T-bone1

Like watching paint dry . . . At least we know the painter has $8 billion in cash, the ability to double written premiums under the current cost structure, and a gigantic hedge against things going very badly in Europe.

There has been a lot of talk P&C premiums firming up and AIG no longer dragging down the industry with irrational pricing. Richard Brindle, CEO of Lancashire, would beg to differ: "The head of Lancashire said he was baffled by rivals’ claims that insurance premiums were on the rise in recent months, as he indicated the company had become fed up with weak prices in important areas. Richard Brindle, chief executive of the Lloyd’s of London insurer, said the company had withdrawn from commercial property and onshore energy insurance because it was concerned about unpredictable losses and “depressed” premiums." article here: http://www.ft.com/intl/cms/s/0/63ada3ce-d640-11e1-ba60-00144feabdc0.html#axzz21jatm7sV I am curious what other data points people on this board see, and how others see this playing out. Bond yields continue to fall and the hard market continues to be pushed out into the future as far as I can tell. I have little doubt that FFH, LRE, WRB and the rest of the more rational players will eventually have an opportunity to pick up the pieces when the industry does finally take a big hit - a hit that I think is just as likely to come from the bond market as it is from the weather. Are some of you more constructive on the current P&C market? Do people think there is huge capital waiting in the wings from Bermuda reinsurance subs set up by financial companies? Will this drag out the cycle? I know a lot of people on this board are much more familiar with some of these issues than I am and would appreciate their insight. thanks!

I'm sure some crocodile tears will be shed on this board if it turns out to be one of our old friends like Herb Greenberg (although I don't think any of those clowns qualify as "major" or "journalists") http://www.businessinsider.com/gasparino-the-feds-are-looking-at-a-major-financial-journalist-over-possible-insider-trading-2012-5 And a very belated and much deserved thank you to Sanjeev, Alnesh and everyone else who helped put on the great events in Toronto last week. I think it was the best one yet and we are all privelaged to be part of such an event.

Interesting to hear that from Boone Pickens. On the other hand, the CEO of Devon Energy thinks that nat gas could go to a $1 handle. It did, yesterday.

how does this affect Steelhead? article 6 of the lockup agreement: (vi) not acquire any additional number of Fibrek Shares or securities convertible into or exchangeable for Fibrek Shares, except, in the case of Pabrai and Oakmont, in compliance with the Exchange Act http://www.resolutefp.com/layout.aspx?pageid=138&id=0001193125-12-017100&doc=1&page=81&compId=216460&isDetail=true Will someone remind me why it would be in steelhead's interest to tender?

Am I the only one dumb/naive/not-paranoid-enough to think that Steelhead will absolutely not tender? Maybe the $1.40 bid was primarily meant to help them with their decision . . . Also, I had thought there was some provision in the orginial FFH/Pabrai lock-up that required a certain amount of shares to be tendered, otherwise the lock-up was broken. Is this wrong? They obviously meant to put the company into play, and I can't beleive they would leave themselves no ability to accept a higher offer.

The debt is obviously senior to the preferreds and probably yields 6.5% (I can check when I'm back in the office tomorrow), but they aren't comparable in my opinion. The debt has a much higher conversion price ($50 vs. $30 or so on the converts at the current price) so the debt trades on yield while the preferred seems to have a floor at about a 6.5% yield it trades on the close-to-the-money conversion feature. I also recollect that the convertible debt has anti-dilutive features that require you to accept cash rather than shares for the excess over par once the convertible debt is in the money. The preferred is obviously much cheaper (both preferreds are), and it should be cheaper. How much cheaper it should be depends on whether you think $15 billion of equity is an adequate cushion against any potential downside.

Where did your friend ever find that gem? The naming convention of the delisted preferred falls into no pattern, so it is nearly impossible to detect. His article on these points to a CHK document that lists two convertible bonds as well. I am not able to find those on FINRA's site, listed either by the issuer or by the CUSIPs. Weird! Is anyone able to find a CUSIP for those bonds that works? There is an unrestricted CUSIP as well as a 144A CUSIP listed. The column in that document for the 5% convertible preferred indicates a mandatory conversion date of 11/15/2010, but is this only for the case where the 20 day trading test is met? The same CHK document indicates a conversion floor price. Does that mean that once the convertible falls below about $76 (did a rough calculation) that you can no longer convert at the 2.5766 ratio? The Cusip is 165167826 . . . it trades like an equity on the pink sheets and is pretty liquid (although the bid/ask is usually a dollar wide) The company can (and likely would) force conversion at any time if the stock trades at 130% of the conversion price for 20 days . . . (130% of $38.81 or $50.45 per share). If this were to take place within one year, you would get $5 in dividends plus receive stock worth $130 . . . not a bad return (and you can of course keep the stock). If it takes longer than a year, you keep on recieving dividends while you wait The conversion price is adjusted down by the amount of cash dividends paid on the common stock above a threshold of $0.065 per quarter. It has been adjusted down by $0.27 so far (in reality the amount of shares you recieve is adjusted up, but I prefer to think of it in terms of the coversion price). There is a floor to how far down it can be adjusted . . . this is a floor on how much lower the effective conversion price can be adjusted down by dividends paid (i.e. the price at which the number of shares you convert to is equal to $100). This floor is set at $30.05 . . . so it can't be adjusted down more than another $8.75 by dividends - a high class problem and not one I anticipate having.

They are, and for that reason I do not like the FFH pref's (and think it is smart of them to be selling). I wouldn't want to own a non-convertible perpetual preferred . . . but I believe we will see inflation.

I've been buying the CHK-DG (their non-exchange listed preferred). A friend did a blog post on how much cheaper it is than their listed preferred (CHK-D): http://www.creditbubblestocks.com/2012/02/limits-to-arbitrgage-dual-chesapeake.html The "DG" trades at about 83, and is convertible into 2.5766 shares. At par it yields 5% At the current price of 83, it yields 6% and effectively converts at $32.21 (83/2.5766) I think this is one of the best and safest and cheapest ways to play a natural gas rebound.

I think credit bubble stocks has some very astute analysis: http://www.creditbubblestocks.com/

Results look great (compared to last few quarters). They are cutting the dividend to $0.40 per year (which probably dissapoints some). I'm surprised the stock is down after hours. The business is operating better than expected finally, synergies are rising, and they will not we able to term out their debt at the current advantageous rates.

I think Berkowitz will be vindicated, but he did say previously that having $3 billion of cash on hand was something of a hedge in case the rest of his concentrated financial positions went down. I think he implied previously that this would be used to buy more or buy other cheap stocks if the market went down. It was prudent to keep this cash on hand and it did take care of the redemptions, but I don't think his comments on the cash then and now are entirely consistint. Either way, I think current FAIRX shareholders will do very well

I don't know that much about the proccess, but I assume that in the spirit of being "fair and friendly" (as FFH is involved for better or worse), ABH will negotiate a better deal for FBK which will include a large consulting contract (bribe) for current management. I figure $1.40 would be a reasonable number (same cash/share option) as an independant valuation will likely come in at well over $2.00 I say I would be happy to walk away with $1.40 in cash/stock because the same management clowns that are going to say $1.00 or $1.40 is way too low were willing to dillute us severely at well under a dollar.

$1.06/$1.46 now . . . a bit more realistic

I would assume we will find out tonight, or certainly by the open on Monday if they have recieved a higher bid. If someone in Canada knows more about this proccess than me, please enlighten me. I did not tender my shares, but would be willing to "go quietly" for $1.40 or so. Looks like about 1,000 shares of FBKZF (US pink sheets) traded at 1.13 and the current market is $1.06/$3/42 . . . not that it means anything

just out: "MONTREAL, Feb. 3, 2012 /CNW Telbec/ - Fibrek Inc. ("Fibrek") announced today that a proposal has emerged from its strategic alternatives review process, which was initiated by Fibrek's Board following the unsolicited insider bid (the "Insider Bid") made by AbitibiBowater Inc. (carrying on business as Resolute Forest Products) ("Abitibi") on December 15, 2011. The Board of Directors and Management are currently in negotiations with a number of third parties in response to the Insider Bid. While it is impossible at this stage to predict whether any other competing offers will emerge, the Board expects to receive alternative proposals from such third parties. Third parties have until 5:00 p.m. today, February 3, 2012 to submit their proposals. Fibrek will update the market as appropriate as this process continues, but there can be no assurance that a transaction will take place. "

more information here, with Einhorn response: http://www.businessinsider.com/david-einhorn-tells-his-side-of-the-story-on-the-fsas-insider-trading-fine-2012-1

It sounds like they were selling out of the stake, found out the bad news (which was material non-public information) and kept on selling just as they were. I would assume Einhorn is very ethical, and it would be something along the lines of: He knew, but didn't tell the trader or portfolio manager who was already selling. I think this is a weird quirk in insider trading law. Lets say you are Warren Buffett and you own 5.1% of a stock and the managers of (lets say Moody's) think you are going to sell out and since it will be reported it will tank their stock. Can they tell you bad or good material non-public information to prevent you from acting? In short, without knowing the guy personally, I would be willing to bet that Einhorn didn't do anythign unethical. Don't forget Buffett and Munger were investigated and nearly nailed to the wall for market manipulation . . .

1M - voted against

mungerville, I think you are referring to when he gave a large amount of shares to his children. He did this when the price was low (in late 2008 I believe) to reduce taxes. Giving away shares is not a taxable event (for long term capital gains) and is a tax efficient way of giving to charity in the US.

it's a crap shoot just like was $10 higher when people did the same analysis you did. The intrinsic value is very difficult to pin down, but I don't think the intrinsic value is 24% lower today than it was yesterday. Assuming you agree that IV hasn't fallen by the same amount as the stock price over the last day, then the risk is neccesarily lower and the potential reward higher (for an outright stock purchase). The January 2012 $35 puts (roughly at the money) are $3.80 bid. The $45 puts were $3.50 bid on Friday and slightly out of the money at that time. On a percentage basis, selling the $35 puts today nets you more than 10% of the current stock price (which is 24% lower than Friday). Comparatively, selling the $45s on Friday would have netted you less than 8% of the stock price. I think that objectively, selling puts today (after bad news is out and the stock is a low lower, with volatility higher) is a much better deal and not just another "crap shoot" I'm not saying this is a great investment, but it is definately a much better investment than was available on Friday . . .

wow. I am speechless. Really priceless that he publicly announces he is buying but at the same time says "it is a small position". I have nothing nice to say, so here is the article: http://blogs.wsj.com/overheard/2011/10/25/tilson-buys-netflix-on-tuesdays-crash/ Whitney Tilson is ready for a rematch with Netflix. Only this time, he’ll be in the other corner of the ring. Having been short when the stock went to the moon, the hedge-fund manager is now at risk of catching a falling knife. Mr. Tilson tells us in an e-mail that he bought the stock this morning after it tumbled 35%: “It’s been frustrating to see our original investment thesis validated, yet not profit from it. It certainly highlights the importance of getting the timing right and maintaining your conviction even when the market moves against you. The core of our short thesis was always Netflix’s high valuation. In light of the stock’s collapse, we now think it’s cheap and today established a small long position. We hope it gets cheaper so we can add to it.”

If a one year bond yields 100% (yield to maturity), that means that it is trading around 50% (most of the yield to maturity would be from getting paid par in one year). So it implies roughly a 50-60% recovery rather than a 3% recovery. -T-bone

Fairfax and their subs have stated that their expense ratio (the cost of having a building full of employees and actuaries actually writing insurance) is currently 5% too high because they are writing less than 1/3 of the business they could be writing due to the soft market. Both to prepare for the hard market and to make sure that agents are incentivised not to write poor business in a soft market, FFH has not downsized their bussiness to match the decline in premiums written. This means that an increase in premiums in a harder market will automatically lower the combines ratio by 5% simply by spreading the costs over more business. This would take the company under a 100% combined ratio. The loss ratio for business written in a harder market should also be at least 5% lower, making for very attractive combined ratios. The ratio just looks bad right now because they are preparing for the turn, where they will write much more premiums at lower rates. In the meantime, FFH still makes more on their bonds (supported by the float) than the float costs them, so the insurance business should have some positive value. When you add the value of the insurance business today to the optionality of a much larger and more profitable insurance business in the future I think a significant premium to tangible BV is in order. Prem sounds like he agrees in the interview and I would imagine they are actively buying back their stock today (I am assuming BV is up at least $20 in the quarter).