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7/29/2019 AIG Case Study II
1/21
CASE STUDY IICASE STUDY II
FAIRHOLME
Ignore the crowd.
7/29/2019 AIG Case Study II
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.
7/29/2019 AIG Case Study II
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.
7/29/2019 AIG Case Study II
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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
YearEnd2001Edition
FAIRHOLME Ignore the crowd.
7/29/2019 AIG Case Study II
5/21
7/29/2019 AIG Case Study II
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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*
ImprovedFundamentals
Availableatattractiveprices
Dateofreversesplit:07/01/2009
Initiatedpurchaseafter
thefinancialcrisis.
FAIRHOLME Ignore the crowd.
*BruceR.Berkowitzhasbeeninvestinginfinancialstocksforover20years. AninterviewwithMr.Berkowitzin
OutstandingInvestorDigestdatedNovember25,1992,isavailableonwww.fairholmefunds.com.
7/29/2019 AIG Case Study II
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Theseedsofgreatperformanceareusuallysown
in
times
of
intense
fear
after
a
disaster. BruceR.Berkowitz,LettertoClients,October2011
FAIRHOLME Ignore the crowd.
7/29/2019 AIG Case Study II
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.
FAIRHOLME Ignore the crowd.
7/29/2019 AIG Case Study II
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
FAIRHOLME Ignore the crowd.
*AIGPressRelease,February23,2012.
7/29/2019 AIG Case Study II
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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.
7/29/2019 AIG Case Study II
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.
7/29/2019 AIG Case Study II
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
FAIRHOLME Ignore the crowd.
7/29/2019 AIG Case Study II
13/21
TrustButVerifyOurResearchhasbeenEnhancedbyUnprecedentedDisclosure
Wearecommittedtoaddingevenfurtherdisclosuretomakeiteasierforpeopleto
reachtheirownconclusions[aboutAIG].We[havealso]acceleratedthepaceof
thirdparty scrutinybyoutsideactuariessothatitsnotaslowercycle.
PeterD.
Hancock,
Chief
Executive
Officer,
Chartis,
December
7,
2011
FAIRHOLME Ignore the crowd.
[Note:ThesealsbelowdepictseveralofthegovernmentagenciesthathaveexaminedAIG,
butinnowaysignifyanendorsementofanykind.]
7/29/2019 AIG Case Study II
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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
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.
7/29/2019 AIG Case Study II
15/21
PowerfulFranchisesandValuableAssetsAsAIGshedsadditionalnoncoreassetsandfurtherreducesriskexposures,
thevalue
of
its
powerful
franchises
and
assets
will
emerge.
AIA
ILFC
MORTGAGE
GUARANTEE
SUNAMERICACHARTIS
MAIDEN LANE II/MAIDEN LANE III
FAIRHOLME Ignore the crowd.
7/29/2019 AIG Case Study II
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
FAIRHOLME Ignore the crowd.
*Price/Book:Aratiousedtocomparethemarketvalueofastocktoitsbookvalue. Itiscalculatedby
dividingthe
current
closing
price
of
the
stock
by
the
latest
quarter's
book
value
per
share.
MarketCapitalizationsasofJanuary30,2012.
7/29/2019 AIG Case Study II
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+
FAIRHOLME Ignore the crowd.
7/29/2019 AIG Case Study II
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
FAIRHOLME Ignore the crowd.
*AIG
Press
Release,
February
23,
2012.
7/29/2019 AIG Case Study II
19/21
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
AsAIGssharepricedecreasedduringthefinancialcrisis,shortinterestgrew.
Recently,short
interest
has
decreased,
although
it
remains
at
elevated
levels.
7/29/2019 AIG Case Study II
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
7/29/2019 AIG Case Study II
21/21