watsa_is_a_randian_hero

I believe the $400 million was issued under the last shelf. Now they want to have a fresh shelf available. Its there in case of a Katrina-like event that causes the need to raise additional capital quickly.

Too late to rethink - already executed :) I know what you're saying in terms of a 10% pullback wiping out the entire position - I certainly would expect anyone to put a substantial amount of their net worth in to this. For me, I have a small position in it, and if ORH declined lower than $45 due merely to a stock market pull back I would back up the truck.

Heres how I look at it. Under my base-case scenario, the $40 call returns 0%, vs 78%. I feel $50 is a pretty reasonable base-case assumption given its been trading slightly less than book lately, and book at Q3 will probably be $54 +/- 1. ORH $40 call $45/$50 Spread Catastrophe $40 -100% return -100% return base $50 0% return 78% return Buyout $57 70% return 78% return High-multiple buyout $65 150% return 78% return

I wrote the $50's for protection in case the buyout doesn't happen by nov, I still think it will be @ 50 by then. So if it is at $50 and the buyout has still not occurred, I will make the profit and can take the proceeds and reinvest into new options (rather than locking capital into feb's). I looked at buying deeper in the money calls as you are saying, but thought it tied up too much capital, and there is more downside risk if something like Katrina happens.

Buy Nov. 45 calls sell Nov 50 Calls. I did this morning for $2.8 each net. Will payoff $5 if ORH is over $50 by November 20 (78% return). Will break even as long as ORH is at $47.8 by Nov 20.

I didn't know if you were implying you felt that it was a fraud and the 30% annual gains were not actually there.

"Many on here know that my thoughts on Renaissance's results from their proprietary trading suffer from a case of severe disbelief." Can you expand on this statement?

Its still not even trading at a premium to book. By my calculations, its trading for right around current estimated book (adjusted for market movement post 6/30). Its probably trading at 1x book or slightly less than 1x book right.

Over the winter I sold 26 shares and used the proceeds to purchase 1 $200 strike Jan 11 call. I just sold the Jan 11 call friday and was able to purchase 42 shares with the proceeds. Not really "selling" per se, just reducing exposure to the options and locking it back in to shares (which don't expire). For accepting the additional risk associated with the options, I was able to increase the 26 shares 62% to 42 shares, which at $350 I am still perfectly comfortable holding. For the most part any trading in FFH that I do is in my IRA's, my shares in my taxable account I just let sit there as a long term hold.

Oldye- that is exactly what I'm doing, trying to estimate under a base-case scenario what a reasonable expectation for the market to give them credit for would be. While all of want the market to give them credit for their historical alpha and forecast that in to the future, I don't think that will happen. We will be lucky if the market eventually gives them credit at all. Buy-side and sell-side analysts in the insurance industry tend to focus on underwriting performance rather than investment performance.

buyout ORH?

With respect to the statement that FFH has grown capital at 23%, that is not what we are talking about here. That number is the book equity, which is levered through debt and insurance float. Actual (unlevered) investment returns are lower. These are meant to be reasonable projections. Their 15 year average is 4% on bonds and 10% on stocks per 2008 annual report. This averages out to 5-6% alpha on investments, depending on portfolio allocation. However, after subtracting for below-average underwriting (losses of 2.8%, while comparable companies might average loss of 1%), I would say historical performance generated 3-4% alpha, counting both assets and liabilities. That might not be possible in future given scale of operations today (and I can guarantee the market will never price in an assumption that prem will earn 4% alpha in to eternity); I have used 1%-2% as reasonable projections that the marketplace could use as assumptions to estimate fair value.

I am comparing them on a relative basis, not an absolute basis. The benchmark is other insurance companies. In my base-case, I've essentially said they will generate 1% alpha relative to what the average portfolio manger for a P&C company can do.

Well I don't know if I'd go so far as to say $5 billion (you need to account for the risk that these guys are human, and human life in general is fragile). That being said I would say base-case we should have another 15 good years based on current age of management. Brian

Here are some more details on my assumptions: FFH asia the $355 represents the difference between what they've booked for ICICI and what the appraised fair value was. The runoff is a tough one. A couple years ago my conservative value would have just book $0 for runoff as a conservative number. However, recent investment gains have increased the book value of the runoff group so much that I don't think that a $0 value would be overly conservative now. The $500 represents slightly less than 50% of book. Part of its book is counted in the equity of other subs. It also represents valuing runoff at only the value of recent investment gains (saying the conservative value would be $0 if it weren't for recent gains, which will probably be distributed back to fairfax holdco anyways). For Hablin Watsa, I don't think this is double counting. The value of the subs are based off of 1x, 1.1x, and 1.2x current BV or 1.1x, 1.2x, and 1.3x 12/31 BV (if it is based off of 12/31 numbers, I used higher book multipleto account for recent gains). This I think would be a normalized market insurance-company multiple. However, what sets FFH apart is its investment management. Essentially I've valued FFH as a generic insurance company with generic multiples (assuming a generic insurer cannot generate alpha), then added additional value for HWIC. The value of HWIC is based off the presumption of 5% growth in investments, 20% discount rate (net 15% cap rate), and $18 billion current investments. Under conservative I assign 0 value. Under base case I assume 1% alpha is created above and beyond what a generic insurer would earn. Under aggressive I assume 2% alpha is created above and beyond what a generic insurer would earn. In response to the question whether a couple of small rooms of employees are really worth $800mm or more, I would pose the question, how much value do you think Prem Watsa alone creates for FFH? I would argue at least $500 million on ability to create alpha. I changed to include all HWIC after recent performance on CDS generated by other key members.

This is my simple model on FFH. Does anyone else have anything they do? I'm assuming we're all talking about base-case values over $400 at this point?

PWC was the auditor for both. Coincidence?

What does this "fair value" of ICICI mean? A or B? A: Is it what they believe the stock would trade for in today's market given present market valuations? B: Is it like the "FAIR" value they paid of 1.3x for NB? If B, then I fear that you might as well count all of their common stocks at "FAIR" value, which probably puts BVPS well over $400. But that's kind of like putting the cart before the horse. If A, then it's perfectly fine to count it towards BV. Fair value per fas 157 - the price at which it would sell for today, in todays market. For most traded securities, fair value means current market price. If you own more than 20%, it means cost or book value, adjusted for your proportionate ownership. Its carried on their books as an equity investment for accounting purposes. This means it is not marketed to market value. Given the high growth in india, it is worth significantly more than this if they were to sell it today.

Given the BV @ 6/30, and given the FV adjustments for equity holdings such as ICICI, with the adjustments for market performance of stocks since 6/30 my estimate of BV today is $350.

You guys notice the weird spike in FFH implied vol in options this morning? All my options we up a boatload this morning with implied vol basically going to 60%+ from 40% for about the first 15 minutes of trading. The Jan 11 $300 calls trades 50% higher than they did yesterday. My in-the-money Jan 11 $200 calls were up $20+ when the stock was only up $6 - $8. Then, after 8:45, the implied vol came plummeting back down, and now the options are back in the range they were in yesterday. Any possible explanation?

I hope so. Forget a $$$ settlement, this has the potential to increase FFH's value much more by boosting their reputation, with the stock trading at a higher multiplier. brian

U.S. Drops Fraud Indictment of Analyst Contogouris (Update2) 2009-07-22 15:53:21.353 GMT (Adds civil allegations in fifth paragraph.) By David Voreacos and Thom Weidlich July 22 (Bloomberg) -- U.S. prosecutors dropped the 2007 fraud indictment of Spyro Contogouris, a freelance stock analyst accused of siphoning $2.5 million from real estate companies where he worked. A judge in New York yesterday granted a request by acting U.S. Attorney Lev Dassin to terminate the case. Contogouris was accused in a four-count indictment of lying to companies that hired him in 1995 to manage properties in New York and Houston and stealing their money. “Based on a review of the evidence in the case and information pertaining to this defendant acquired subsequent to the filing of the indictment, the government has concluded that further prosecution of Spyro Contogouris would not be in the interests of justice,” U.S. District Judge Barbara Jones wrote in an order in federal court in Manhattan. Contogouris, who was arrested in November 2006, was charged in a mail-fraud indictment in March 2007 with diverting tax payments to his personal accounts and siphoning tax refunds intended for the real estate companies. Separately, Contogouris, who has run a research consulting company called MI4 LP, is defending fraud allegations in a civil lawsuit brought by Toronto-based Fairfax Financial Holdings Ltd. Fairfax accused him of conspiring with SAC Capital Advisors LLC, Kynikos Associates Ltd. and other hedge funds to drive down its stock price by spreading lies about the company. The hedge funds denied wrongdoing. Contogouris’s Lawyer Contogouris’s attorney James Felix didn’t immediately return a call seeking comment. A spokeswoman for Dassin, Yusill Scribner, declined to comment immediately on the dismissal. U.S. prosecutors in Manhattan have dropped criminal charges filed in recent years against other fraud defendants, including David Stockman, the former chief executive officer of Collins & Aikman Corp.; David Pinkerton, the former American International Group Inc. director; and five New York Stock Exchange specialists. The case is U.S. v. Contogouris, 07-cr-196, U.S. District Court, Southern District of New York (Manhattan). For Related News and Information: Financial crime stories: TNI FIN CRIME BN <GO> Top legal stories: TLAW <GO> Menu of Bloomberg legal resources: BLAW <GO> --With assistance from David Glovin in New York. Editors: Charles Carter, Glenn Holdcraft To contact the reporters on this story: David Voreacos in Newark, New Jersey, at +1-973-286-0016 or dvoreacos@bloomberg.net; Thom Weidlich in Chicago at +1-312-427-5474 or tweidlich@bloomberg.net.

EPS won't be near that high. Book value growth may be though. Mark-to-Market unrealized gains on stocks & bonds are not taken through EPS until they are realized. They do however, hit the balance sheet through OCI.

Maybe it wasn't just his bonus - maybe he had some of his personal money in CDS as well. Brian

why declining so much today? just sold $40 july puts @1.2