T-bone1

SD has hedged their oil for the next three years at $87 . . . I don't think there is enough world supply for the price to go to $30 for more than a year or two . . . there are very few new projects that make sense at this price and legacy production is declining (just like natural gas, but with more complicated global dynamics in both supply and demand).

I agree Myth, the company is not as cheap after the deal (as they were more undervalued than ARD and are paying with stock), but now they have much less risk. This fixes both their balance sheet and their oil/gas mix, and takes BK risk off the table in my opinion. I would not want to be short SD here . . . and I would imagine that those who are (not including the merger arbs) are going to come to a similar conclusion very quickly. On that note, ARD has traded in a very tight spread to the SD deal (never more than about 2% off) . . . so I think the market is saying that this deal gets done.

Yes, I bought the WFC+ and plan to sell higher volatility short term (out of the money) calls over them for the next 8 years

I think the major concern is that the might be putting this ban in place because they plan to restructure the debt of greece (and any other PIIGS that can't turn it around) and they don't want people speculating/profiting on it or making matters worse through CDS, shorting banks etc. German banks own a lot of Greek paper and would likely need assistance in the event of a restructuring.

I guess great minds think alike. From Seth Klarman's talk at the CFA institute today: One area Klarman said he is currently scouring for potential investments is private commercial real estate below the top quality. Publicly traded real estate investment trusts, however, have "rallied enormously" and are "quite unattractive," he said.

S&P puts SFK pulp on watch positive on refinancing plan

SD, I didn't mean to imply that its enough interest and dividend income to provide a margin of safety at 111% combined ratios. I think about the company as two seperate parts: one is the insurance company and all of the bonds, the other is the stocks - basically a mutual find. My point was that bonds (and possibly stock dividends) now provide enough interest and divs that the insurance half can "break even" at a 111% combined ratio. I think this insurance half of the company will have better combined ratios going forward, but my point was that it is unlikely to lose money (net of received interest and div income) over any significant period of time. I think this means it must have a positive value . . which I think argues for a valuation today somewhere above book. I am not complaining about the present value though, just trying to have a discussion to find holes in my own arguments. I am happy to buy at these prices and I suspect we will find that Prem is too.

I think with this oil spill Q2 is shaping up to be a pretty terrible underwriting quarter for the industry as well . . . but that which does not kill us only serves to harden the market.

Prem said on the call that the impact of the Gulf oil spill is not expected to be significant for them. I think he said at the AGM that the Chilean earthquake wasn't significant (please correct me if I'm wrong on this) . . . so I would guess that they have exposure and its around $100 Million, but this is just a wild guess.

I couldn't have said it better myself. Interest and dividend income are now high enough to more than outweigh the effect of high (110%) combined ratios . . . and no one seems to believe that we will see low ratios. At a 90% company-wide combined ratio (which would probably be the peak), we are looking at UW+interest+divs of close to $500 Million per quarter (I am assuming they will be writing almost twice as much business at this point) . . . I'm willing to pay a little over book to own a business that will perform at this level at some unknown time in the future.

Hawk, I am an SD shareholder, so I am biased but here it goes: The $100 for the building is annoying, but they are only spending $20MM or so in the near term, and they are avoiding the cost of leasing office space, and the building is worth something . . . so basically they are spending the shareholders money on something stupid, but the net loss to shareholders is probably $5-10MM for now, and maybe some more later. This stinks, but its a lot better than spending $100MM this year. The ARD acquisition takes care of the high debt, assuming it goes through. By paying with so much equity, they are delevering their balance sheet. If the deal doesn't go through, they are indeed very levered, but their debt maturities are pushed out to 2014 and beyond, so - at least in my opinion - gas will have recovered well before they have to think about terming out or paying off the debt. As for shareholder dilution . . . yup, but its either that or high debt. I actually would prefer that they stayed a highly-levered natural gas player, but if instead I get a safer, more oily investment that isn't quite as cheap . . . thats okay too.

Al, I spoke with Doug after the meeting and he elaborated on this, suggesting that the other insurers may have already "turned the corner" and were now under reserved. He doesn't believe the estimates that the industry as a whole is still over reserved.

Thanks again for setting up the dinner Sanjeev! I think everyone had a great time and learned a fair amount. You have really put together a great group here and you deserve all of our thanks. A few notes from the AGM: When asked about buybacks Prem mentioned that they all "keep (Henry) Singleton in the back of our minds" No one gave a specific estimate, but I think the best guess at the subs is that the soft market will last at least one more year and probably two. The guys running the insurance businesses were very impressive As usual, Prem said they talk about hedging a lot and might hedge more at any point, but haven't yet. He said they also might sell stocks, but suggested that he planned on holding the core 4 (JNJ, USB, K, WFC) for ten years of more There is now $40/share in pretax income from interest and dividends alone, not sure if this includes common stock divs or not The future growth of FFH will come from abroad, Poland/Eastern Europe, Asia and especially India, where Prem mentioned that only 1% of households are insured. He wants to take ownership of ICICI Lombard up to 49% as soon as the Indian government allows it There was a slide showing that the expense ratio is up at least 5% purely from writing less premiums, so when we get a hard market and write more insurance, we can expect significant improvements in both the expense ratio and the loss ratio (90-95% CR's anyone?) more to come, but I wanted to get the ball rolling . .

I agree Myth, the annual decline rate of "legacy" production (every US natural gas well that was drilled before this year) is around 28% . . . so its as if there are two many airline seats, but 28% of the planes will be scrapped every year. I don't think we'll have to wait too long for natural gas to get back to a reasonable level.

I've been buying in Canada . . . I think the market for FFH is more efficient there

Well done Partner . . . I almost fell out of my chair.

The plot thickens . . . Hank Greenberg's company is selling AIG stock . . . AIG American International Group holder Starr In'tl enters variable pre-paid forward sale agreement for up to 10M shares of AIG common On 17-Mar, Starr entered into the agreement for the pre-paid forward sale of up to 10M shares, pursuant to 4 stock purchase agreements, each between Starr and UBS. The agreements provide for stock to be delivered to UBS at various anniversaries of 17-Mar-10. Starr will receive aggregate proceeds of $278.2M under the transaction

Either he is making a big bet on inflation . . . the value of assets and earnings at C and AIG will outpace the value of their debt, or I have no idea what's going on. I haven't seen a credible explanation for why AIG is solvent, much less worth anything. I was surprised by his big equity investment in GGWP. He certainly seems to have been right about Sears, no matter how bad the stores look and their reputation may be, they are a cash flow machine . . . Sears wasn't hugely leveraged though.

Pulp Price Surges on Chilean Quake, Finnish Strike By Chad Thomas and Matt Craze March 11 (Bloomberg) -- Chile’s earthquake and a Finnish port strike may propel pulp prices to a record, hastening a tightening of inventories after papermakers cut output. The price of European benchmark pulp rose to $875.62 a ton this week, the biggest seven-day increase in almost six years, according to Helsinki-based FOEX Indexes Ltd. Pulp in Europe could top $1,000 a ton, higher than 1995’s peak, within a few months, said Kurt Schaefer, who analyses the fiber industry at Bedford, Massachusetts-based paper researcher RISI. Mills have ground to a standstill in Chile and Finland, which together account for 12 percent of world pulp sales. The spiraling pulp price, which in turn boosts paper prices, marks a turn in the market for papermakers including Stora Enso Oyj of Finland and Norske Skog ASA of Norway, which have both spent years cutting output to restore depressed paper and pulp prices. “The pulp market has never seen a disruption this sudden and this large,” Schaefer said. “The market is so tight at this point that every disruption is magnified 10-fold.” The stoppages come after average pulp stocks fell to 20 days, from 50 days at the height of the financial crisis, as papermakers lowered inventories, Schaefer said. The 20-year average is 32.6 days. Strongest in 50 Years Last month’s 8.8 magnitude earthquake in Chile, the country’s strongest in 50 years, killed hundreds, destroyed thousands of homes and hammered pulp and timber producers in the country’s central southern region, close to the epicenter. Pulpmakers affected include Empresas Copec SA’s Celulosa Arauco y Constitucion SA unit and Empresas CMPC SA, the two largest. Stora Enso fell as much as 1.1 percent to 4.93 euros and was down 0.3 percent as of 1:08 p.m. in Helsinki trading today. CMPC and Copec have lost 2.1 percent and 5 percent since the earthquake, while Brazil’s Fibria Celulose SA is up 8.1 percent Only one of 35 pulp plants and sawmills owned by Celulosa Arauco is currently operating, spokesman Andres Moran said. Part of the Mutrun sawmill was swept out to sea and pools of water remain in log stores, he said. A third tidal wave also flooded an area where it stores timber in southern Chile. “We are still in a first stage of clearing away the debris,” Moran said. “Following that we will begin an evaluation process of determining in what condition the machinery is.” The company said it probably won’t produce in March. Norske Skog, Norway’s biggest newsprint supplier, said its Concepcion paper mill is closed and a force majeure claim is in place over failed supplies. The closure will last for “some time,” said Tom Bratlie, the Lysaker-based company’s spokesman. Finnish Strike In Finland, Stora Enso and UPM-Kymmene Oyj, Europe’s two largest papermakers, have closed mills and cut production as a strike by port workers that started March 4 has cut off 90 percent of the Nordic nation’s exports. The Helsinki-based companies have said it’s only a matter of days before they halt production fully as they run out of space to store inventory. Stevedores and port operators are set to meet with a government mediator this afternoon to try and resolve the week- old dispute, the Transport Workers’ Union said. “It’s a perfect storm,” Cesar Perez, a managing director at brokerage Celfin Capital SA in Santiago, said in a telephone interview. “There’s not much availability of fiber in other parts of the northern hemisphere, so that’s going to push prices even higher in the following months,” he said. CMPC, owned by Chile’s billionaire Matte family, said March 2 it halted production at its plants because of a lack of power and water supply. The company owns three pulp plants in Chile and Argentina, where it also makes paper products. Effects on Paper Pulp is the main raw-material for paper, and a shortage in supply will have knock-on effects in that market too, said Timo Jaakkola, a Helsinki-based analyst with Oehman. “Higher pulp prices will translate to higher paper prices when the paper market balance is tight enough,” Jaakkola said. “The pulp shortage will likely send pulp prices quite a bit higher for the next few months.” M-real Oyj raised paper prices twice this month, citing the pulp shortage and cold weather in northern Europe. Finland’s third-largest papermaker announced price increases of as much as 15 percent this month, to take effect in April. “We see these increases in paper prices as very important,” M-real Chief Executive Officer Mikko Helander said in an interview. “There’s going to be a shortage of pulp, and prices will continue to increase.” Biggest Price Rise One Chinese paper producer introduced Asia’s biggest price increase ever this week, raising prices by $150 to $1,050 a ton, said Sandy Lu, a Shanghai-based paper economist at RISI. It’s unclear whether the price hike will stick, she said. Lu didn’t identify the Chinese producer. Chile’s outages “are tightening the situation and supporting a rising price trend,” Ilkka Haemaelae, chief executive officer of Metsae-Botnia Oy, a Finnish pulp producer, said in a telephone interview. “Raw materials have no other drivers than the balance of supply and demand.”

simple back of the envelope math: assume margins on NBSK and RBK are up $100 per tonne in 2010 over Q4 average (prices are up over $100, but between discounts, wastepaper prices etc. this is my best guess . . . hopefully there is upside to this) and calling Q4 cash-flow breakeven (I know it was a little lower, but there was a maintenance outage and a restructuring charge): then SFK should generate $76 Million in cashflow in 2010 . . . not bad, and great if we are on the upswing. please let me know if anyone sees a major problem with my (3rd grade) math. I figure there is actually more margin improvement in NBSK than RBK and 10Q says a $10 move in each will move earnings by $3.8 million

I think they mean that you will save an amount equal to what you paid over 3-5 years . . . kind of like paying par for a 4 year zero-coupon bond. Even so I think this is very exciting, I wonder how long these last though. I think I have seen figures for these types of cells that suggest 5% annual degredation (not sure if this is in efficiency, capacity or both). I would much rather have natural gas delivered to my home/business and run one of these, even if the economics are only mildly robust over ten years than deal with the incompetent and inneficient power generation/transmission system (in suburban US with ~10 power outtages per year)

it sounds to me like a great technology except . . . did they say you need to put oxygen in one side and fuel in the other? If the "oxygen" side can use regular air this sounds great. If it needs pure oxygen then whats the point?

link (to at least part of it). She seems like someone in Government who really gets whats going on (or maybe they all get it, but she is one of the few willing to talk about it): http://videos.mediaite.com/video/Elizabeth-Warren-On-HBOs-Real-T

Munger hits the nail right on the head as usual . . . I wonder if this article will get much attention though. When Buffett wrote his op-ed suggesting "now is the time to buy stocks" it was all over the news for a week. It would be nice if this piece by Munger got anything close to that sort of attention, especially right now as the Washington establishment is about to (or already has) kill the proposed Volker rule.

I'm not happy about the dividend either, but I must repeat what I have said before . . . I think people are way too hard on this company considering that FFH is run in a more shareholder friendly manner than 95-99% of the other companies out there. Yes I am a shareholder and expect to be treated fairly, but I do not forget that Prem and everyone else at FFH is creating wealth and value for me - not the other way around! From my understanding Prem does not lead and extravagant lifestyle by any means, and if he did I would not begrudge him that at all! If you would prefer that Prem paid himself and other insiders multi-million dollar salaries rather than pay dividends that every owner receives equally then go invest in Goldman Sachs. I don't mean this to be offensive or to start an argument, I just think that we are lucky to be able to invest in a company like FFH - not the other way around. Prem has said on numerous occasions that he holds all the votes, wouldn't sell-out for 4 times book and that if you don't like it don't invest.