SharperDingaan

The reality is that there is no check list to follow, but if your accounting is up to it - look at the forensic accounting texts. Focus on what the criminal is trying to do, why its required, & how that specific tweak helps him achieve his goal. Then apply you findings to known frauds (ie: Enrons). Look at what is typically said when the flags first go up, what the typical trading looks like, & how long it takes to `discovery`. Come up with some progressive flags - & you have a taleb like trading position. Just keep in mind that the vast majority of firms are honest, & that most frauds are typically very country or culture specific. The seminal texts mentioned use GAAP BS and P&L accounting information, which will dissappear on 01/01/2011 (ie: under IFRS the BS, P&L, Statement of Cashflow, etc. will no longer be produced). There will always be frauds, but there is no reason why you have to be burned by them SD

Thanks. While we've used the opportunity to triple our share holding for very little additional investment, we think the shares are a little ahead of themselves at present :( We still hold the debs, but their true value is in their +ve carry (long deb, short T-Bill) May we all prosper SD

Cardboard Think a blue chip syndicate taking out all of AIG, backed with a 10yr+ central bank/fed reinsurance policy after the first $X of potential loss. WEB's mono-line coverage serving as the basic model. No one company could afford the stand-alone risk, they would need to be multi-national, demonstrate deep & rational operating knowledge, be a fairly small like-minded group, & have a history of deep & patient capital. The central bank presence actually makes the $ a secondary issue. And if your firm is a part of it ...... SD

A few things to keep in mind ;) 1) All this discussion on ORH/acquisitions is bringing the momentum players in. A 5-10% 'premium' is pretty much automatic. 2) Whatever happens it'll be accretive, & it looks like its allready mostly a done deal. That 'new' higher BV will reduce the multiple. 3) The debt issue is sizeable, & funders like what they've been told. FFH will probably be perceived differently after its done. 4) If Katrina-2 suddenly hits, the deal becomes significantly cheaper. Leaving material change to boost capital if needed. With so many positives, it's pretty hard to not wait & see what happens. SD

Rabbit The whole world is going to IFRS & like it or not the US will be forced to as well. There will be a lot of screaming & posturing - but it will happen. The MTM is really no different to what allready occurrs, just that now it goes on the face of the FS wheras before you did your own calculation on a spreadsheet. We're better off for the standardized disclosure, & shining the light in what is often a very dirty area. SD

Maturing bills getting rolled over + some new cash looking for a home

Seems more likely that HW has a game changer in mind. The whole hedge fund discount to BV argument is because HW investment performance is outshining the UW wrapper that provides its float. Were FFH a much bigger ‘name-brand’ UW with quality lines - we’d all be valuing at 1.6x BV versus .90x and citing what great businessmen they are. Referencing. We know FFH has a target debt/equity ratio & that there is material div capacity within the group. Perhaps FFH now has too much equity, & needs the debt to get them back on target? Or do they have a game changer in mind, & plan an equity issue to restore the ratio after it’s done? Hopefully it is a piece of something very big, with invitation only blue-chip partners, possibly taking over a government administered asset? Partners to spread the financial operational risks over, & a once-in-a-lifetime opportunity for all. Disclosure: Long FFH common SD

If they owe you, it`s pretty much the average prime rate at Sched-A banks over the last quarter. If you owe them - add another 200bp!

Given that these transactions were each < 5K, there is a distinct probability that they were from Tax Free Saving Accounts (TFSA). If you think that the shares will go to $2.00/share, then these things will be worth 40-45K each. A downpayment on a house? Good on them ;) SD

Big question is if they can offset their downward spiral quickly enough, & what surprizes are hiding in the run-off. While we wish them luck, we also expect to see another few rounds of capital injection SD

Crip Brick is one of the dominant big box stores in the sector. Most folks will have bought at least 1 item (couch, appliance, furniture, etc) from them within their first 8 yrs or so of starting out. Lower quality middle of the road offerings at attractive value. Within the triangle they have a zoo of aggressive, & good, niche competitors. Leons & Sears in furniture, Sleep Country in matresses, Goemans & Sears in appliances, Best Buy/Future Shop in electronics. Their advantage is economy of scale - if they have it in stock at the right time & place. The sales force used to be very good, loyal, long standing, & well motivated. Many were privately rewarded with free stock when Brick went public, & there are many stories of above & beyond service - from that time. The stock out problem has gotten progressively worse, goodwill is close to empty, & many of their best salesman have voted with their feet. Especially troublesome - as the salesforce is disproportionally ethnic, & these individuals are likely to experience some discimination in their job search. Ticking bomb. If they can get their act together they will do extremely well, but they need to show very real improvements - & soon. There's been some hubris, & panic execution in places (sales force), but they've also demonstrated that at one point they knew how to run this business. Long call investment with an upward bias around binary events. You should know by the end of January SD

Sometimes you get what you need, Rolling Stones. Few have realized what management have really told us. 1) Q2 was all about cash conversion. Inventory sold at a loss, working capital management, confirmed black liquor subsidy recipient, debenture interest negotiation. The true value of the subsidy is that it's a back door by which Quebec can inject material $ into the industry, the interest & repayment free $ start flowing in the last 1/2 of the year, & there is no real cap - essentially a mini TARP fund. The real value of interest capitalization is no cash interest payments on the non-debenture debt for 12 months. 2) Banks are not charities - yet they've agreed to increase debt, take no interest for a year, & allowed deb holders a cash interest payment? Or is it more likely that it wasn't just SFK in the room, & that the banks have been persuaded that they can be confident of the minimum projected cash flow for the next 12 months? 3) $US NBSK prices have risen every week for at least the last 10 weeks & are now at least 10% higher than they were. Q3 is a traditionally higher volume quarter (xmas wrapping paper) & the price is rising; we're also starting to see brown paper grocery bags replacing plastic (incremental secular volume). St Feliceons inventory is low, & Kruger has just cut production; so why wouldn't the growing margins flow to the bottom line fairly rapidly? At $40 the Debs are priced at a 17.5% cash yield, a 50%+ YTM, & the cash yield reflects the negative possibility of repayment in common vs cash. Discount at the cash yield & you get a 3 bagger - with the principal repaid in either cash or common (assumes no bankruptcy). To hold common most folks would want at least 2.5x as much to compensate for their higher risk, hence the common needs to be at least a 7.5 (3x 2.5) bagger by 12/31/2011. ie: At todays price - it needs to be at least $1.65 within 2.5 years. Then consider: If the biggest creditors are confident in the cash flow, & business conditions are improving, why does the Deb need a 17.5% cash yield? And wouldn't the possibility of getting repaid in common now be a positive if you could get 2.5x as much common (100/40), & SFK had a very strong reason to pay in common vs cash (Debt/Equity ratios) Disclosure. We are no longer short common SD

Is this what's known as 'raider bait' ;D SD

Arbitragr: As the put writer of an exchange traded American option, we have no say. The buyer has the ability to ‘put’ the shares onto us at the agreed strike, at anytime up to the expiry date, & could do so whenever the market price fell below the strike price. To exercise, the buyer would simply advise his broker who would advise the exchange; the exchange would then assign the exercise against one/more of the put writers. If the puts are in the money at end of trading on the maturity date, the exchange will automatically assign all the open positions. Until that put matures we have committed $X of T-Bill or borrow capacity, to a potential buy (hence the forest of obligations). To escape early we have to buy the option back, & flatten our open interest. As we will be paying a premium - the time-shift in the greeks is critical to us, as it determines whether or not we will make a profit. For short dated options time is the driver (& the decay is known), for long dated options the driver is volatility (& the decay is unknown). As the short-term put writer the premium income boosts my margin of safety. As the long-term put-buyer I’m trying to buy when everyone is sure the future is bright (long-term volatility is low), & trying to roll when there is choppy trading (short term volatility is high). Nirvana is a volatility trade that covered the decay cost, leaving me with a zero cost long-term hedge. Greeks are important. SD

T-Bone: Great post May we suggest that you look at FFH/ORH more as a business, & less as an investment - as they are not neccessarily the same. Agreed reserves are very likely on the high side, & the expense ratio is artifically high. We would also point out that if they went to the 'industry' asset mix, & yield, they could also triple their UW income very easily. But ask yourself; From a business perspective, over the next 12-18 months, how likely is it that HW will ever again see such reasonably safe opportunties to double (or even triple) their UW business - in their lifetime ? - They have the reserves to cover them against significant estimation error - Their financial flexibility cant get much better (debt maturities, ratios, hidden asset value, cash, etc) - They have surplus expertise, & the experience to merge entities - They have time to confirm which way the NA economy is going (double-dip, inflation/deflation, etc). - While they wait they can expect to get stronger. Good businessmen also diversify their product lines, so don't assume another NA P&C, or similar lines. There's a nice growing class of US muni debt out there looking for some kind of insurance :P Prem doesn't just have an arc, he also has a war chest. At some point he'll use it. SD

We'll post our take in a a week or so ;) SD

Lot of red flags: Despite the fed takeover, they're still keeping reinsurance risk within the group (from one sub to another) ? Either the risk was so toxic for the price, that industry refused it (so they had to do it amongst themselves) - or no-one is looking at the consildated group risk (its only individuals within each sub looking at only their sub). The fed invests 130BB+ and isn't aware they its behind, & not ahead of policy holders ? Or is it more likely that at the operating level AIG's UWs haven't been told that the fed has an override - so they believe they have to write, because they need the premium ? AIGs UW risk has to be rising dramatically - as they're writing for additional premium, and don't seem to be able to reinsure much of it. Assume reinsurance where-ever practical, & their book can only contain a material & growing slug of really low quality business. The securitiation issue again, but this time with insurance vs Alt-A & liar loans ? A super-cat loss doesn't have to be weather related, it could also be the collapse of significant UW capacity - & arguably the risk that AIG is increasingly representing. We know that WEB has been withdrawing from super-cat because the premium doesn't warrant the risk - perhaps this is part of the reason? It cant be easy running AIG, so lapses is corporate wide risk management & communication are to be expected. Hopefully they can fix it before it blows up. SD

This is why you hedge. A net loss of 37c for the quarter - ouch! http://cxa.marketwatch.com/TSX/en/Market/article.aspx?guid=http%3a%2f%2fsystem.marketwatch.com%2fnewscloud%2fdocguid%2f%7bF4F5CCAC-AB36-4634-A55A-6408CD51C890%7d&symb=SFK.U SD

The UW doesn't bother us as FFH doesn't discount the liability, & has a far lower income simply because it isn't chasing yield. Best guess; if that 'measurement difference' is around 5 on the CR, they're actually writing at close to break-even & playing to their strength - investment. We think the bigger issue is the inherent MTM BV volatility, multiplied by the UW exposure. Eg: major flooding/hurricane damage concurrent with a 20% drop in NA indexes - in 1 quarter. Not that long ago no one believed in black swans - but now they show up on a regular basis (AIG?). A non P&C investor is going to take a sizeable discount for the perceived risk. A normal business risk to an experienced P&C investor, & a frustration as we never get to intrinsic value. But if you see the change in BV multiple as essentially being a seasonally driven annual business cycle - then the nature of this investment changes dramatically. If the ROE is 15%, a round trip would generate a fairly reliable 75% of BV [(1.25-.9)x2x(1+.15/2)] vs 15% for a buy/hold - or 5x as much. Even if you only capture 40% of the potential 75% you're still 2x better off. Not an approach for everyone, but it doesn't hurt to be flexible. SD

Couple of thoughts that immediately sprang to mind: Why so few questions. OK partly it’s the day before a long weekend, but doesn’t it also reflect a greatly reduced media/industry interest? If the BV multiple is to rise over the near term, we need more buyers than sellers – so where is that $ flow coming from? Trade versus value play. This is hurricane season, and FFH does not appear to be a market hottie – so why would you NOT expect the BV multiple to drift downward as we move through the quarter? Then if you believe that 1.25x is reasonable & you can buy at .90x (or less) - aren’t you really making your money from trading versus holding? Then doubling it - if you actually see FFH as being a long term value play. Why such UW variation. Lot of possibilities, but perhaps the real issue is that they haven’t bought out other carriers & used their expertise to extract the synergies. Additional float, economy of scale, etc. Buying in your own subs (NB) boosts financial return, but has no impact on the UW. Long term operations. ORH is inherently riskier business, so if you can already lay off some of the non-systemic equity risk (via the publics holding) – why would you want to take it back anytime soon, when even WEB is backing away from cat risk? Alternatively why would you NOT have ORH make other reinsurance acquisitions to grow its entire business? Value Trap. For the foreseeable future FFH is going to be primarily an investment vehicle – so wouldn’t its NAV always be discounted for its UW operation, because it is not directly comparable to other investment funds? Especially as it would seem to be that only with a great effort at the annual AGM – do they get anything close to an insurance coy valuation. Another great quarter, but you have to ask why are we not getting the bounce that we might expect. SD

You might want to consider temporarily selling the odd share or two & going the T-Bill+call route. It could be a terrible shame to not take Mr Market up on his offers ;) SD

We think that Uncles should only steer, & not force any given calling. The nephews live across the pond, are aged 11 & 14, & are free to choose whatever they’d like to do. But as a minimum, they will each take the following life skills with them. Wealth & privilege: Wealth is who you are as a person, what’s in your head, how you act amongst your peers (of any age), and how others perceive you. Financial wealth is ashes-to-ashes within one generation. If you had to start over again tomorrow, with nothing & someplace else, would you thrive? Ethics: Live modestly, do the right thing, do no harm, & help others. Buy a bum coffee & a meal – but if somebody crosses you, go to the mat. If I read about what you’ve done in the papers tomorrow, will I be pissed? Ownership: Joint bank account & they write the cheques – mom/dad & I as counter-signers. From that account they’ve bought 100 shares of Manchester United, & units in a music royalty trust. A home football match is a shareholder meeting, and 700 plays on a radio station is a 1p distribution. Heroes & media: The bios/histories of Suleman, Sir Francis Drake, CJ Rhodes, JP Morgan & the odd Mafioso are all required reading. All were bastards, but in their time they were amongst the best at what they did, & the winner gets to write the press. No bubble: Experience how different kinds of businesses are run. Learn how to make friends outside of your circle. Deliberate in your face exposure to life events. Backpack travel abroad once every 2 years. I’m informed that Cairo’s Khan el-Khalili is brilliant. Interesting side-effects: There’s always a swarm of strong minded & fiercely protective girls around these two. I’d like to think their easy leadership is starting to set them apart. The glamour job is ‘Financial Regulator’ …. but in the Drake/Rhodes/Morgan mold. Steal the money back with a privateering license, 10% personal bonus, & 10% to the underworld ;D SD

"Several posters speak in the plural ("We") when talking. Dazel, Sharper, and a few others" Speaking only for myself. I manage the family investments as a sideline, & am training 2 nephews in the darkarts of finance - hence the 'we'. Part of their training is that they can each make a BS/PL 'dance', & that they each have to present a new idea on the back of an envelope every quarter-end. If it survives the 20 questions, we put real money on it (a very small allocation from the main portfolio) ;) They're at the table whenever the major decisions are made, & are there to ask questions & learn by osmosis. Once/year they have to present a business plan to a small businessman, buy some inventory, & then help in selling it through his/her store (preferably something edible in case they screw up) :D Real life experience, with 20% of their gross going to charity and another 20% going to travel. Taxation. They also read this board as well SD

Very nice to see Keep in mind that its not just seasonal 'fudging'. Net asset values are also being inflated (accounting changes). There is also zero mention of the interest that should have been paid on TARP funds this reporting season. Most would suggest that bad news is also being deliberately undereported. Housing is not just overbuilt, its also obsolete. A retiree cant keep such a large house clean, & an illegal worker cant afford such a large space - so who are you going to sell it to? Then add in that the growing army of the destitute all need a place to stay - so why wouldn't they simply squat in the existing foreclosed houses ? It is now almost enevitable that the US is going to have to devalue, & very likely lose its reserve currency status along with it. SD

We use options exclusively for hedging purposes, & almost always as the option writer. As a put writer we generally prefer shorter term options at the money, & write with a view to acquiring the underlying. Greeks are important to us, & the premium is the consolation prize if we fail. We will occassionally sell a position & hold the T-Bill +long call equivalent. Allmost always around binary events where there is an upward bias, but the outcome could go either way. The premium is insurance. We find the biggest advantage of being long the underlying is the flexibility. Certainty, today, every time we do a buy/sell. More secure lending vs premium income. Borrow capacity every time we need it. No forest of potentially adverse forward obligations. We also snore very soundly every night ;D SD