C ASE S TUDY II C ASE S TUDY II FAIRHOLME Ignore the crowd.
C URRENT I NVESTMENT O PPORTUNITY We have identified a public company: Trades at less than one ‐ half tangible book value Fortress balance sheet Shareholder equity ‐ to ‐ assets ratio of 15% Repurchasing common stock Leader in global property and casualty insurance Dominant U.S. life insurance and retirement services provider 86 million customer and client relationships worldwide …Sound interesting? FAIRHOLME Ignore the crowd.
…We certainly think so. “Insurance is critical to the smooth functioning of the world economy. Businesses cannot operate without coverage against the unexpected and most capital transactions cannot be financed without insurance.” Bruce R. Berkowitz Outstanding Investor Digest Year End 2001 Edition FAIRHOLME Ignore the crowd.
Investment Thesis for AIG Reasonable Expectations 10% Return on 20% Implied Annual Owner’s Equity Return on Investment This is a reasonable return This is a reasonable return even at heightened capital when you buy stock at less than half book value. ratios expected this cycle. FAIRHOLME Ignore the crowd.
Investing in our Circle of Competence Experienced with insurance companies Fixable problems Favorable earnings power Available at attractive prices $1,800 $1,600 Initiated purchase after the financial crisis. $1,400 $1,200 $1,000 Price * $800 $600 $400 $200 $ ‐ Price Book Value per share * Date of reverse split: 07/01/2009 FAIRHOLME Ignore the crowd.
“The seeds of great performance are usually sown in times of intense fear after a disaster.” – Bruce R. Berkowitz, Letter to Clients , October 2011 FAIRHOLME Ignore the crowd.
“When a recovering icon trades at half of our understanding of intrinsic value for a reason that has nothing to do with its prospects, we swing big.” – Bruce R. Berkowitz, Letter to Clients , June 30, 2011 $60 $50 $40 Price $30 $20 With AIG’s price significantly As the gap between AIG’s stock $10 below book value, we initiated price and book value widened in our investment. 2011, we increased our stake. $0 Price Book Value per share FAIRHOLME Ignore the crowd.
is Back #1 Global Property and Casualty Insurer, Serving Customers in more than 130 Countries E UROMONEY I NSURANCE S URVEY B EST I NSURER O VERALL ‐ G LOBAL R EGION C ATEGORY #1 Western Europe #1 General P & C #1 Latin America #1 D & O Liability #2 North America #1 Marine and Fire #2 Asia #1 Medical and Life #2 Central & Eastern Europe #2 Catastrophe “AIG’s crisis is over…all the fundamentals of running this company are moving in the right direction. We can look forward and focus on operating results. It’s all about how to create the best shareholder value going forward.” —Robert H. Benmosche, President and Chief Executive Officer, AIG, August 5, 2011 FAIRHOLME Ignore the crowd.
Key Franchises Unscathed by Crisis, Revenues Growing Revenues by Reportable Segments (in millions) World leader in global property and +10% +10% casualty insurance. $41,590 45,000 employees • $37,629 70 million worldwide clients • $11,317 #1 Global Insurer (Euromoney) • $10,147 U.S. life insurance and retirement $30,273 $27,482 services leader. 13,000 employees • 16 million customers • YTD 2010* YTD 2011** Recognized leader in U.S. market • Chartis SunAmerica * Revenues by reportable segments through 09/30/2010 FAIRHOLME ** Revenues by reportable segments through 09/30/2011 Ignore the crowd.
Industry Leader With Loyal Customer Base 2011 A CCOLADES 98% B UYER ’ S C HOICE A WARD FOR E XPERTISE , B USINESS I NSURANCE I NNOVATION A WARD , B USINESS I NSURANCE 96% M OST T RUSTED B RAND IN K OREA , C HOSUN I LBO B EST Q UALITY S ERVICE T RAVEL I NSURANCE C OMPANY (C HINA ), W ORLD T RAVEL F AIR S TANDOUT C OMPANY A WARD (B RAZIL ), 89% R EVISTA S EGURADOR B RASIL B EST P RODUCT I NNOVATION A WARD (G ENERAL I NSURANCE ), C ELENT ~33% C OMPANY OF THE Y EAR (H EALTH I NSURANCE ), C ELENT B EST P RACTICES IN T ECHNOLOGY (G LOBAL M ARINE AND E NERGY ), C ELENT ~ 93%* Retention on these Segments * At September 30, 2011, based on a 12 ‐ month rolling average. FAIRHOLME Ignore the crowd.
Tracing its history back to 1850, SunAmerica has over a 160 ‐ year track record of leadership in the U.S. life and retirement services market. L EADING P ROVIDER OF TERM AND UNIVERSAL LIFE PRODUCTS L ONG ‐ STANDING LEADER IN THE STRUCTURED SETTLEMENT ANNUITY MARKET L ONG ‐ STANDING LEADER IN 403( B ) DEFINED CONTRIBUTION MARKET T OP BANK CHANNEL FIXED ANNUITY PROVIDER FOR 15 CONSECUTIVE YEARS L EADER IN INDIVIDUAL VARIABLE ANNUITIES FAIRHOLME Ignore the crowd.
Trust But Verify Our Research has been Enhanced by Unprecedented Disclosure “We are committed to adding even further disclosure…to make it easier for people to reach their own conclusions [about AIG]. We [have also] accelerated the pace of third ‐ party scrutiny by outside actuaries so that it’s not a slower cycle.” —Peter D. Hancock, Chief Executive Officer, Chartis , December 7, 2011 FAIRHOLME Ignore the crowd.
AIG Moving Forward Aggressively Winding Down and De ‐ Risking the AIGFP* Derivatives Portfolio $1,600 $1,450 $1,400 $1,200 Exposure (in billions) 89% Reduction in Derivatives Exposures ‐ 89% $1,000 $800 94% Reduction of Trade Positions $600 $400 95% Reduction of CDS portfolio $240 $144 $200 $65 $40 $18 $20 $8 $0 Market Derivatives Arbitrage/Multi Regulatory Capital Stable Value Wrap Sector CDS CDS (including Book Mezzanine) 2008 3Q2011 40,000 $350,000 35,000 $302,201 35,000 $300,000 Super Senior CDS Exposure Outstanding Trade Positions 30,000 $250,000 ‐ 94% (in millions) 25,000 $200,000 ‐ 95% $183,526 20,000 16,100 $150,000 15,000 $100,000 10,000 $59,850 3,900 $50,000 5,000 2,100 $26,042 ‐ $0 2008 2009 2010 3Q2011 2008 2009 2010 3Q2011 * AIG Financial Products Corporation FAIRHOLME Ignore the crowd.
Powerful Franchises and Valuable Assets As AIG sheds additional non ‐ core assets and further reduces risk exposures, the value of its powerful franchises and assets will emerge. ILFC M ORTGAGE AIA G UARANTEE C HARTIS S UN A MERICA M AIDEN L ANE II / M AIDEN L ANE III FAIRHOLME Ignore the crowd.
Compared to its Peers, AIG is Exceptionally Cheap 1.40 Historical 15 ‐ year Price/Book Average for Property & Casualty Insurance Sector = 1.30 1.20 AIG Price/Book = 0.56 1.00 Price to Book 0.80 0.60 0.40 0.20 ‐ Chubb Ace Travelers Allstate American International Group (Market Cap: $18+ Billion) (Market Cap: $23+ Billion) (Market Cap: $23+ Billion) (Market Cap: $14+ Billion) (Market Cap: $47+ Billion) 5 ‐ Year Average Price / Book Current Price / Book Market Capitalizations as of January 30, 2012. FAIRHOLME Ignore the crowd.
Margin of Safety: $25 Buys You $45+… “Investing is all about what you give versus what you get.” * G IVE = $25 Future Cash Flows Market Cap: $47bn In return for purchasing stock (above) at historic lows, an investor in AIG receives Tangible Book Value: $80bn value (right) that far outweighs the cost. Reserves: $73bn This provides downside protection as well DTAs: $17bn ‐ $25bn as upside opportunity — when the market returns to a “weighing machine,” AIG’s market cap will increase. G ET = $45+ * Bruce R. Berkowitz, Morningstar Conference, June 9, 2011 Market Prices as of January 30, 2012. FAIRHOLME Ignore the crowd.
AIG’s Long ‐ Term Goals Positioning for Success I NCREASE R ETURN ON E QUITY (ROE) TO 10% G ROW E ARNINGS P ER S HARE I NCREASE P RE ‐ T AX O PERATING I NCOME U TILIZE D EFERRED T AX A SSETS (DTA) R EDUCE G ENERAL & A DMINISTRATIVE EXPENSES D EPLOY E XCESS C APITAL FOR : P OTENTIAL S HARE R EPURCHASES • D IVIDEND P AYMENTS • A CQUISITIONS • O RGANIC B USINESS O PPORTUNITIES • “Simply put, this company is too valuable to ignore. And we have a clear vision for [AIG] to be the most valuable insurance company, not the biggest. This is a franchise that has a real extraordinary uniqueness to it.” —Peter D. Hancock, Chief Executive Officer, Chartis, December 7, 2011 FAIRHOLME Ignore the crowd.
“Many shall be restored that now are fallen…” – Horace, Ars Poetica 40,000,000 $1,800 $1,600 35,000,000 $1,400 30,000,000 $1,200 25,000,000 Short Interest $1,000 Price * 20,000,000 $800 15,000,000 $600 10,000,000 $400 5,000,000 $200 ‐ $ ‐ Short Interest Price * Date of reverse split: 07/01/2009 FAIRHOLME Ignore the crowd.
Staying the Course Courage of Conviction “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 fundamentals…Each 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 don’t stay cheap for long.” Bruce R. Berkowitz Letter to Clients February 2000 FAIRHOLME Ignore the crowd.
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