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Bruce Berkowitz Has 26% Of The Fairholme Fund In AIG – Don’t You Think You Shoul


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http://www.gurufocus.com/news/160153/bruce-berkowitz-has-26-of-the-fairholme-fund-in-aig--dont-you-think-you-should-at-least-consider-it-for-your-portfolio

 

"Isn’t it amazing that in one year Berkowitz has gone from being crowned the manager of the decade by Morningstar in 2010, to someone you are afraid to entrust your money to?

 

I just don’t buy that Berkowitz has lost it. The mistake that Berkowitz has made in my opinion is that he has invested the fund's money the way he would invest his own money. He is taking a concentrated portfolio approach and trying to make as much money as he can, without risking permanent impairment of capital."

 

Also article has a short video of AIG chairman.

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http://www.gurufocus.com/news/160153/bruce-berkowitz-has-26-of-the-fairholme-fund-in-aig--dont-you-think-you-should-at-least-consider-it-for-your-portfolio

 

"Isn’t it amazing that in one year Berkowitz has gone from being crowned the manager of the decade by Morningstar in 2010, to someone you are afraid to entrust your money to?

 

I just don’t buy that Berkowitz has lost it. The mistake that Berkowitz has made in my opinion is that he has invested the fund's money the way he would invest his own money. He is taking a concentrated portfolio approach and trying to make as much money as he can, without risking permanent impairment of capital."

 

Also article has a short video of AIG chairman.

 

I admit I haven't done nearly the research that Berkowitz has done on AIG's financials but I still can't understand the current negative sentiment about the company.

 

If your talking about 2000-2008 that is a different story. Bob Benmosche and his team seem to be doing a great job of turning the company back into a plain vanilla insurance company like Moynihan is turning BAC back into a plain vanilla bank.

 

That should be cause for celebration but Bruce B. seems to be alone in his sentiment.

 

They seem to have the same issues facing other life insurers but that is only a part of their global business. The near constant disasters of 2010 and 2011 should push prices up soon and the Feds are being passive until AIG is ~$30 but the UST hasn't indicated that it would dump the shares on the market at once.

 

Perhaps all of the attention (deservedly) being paid to Apple and (undeservedly, in my opinion) to Facebook is keeping the attention away from comeback companies like AIG.

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* Chartis + SunAmerica historic earnings per year: $10B+

* AIA 30% share: $13B

* ILFC: $7B+

* Deferred tax assets not in the books: $20B+

* Maiden Lane II and III: a nice possible extra, just watch what AIG bid for US Government share

 

* With a willing seller of its shares below book: the US government

* While reducing risk: deal with Buffett to get asbestos out of the books, large one-time build up of reserves at Chartis

* And buying back shares well below book: authorized by the US government (!)

* And the TARP warrants are cheap even using Black and Scholes

 

 

Probably should be in the watchlist.

 

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* Chartis + SunAmerica historic earnings per year: 10B+

* AIA 30% share: 13B

* ILFC: $7B+

* Deferred tax assets not in the books: $20B+

* Maiden Lane II and III: a nice possible extra, just watch what AIG bid for US Government share

 

* With a willing seller of its shares below book: the US government

* While reducing risk: (deal with Buffett to get asbestos out of the books, large one-time build up of reserves in Chartis

* And buying back shares well below book: authorized by the US government (!)

* And the TARP warrants are cheap even using Black and Scholes

 

 

Probably should be in the watchlist.

 

Plan, no need to spell it out so clearly!

 

We need this thing to stay dirt cheap while we build our positions.

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Taking advantage of the opportunity, "FATAL RISK" is an excellent book on the rise and downfall of AIG. Great read.

 

Written by Roddy Boyd, a favorite among this board.

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TX whats your take on the warrants and on Chartis Underwriting?

 

I dont like and am not strong with Life Insurance, but its there. They are spinning off or selling most non core assets like Aircraft Leasing. I think I and others have made this too complex. I guess we have a well known insurance company trading at half of book. Seems like a simple enough bet for a small percent of the portfolio. The story will get simpler as they spin out more and more assets and continue cleaning up the balance sheet / legacy assets.

 

What do you make of common vs. warrants. I am thinking of making a small allocation to the warrants, and getting to know the story overtime. I dont see myself getting to the bottom of AIG, one just has to trust its cleaned up and Berkowitz / US Gov have done there homework. Value will be unlocked as assets are shed and the story gets simpler...

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TX whats your take on the warrants and on Chartis Underwriting?

 

I dont like and am not strong with Life Insurance, but its there. They are spinning off or selling most non core assets like Aircraft Leasing. I think I and others have made this too complex. I guess we have a well known insurance company trading at half of book. Seems like a simple enough bet for a small percent of the portfolio. The story will get simpler as they spin out more and more assets and continue cleaning up the balance sheet / legacy assets.

 

What do you make of common vs. warrants. I am thinking of making a small allocation to the warrants, and getting to know the story overtime. I dont see myself getting to the bottom of AIG, one just has to trust its cleaned up and Berkowitz / US Gov have done there homework. Value will be unlocked as assets are shed and the story gets simpler...

 

Regarding Chartis and underwriting at AIG, in general, I know there have been questions about reserves and about the willingness to underwrite at a loss due to being owned by the government.  Bill Berkley, for example, has criticized AIG for being not so well capitalized and keeping prices down.  While there was likely some truth to his comments, he was probably also over-exaggerating, as he is a competitor to AIG and has for some time touted that there will be a turn in the cycle.

 

I think AIG recognized these issues and has been taking actions to make its balance sheet a "fortress balance sheet."  See, for example, http://www.bloomberg.com/news/2011-03-25/aig-had-worst-underwriting-results-last-year-in-a-m-best-study.html.  And we shall see what their underwriting results look like now that we appear to be entering a hard market.  Ultimately, it comes down to management and what you think they will do going forward.  I really like Benmosche and Steve Miller.  I trust them to do what's right for all constituencies.

 

Regarding the warrants, I'm no options guru like Ericopoly.  My mind simply doesn't work that way.  So he's probably the right guy to ask about that sort of thing.

 

But here's how I look at it.  I sort of think of the warrants and long term options as nonrecourse loans where you pay all the interest upfront.  And then I calculate what the "interest rate" is on the loan.  Even if the interest rate on the TARP warrants are high, they are also long term and worth it if you believe the annualized returns will be much higher.  Also, with the TARP warrants. the "interest rate" really varies based on whether (or how much) you think the exercise price will ratchet down due to dividends and buybacks.

 

Having said the above, I tend to own both warrants and LEAPS for these TARP stocks because, as Eric has pointed out, the LEAPS are much cheaper in terms of interest rate, and I do think there could be rapid upward movements in the underlying stocks once people understand how these ships are turning around.

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TX whats your take on the warrants and on Chartis Underwriting?

 

http://online.wsj.com/article/SB10001424052748703530504576165073748969558.html

 

Chartis's U.S. operation set aside $3.95 billion to cover its newly increased estimate of potential claims on policies it sold prior to 2010. But catastrophe claims and the decline in premium revenue also helped push the U.S. business to a $4.96 billion underwriting loss.

 

Chartis's overseas operations, meanwhile, said the value of policies sold in 2010 rose 17%. But that was due entirely to an acquisition and the beneficial effects of foreign-exchange rates. Without them, written premiums would have been down slightly. The result was hurt in part by Chartis International's decision to exit from a credit-card indemnification program that "did not meet certain profitability targets," according to a regulatory filing Thursday.

 

Even with the newly acquired operation, the international business had an underwriting loss of $498 million last year. That included a reserve charge of $332 million.

 

AIG isn't alone in facing trouble in its property-casualty operation. Many insurance customers have cut back on how much coverage they buy since the financial crisis struck in 2008, and the price of commercial insurance has fallen substantially in the U.S. in recent years. AIG's annual report said 2011 will bring more of the "weak growth environment" in most developed countries it operates in, and the company said it expects continued weakness in prices of U.S. commercial insurance. In addition, the company already expects "significant claims" from floods that submerged large swaths of Australia in the first weeks of this year.

 

Still, while other insurers have also complained about the poor pricing environment, AIG is one of the only large property-casualty insurers that has added to reserves. Travelers Cos. and Chubb Corp. have reduced their estimate of the cost of claims, while AIG has pumped billions of dollars into Chartis to bolster the unit's capital position over the past two years.

 

But now that the U.S. has ended active financial aid to AIG, the parent company's ability to support the business could be more limited. If Chartis needs to raise significantly more capital in the future, AIG may have to raise funds from the markets.

 

In raising its loss reserves, which are estimates of future liabilities, AIG is addressing concerns raised by analysts and potential investors about the true profitability of its insurance businesses. The company is also trying to strengthen its balance sheet as well as fix issues that predate the government's bailout of the company and that engendered distrust among the investment community.

 

New disclosures in the company's annual report on Thursday provided more information about the company's latest reserve charge and may placate some potential investors. The company offered details on new, stricter actuarial assumptions that caused it to add to asbestos, workers' compensation and so-called excess casualty reserves.

 

For example, the company explained that it usually uses its claims experience for the past five years to help predict future excess casualty claims, but as losses increased in the second half of 2010, Chartis decided to limit the analysis to the three most recent years—which had been more costly. That drove up the estimate of future claims and caused the company to add $620 million in reserves for claims costs expected from 2007 and later.

 

 

 

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http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/insurance/8464624/AIG-offloads-3.5bn-asbestos-risk-to-Warren-Buffetts-Berkshire-Hathaway.html

 

The US insurance group, which received $182bn (£111bn) in government bail-out funds at the height of the financial crisis, took a charge of more than $4bn in the fourth quarter because asbestos claims in its Chartis general insurance business were higher than it expected.

 

AIG will now pay Berkshire Hathaway $1.65bn to take on its remaining risk in exchange for re-insurance protection worth up to $3.5bn. Any further exposure beyond that limit would be absorbed by AIG.

 

 

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http://online.wsj.com/article/SB10001424052970203315804577207512182614078.html

 

Five Wall Street banks have been invited to bid this week for another multibillion-dollar bundle of risky mortgage bonds held by the Federal Reserve Bank of New York as a result of its 2008 rescue of American International Group Inc.

 

The invited firms are the U.S. securities arms of Barclays PLC, Credit Suisse Group AG, Goldman Sachs Group Inc., Morgan Stanley and Royal Bank of Scotland PLC, according to people familiar with the matter. They said the New York Fed is seeking bids by midweek for residential mortgage-backed securities with an unpaid principal balance of $6 billion, or about half the remaining bonds in a vehicle called Maiden Lane II.

 

Selling the bonds would let the New York Fed take advantage of buoyant market conditions to dispose of more troubled assets from the financial crisis. It also would bring the central bank closer to ending a controversial chapter of its support for financial markets since 2008.

 

A sale could take place as soon as Wednesday, the people said, if the New York Fed and its investment manager, BlackRock Solutions, feel the winning bid represents good value for U.S. taxpayers. Representatives of the New York Fed and the banks declined to comment Monday on the coming auction.

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The Fed's loan balance is below $7 billion now, following last year's sales and interest and principal payments it received from the bonds. After the Fed's loan is repaid, AIG—led by CEO Robert Benmosche—will get the next $1 billion.Any further profits will be split between the New York Fed and the insurer, with the bulk going to U.S. taxpayers.
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The Fed's loan balance is below $7 billion now, following last year's sales and interest and principal payments it received from the bonds. After the Fed's loan is repaid, AIG—led by CEO Robert Benmosche—will get the next $1 billion.Any further profits will be split between the New York Fed and the insurer, with the bulk going to U.S. taxpayers.

 

http://newyorkfed.org/markets/maidenlane.html#tabs-3

 

    * The New York Fed loan to ML II LLC is senior to the right of the AIG insurance subsidiaries to receive the fixed deferred purchase price. The New York Fed loan and the fixed deferred purchase price are secured by ML II LLC’s portfolio of assets. The New York Fed loan has a stated term of 6 years, and may be extended by the New York Fed at its discretion.

    * The interest rate on the senior loan is one-month LIBOR plus 100 basis points.

    * After the New York Fed loan has been repaid in full with interest, to the extent that there are sufficient remaining cash proceeds, the AIG insurance subsidiaries will be entitled to receive the fixed deferred purchase price, plus accrued interest at a rate of one-month LIBOR plus 300 basis points.

    * After repayment in full of the New York Fed loan and the fixed deferred purchase price (each including accrued interest), any remaining proceeds will be split 5/6th to the New York Fed and 1/6th to the AIG insurance subsidiaries.

    * The distribution of the proceeds realized on the ML II LLC portfolio (including interest proceeds and proceeds from the maturity or liquidation of the asset portfolio) occurs on a monthly basis, unless otherwise directed by the New York Fed, and is made in the following order (each category must be fully paid before proceeding to the next lower category)

 

http://newyorkfed.org/markets/maidenlane.html#tabs-4

 

    *  The New York Fed loan to ML III LLC is secured by ML III LLC’s portfolio of assets. The loan has a stated term of 6 years, and may be extended by the New York Fed at its discretion.

    * The interest rate on the New York Fed loan is one-month LIBOR plus 100 basis points.

    * After the New York Fed loan has been repaid in full plus interest, to the extent that there are sufficient remaining cash proceeds, AIG is entitled to repayment of its equity interest, plus accrued interest at a rate of one-month LIBOR plus 300 basis points.

    * After repayment in full of the New York Fed loan and AIG’s equity interest (each including accrued interest), any remaining proceeds will be split 2/3rds to the New York Fed and 1/3rd to AIG (or its assignee).

    * The distribution of the proceeds realized on the ML III LLC portfolio (including interest proceeds and proceeds from the maturity or liquidation of the asset portfolio) occurs on a monthly basis, unless otherwise directed by the New York Fed, and is made in the following order (each category must be fully paid before proceeding to the next lower category)

 

 

 

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Great links, looks like for ML3 the collateral and the profit split is better for AIG.

 

http://www.aigcorporate.com/GIinAIG/whataigowes/Govt_Support_110211.pdf

 

The Treasury also has $9.3 billion in preferred interests collateralized by the $13 billion AIA share owned by AIG. All indicates that the Treasury will get out of this with its principal, interests and a profit.

 

 

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What do you guys think of the stability of top management:

 

" Bailed-out insurer American International Group (NYSE:AIG - News) will review its succession plans after its chairman accepted a job as the chief executive of an airplane maker, the company said on Tuesday.

AIG CEO Bob Benmosche has been in treatment for cancer since late 2010. Chairman Steve Miller was to become interim CEO if Benmosche were unable to continue with the job."

 

http://finance.yahoo.com/news/AIG-reviewing-succession-rb-1874890134.html?x=0

 

Do you guys think this means anything?

 

AIG seems like such a huge job that I would think that if I was Miller I would want to be there when everything is glorious again. Unless he knows something we should know.

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WSJ: AIG Shows It Still Has Price Power

http://online.wsj.com/article/SB10001424052970203413304577084451422875314.html

 

"We started to assert our leadership position, which we traditionally had in terms of price-setting, and you can almost date it to the moment we repaid the Fed," he said. "When we started to ask for rate [increases], there was a lot of relief from the industry that finally we're back driving the bus in terms of getting a proper return on risk."

 

Chartis, which sells property-casualty coverage in roughly 90 countries, is now one of two major units at AIG after the company restructured and repaid its bailout. The other, SunAmerica, sells life insurance and retirement products in the US

 

In the years before the financial crisis, AIG's property-casualty unit "had a lot of influence as to where the market went," said Paul Newsome, an insurance analyst with Sandler O'Neill + Partners LP. "It's declined quite a bit since their financial troubles. I don't think they're able to drive pricing like they did in the past, but even in their diminished capacity, they're a formidable part of the market."

 

[...]

 

Mr. Hancock said the company had increased commercial rates 4.6% in the US overall, with property-insurance prices rising 8.8%. The company also is passing along more risk to reinsurers in the US to shrink its exposure to large losses from catastrophes, or "cats," he said.

 

"For the most part, we've used too much reinsurance for our foreign operations and underutilized reinsurance for our property-cat exposure here," Mr. Hancock said. "So we are pulling back our capacity in the property-cat market here in the US because we don't think we are getting enough rate even with an 8.8% increase year on year."

 

That effort is ongoing, Mr. Hancock said. "Until the pricing environment improves, the US is going to be a shrinking part of our business," he said.

 

There have been indications of at least a slight industrywide pricing turn in recent days. MarketScout, a Dallas-based insurance exchange, said its data show commercial insurance rates up 1% in November, the first time its market barometer has shown an increase in nearly seven years. Insurance broker Marsh Inc. said Friday that commercial property-insurance prices had increased 1.7% so far in the fourth quarter.

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AIG's Man in the 'Risk' Trenches

http://online.wsj.com/article/SB10001424053111904491704576574972537237478.html

 

"Peter is an astute evaluator of risk…and he figures things out very quickly," said Ajit Jain, who heads Berkshire Hathaway Inc.'s reinsurance business and has known Mr. Hancock socially and professionally for a decade. "He will recognize faster those things the insurance industry does poorly and be in a better position to find untapped potential."

 

If Mr. Hancock succeeds, he could be a shoo-in to become AIG's next chief executive when CEO Robert Benmosche retires, likely in 2012 or 2013, according to people familiar with AIG's management succession plan. Mr. Hancock "has been given an opportunity to fix the business and to potentially inherit the throne," said Jim Millstein, the Treasury Department's former chief restructuring officer who now runs Millstein & Co., a financial advisory firm.

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I have been looking at 2014s Jan calls on AIG.  They look to be 20-50% undervalued.  I use BS as a guideline.  715 days, volatility 40 % and thats being conservative.  Risk Free - 4%.  Have a look.

 

Thoughts?

 

I am still analyzing AIG but have initiated a tiny call position.

 

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Thomas Gallagher - Credit Suisse: Got it. Okay. Then can you talk a little bit, I guess this should be for David, can you talk a bit about your overall capital position today, I see you have north of $15 billion of liquidity resources at the holding company, but can you talk a bit about aside from the stakes in AIA and ILFC, which I realize are – at least I think about them as residual asset values that could be monetized into capital, but as it relates to capital levels that the insurance companies – is there any excess? I guess the other side question I had to that is the $11.6 billion of cash in short-term at the holding company, there is a footnote in your Q that said $8.7 billion in reverse repos is used to reduced unsecured exposures. I'm just not sure what that means, if you could elaborate?

 

Robert H. Benmosche - President and CEO, AIG: Sure, I'll cover parts of it and I'll ask Brian Schreiber, our Treasurer to comment on your last part there with respect to the reverse repos and the strategy behind that and the use of those. How we think about the capital management? You're right, we grew our cash and short-term and financial resource of the holding company to just north of $15 billion in the quarter. Again, we've renewed the bank facility, had a terrific stable of banks participating. We were very pleased with that participation. We also announced that we put in place an additional contingent capital facility, again building up contingent capital and contingent resources in order to again allow us the greatest degree of financial flexibility. I think we've talked quite a bit about historically the capital maintenance agreements that we put in place with all of our operating companies. Those agreements, I would say, continue to operate as designed, that the capital flows are coming to the holding company in accordance with what our expectations were with those capital levels. We don't report or haven't reported yet the RBC levels of the companies, but suffice it to say, our domestic life retirement savings companies remained very strong and in line with where they were at year-end, which was upwards of 500% RBC. The capital maintenance agreements levels were in the 350% range, and would expect Chartis likewise to be at or above its capital maintenance agreement threshold. So again, the underlying capital positions of our operating companies remains very strong . Again, I won't quantify a 'excess capital' that you can get a feel for, for that where we are there. Brian, you want to comment on the short-term investments and the use of the reverse repos?

 

Brian Schreiber - EVP, Treasury & Capital Markets: Sure. A key component of our capital and liquidity plan has been to reduce contingent liquidity risk at AIG, and as you know, AIG in the past had issued debt in foreign currencies and swapped that debt back to dollars. That exposed us to contingent liquidity risk from a strengthening dollar. We have net assets over a long capital in many of the currencies in which we've issued the debt. So, we've been able to unwind the swaps, eliminate the contingent liquidity risk, and effectively invest short-term in those currencies to (defies) that debt. So, we are economically hedged, and we've eliminated the contingent liquidity risk. We've chosen to go in reverse repos because it offers the best sort of risk-adjusted returns for the Company from a short-term investment standpoint. So, I hope that addresses your question.

 

Thomas Gallagher - Credit Suisse: Yeah, it does; just the follow-up, Brian. So should I be thinking about $8.7 billion still available fully utilizable by your Holdco, or is there some level of – are those funds encumbered in some way shape or perform? Like, I just want to understand how to think about – I heard the technical explanation, but I just want to know practically speaking, are those funds there for you, or is there some level of that those are encumbered?

 

Brian Schreiber - EVP, Treasury & Capital Markets: The cash apparent is not encumbered. It is a fungible asset that can be utilized how the parent company sees fit.

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