillions)

* Revenuesbyreportablesegmentsthrough09/30/2010

**Revenuesbyreportablesegmentsthrough09/30/2011

Pastperformancedoesnotguaranteefutureresults.FAIRHOLME Ignore the crowd.


11/21

2011ACCOLADES

BUYERS CHOICE AWARD FOR EXPERTISE,BUSINESS INSURANCE

INNOVATION AWARD,BUSINESS INSURANCE

MOST TRUSTED BRAND IN KOREA,CHOSUN ILBO

BEST QUALITY SERVICE TRAVEL INSURANCE COMPANY (CHINA),WORLD TRAVEL FAIR

STANDOUT COMPANY AWARD (BRAZIL),

REVISTA SEGURADOR BRASIL

BEST PRODUCT INNOVATION AWARD (GENERAL INSURANCE),

CELENT

COMPANY OF THE YEAR (HEALTH INSURANCE),CELENT

BEST PRACTICES IN TECHNOLOGY

(GLOBAL MARINE AND ENERGY), CELENT

IndustryLeaderWithLoyalCustomerBase*

~93%**RetentionontheseSegments

98%

96%

89%

~33%

* PiechartsrepresenttheproportionofeachindicatedsegmentthatdoesbusinesswithChartis.

**AtSeptember30,2011,basedona12monthrollingaverage.FAIRHOLME Ignore the crowd.


12/21

Tracingitshistorybackto1850,SunAmerica hasovera160yeartrack

recordofleadershipintheU.S.lifeandretirementservicesmarket.

LEADING PROVIDER OF TERM AND UNIVERSAL LIFE

PRODUCTS

LONGSTANDING LEADER IN THE STRUCTURED

SETTLEMENT ANNUITY MARKET

LONG

STANDING LEADER IN 403(B)DEFINED

CONTRIBUTION MARKET

TOP BANK CHANNEL FIXED ANNUITY PROVIDER FOR

15CONSECUTIVE YEARS

LEADER IN INDIVIDUAL VARIABLE ANNUITIES



13/21

TrustButVerifyOurResearchhasbeenEnhancedbyUnprecedentedDisclosure

Wearecommittedtoaddingevenfurtherdisclosuretomakeiteasierforpeopleto

reachtheirownconclusions[aboutAIG].We[havealso]acceleratedthepaceof

thirdparty scrutinybyoutsideactuariessothatitsnotaslowercycle.

PeterD.

Hancock,

Chief

Executive

Officer,

Chartis,

December

7,

2011


[Note:ThesealsbelowdepictseveralofthegovernmentagenciesthathaveexaminedAIG,

butinnowaysignifyanendorsementofanykind.]


14/21

35,000

16,100

3,9002,100

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

2008 2009 2010 3Q2011

OutstandingTradePositions

94%

$302,201

$183,526

$59,850

$26,042

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

2008 2009 2010 3Q2011

SuperSeniorCD

SExposure

(inmillio

ns)

95%

$1,450

$65

$240

$40$144

$18 $8 $20

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

MarketDerivatives Arbitrage/Multi

SectorCDS

RegulatoryCapital

CDS(including

Mezzanine)

StableValueWrap

Book

Exposure

(inbillions)

2008 3Q2011

89%

AIGMovingForward

Aggressively

Winding

Down

and

De

Risking

the

AIGFP

Derivatives

Portfolio1

89%ReductioninDerivativesExposures

94%ReductionofTradePositions

95%Reduction

of

CDS*

portfolio

1AIGFinancialProductsCorporation

*Seelastpagefordefinitionsofterms.FAIRHOLME Ignore the crowd.

*

*

*

*

*

AIG has considerably reduced its legacy AIGFP portfolio since

2008. The Companys current derivatives portfolio facilitates the

hedging of the its assets and liabilities.


15/21

PowerfulFranchisesandValuableAssetsAsAIGshedsadditionalnoncoreassetsandfurtherreducesriskexposures,

thevalue

of

its

powerful

franchises

and

assets

will

emerge.

AIA

ILFC

MORTGAGE

GUARANTEE

SUNAMERICACHARTIS

MAIDEN LANE II/MAIDEN LANE III



16/21

0.20

0.40

0.60

0.80

1.00

1.20

1.40

Chubb Ace Travelers Allstate AmericanInternationalGroup

Priceto

Boo

k

5YearAveragePrice/Book* CurrentPrice/Book*

ComparedtoitsPeers,

AIGis

Exceptionally

Cheap

(MarketCap:$47+Billion)(MarketCap:$14+Billion)(MarketCap:$23+Billion)(MarketCap:$23+Billion)(MarketCap:$18+Billion)

AIGPrice/Book*

=0.56

Historical15yearPrice/BookAverageforProperty&CasualtyInsuranceSector= 1.30


*Price/Book:Aratiousedtocomparethemarketvalueofastocktoitsbookvalue. Itiscalculatedby

dividingthe

current

closing

price

of

the

stock

by

the

latest

quarter's

book

value

per

share.

MarketCapitalizationsasofJanuary30,2012.


17/21

MarketCap:$47bn

$25BuysYou$45+Investingisallaboutwhatyougiveversuswhatyouget.*

* BruceR.Berkowitz,MorningstarConference,June9,2011

Market

Prices

as

of

January

30,

2012.** Futurecashflowsarenotguaranteed.

In return for purchasing stock (above) at historic

lows, an investor in AIG receives book value

(right) that far outweighs the cost. This provides

potential downside protection as well as upside

opportunity. There can be no assurance that themarket will recognize AIGs true intrinsic value,

but when the market returns to a weighing

machine, AIGs market cap should increase.

TangibleBookValue:$80bn

Reserves:$73bn

DTAs:$17bn $25bn

FutureCash

Flows**

GIVE =$25

GET =$45+



18/21

AIGsLongTermGoals

Preparingto

Prosper

Once

Again

*

INCREASE RETURN ON EQUITY (ROE)TO 10%

GROW EARNINGS PER SHARE

INCREASE PRETAX OPERATING INCOME

UTILIZE DEFERRED TAX ASSETS (DTA) REDUCE GENERAL &ADMINISTRATIVE EXPENSES

DEPLOY EXCESS CAPITAL FOR:

POTENTIAL SHARE REPURCHASES

DIVIDEND PAYMENTS

ACQUISITIONS ORGANIC BUSINESS OPPORTUNITIES

Simplyput,thiscompanyistoovaluabletoignore.Andwehaveaclearvisionfor

[AIG]

to

be

the

most

valuable

insurance

company,

not

the

biggest.

This

is

a

franchisethathasarealextraordinaryuniquenesstoit.

PeterD.Hancock,ChiefExecutiveOfficer,Chartis,December7,2011


*AIG

Press

Release,

February

23,

2012.


19/21

Manyshallberestoredthatnowarefallen

*Dateofreversesplit:07/01/2009

Horace,Ars Poetica


$

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

Price

*

Short

Interest

ShortInterest Price

AsAIGssharepricedecreasedduringthefinancialcrisis,shortinterestgrew.

Recently,short

interest

has

decreased,

although

it

remains

at

elevated

levels.


20/21

Staying theCourseCourage ofConviction

This is not an easy time for value investors. As we practice

the strategy, value investing has been underperforming andprices for our companies are depressed and do not reflect

intrinsic value or business fundamentalsEach of our holdings

generates excess free cash. All are at bargain prices. Yet, our

investment experience has taught us that we cannot controlprices. Cheap can get cheaper, even if there is nothing

fundamentally wrong. However, market history says that high

quality, well

managed companies dont stay cheap for long.

BruceR.Berkowitz

LettertoClients

February2000

FAIRHOLME Ignore the crowd.Pastperformancedoesnotguaranteefutureresults


21/21

AIG Case Study II

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