Bruce Berkowitz has the second largest take in American International Group, the nation’s largest insurance company, next to the federal government. It is also the largest holding in his Fairholme Fund portfolio. The future of AIG has hung in the balance for some time, but Berkowitz has held firm in his position, even though it has drug down his returns. Now that new challenges have unfolded for the company, Berkowitz’s fund has fallen even more. In his May 9 conference call with investors, Berkowitz’s admitted he was wrong about some things, but expressed optimism about the company’s overall prospects based on its fundamentals, even quoting “Security Analysis” to defend his position: “Many shall be restored that are now fallen, and many shall fall that are now in honor.”
AIG was one of the decimated companies the government deemed “too big to fail” during the 2008 credit crisis. The government decided to rescue the company with a $130 billion infusion, including loan and share purchases and a mortgage securities portfolio.
The government’s 92% ownership stake has provided a significant crutch to the company and allowed it to stabilize to some degree. The financial results are one of Berkowitz’s top reasons for staying in the game. “Today, the trends are quite positive,” he said in his conference call. “Balance sheets are getting stronger and stronger.” In 2010 the company managed to have a $7.8 billion net profit, up from a loss of almost $11 billion in 2009, and a loss of $99.3 billion in 2008.
But on May 5, 2011, the company reported disappointing financial results. First-quarter net income fell to $269 million from $1.8 billion in first-quarter 2010, but they reported a loss of $542 million. After-tax operating income rose to $2.0 billion from $637 million in first-quarter 2010. Though the company made money, it had diluted loss per share of $0.35 for first-quarter 2010, down from earnings of $2.66 a year ago, because it had to pay dividends to preferred shareholders. AIG also spent $3.3 billion paying off a debt it owed the Federal Reserve Bank of New York Credit Facility, and is covering the costs for the United States Department of the Treasury to sell off its shares of AIG, which amount to an estimated $385 million.
In a new twist that Berkowitz was not expecting, the AIG board of directors will decide Tuesday whether to hold a share offering of the Treasury Department’s shares at two-thirds of book value. Along with Berkowitz, the government saw the potential for enormous profits when it bought AIG shares and thought it could make billions for taxpayers through the deal. In January of 2011 the price for AIG shares climbed over $60, but that was followed by a steep decline. Year to date, the stock has fallen 48.6% to $29.62 per share. Over the last five days, the stock dipped another 4.5%. The spiral downward could be accelerating the Treasury’s plan to sell its shares, even though the current price of two-thirds below book value could mean a loss for the government, although AIG CEO Robert Benmosche has said that the break-even point for the government would just under $30 per share.
Such a large sell-off could dilute prices for current shareholders.
“You could ask, why do we hold?” Berkowitz said in his conference call. “Well, I was wrong. I found it very hard to believe that the government would sell its stake below its book value.”
Berkowitz began buying AIG shares in first quarter 2010 at $28.69 per share, but the bulk of his shares were bought in the second, third and fourth quarters of 2010 in the high $30 to mid-$45 range.
AIG’s book value per share in March was $47.32. In a May 9 Barron’s article, insurance analyst Cliff Gallant of Keefe, Bruyette & Woods estimated that the company has earnings power of $2.70 per share for 2012, and gave the stock a price target of $23 based on an 8.5 price/earnings ratio.
To view Bruce Berkowitz’s full portfolio, click here.
AIG was one of the decimated companies the government deemed “too big to fail” during the 2008 credit crisis. The government decided to rescue the company with a $130 billion infusion, including loan and share purchases and a mortgage securities portfolio.
The government’s 92% ownership stake has provided a significant crutch to the company and allowed it to stabilize to some degree. The financial results are one of Berkowitz’s top reasons for staying in the game. “Today, the trends are quite positive,” he said in his conference call. “Balance sheets are getting stronger and stronger.” In 2010 the company managed to have a $7.8 billion net profit, up from a loss of almost $11 billion in 2009, and a loss of $99.3 billion in 2008.
But on May 5, 2011, the company reported disappointing financial results. First-quarter net income fell to $269 million from $1.8 billion in first-quarter 2010, but they reported a loss of $542 million. After-tax operating income rose to $2.0 billion from $637 million in first-quarter 2010. Though the company made money, it had diluted loss per share of $0.35 for first-quarter 2010, down from earnings of $2.66 a year ago, because it had to pay dividends to preferred shareholders. AIG also spent $3.3 billion paying off a debt it owed the Federal Reserve Bank of New York Credit Facility, and is covering the costs for the United States Department of the Treasury to sell off its shares of AIG, which amount to an estimated $385 million.
In a new twist that Berkowitz was not expecting, the AIG board of directors will decide Tuesday whether to hold a share offering of the Treasury Department’s shares at two-thirds of book value. Along with Berkowitz, the government saw the potential for enormous profits when it bought AIG shares and thought it could make billions for taxpayers through the deal. In January of 2011 the price for AIG shares climbed over $60, but that was followed by a steep decline. Year to date, the stock has fallen 48.6% to $29.62 per share. Over the last five days, the stock dipped another 4.5%. The spiral downward could be accelerating the Treasury’s plan to sell its shares, even though the current price of two-thirds below book value could mean a loss for the government, although AIG CEO Robert Benmosche has said that the break-even point for the government would just under $30 per share.
Such a large sell-off could dilute prices for current shareholders.
“You could ask, why do we hold?” Berkowitz said in his conference call. “Well, I was wrong. I found it very hard to believe that the government would sell its stake below its book value.”
Berkowitz began buying AIG shares in first quarter 2010 at $28.69 per share, but the bulk of his shares were bought in the second, third and fourth quarters of 2010 in the high $30 to mid-$45 range.
AIG’s book value per share in March was $47.32. In a May 9 Barron’s article, insurance analyst Cliff Gallant of Keefe, Bruyette & Woods estimated that the company has earnings power of $2.70 per share for 2012, and gave the stock a price target of $23 based on an 8.5 price/earnings ratio.
To view Bruce Berkowitz’s full portfolio, click here.
