T-bone1

interesting, thanks link

It looks to me like they have about $5 Billion in debt, which is about equal to net current assets

I read a good research piece on Dell written by Murray Stahl once. His thesis was that Dell could never grow their top line sales fast enough to offset the gradual erosion of margins. They have an operating margin of about 5% right now, if they lose 1% percentage point here they will need to grow their sales by 20% to make up for it! I guess the counterargument to this would be that they have such efficiencies of scale that at current prices their 5% margin equates to a 0% margin for all but their largest competitors. I'm not sure this is true or how you could convince Acer and Lenovo not to go after your market share without colluding. The other argument against Dell I have seen lately is that the current trend is for people to buy their computer "off the rack" at Best Buy rather than customize one and have it mailed in a few days or weeks from Dell. I used to always get custom machines, but now I don't care or don't know enough when I get a new computer to bother with ordering a custom machine. I think I can get a better deal buying a "good enough" machine at a big box store. I wonder how much of any moat that Dell has is related to the custom/mail order business. Either way, I am not going to second guess Hamblin Watsa, but this is definately in the "too hard" pile for me. I have a tough time thinking of another company in another industry at another time that is analogous. Maybe automobile companies at some point (durable comsumer good that everyone needs, with declining prices and improving features during industry consolidation), but this doesn't lead to much of a conclusion. The company throws of a decent amount of cash and should be safe, so I'm not going to go shorting it out of my FFH position or anything like that, but I have a tough time understanding what this company looks like in "success mode", or imagining how that would come about. I would be very interested to hear a long thesis (even if it is stolen from someone else like my pessimistic take on the company) T-Bone1

I think they would have already had to file a 13G or form 4 if they sold ORH shares. Maybe they just moved them around?

I agree. I think 1.3 times book value is the metric . . . at least in this market. Lets not forget that Fairfax stands for Fair and Friendly Acquisitions. Even if ORH management didn't own a bunch of stock, I think this is a point of honor for FFH.

I think the past experience with acquisitions suggests that they would rather pay a premium to buy an (likely overreserved) ORH for a premium than to get a better price on a book of business they don't know. FFH and ORH have a lot more capacity than they are currently writing, so I think that suggests they would not be interested in a North American acquisition. I agree that a Chine acquisition is more likely to be a small company they can grow than an established player. Also, publicly traded companies in China are not cheap right now, so it would be tough to get a good deal on a big company. I still think this debt sale makes a lot of sense in its own right, but I have a tough time seeing FFH spend more than $100M or so to acquire anything other than ORH.

Let the debate rage on: FFH just announced they are increasing the offering to C$400 Million in ten year debt (not sure if this means it will be C$ denominated). "some of the proceeds will be used to retire debt" Oportunistic, yes, but also looking more like ORH's days are numbered

Mercer Intl hikes September NBSK price worldwide SAN FRANCISCO, Aug. 11, 2009 (RISI) - Mercer International today informed worldwide customers that it is raising market northern bleached softwood kraft (NBSK) pulp prices, effective September 1 until further notice, industry contacts told RISIinfo.com. Mercer slated a $50/tonne price hike in North America, Europe, and Asia, market participants said. That would bring its list price to $780/tonne in North America. In Europe is plans a $740/tonne level. In China it plans $650/tonne. Mercer, which has three market pulp mills in British Columbia and Germany with a combined 1.28 million tonnes/yr of NBSK capacity, becomes the first known producer to plan a pulp hike in any market for September business. The firm's move comes during a time of low market pulp inventories worldwide, solid demand, and a weak US dollar. FOEX pulp indices continue rising but P&B decline BRUSSELS, Aug. 11, 2009 (RISI) - FOEX's northern bleached softwood kraft (NBSK) pulp index gained $7.20/tonne to reach $663.83/tonne this week. The dollar-based bleached hardwood kraft (BHK) pulp index climbed by $9.94/tonne to $539.25/tonne, and the euro-based BHK index increased by Euro 1.21/tonne to Euro 375.60/tonne, as the euro strengthened against the dollar. The newsprint index inched down by Euro 0.11/tonne to Euro 518.61/tonne and the lightweight coated (LWC) paper index decreased by Euro 3.17/tonne to Euro 691.40/tonne, driven by the weakening of a basket of non-EMU currencies against the euro. The coated woodfree paper index dipped by Euro 1.36/tonne to Euro 688.80/tonne, and copy paper fell by Euro 5.87/tonne to Euro 801.28/tonne.

Compton has great assets, but the market for those assets might not recover before their secured debt comes due. I would be very careful of any company with a lot of secured debt maturing that can't be paid off. There is currently a dearth of debtor in possesion financing in most bankruptcy cases, which allows the secured creditors to run roughshod over subordinated creditors, charging high rates of interest for DIP financing and forcing 363 sales etc.

I think this is most likely just an opportunistic debt offering; spreads have come in a great deal and inflation in likely to pick up at some point in the next ten years. It certainly looks like they might buy back the rest of ORH, and this is one more piece of evidence, but there are plenty of stand-alone reasons to offer this debt right now. For those keeping score at home (like me), mounting pieces of evidence of an ORH buyout: 1) NB buyout 2) continuing ORH buybacks 3) cash preservation at FFH and lack of buybacks despite similar discount to ORH during same time period as ORH buybacks 4) today's debt offering

Does anyone else think that cracking down on naked shorts is the reason for the huge rally in all of the worthless stocks (AIG, FRE etc.)? I have always wondered if official short interest numbers include naked shorts. The last 48 hours have convinced me that they do not. There are officially 20 million shares short at AIG, but the stock has already traded 190 Million shares in the last two days (and this day isn't over). I am curious if the board members think: A) this has nothing to do with naked shorting B) the huge rise in AIG is due to 20 million shorts covering, the rest of the volume is High Frequency Traders playing games C) there is a huge amount of undeclared naked shorts in the system, the covering of which has just given AIG a $16 Billion dollar market cap anyone (else) buying the very expensive AIG puts?

Thanks Wabuffo! I already ordered the book and look forward to reading the article. Its nice to get some color on the story, as the only impression I have is also negative. Strange that someone of his (one-time) stature barely has a wikipedia article.

Thanks el Chieh!

Scorpion, I don't mean to say that Greenberg was on par with Buffett, only that decentralized businesses seem to have a tendency to fall apart when the strongman at the top is gone. Obviously Buffett is a very unique type of "strongman" in that people seem to work extra hard to not dissapoint him out of respect rather than fear. Gates might be on the board, but he isn't going to be breathing down the neck of subsidiary managers. Maybe Sokol can do this . . . I'm not saying there will be a problem, only that transitions of this type have historically been problematic. Obviously Greenberg's ouster and replacement was not planned or smooth . . I am not suggesting a repeat at BRK. Wabuffo, I am too young to remember Teledyne, but someone else recently suggested that I read about it. Can you suggest a decent book or source of information. It sounds like an interesting saga. Thanks, T-bone1

lethean brings up an interesting point. Did anyone read the recent Michael Lewis article on AIG? I am certainly not comparing BRK to AIG, but it is interesting that AIG was also a succesful group of businesses with a strong manager and strong cult of personallity at the top in Greenberg. Once he was gone, the subsidiary managers one by one seem to have gone off the reservation. I think Warren has prepared BRK as best as possible the eventual transition, but it is tough to imagine that any replacement could command the respect and deference that Warren does

Thanks, they have updated the story. The first version said it was Fairfax Financial Holdings. It did sound a little strange.

Viking, I think this has to be a combination of 1 and 2. However, this is a subjective opinion, and as you say time will tell. We do have a few facts to look at: Prem's reputation and willingness to take the blame for any and everything (including many things that aren't his fault) suggest to me that if C&F and NB really were average underwriters, Prem would be the first to say so . .. and then he would do something about it - So I think number 3 is unlikely. Number 1, the cost structure: I think is definately true and Prem backed this up on the call. It is just a question of how much of an effect this has. Can FFH write twice as much insurance in a hard market and see their expense ratio fall from 25% to 15% (I'm just making these numbers up), I don't know. Number 2, reserve releases: Again I think it is pretty clear that FFH is better reserved and more cautious/conservative right now than many other companies who are having a much harder time. Like number 1 above, I think it is just a question of how much of an effect this will have. Time will tell, but considering the corporate culture at FFH and their current ability to be conservative, I would guess we will be pleasantly surprised yet again at some point in the future. Thanks, T-Bone1

SharperDingaan, Thanks for your comment. I could not agree with you more, and I can assure you that I look at FFH as a business, not as some combination of investment vehicles. I use this model (fund + float income) as a guide to value the business, or at least as a way of showing (I think) that FFH is worth a lot more than tangible book value. I look forward to seeing what this business does next, and am curious about the team of Middle East investment bankers FFH just hired (BB story yesterday). Thanks, T-Bone1

I couldn't agree more. Even if float has a cost . .. maybe a few percent per year over time . .. it is a huge advantage for a long term investor like Hamblin Watsa. That being said, I think some of us are focused too much on the last few years and not enough on the next few. In the spirit of Ericopoly's post, I posit the following points. If I am wrong on any of these, you would be doing me a great service to point that out. Thanks: 1) To roughly paraphrase Prem, reserves are in the best shape they have been in for years. I think the company is certainly overreserved at this point, which is both tax efficient and provides a hidden asset. This will improve the CR as excess reserves roll off 2) I think FFH has a higher combined ratio than some competitors right now because of their expense ratio not their loss ratio. I believe that they are writing good business, they just have an organization that is sized to write more business. I think this is an asset and that when the market hardens, we will benefit both from lower loss ratios and lower expense ratios (because the expenses will be spread over more business) at the same time. 3) After a couple of years of FFH holding safe low-yielding investments, we are now seeing what happens when they can finally reach (safely) for some yield. $10 per share, per quarter, in passive interest and dividend income is a beautiful thing. 4) While we are starting to enjoy "success mode" on the investment side (I don't mean capital gains, but the type of repeatable passive income that insurance company analysts look for in valuing a company), we still haven't seen "success mode" on the insurance side. We all patiently waited for FFH to deploy their treasuries into better investments, I don't understand why everyone is so impatient with the insurance operations. I think this is a huge asset that they will deploy (write more business) at the right time. When the market turns we will be in a position to write more business than ever, and likely at some of the best CR's in the industry. 5) The possible affect of writing more business at a 95% (or better) CR at the same time as earning an after tax 5% return (or better) on the FI portfolio is likely event at some point in the next few years. Over a float/asset base of $16B this would lead to 33% book value growth from operating income alone. This isn't a hedge fund and this isn't "success mode" . . . FFH has made a lot of progress and I believe they have built the right vehicle, but they aren't at the finish line yet. I think FFH's insurance operations (and the income associated with the float) can add 10-20% to BV per year over the next few years. As I have said before (and I still don't think anyone has agreed with me on this) I think FFH is a mutual fund (equities) plus an insurance company (float and associated FI assets). If the insurance company adds 10% to the mutual fund's performance each year, and the mutual fund is well managed and will probably beat the S&P 500 on its own . . . then the question is, what should you pay to buy this mutual fund. I think 10% from the insurance side will be an easy bogey to hit over the next few years. If the expected return of the stock market is less than 10% over the next few years (which is likely in my opinion) then I think you could say the insurance portion is worth as much as the mutual fund (tangible book) portion. This suggests to me that the company is worth 2X book value. I am not suggesting anyone pay 2X book, but I am suggesting: 1) for this company to not trade at some meaninful premium to tangible book (adjusting both the goodwill and ICICI position - which basically cancel out) is very very silly 2) FFH is a slumbering giant in insurance right now. The current combined ratios should be critisized no more than the 3% yields they were getting on ten year treasuries. Safety and prepartion for a big opportunity is worth far more than a few percent per year. I welcome (and even request) any and all criticism of the above

Great presentation. Thanks Ben! I hope FFH (ORH) has written a lot of GOM energy cat business. Anyone care to take a guess at current FFH book value? They disclosed current (april 20th I think) book value on the Q1 call, so I assume they will be consistent and do it again (so as not to only report "current" book when it has risen). FWIW I think BV is arounf $320 at this point.

the warrants are worth more than the article states because they still have years left before they expire . . .

Do we think they dropped the charges because: A) There was no evidence or the guy he stole from decided not to testify B) The prosecutors are "captured" C) He is cooperating on some other case (this is obviously what I'm hoping for) D) None of the above

Marc Drier's (the lawyer who impersonated big investors in their own offices to sell fake debt to hedge funds) apartment just got auctioned off in bankruptcy court and the winning bidder was . .. Ajit Jain! Looks like he got a bargain, albeit an expensive one: http://www.nydailynews.com/real_estate/2009/07/22/2009-07-22_dreiers_fancy_pad_sold.html

CHK The risks are vastly overstated, the non-productive assets are valued at zero, and they are going to be the low-cost producer of natural gas in this country for years and maybe decades to come. They have the best people, technology and land to make this very low risk over the long term. In the short term natural gas prices are low so no one cares. obviously this is just my opinion and do your own d/d, but I consider this a safe, cheap, long-term great business on par with the opportunity in FFH (as far as current risk/reward, and my expectation of future performance over 5-10 years).

From updating the values of the equities we know of, along with the known change since they reported Q1 and estimates for bonds etc. it looks to me like FFH book value per share should be about $300.00 US at the end of Q2. If one is to assume that they made a small underwriting profit and take into account the higher investment income, it could be as high as $310 in my opinion