A_Hamilton

Anyone else not seeing the interim financials on their website?

Herk has generally checked out of investments at his namesake firm. He sits on the company's midcap committee which runs relatively little of the firm's capital (Though he does still do a good bit of marketing). If you want to get insights from him ask him about his best investments in the 1985-1993 period. He's better for case studies than current ideas.

As Andrew Carnegie said, "Put all of your eggs into 1 basket, and watch that basket!"

4 Long Holdings FRFHF 23.6% SMBC 42% FSFG 14.2% JPM 15% Cash 5.2% __ Short IWM ~60% of portfolio.

In case anyone missed it: Moody's upgrades Fairfax Financial (senior to Baa3); outlook stable 2011-03-15 21:36:06.115 GMT New York New York Enrico Leo Robert Riegel Asst Vice President - Analyst MD - Insurance Financial Institutions Group Financial Institutions Group Moody's Investors Service Moody's Investors Service JOURNALISTS: 212-553-0376 JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 SUBSCRIBERS: 212-553-1653 Moody's upgrades Fairfax Financial (senior to Baa3); outlook stable Approximately $1.5 billion of rated debt impacted. New York, March 15, 2011 -- Moody's Investors Service has upgraded the senior unsecured debt rating of Fairfax Financial Holdings Limited (Fairfax; TSE: FFH) to Baa3 from Ba1. Moody's also upgraded the preferred stock rating of Fairfax to Ba2 (hyb) from Ba3 (hyb) and the trust preferred stock rating of Fairfax's affiliate, TIG Capital Trust, to Ba2 (hyb) from Ba3 (hyb). These actions conclude a review for possible upgrade that was initiated on December 13, 2010. The outlook for the ratings is stable. RATING RATIONALE "The upgrade of Fairfax's ratings reflects a continuation of favorable trends in terms of the group's financial flexibility including: significant dividend capacity from its insurance subsidiaries (approximately $750 million in 2011 without regulatory approval); abated risk at its run-off insurance operations; the ongoing commitment to maintain approximately $1 billion in cash at the holding company as well as the overall improved diversification across the Fairfax group of companies," explained Moody's Assistant Vice President, Enrico Leo. Moody's also expects that adjusted financial leverage will remain at or near current levels (31% as of 12/31/10), and that any future acquisitions will be managed to maintain the group's financial flexibility. Fairfax maintains a diversified revenue stream by product and geography, particularly as it now owns 100% of Odyssey Re (A3 IFS, positive), Northbridge (Canadian insurance operations, unrated), Crum & Forster (Baa1 IFS, stable), Zenith National (A3 IFS, stable) and First Mercury (Baa2 IFS, positive); and has about 20% of its operations outside of North America. Several challenges remain significant to Fairfax's credit profile including historically weak operating earnings (excluding realized gains) at its insurance operations, exposure to catastrophe risk, the high level of common stock investments (though a substantial portion of equities are currently hedged), and historically volatile loss reserves particularly at its run-off operations. In determining the Baa3 senior debt rating, Moody's considered the collective insurance financial strength ratings of the Fairfax group of companies and the debt outstanding at intermediate holding companies, which results in structural subordination at the ultimate holding company. The structural subordination at the ultimate holding company is mitigated by both the diversification of businesses and by the commitment to maintain significant levels of cash at the parent company. The outlook for the ratings is stable. The rating agency said the following could lead to an upgrade of Fairfax's rating: (1) stand-alone insurance financial strength ratings of the company's lead operating P&C and/or reinsurance companies are upgraded; (2) adjusted financial leverage consistently below 30% and operating earnings coverage (excluding realized gains/losses) consistently above 4x; and (3) aggregate combined ratios consistently less than 100%. Conversely, the following could lead to a downgrade of the ratings: (1) stand-alone financial strength ratings of the company's lead operating P&C and/or reinsurance companies are downgraded; (2) adjusted financial leverage consistently above 35% and earnings coverage (excluding realized gains/losses) consistently less than 2x; (3) holding company cash and marketable securities is not maintained above $750 million and above 3x total fixed charges; and/or (4) significant adverse reserve development at Fairfax's run-off or ongoing operating subsidiaries (greater than 1% of gross reserves). The following ratings were upgraded, with a stable outlook: Fairfax Financial Holdings Limited -- senior unsecured debt rating to Baa3 from Ba1; preferred stock to Ba2 (hyb) from Ba3 (hyb); TIG Capital Trust I -- trust preferred stock to Ba2 (hyb) from Ba3 (hyb). Fairfax is a financial services holding company which engages in property & casualty insurance, reinsurance, and investment management through its operating subsidiaries. As of December 31, 2010, Fairfax reported net premiums written of $4.4 billion and net income of $471 million, and year-end total shareholders' equity of $8.7 billion. The principal methodologies used in these ratings were Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010 and Moody's Global Rating Methodology for Reinsurers published in July 2008. REGULATORY DISCLOSURES Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information. Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating. 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Small Cap, What I'm saying is that if I buy say 25 bonds, am I going to get a horrible quote when I try to sell these, versus 100 bonds. How big of a lot do I need for a broker to give me something close to what an institution would get for these versus a retail holder.

Anyone have thoughts on how many bonds one needs to purchase so that they don't get their faced ripped off when they try to sell these?

Liberty (and others), I don't understand the frequent question on this board about FFH purchasing messy turnarounds. I recognize that this makes up some of their portfolio holdings, but what about the massive positions in RIMM, USB, WFC, GE, JNJ, KFT, DELL? Also, I've never seen a more conservative fixed income portfolio from a credit perspective... Additionally, Buffett and Berkshire are not against buying into difficult situations and have made a fortune on them over time: Johns Manville, Comdisco, USG, Level 3, not to mention Berkshire Hathaway itself. Buffett's also lost a ton by buying massive stakes in hugely distressed Irish banks. I think Buffett's refrain is quality businesses because he has a responsibility to the public and doesn't want some guy with $50,000 of his net worth to go out and put 100% into LVLT...much better for the guy to own 100% of KO. I'd highly recommend differentiating between what Buffett says and what he does in investing (writing swaps on indexes ring a bell?). Just my two cents, as I don't believe FFH is that into buying junk per se, it's just where the opportunities are sometimes...

Ok22 a few thoughts: 1.) Very simple on the the index swaps. They have $3.3 billion in notional against the Russell 2000. For every 1 percent increase in the Russell they lose $33 million. There is no limit to the amount that they can lose, except that they can close out the trade whenever they wish. Same deal with the S&P 500 swaps. 2.) On the CPI linked derivatives, the most that they can lose is their cost basis, or ~$300 million. 3.) See point 1. 4.) See 1. 5.) They don't know how their long portfolio of equities will perform, so there is no scenario analysis possible.

I would concur with this view. Anyone who thinks that MSFT is a value stock should open up their Microsoft Excel spreadsheet and run a number of hypothetical discounted cashflow models. They really only take about 5 minutes to build a 10 year earnings forecast, apply growth rates and discount rates, and then see what you get. When you do this, think very carefully about what sort of discount rate that you would need to apply to MSFT's earnings after about year 5 or so. IMHO, those earnings are so uncertain that I'd want a 10-15% discount rate on anything past about year 5. To be comfortable with MSFT at $27, you need to either be very confident about the distant cashflows (and thus use a relatively modest discount rate) or you need to assume some healthy earnings growth. I'm not saying that MSFT will implode any time soon, but I just can't get comfortable with the numbers and uncertainty. SJ Did you incorporate the $6 in cash per share on the B/S?

Read a little bit more detail. The series B “C WS B." are pretty far out of the money. "The United States Department of the Treasury, referred to in this prospectus supplement as the selling security holder or Treasury, is offering to sell 210,084,034 warrants, each of which represents the right to purchase one share of Citigroup common stock, par value $0.01 per share, referred to in this prospectus supplement as the Common Stock, at an initial exercise price of $17.85 per share. Both the exercise price and the number of shares that will be acquired upon the exercise of a warrant are subject to adjustment from time to time as described in this prospectus supplement. Citigroup will not receive any of the proceeds from the sale of the warrants offered by the selling security holder. The warrants expire on October 28, 2018." Quarterly dividends need to be in excess of $0.16 in order to get a reduction in the strike price. The other set (Class A) are also out of the money, but not nearly as far. The United States Department of the Treasury, referred to in this prospectus supplement as the selling security holder or Treasury, is offering to sell 255,033,142 warrants, each of which represents the right to purchase one share of Citigroup common stock, par value $0.01 per share, referred to in this prospectus supplement as the Common Stock, at an initial exercise price of $10.61 per share. Both the exercise price and the number of shares that will be acquired upon the exercise of a warrant are subject to adjustment from time to time as described in this prospectus supplement. Citigroup will not receive any of the proceeds from the sale of the warrants offered by the selling security holder. The warrants expire on January 4, 2019. Citigroup originally issued 188,501,414 warrants to Treasury in a private placement in connection with Citigroup’s participation in the Targeted Investment Program, or TIP, under the Emergency Economic Stabilization Act of 2008, or EESA, and issued 66,531,728 warrants to Treasury in a private placement in connection with a loss-sharing agreement among Citigroup, Treasury and the Federal Deposit Insurance Corporation, or FDIC. Prior to this offering, there has been no public market for the warrants. Citigroup has applied to list the warrants on the New York Stock Exchange under the symbol “C WS A.” The Common Stock is listed on the New York Stock Exchange under the symbol “C.” On January 21, 2011, the last reported sale price of the Common Stock on the New York Stock Exchange was $4.89 per share. Additionally, the exercise price of, and the number of shares underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.01 per share of Common Stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury

I don't know if they will be available to retail in the initial offering, but certainly in the secondary market. From the prospectus: Citigroup has applied to list the warrants on the New York Stock Exchange under the symbol “C WS B."

Does anybody know what all of the Long Total Return Swap positions are in? I've got the 3 pieces reported in the ORH insurance filing. KFT, USB and WFC at notional values of 150 million, 150 million, and 243 million, however, this only adds up to ~$550 million. The 3rd quarter interim report said that there were $1.13 billion of notional TR swaps on a long basis. What's the other $550 million? Additionally, have there been any indications of what the single name total return swap shorts (not the indices) are ($518 million short; these had to have hurt in the quarter)? Thank you. AHamilton

Why do you all keep referencing a mutual fund? Looks like Ravi is trying to start an unregistered hedge fund. I'd be interested to hear what others think, but a New York firm giving you a relatively standard partnership document would charge $40,000. Though you are also going to have to figure out whether you need an administrator, and you'll need an auditor and tax accountant. If your $1 million is coming from family/friends you may be able to get off the ground with a simple partnership agreement for a few thousand $$$, and forego the auditor, administrator.

One item to think about, in my mind, on V and MA is that the companies are needed by the governments in emerging market countries because electronic transactions create records which stop the underreporting of taxes, sales and otherwise...so many EM governments are actually very happy to allow these guys to run at large margins (likely until penetration rates are extremely high, then they will get whacked like in the U.S.). Very big cash flow generation will come from these markets for these guys going forward and the market is probably overly focused on their U.S. issues...

Thanks for the shout out, Barminov. I love that the government continues to fail to clamp down on large swap transactions that are wholly unnecessary...great for Fairfax (and hedge fund community), but would hate to find out which bank isn't hedging its position properly in these...

I'm really floored at people's reaction to my comment that mid-teens (or 15% returns as I stated originally) return expectations seem "silly" for a large money manager like Longleaf who has $25+ billion under management. Now, I realize the past decade was a tough one, but to put into perspective how difficult this feat has been over the past decade, exactly 1 manager in Morningstar's list of All US Diversified Stock Funds (3325 funds) with a 10 year history has a return greater than 15%- CGM Focus (17.39%). The average return is 2.39%, and as we all know, there is survivorship bias in 10 year fund numbers. I know a lot of people on this board have put up fantastic returns in their PAs, but between market impact in trading, institutionalization of purchase and sell decisions, skid from the delays due to the instiutionalization of idea flow, etc, these types of returns are just fantastical as a return expectation for a large money manager, especially when the market is trading at or above its historical averages as it appears to be today. They come out with this as their Q1 2009 letter, "Ok," but today? Ain't gonna' happen.

Was the RIMM holding previously disclosed?

"We believe mid-teen returns are acheivable based solely on the metrics of the businesses we own." That's where the 15% business comes in. Additionally, when FFH is 91% hedged and Longleaf is claiming "mid-teens" returns are possible from here, someone is going to be wrong. I happen to trust FFH's analysis of the situation, and so just have no idea where they expect 15% returns to come from in a long only portfolio of equities.

This letter is just silly. 15% (mid-teens) returns on their portfolios going forward with a current $25 billion under management?!? Delusions of grandeur.

So per Bloomberg five year FFH debt trades at a 6.4% YTM maturity (when it trades which is a few times a month)...so 2.1% (5 yr canadian treas) + 2.85% seems cheap (even when tax effecting the dividend v. interest payments), especially since FFH has the option to let this remain outstanding. My questions would be 1.) Why do they keep parceling this out rather than doing one big issue?, and 2.) if FFH thinks low rates are here to stay why not just issue prefs at 3month LIBOR (I don't know what the canadian equivalent is) plus a spread (which is what was just called away at ORH)...

Investor is a really bad example, since they are hardly even actively managing their portfolio. Even if you would argue that they do, they are still overpaying their corrupt executives for making the "active" decision of holding on to companies of which they have been the majority shareholder for decades. I'm actually quite disgusted by Investor and the Wallenberg heirs. I don't know that I necessarily agree that it is such a "really bad example," of a company that invests where its sees the best opportunities. The company has to manage its cash flow each year, choose whether it is going to invest in its holding companies, retain capital, etc., and the fact is, even if their execs are overpaid (name 10 execs who aren't today), the returns over time speak for themselves (See the attached chart of preformance versus the S&P 500). I'm not saying invest in any price, but it is a Holding Co. that invests in several different industries and that has beat the market over time.

Groupe Bruxelles Lambert/Pargesa/Power Corp of Canada Investor AB Jardine Matheson Oresund Investment AB Kinnesik I'm sure we can get a larger list going...

I think its a foregone conclusion that all of the ORH preferreds will be called. Odyssey paid $3.5 million to alter their bond indentures so that they don't have to make SEC filings to be in compliance with their bonds, and can instead make their NAIC filings available to bondholders free of charge. Plus, as has been said here, there is cheaper money available. $80 million to call both series of pref's will in no way break the bank given the level of capital at ORH right now. They can call whenever they want, but they need to give 30 days notice...so if they want the call to take effect at the time the next divi is due, they will need to call by Sept. 20th....

Most sell-side research won't give you the long term historicals you are looking for...most models only go back 2 or 3 years as everything they do is forward looking. If you are trying to normalize historical spreads and margins you are much better off with a VL tear sheet or an S&P Outlook tear sheet. Only other quality way to get this info. is through Bloomberg/Capital IQ/Factset...but those are expensive, and still have errors (but at least there is heavy support behind those products to fix any errors that you discover).