CASE STUDY II FAIRHOLME. Ignore the crowd.

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1 CASE STUDY II

2 This presentation uses American International Group as a case study to illustrate Fairholme Capital Management s investment strategy for the Fairholme Fund. In the pages that follow, we show Fairholme Fund shareholders why we Ignore the crowd with regard to our portfolio positions that are currently out of favor in the market. However, nothing in this presentation should be taken as a recommendation to anyone to buy, hold, or sell certain securities or any other investment mentioned herein. Our opinion of a company s prospects should not be considered a guarantee of future events. Investors are reminded that there can be no assurance that past performance will continue, and that a mutual fund s current and future portfolio holdings always are subject to risk. As with all mutual funds, investing in the Fairholme Fund involves risk including potential loss of principal. Opinions expressed are those of the author and/or Fairholme Capital Management, L.L.C. and should not be considered a forecast of future events, a guarantee of future results, nor investment advice. The Fairholme Fund s holdings and sector weightings are subject to change. As of February 29, 2012, American International Group securities comprised 32.2% of the Fairholme Fund s total net assets. The Fairholme Fund s portfolio holdings are generally disclosed as required by law or regulation on a quarterly basis through reports to shareholders or filings with the SEC within 60 days after quarter end. A complete list of the Fairholme Fund s top ten holdings is available on our website at The Fairholme Fund is non diversified, which means that it invests in a smaller number of securities when compared to more diversified funds. Therefore, the Fairholme Fund is exposed to greater individual security volatility than diversified funds. The Fairholme Fund can invest in foreign securities which may involve greater volatility and political, economic, and currency risks and differences in accounting methods. The Fairholme Fund may also invest in special situations to achieve its objectives. These strategies may involve greater risks than other fund strategies. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer term debt securities. Lower rated and non rated securities present greater loss to principal than higher rated securities. The Fairholme Fund s investment objectives, risks, charges, and expenses should be considered carefully before investing. The prospectus contains this and other important information about the Fairholme Fund, and may be obtained by calling shareholder services at (866) or by visiting our website at Read it carefully before investing.

3 CURRENT INVESTMENT OPPORTUNITY We have identified a public company: Trades at less than one half tangible book value* De risked balance sheet 1 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 Sound interesting? 1 Peter D. Hancock, May 31, * See last page for definitions of terms.

4 We certainly think so. 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. Bruce R. Berkowitz Outstanding Investor Digest Year End 2001 Edition

5 Investment Thesis for AIG Reasonable Expectations 10% Return on Owner s Equity* 20% Implied Annual Return on Investment* This is a reasonable return even at heightened capital ratios expected this cycle. 1 This is a reasonable return when you buy stock at less than half book value. 1 AIG s 1Q Q filing announced a long term aspirational goal of 10% or more Return on Equity by the year ended December 31, Between 1988 and 2007, before the financial crisis, AIG s Return on Equity has averaged 14%. * See last page for definitions of terms.

6 Investing in our Circle of Competence * Experienced with insurance companies Favorable earnings power Improved Fundamentals Available at attractive prices $1,800 $1,600 $1,400 Initiated purchase after the financial crisis. $1,200 Price $1,000 $800 $600 $400 $200 $ Price Book Value per share Date of reverse split: 07/01/2009 * Bruce R. Berkowitz has been investing in financial stocks for over 20 years. An interview with Mr. Berkowitz in Outstanding Investor Digest dated November 25, 1992, is available on

7 The seeds of great performance are usually sown in times of intense fear after a disaster. Bruce R. Berkowitz, Letter to Clients, October 2011

8 When a recovering icon trades at half of our understanding of intrinsic value for a reason that has nothing to do with its prospects, we swing big. Bruce R. Berkowitz, Letter to Clients, June 30, 2011 $60 $50 $40 Price $30 $20 $10 $0 With AIG s price significantly below book value, we initiated our investment. As the gap between AIG s stock price and book value widened in 2011, we increased our stake. Price Book Value per share

9 is Back * #1 Global Property and Casualty Insurer, Serving Customers in more than 130 Countries EUROMONEY INSURANCE SURVEY BEST INSURER OVERALL GLOBAL REGION #1 Western Europe #1 Latin America #2 North America #2 Asia #2 Central & Eastern Europe CATEGORY #1 General P & C #1 D & O Liability #1 Marine and Fire #1 Medical and Life #2 Catastrophe AIG s crisis is over all the fundamentals of running this company are moving in the right direction. We can look forward and focus on operating results. It s all about how to create the best shareholder value going forward. Robert H. Benmosche, President and Chief Executive Officer, AIG, August 5, 2011 * AIG Press Release, February 23, 2012.

10 Key Franchises Unscathed by Crisis, Revenues Have Grown World leader in global property and casualty insurance. Revenues by Reportable Segments (in millions) +10% 45,000 employees 70 million worldwide clients #1 Global Insurer (Euromoney) $37,629 $10,147 $41,590 $11,317 U.S. life insurance and retirement services leader. $27,482 $30,273 13,000 employees 16 million customers Recognized leader in U.S. market * Revenues by reportable segments through 09/30/2010 ** Revenues by reportable segments through 09/30/2011 Past performance does not guarantee future results. YTD 2010* YTD 2011** Chartis SunAmerica

11 Industry Leader With Loyal Customer Base * 2011 ACCOLADES 98% BUYER S CHOICE AWARD FOR EXPERTISE, BUSINESS INSURANCE INNOVATION AWARD, BUSINESS INSURANCE MOST TRUSTED BRAND IN KOREA, CHOSUN ILBO BEST QUALITY SERVICE TRAVEL INSURANCE COMPANY (CHINA), WORLD TRAVEL FAIR STANDOUT COMPANY AWARD (BRAZIL), REVISTA SEGURADOR BRASIL BEST PRODUCT INNOVATION AWARD (GENERAL INSURANCE), CELENT COMPANY OF THE YEAR (HEALTH INSURANCE), CELENT BEST PRACTICES IN TECHNOLOGY (GLOBAL MARINE ANDENERGY), CELENT 96% 89% ~33% ~ 93%** Retention on these Segments * Pie charts represent the proportion of each indicated segment that does business with Chartis. ** At September 30, 2011, based on a 12 month rolling average.

12 Tracing its history back to 1850, SunAmerica has over a 160 year track record of leadership in the U.S. life and retirement services market. LEADING PROVIDER OF TERM AND UNIVERSAL LIFE PRODUCTS LONG STANDING LEADER IN THE STRUCTURED SETTLEMENT ANNUITY MARKET LONG STANDING LEADER IN 403(B) DEFINED CONTRIBUTION MARKET TOP BANK CHANNEL FIXED ANNUITY PROVIDER FOR 15 CONSECUTIVE YEARS LEADER IN INDIVIDUAL VARIABLE ANNUITIES

13 Trust But Verify Our Research has been Enhanced by Unprecedented Disclosure [Note: The seals below depict several of the government agencies that have examined AIG, but in no way signify an endorsement of any kind.] We are committed to adding even further disclosure to make it easier for people to reach their own conclusions [about AIG]. We [have also] accelerated the pace of third party scrutiny by outside actuaries so that it s not a slower cycle. Peter D. Hancock, Chief Executive Officer, Chartis, December 7, 2011

14 Outstanding Trade Positions 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 AIG Moving Forward Aggressively Winding Down and De Risking the AIGFP Derivatives Portfolio 1 89% Reduction in Derivatives Exposures 94% Reduction of Trade Positions 95% Reduction of CDS* portfolio AIG has considerably reduced its legacy AIGFP portfolio since The Company s current derivatives portfolio facilitates the hedging of the its assets and liabilities. 35,000 16,100 3,900 94% 2, Q2011 Exposure (in billions) * $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 Super Senior CDS Exposure (in millions) $0 $1,450 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1 AIG Financial Products Corporation * See last page for definitions of terms. $144 Market Derivatives* $302,201 $65 Arbitrage/Multi Sector CDS * $183,526 $240 $18 $8 $40 $ Q % Regulatory Capital CDS (including Mezzanine) * $59,850 Stable Value Wrap Book * 95% $26, Q2011

15 Powerful Franchises and Valuable Assets As AIG sheds additional non core assets and further reduces risk exposures, the value of its powerful franchises and assets will emerge. AIA ILFC MORTGAGE GUARANTEE CHARTIS SUNAMERICA MAIDEN LANE II / MAIDEN LANE III

16 Compared to its Peers, AIG is Exceptionally Cheap 1.40 Historical 15 year Price/Book Average for Property & Casualty Insurance Sector = AIG Price/Book * = 0.56 Price to Book Chubb Ace Travelers Allstate American International Group (Market Cap: $18+ Billion) (Market Cap: $23+ Billion) (Market Cap: $23+ Billion) (Market Cap: $14+ Billion) (Market Cap: $47+ Billion) 5 Year Average Price / Book * Current Price / Book * * Price/Book: A ratio used to compare the market value of a stock to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Market Capitalizations as of January 30, 2012.

17 $25 Buys You $45+ Investing is all about what you give versus what you get. * GIVE = $25 Future Cash Flows ** Market Cap: $47bn In return for purchasing stock (above) at historic lows, an investor in AIG receives book value (right) that far outweighs the cost. This provides potential downside protection as well as upside opportunity. There can be no assurance that the market will recognize AIG s true intrinsic value, but when the market returns to a weighing machine, AIG s market cap should increase. Tangible Book Value: $80bn Reserves: $73bn DTAs: $17bn $25bn GET = $45+ * Bruce R. Berkowitz, Morningstar Conference, June 9, 2011 Market Prices as of January 30, ** Future cash flows are not guaranteed.

18 AIG s Long Term Goals Preparing to Prosper Once Again * INCREASE RETURN ON EQUITY (ROE) TO 10% GROW EARNINGS PER SHARE INCREASE PRE TAX OPERATING INCOME UTILIZE DEFERRED TAX ASSETS (DTA) REDUCEGENERAL & ADMINISTRATIVE EXPENSES DEPLOY EXCESS CAPITAL FOR: POTENTIAL SHARE REPURCHASES DIVIDEND PAYMENTS ACQUISITIONS ORGANIC BUSINESS OPPORTUNITIES Simply put, this company is too valuable to ignore. And we have a clear vision for [AIG] to be the most valuable insurance company, not the biggest. This is a franchise that has a real extraordinary uniqueness to it. Peter D. Hancock, Chief Executive Officer, Chartis, December 7, 2011 * AIG Press Release, February 23, 2012.

19 Many shall be restored that now are fallen Horace, Ars Poetica 40,000,000 $1,800 35,000,000 $1,600 Short Interest 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 $1,400 $1,200 $1,000 $800 $600 $400 Price * 5,000,000 $200 $ Short Interest Price As AIG s share price decreased during the financial crisis, short interest grew. Recently, short interest has decreased, although it remains at elevated levels. * Date of reverse split: 07/01/2009

20 Staying the Course Courage of Conviction This is not an easy time for value investors. As we practice the strategy, value investing has been underperforming and prices for our companies are depressed and do not reflect intrinsic value or business fundamentals Each of our holdings generates excess free cash. All are at bargain prices. Yet, our investment experience has taught us that we cannot control prices. Cheap can get cheaper, even if there is nothing fundamentally wrong. However, market history says that high quality, well managed companies don t stay cheap for long. Bruce R. Berkowitz Letter to Clients February 2000 Past performance does not guarantee future results

21 Book Value: The net asset value of a company, calculated by total assets minus and liabilities. Equity to Asset Ratio: A ratio used to help determine how much shareholders would receive in the event of a company wide liquidation. The ratio, expressed as a percentage, is calculated by dividing total shareholders equity by total assets of the firm, and it represents the amount of assets on which shareholders have a residual claim. The figures used to calculate the ratio are taken from the company s balance sheet. Implied Annual Return on Investment: Calculated by dividing a company s implied annual earnings by its total market capitalization at the time of investment. Return on Equity (ROE): The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation s profitability by revealing how much profit a company generates with the money shareholders have invested. Credit Default Swap: Transfers the credit exposure of fixed income products between parties. The buyer of a credit swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. Risk of default is transferred from the holder of the fixed income security to the seller of the swap. Market Derivatives: Derivatives are financial arrangements among two or more parties with returns linked to or derived from some underlying equity, debt, commodity, or other asset, liability, or foreign exchange rate or other index or the occurrence of a specified payment event. Arbitrage/Multi Sectors CDS: Represents the CDS portfolio that, according to Federal Reserve officials, is a synthetic long credit position and written on CDO transactions that generally had underlying collateral of residential mortgage backed securities, commercial mortgage backed securities, and CDO tranche securities. Regulatory Capital CDS (Including Mezzanine): Represents derivatives written for European banks that allowed them to reduce the amount of capital they needed to set aside to cover potential losses on certain asset portfolios of residential mortgages and corporate loans by buying protection against losses on underlying assets. Mezzanine refers to transactions in which the underlying collateral credit ratings on a stand alone basis were predominantly A or lower at origination. Stable Value Wrap Book: Maintenance agreement that a stable value fund enters into with one or more financial institutions to maintain a stable or positive net asset value. The wrap contract is known to smooth performance and reduces the impact of market volatility. Stable value is a low risk asset class that seeks capital preservation and consistent returns. Super Senior CDS Exposure: Credit default swap transactions were entered into with the intention of earning revenue on credit exposure. In the majority of these transactions, credit protection was sold on a designated portfolio of loans or debt securities. Generally, such credit protection was provided ona second loss basis, meaning that credit losses would be incurred only after a shortfall of principal and/or interest, or other credit events, in respect of the protected loans and debt securities, exceeds a specified threshold amount or level of first losses. Fairholme Distributors, LLC (06/12)