A new buy – AIG

It is always interesting to keep an eye on to what Bruce Berkowitz @FAIRHOLME is doing. I made major investment on BAC last year by getting the wake-up call from Fairholme’s thesis on BAC. Since the beginning of this year, I have spent about three months to scrutinize another interested company – AIG – by following and understanding Fairholme’s thesis.

Here is FAIRX-case-study-of-AIG,

Highlighted points:

• Trades at less than one‐half tangible book value – the price/BV for major competitors are in the range of 0.8 ~ 1.2
• 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

Regarding the impact of insurance business on economy, here is one quote from Bruce,

“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.”

In my view, AIG gradually comes back but is still in the blind side of most investors and public. The small yet toxic and lethal division (AIGFP) which almost fully bankrupted AIG has wound down >95%; the core businesses (Chartis and SunAmerica) are unscathed by 2009 crisis; AIG is either on track or way ahead schedule to repay the debt from Fed.

All in all, AIG is turning around as an exceptional business with a ridiculous cheap price. The downside risk is almost bottomed, if not at all; whereas the upside opportunities are copious.

Disclosure: I long AIG (AIG.WS).