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Fairholme Capital Reduces AIG Stake

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Fairholme and AIG

In the fourth quarter of 2014, Fairholme Capital reduced its stake in American International Group (AIG) by 9.0 million shares to roughly 66 million shares (8.26% in the form of warrants). The position made up 47.63% of Fairholme’s fourth quarter portfolio. AIG continues to make up the bulk of Fairholme’s exposure to the financial services sector, which stood at ~73%.

In 4Q14, Fairholme’s other investments in the financial services sector include Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), JPMorgan Chase (JPM), Lincoln National Corporation (LNC), and Berkshire Hathaway (BRK-B). AIG is a component of the Financial Select Sector SPDR Fund (XLF) and the Vanguard Financials ETF (VFH), making up 2.63% and 2.02% of their respective ETF portfolios.

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AIG overview

American International Group (AIG) is one of the leading insurance and retirement services for both individual and commercial consumers. Its product line is composed primarily of property and casualty insurance, life insurance, and retirement solutions.

From a geographic standpoint, AIG’s top line is well diversified with revenue contributions from the Americas, Asia-Pacific, and EMEA—or Europe, Middle East and Africa—region, shown in the chart above. The Americas are the major contributor toward AIG’s top line, providing ~50% of property and casualty premiums and 97% of the life insurance revenues.

Fourth quarter performance disappoints investors

In 4Q14, American International Group (AIG) reported a decline in net income. The drop, from $2.0 billion in 4Q13 to $655 million in 4Q14, was due to an after-tax charge of around $800 million for debt retirement activities.

In per-share terms, the negative impact was of $0.58 per share, leading to an earnings per share of $0.46 in 4Q14, a 67% decline from $1.34 per share in 4Q13. Fourth quarter earnings were below consensus estimates of $1.05 per share and triggered a 1.6% drop in share prices on the date of the earnings announcement.

Berkowitz considers AIG to be undervalued

Despite the reduced stake in the fund, AIG remains Fairholme’s largest position. In a letter to Fairholme’s shareholders, Berkowitz noted that while AIG’s returns in 2014 were on par with the market, it continued to trade at a discount to its book value.

AIG grew its book value per share by 13% to $77.69 in 2014, well below its prevailing market price of $54.45. Berkowitz believes that if AIG starts to deliver underwriting results comparable to its peer group, it might lead to a correction in its stock price.

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