AIG (stock)

The insurance giant at the brink of bankruptcyIn 2008, AIG was at the brink of bankruptcy. Its derivatives-trading subsidiary AIG Financial Products. AIG FP, as it's called, merits only a mere paragraph in the nine-page description of the company's businesses in its most recent annual report. But it's a huge player in the new and mysterious business of credit-default swaps (CDS). And as we all know CDS turned upside during the Global Financial Crisis, resulting in AIG FP losing more than $10 billion in 2007 and $14.7 billion in first six months of 2008. Compounding to the losses, its credit rating was cut and AIG had to fork over $13 billion in collateral to buyers of its swaps. The consensus then was that the company only could survive another day or two.

US government bailoutGiven the size and the reach of AIG, the US government had to bail out AIG, thereby abruptly reversing the their previous hardline position of letting Lehman Brothers fall. To save AIG, the US government eventually had to pledge US$182 billion, although only US$67.8 billion was eventually disbursed. US government ended up owning over 80% of AIG.

Recovering IconAfter US government bailout, which wiped out existing shareholders, AIG was under intense scrutiny. With its furture uncertain, AIG would become a great investment:
- Trades at less than one‐half tangible book value*
- “De‐risked” balance sheet1
- 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

Motivated sellerBy mid 2012, AIG had stablized but the US government was also eager to reduce its AIG shares, thereby creating an overhang in AIG's stock price. In dec 2012, US government completed the share of its AIG shares at US$ 32.50 per share.

FairholmeBruce Berkowitz's Fairholme Fund grabbed the opportunity to invest in AIG. Berkowitz began purchasing in the first quarter of 2010, when the price dropped to US$24 per share on average. That year, AIG's book value was US$94.94. He then more than doubled the stake in 2011, at an average price of US$31 per share. The book value in 2011 was US$53.46. Fairholme still holds its stake in AIG and Bruce Berkowitz is looking for AIG to recover to at least tangible value and for the price to exceed their estimate of intrinsic value.