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8/3/2019 120201 - Case Study II (With Disclaimers)
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CASE STUDY IICASE STUDY II
FAIRHOLME
Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
2/20
Tradesatlessthanonehalftangiblebookvalue
Fortressbalancesheet
Shareholderequitytoassetsratioof15%
Repurchasingcommon
stock
Leaderinglobalpropertyandcasualtyinsurance
DominantU.S.lifeinsuranceandretirementservicesprovider
86millioncustomerandclientrelationshipsworldwide
CURRENT INVESTMENT OPPORTUNITYWehaveidentifiedapubliccompany:
Soundinteresting?
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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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
Year
End
2001
EditionFAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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InvestmentThesis
for
AIG
ReasonableExpectations
10% ReturnonOwnersEquity
20% ImpliedAnnualReturnonInvestment
Thisisareasonablereturn
evenatheightenedcapital
ratiosexpected
this
cycle.
Thisisareasonablereturn
whenyoubuystockatless
thanhalf
book
value.
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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$
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
Price
*
Price BookValuepershare
Experiencedwith
insurance
companies
Favorableearningspower
InvestinginourCircleofCompetence
Fixableproblems
Availableatattractiveprices
*Dateofreversesplit:07/01/2009
Initiatedpurchaseafter
thefinancialcrisis.
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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Theseedsofgreatperformanceareusuallysown
intimes
of
intense
fear
after
adisaster.
BruceR.Berkowitz,LettertoClients,October2011
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
7/20
$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.
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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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
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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KeyFranchisesUnscathedbyCrisis,
RevenuesGrowing
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
**Revenuesbyreportablesegmentsthrough09/30/2011FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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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%
*AtSeptember30,2011,basedona12monthrollingaverage.
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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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
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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TrustButVerifyOurResearchhasbeenEnhancedbyUnprecedentedDisclosure
Wearecommittedtoaddingevenfurtherdisclosuretomakeiteasierforpeopletoreachtheirownconclusions[aboutAIG].We[havealso]acceleratedthepaceof
thirdparty scrutinybyoutsideactuariessothatitsnotaslowercycle.
PeterD.Hancock,ChiefExecutiveOfficer,Chartis,December7,2011
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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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
Portfolio
89%ReductioninDerivativesExposures
94%Reduction
of
Trade
Positions
95%ReductionofCDSportfolio
*AIGFinancialProductsCorporationFAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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8/3/2019 120201 - Case Study II (With Disclaimers)
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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
MarketCapitalizationsasofJanuary30,2012.
FAIRHOLME Ignore the crowd.
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MarketCap:$47bn
MarginofSafety:$25BuysYou$45+Investingisallaboutwhatyougiveversuswhatyouget.*
*
Bruce
R.
Berkowitz,
Morningstar
Conference,
June
9,
2011MarketPricesasofJanuary30,2012.
In return for purchasing stock (above) at
historic lows, an investor in AIG receives
value (right) that far outweighs the cost.
This provides downside protection as well
as upside opportunity when the market
returns to a weighing machine, AIGs
market cap will increase.
TangibleBookValue:$80bn
Reserves:$73bn
DTAs:$17bn $25bn
FutureCash
Flows
GIVE =$25
GET =$45+
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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AIGsLongTermGoals
Positioning
for
Success
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
FAIRHOLME Ignore the crowd.
8/3/2019 120201 - Case Study II (With Disclaimers)
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Manyshallberestoredthatnowarefallen
*Dateofreversesplit:07/01/2009
Horace,Ars Poetica
FAIRHOLME Ignore the crowd.
$
$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
8/3/2019 120201 - Case Study II (With Disclaimers)
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Staying theCourseCourage ofConviction
This is not an easy time for value investors. As we practice
the strategy, value investing has been underperforming and prices 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 control prices. 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.
8/3/2019 120201 - Case Study II (With Disclaimers)
20/20
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 November 30, 2011, American International Group
securities comprised 26.2% 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 Distributors, Inc. (01/12)
FAIRHOLME Ignore the crowd.