Vinayd

Well, I'm still in the camp that FFH is eager to take ORH private versus other opportunities for a couple of reasons. 1. The first, and overwhelming, is that as much as we attempt to overcome (...and it is a lifelong process), we continue to think as equity analysts and not private business owners. Business owners are passionate about their business, and feel it a part of their family. They own it forever and pass it on to their children or charity for future generations. What is Fairfax? How would the owner define it's business entity. What are the components or 'string' that tie Fairfax owners/shareholders/employees to it? This question goes beyond the quarterly short term price fluctuations of the individual pieces. FFH, to it's owners, is defined by the success and challenges of it's 4 major on-going components: Northbridge, C&F, OdysseyRE & Hamblin Watsa. This is how they lay it out in their quarterly and annual statements, and this is how in their minds they own and define FFH. This is what FFH business owners own for the long term. The reason for taking NB private was clearly to get back what they had to 'rent-out' during difficult times. If FFH management felt that they needed improved capital flexibility at the sub-level, or greater transparancy of their value, and only thought of these entities as investment vehicles -- then the correct decision would have been to actually take a piece of C&F public during 2007 to complete this strategy. By taking NB private and proactively reducing ORH public shares by 30%, the remaining small float of ORh does little in providing capital flexibility and transparancy on FFH's ultimate value. FFH had to sell part of their main house in dire times, and they are taking the opportunity to buy it back. They have shown this with NB and may likely continue with ORH. 2. Regarding whether to buy more FFH shares at below book versus buying ORH at 1.2. Again, although an investment firm mindset could buy $100M-$200M worth of ORH at 0.9X book, but likely could not buyout the remaining shares at 0.9X book. 1.2X book of the rest of ORH is a good deal long term. It makes their house whole again, and better defines their business entity. Obviously, there were many other better investment deals in Dec/Jan than buying NB at 1.3X book (and a $400M investment is significant even for FFH -- so there was more to it than an investment decision). 3. Now the timing of taking ORH private, in my opinion, may only occur post Dec 2009. Clearly, FFH will need dividend capacity from their subs to help out on this purchase. FFH cannot get clearance for their subs' dividend until the regulators validate their 2009 reserve levels in December 2009. This is likely why the timing of NB occurred in January, and could be repeated. 3. The real catch in blocking FFH from purchasing ORH may more likely be due to FFH's strategy on how to handle their upcoming debt maturities. Although debt maturities at sub level and holding company don't occur until 2013, This is only 3 years away and it is significant. ORH has significant maturities in 2012-2013, C&F has debt maturities in 2013 and FFH holding has some in the 2013-2015 range. IF FFH wants to significantly reduce their outstanding debt they will need to start building cash now, and therefore may not purchase ORH. If they plan to extend a significant portion, they will likely take ORH private. I think this is the key long term decision FFH is mulling. With the size of float, cash holding, number of employees, etc. FFH needs to be making decisions now that may be implemented in 2-3 years. So, the decision of less long term leverage versus making your house whole again is the major decision for business owners. cheers, Vinayd

Thanks Ben for the great explanation. In looking at the Russell additions and deletions -- it doesn't look that ORH was removed. So, that leaves some level of rebalancing by various holders of ORH. But, someone still has to sell the 2.5M shares or ORH and someone had to buy them on that day. Also, the 1.4M block trade at the end-of-day looked as if someone decided to take the Russell rebalancing opportunity to get out of ORH for whatever reason. I'd like to know who was on the other side of that block trade! cheers, Vinayd

Hi lcf, I'm not sure what you mean. Could you elaborate or direct me to a link on the board that discusses this Russell rebalancing, or news release (...or FFH/ORH report) that describes this. Thanks in advance. Vinayd

I'm still interested in this massive volume on Friday June 26th. The last time the volume was close to this occurred on Sept. 3rd, 2008. On that day, ORH issued a press release that they are extending their Normal Course Issuer Bid by an additional $200M. http://phx.corporate-ir.net/phoenix.zhtml?c=129394&p=irol-newsArticle&t=Regular&id=1193331& Their Q3 report showed they purchased back 3.8M shares during Q3. So, my speculation continues to be that ORH bought back a huge chunk through some private transaction that closed at the end of the Q2. "During the quarter ended September 30, 2008, the Company repurchased and retired approximately 3.8 million shares of its common stock for $140.7 million, representing an average repurchase price of $37.34 per share. From the inception of the repurchase program in June 2007 through September 30, 2008, the Company has repurchased and retired 12.1 million shares of its common stock at an aggregate cost of $445.8 million, representing an average repurchase price of $36.79 per share;" cheers, Vinayd

Amazing to see this activity! What is your speculation: 1. some weird options expiry thing 2. Distressed seller made a deal to sell stock at a predetermined price that would be transacted today through the NYSE 3. More misguided short selling attack, either to shake loose some weak hands to cover older positions. Frankly, I'm partial to #2 -- and the buyer may even be ORH! It could also explain the slow runnup this past 2 weeks, as the price may have been set at 5% below the average trading price the past X days (10-20 days). Again, this is all my speculation -- but I'm not concerned over this strange trading activity. If it persists for any reason I"m sure ORH will start utilizing their remaining $150M in the NCB to sop up this mess. cheers, Vinay

Radian, My BV calculations was to offset BV gains from stocks/bonds. My calculation was more back-of-the-envelope, and not thta much thought involved. I simply took $3B bonds and assumed a 3%-5% mark-to-market loss since April 24th and divided by number of shares. It was in the $6-$8 range. This is in between your pessimistic and realistic range. Cardboard made agood point that stock gains occurring from April 24th to now may be significant. Hopefully FFH will have capitalized on some of it. I am long ORH in the bulk of my portfolios....and feeling the $CDN short term pain (...hopefully for longer term gain). Vinay

Viking, Your BV calculations are great. I would like to add however, that since April 24th, the US$ has dropped dramatically in value,and the Long US Treasury Yield has spiked up (...also gone down in value). From FFH's annual presentation, although they moved a substantial amount of US treasuries into Tax exempt munis and common stocks, the FFH investment portfolio still had approx 15% in US treasuries. The mark-to-market on these has dropped somewhat, and therefore you should adjust the BV calculation to take this into account. My unqualified guesstimate is a drop in BV (due to mark-to-market US treasury holdings) of $6-$8, and for ORH -- about $2. cheers, Vinayd

Nice summary Viking, thanks! These FFH/NB/ORH arbitrage discussions are always interesting. Putting the multiple discussions of which is better value (FFH/ORH), the CDN$/US$ valuation, the purchase price of NB in January, and the stock buybacks from ORH/FFH over the last 12-18 months, a notion comes into my head on how/why it would be a good deal for FFH to buyout ORH now. I don't remember if this was discussed before, but the purchase of NB in January for 1.3X book was more than a good deal when taking into account currency exchange. NB was purchased with US$ -- when the US$ was near a high compared to now (U$ has dropped approx 12% against CDN$ in last few weeks). So there may likely be a gain on FFH books in relation to the value of NB when translated back into US$. There may be a way to capitalize on this currency gain to puchase ORH. The bulk of the share buybacks (mainly at ORH) have been done via cash accumulated through operations/investment activities. Therefore net/net, they have SHRUNK their capital structure accross the group -- to the benefit of existing shareholders. Buying back the rest of ORH could be done via a combination of cash/debt (in effect re-expanding their capital structure), but still be very conservitavely leveraged. A buyout by FFH of ORH has been discussed extensively, but with the lowered cash holdings at FFH (approx $885M), it may be too much of a strain to buyout the remaining 17.8M shares at $58-$60 US with cash alone. Recently, there has been a strong appetite for preferred share offerings in Canada by CDN financial institutions, and the rates being asked have contracted along with yield spreads. I think the time may be ripe for FFH to issue Canadian Preferred shares (likely baring 6.5% interest), to Canadian investors only, in the order of $500M (...or about the price they paid for NB). This money could be used, along with current FFH cash holdings and the remaining $150M in the ORH NCIB funding envelope to buyout ORH shares while the $CDN dollar is soaring. This will effectively allow FFH to capitalize on the currency arbitrage they inadvertently entered with the purchase of NB with US$. ...great discussions as always. Vinayd