Grenville

Watsa, Nice idea! Thanks for sharing.

Thanks for the ticker! Here's the prospectus: http://www.sec.gov/Archives/edgar/data/72971/000119312510126208/d424b5.htm Wells Fargo bought about 70mil of the warrants leaving about 40mil outstanding.

Yes, I agree too. I was speaking more to the Q2 outlook above (short term). In regards to operating costs, I'm not sure that SFK can align their input costs quick enough under the current structure? SFK entered into a fiber supply agreement with ACCC that became effective on Sept 1, 2009. The contract is a 3 year contract so that won't end until Aug 31, 2012. The contract with ACCC supplies SFK with 2/3rds of St. Felicien's required fiber at market prices. So, 2/3rd's of their fiber costs are locked into a contract at market prices. Even with $1000/tonne pulp prices, they are barely getting into the black in Q2 with the current costs of fiber. If pulp prices begin to retreat over the coming quarters (expected) then fiber costs must decline too to hold the margins and keep the company profitable. Annually, SFK requires 775,000 tonnes to operate to capacity. So, in terms of tonnes, SFK gets 520,000 tonnes from ACCC and the remaining 255,000 tonnes from other suppliers in the area. The AIF actually says, "The remaining required volume of wood fibre for 2010 is currently contracted with other suppliers in the region." Does the wood fiber supply agreement get renegotiated in a change of control scenario? Are they required to buy through the agreement if a wood chip supplier is involved in some sort of combination?

thanks for posting!

SD, I think this is the post you're referring to. If this is the case, how do they plan on setting the subscription price on the offering? No where have they stated how they are going to set the price for the rights offering except in the reference to the standby agreement with Fairfax. <IV, Thanks for checking. Hopefully you'll get clarification on how the price will be set.

From the SFK Sedar Standby Agreement with Fairfax: "AND WHEREAS any holder of Common Shares who exercises his right (the "Basic Subscription Right") to subscribe for all of the Common Shares that can be initially purchased upon exercise of all Rights issued to such holder shall be entitled to subscribe for, at the Subscription Price per share, additional new shares (the "Additional Subscription Privilege") in the manner set forth in National Instrument 45-101 – Rights Offering;" ... "Subscription Price" means the price at which each Common Share is issuable upon the exercise of Rights pursuant to the Rights Offering; .... 2.2 Price Determination. (a) The Subscription Price shall be equal to the lesser of: (A) the volume-weighted average price of the Common Shares (or the Fund's units, as the case may be prior to the Conversion) on the TSX for each of the trading days on which there was a closing price during the five (5) trading days immediately preceding the date of filing of the Final Prospectus, less a discount of 20% and (B) the volume weighted average price of the Common Shares (or the Fund's units, as the case may be prior to the Conversion) on the TSX for each of the trading days on which there was a closing price during the forty (40) trading days immediately preceding the date of filing of the Final Prospectus (the "Trading Observation Period"), less a discount of 20%; (b) Immediately following completion of the Trading Observation Period and prior to the filing of the Final Prospectus, the Corporation will determine the Subscription Price and shall provide Fairfax with written notice thereof. " From reading this, the subscription price will be at a 20% discount regardless of whether Fairfax takes up any of the additional unsubscribed rights offerings.

Summary of changes: http://holdings.nasdaq.com/asp/OwnerPortfolio.asp? FormType=OwnerPortfolio&CIK=0000915191&HolderName=FAIRFAX+FINANCIAL+HOLDINGS+LTD/+CAN Interesting to see the investment in Citigroup.

Oldye, Where did you find this information? Was it disclosed in the annual report or quarterly report for FFH?

No, not quite Oldye. Every shareholder will receive one right for every share held. So initially there would be about 91M rights issued. But the subscription price hasn't been set yet. Let's say it was set at $1.50/share not taking into account any discounts. So every shareholder gets the right to buy another share at $1.50 for a fixed (short) period of time. They want to raise $40M so this would involve issuing another 27M shares (@ $1.50/share). Remember though there are 91M rights floating around so there would be a conversion ratio established. In my example it would take 3.37 rights to acquire 1 new share (91M/27M). In other words, for every share you currently own they are offering you roughly 30% more shares at the favorable price (1/3.37). As a shareholder you will get your rights issued and then have a decision to make. You can (a) subscribe to the rights issue in full, (b) ignore your rights or © sell the rights to someone else as they will get listed on the TSX. They value of the rights should theoretically offset the dilution you'd experience. So, if you choose (b) and do nothing, you will be diluted and Fairfax will scope your part of the deal. Very nice, concise explanation!

Nice advice Partner. Discipline is key! Some words from Charlie Munger: "The last idea I want to give to you…..is that this is not the highest form that a civilization can reach. The highest form a civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another. That’s the way an operating room works at the Mayo Clinic. So never forget, when you’re a lawyer, that you may be rewarded for selling this stuff but you don’t have to buy. What you want in your own life is a seamless web of deserved trust. And so if your proposed marriage contract has 47 pages, my suggestion is you not enter."

Most interestingly, I had a sidebar conversation with the folks at FFH during the AGM and the investment thesis of LVLT is "trust in management". Now, you go to any message board and long term LVLTers, it is all about the "lack of trust in management". Go figure. When it comes to LVLT, there are two mutually exclusive worlds indeed! Time is both a friend and an enemy depending on who you ask. Longinvestor, Thanks for the color from the AGM. You gotta like how accessible and friendly the Fairfax people are!

Eric, Here is C&F 2009 10K found on their website. It may have the breakdowns you are looking for. http://www.cfins.com/assets/downloads/financial/CFHC-10K-02262010.pdf http://www.cfins.com/financialinformation.html

Interesting development in the Sears Holding evolution. Very nice.

An interview with William Berkeley that provides color on the risk levels in the policies written by WRB. WRB relies more on policy limits whenever possible instead of buying reinsurance. Beerbaron posted the first part of this video in another thread:

Assume that over the past 4 years the market has been getting soft... Let's say that you write $100m of business 4 years ago and only write $50m of business today. And let's say you reserve too high all along, such that 5% of your business written in any given year will come back out as a reserve release 4 years later. This means that today you are excessively reserving only $2.5 million for the business you wrote this year, but you are getting a favorable reserve release of $5m from the business you wrote 4 years ago. So doesn't this tend to INFLATE your current combined ratio by the net $2.5m reserve benefit? And in 4 more years if you are still writing the same volume of business, that $2.5m benefit will vanish. So Fairfax might actually be seeing a tailwind from their reserving practices as they shrink their business -- but if their business stops shrinking the tailwind drops off. I agree with the over reserving showing up later as reserve releases. The question is when those reserves are released and how much they have affected the CRs. I haven't tracked where they have been for the last couple of years. My only other concern would be with the use of reinsurance versus competitors. That's all I can think of for now.

Their volumes are dropping hard though. It's true that they are walking away from business, yet they're just not getting meaningfully below 100%. Could it be that they are weighted towards lines of business that are easier to enter and so capital flows in freely (aka: fiercely competitive). I don't know... you have to wonder that this might be the case. Otherwise, why do they keep giving up business and tend to write aggregate CRs much higher than WR Berkeley and Markel? It has to be that however they're set up, they're fishing in the wrong pond. Some ponds have trout and some have carp. Better theory? Here are my thoughts, I can't speak for the other companies, but I wonder if they follow the same policy as Fairfax. 1. Fairfax buys reinsurance to cap losses on most of their contracts. From the Annual: "The company follows the policy of underwriting and reinsuring contracts of insurance and reinsurance which, depending on the type of contract, generally limits the liability of the individual insurance and reinsurance subsidiaries to a maximum amount on any one loss of $15.0 for OdysseyRe and Advent, $5.1 (excluding workers’ compensation) for Crum & Forster and $3.3 for Northbridge. Reinsurance decisions are made by the subsidiaries to reduce and spread the risk of loss on insurance and reinsurance written, to limit multiple claims arising from a single occurrence and to protect capital resources. The amount of reinsurance purchased can vary among subsidiaries depending on the lines of business written, their respective capital resources and prevailing or expected market conditions. Reinsurance is generally placed on an excess of loss basis and written in several layers, the purpose of which is to limit the amount of one risk to a maximum amount acceptable to the company and protect from losses on multiple risks arising from a single occurrence. This type of reinsurance includes what is generally referred to as catastrophe reinsurance. The company’s reinsurance does not, however, relieve the company of its primary obligation to the policy holder." 2. Fairfax doesn't discount their liabilities. From the annual: "Under Canadian accepted actuarial practice, the valuation of policy liabilities reflects the time value of money. Management has chosen not to reflect the time value of money in its valuation of the policy liabilities." If the other companies don't follow this specific policy, it will affect the CR's given similar reserving and make it an unequal comparison.

Nice call, thanks for the heads up! I found this part interesting about new international markets: "A couple of sound bytes on the five different segments maybe cutting right through to the chase as far as the one particularly noteworthy outlier that would be our international segment. It came in with a combined ratio of a [111]. This was in part driven by an expense ratio of 44. and this was really due to some of the fact that we have a significant number of start ups in that segment including our new Lloyd’s syndicate, our operations in Australia, our effort to build our business in Brazil as well as a few branches that we have created in Western Europe as part of WR Berkley, Europe, our FSA company."

Cardboard, Thanks for the heads up on the debt repayment!

Any recommendations on brokerages that allow orders to be placed directly on the Toronto Stock Exchange for a US based investor? Are there brokerages in the US that allow for accounts held in US dollars or Canadian dollars? I'm trying to find the best route to buy and sell Toronto listed stocks directly instead of using the pink sheets.

They keep the old ones well hidden, but they can still be accessed. I can't find the 2010 one yet: http://www.fairfax.ca/Assets/Downloads/2006_AGM_Slide_Presentation.pdf http://www.fairfax.ca/Assets/Downloads/2007_AGM_Slide_Presentation.pdf http://www.fairfax.ca/Assets/Downloads/2008_AGM_Slide_Presentation.pdf http://www.fairfax.ca/Assets/Downloads/2009_AGM_Slide_Presentation.pdf Ericopoly, Thanks for the links to the old slides!

General question regarding the acquisition of income trust by normal companies. Why don't all these interested companies by the income trusts before they convert? I know that income from income trusts are taxed at higher rates if a corporation owns them, but if they will be converting soon anyway why wait for the conversion to acquire? It seems like these trusts will be more expensive after the conversion than now. Is there some funny tax laws if the conversion happens inside a corporation versus on a stand alone basis? Thanks!

Not to beat this issue to death, but another interesting article regarding the Iceland Volcano and its bigger sibling. A Bigger Iceland Ash Blast Probably Coming Soon, Says RMS http://www.property-casualty.com/News/2010/4/Pages/A-Bigger-Iceland-Ash-Blast-Probably-Coming-Soon-Says-RMS.aspx?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+NationalUnderwriterPropertyAndCasualtyBreakingNews+(National+Underwriter+Property+and+Casualty+Breaking+News) Also at the AGM Prem in answering a question about stress testing for insurance events that could wipe out the insurance subsidiaries said that there were no losses due to the Icelandic Volcanic Ash.

Prem answered a question in regards to this at the AGM today. Summary of Prem's answer with some additional details from me: OTTI (other than temporary impairment) write downs flow through the income statement leading to a reduction in the cost basis for the various investments. LVLT original basis was $2 and now its $0.7 due to an OTTI write down. The important thing to remember is that as the value of LVLT rebounds any MTM (mark to market) gains are registered in shareholder equity (book value) through OCI (other comprehensive income). The MTM gains on LVLT will not be realized in the income statement until the investment is sold. The gains are not "hidden", they show up in book value. My additional color: Book value reflects the MTM of the common equity positions. The only ones it doesn't reflect are the equity accounted investments like ICICI that are held at carrying value. P.S. Please let me know if I missed something, but that's how I understand it.

From the SEC complaint: http://online.wsj.com/public/resources/documents/secgoldman2010-04-16.pdf 18. At the same time, GS&Co recognized that market conditions were presenting challenges to the successful marketing of CDO transactions backed by mortgage-related securities. For example, portions of an email in French and English sent by Tourre to a friend on January 23, 2007 stated, in English translation where applicable: “More and more leverage in the system, The whole building is about to collapse anytime now…Only potential survivor, the fabulous Fab[rice Tourre]…standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!” Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”

Thanks for the link!