A_Hamilton

Zach, I agree that BBRY's impact isn't so large as to cause a major impact on FFH's valuation. However, I think your valuation of the converts may need some refinement. The call option embedded in the convert went from $2 out of the money to in the money during the quarter. This is surely worth more than 12 million on a $500 million par value convert with a 6% coupon and $10 conversion price.

You don't need to become a member of FINRA. Everything before your paragraph beginning with the word "However" is what you need to do.

When you have a 4% savings rate and a median household income of $51,000 it's easy for that to happen. Also, the 4% savings rate has a fat right tail full of high income/high wealth individuals, so very little saving going on until you get into the 80%+ income bracket.

It's a great plan. Let's tax JPM's $40 billion of goodwill. Define Bill of Attainder.

I did not quite understand why you would not believe the accident year CR. Could you please explain? Thanks Vinod They sandbag the accident year reserve. If they think they are going to have losses of $100 on a policy they put $115 into the reserve. They say they are being conservative (which they very well may be, who knows what will happen between a reserve being established and claim identification/settlement. Courts could become more hostile to insurers, inflation could go up, an unforseen risk might not have been excluded from a policy). However, at a certain point you've reserved for the unknowns that I've bracketed and you are effectively setting up redundant reserves that you will bleed through calendar year combined ratios in future years. That is what FFH is doing...it's also what BRK.b and WRB are notorious for.

+1 It is good to see underwriting going in the right direction, but it is aided by $440 million reserve release. Accident year CR is at 100%. Vinod Do you still believe in their accident year combined ratios? They have to use the most conservative level that their auditors/independent actuary will allow. Here's a question for FFH management: How much inflation do you bake into your reserves and how is this level consistent with your view that deflation is likely across the western world?

USD :) Adjust for all of the unrealized gains this Q and subtract out the dividend that was paid and you are around $370-$375 in BVPS. Under $370 would be a decent bargain.

Perhaps, though with the gains in IRE, BBRY, RFP, KW, USG, LT bonds thus far this quarter and the only real offset being a loss on OSTK, BV today is substantially higher than reported BV...so not really sure it matters what they reported for year end.

Is it saying pension plan held investment which increased from $223mn to $389mn in 9 months? I wonder which one that would be. Mostly some large cap. Also structure of this transaction will point to Buffett's valuation of Berkshire. I think it was good bargain below 109 and still not very far from it. Valeant Pharma. Sequoia is one of the two managers of the pension plan and Valeant has been a grand slam home run for them. That's a good guess. Matches the reported gain. Also, I don't think this has anything to do with Buffett having a love affair with any of WPO's assets at this point. Kaplan has been a stain and a strain on the Gates' and his relationship . Melinda Gates resigned from WPO's board, Buffett resigned and I think he just wants to get away from for-profit ed.

Is it saying pension plan held investment which increased from $223mn to $389mn in 9 months? I wonder which one that would be. Mostly some large cap. Also structure of this transaction will point to Buffett's valuation of Berkshire. I think it was good bargain below 109 and still not very far from it. Valeant Pharma. Sequoia is one of the two managers of the pension plan and Valeant has been a grand slam home run for them.

I don't think so. The hedges are for providing losses to temper the gains on the the stocks in their portfolio providing gains to temper the losses on the stocks in their portfolio. Potential upside from equities begins after they've dropped the hedges -- until that point, the gains would likely be on the bonds and other things they may have (like potentially the deflation CPI thingies). That was good. Agree about the upside being muted for now. Think about the holdings in the background. In a 40% loss scenario needed to bring the hedges to break even (give or take) BKIR, BB, and RFP are gojng to drop alot more than 40%. I would wager 90% on RFP and BB. add to this: In the last major market drop FFh dropped 1/3 after reporting huge earnings. Agree with Dazel. FFh has the best bond group going. Why would you think RFP would drop 90% if the IWM dropped 40%?

I don't track FFH very closely, but when Watsa say that he was unwinding the hedges? He didn't. The hedges have very little value left between the writedowns/passage of time/continued increases in CPI. Don't know if I want that to reverse or not..

Ok I see what you mean. What you suggest is very reasonable. I don't have a good sense of how substantial these tax-exempt entities are, but I'm guessing they are a smaller part of this overall phenomenon? Thanks for explaining. I'd actually think they are a very big part of the cat bond market. These are high yield instruments that tend to have low correlation to junk bonds and equities. These are an ideal pitch to every pension fund and endowment.

Hi A_Hamilton, can you explain this some more? Thanks First, on 5-8% cost of capital. Think about a pension plan with an 8% return on plan assets assumption. If they can acheive that by owning cat bonds they'll allocate capital there. FFH has a much higher required return assumption which is one reason why so much capital will flow from pensions ane endowments into these structures. Separately, on UBTI, I don't know how other countries operate, but in the U.S. a non-profit or pension can't directly control a company. So, for instance, Harvard can't buy 100% of Kraft and operate it as a for profit entity but not pay tax because Harvard is a non-profit. If Kraft were owned by Harvard it could charge substantially less for products than other consumer food companies because they don't have to pay taxes and can still earn a decent return on capital. To me, since these entities are effectively in the business of writing insurance our laws should force non-profits to pay taxes on their cat bond returns as any other taxable player would.

I agree, that's the way it looks. But then why would someone with the industry stature and experience of Richard Brindle think that this capital is to be taken seriously?? These vehicles aren't been run by complete novices either. As gio already pointed out, the 'permanent capital' guys such as TPRE and GLRE, typically hire-in teams with lots of experience. And with the sidecars, the sponsors typically put up 10-15% of the capital at risk, so interests are at least somewhat aligned. At what point the benefit of the fees outweigh the sponsor capital at risk, I'm not sure, but I don't think we're there yet. I'm also interested to know whether anyone has an opinion as to how alternative capital may impact the direct insurance market down the line. I believe that to date alternative capital has probably been a net positive for direct insurers, lowering their reinsurance costs. In the future, perhaps alternative capital may find routes to market and reduce returns there too?? I'd add to this, what is the cost of capital for an endowment or pension plan? 5-8% depnding on the situation. These cat bonds are problematic in my opinion because if it were any other industry they would be treated like UBTI (after all they are effectively in the business of writing insurance), how can there be taxable competitors with this disadvantage?

Does any one have comments from Buffett on the % of daily volume he maxes out at when building positions/exiting a name? I'd be interested to read any intelligent thoughts about this from others as well. Assume you plan to hold the name for years and aren't day trading. Thank you. A_Hamilton

wrong. the company is incinerating cash. it burned almost half a billion in the last 39 weeks and cash burn accelerated in the most recent quarter. your fcf number is astonishingly wrong. Chen's stated objective is to "arrest" cash burn. Thank you Wellmont. I was seating here since yesterday waiting for someone to point out that barely two months after the $1B cash infusion (after the failed go private attempt) Blackberry is going back to Fairfax for $250M more in cash. And no one is asking why, or even considering it to be worrisome. Remember the days when part of the RIM bull case was how they had all this cash on their balance sheet with no debt etc... but now two months can't go by without the need for an additional cash infusion. Come on guys... COME ON!! BBRY didn't go back to FFH. FFH was given an option to invest and they exercised it. The question is did FFH exercise it without partners because i.) they believe strongly in the story, ii.) the converts are worth more than the original tranche as the common has rallied since the first $1 billion piece was announced, or iii.) cash burn is terrible and/or FFH couldn't find anyone else willing to put a penny into this thing.

Al, of course he has his inconsistencies! Yet, he is the one who created an $8 billion company from scratch. Not me, neither you, nor anyone on the board (at least that I know of!). Therefore, the real question is: has he lost his mind? From a first class entrepreneur, has he suddenly become third tier? Gio He has not adapted to having large amounts of cash available. It is all back to the argument you had on the other thread. If they are gojng to be in the insurance business they need to invest for cash flow, not lumpiness. If they are going to be a PE shop then this is fine. The high debt, and poor cash flow of this style is damaging the insurance operation. Again, I repeat: 1.4 billion could have generated a lot of cash flow directly to Fairfax. 150 to 250 million per year. instead it was thrown away on a speculation. Think about that while you defend them Gio. Where are you finding these businesses with sustainable cash flow yields of 11-18% in this environment? I want in on that action.

$350 million. I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt. Thanks for the cost base in BOI. I agree there is a huge difference between debt and equity. Risk is much less. It's the position size that bothers me. I would say my biggest issue with BBRY is that they took a huge equity position (when they had the Total Return Swaps on BBRY as well) relative to FFH's equity. That made absolutely no sense.

$350 million. I agree there is an outstanding risk control question of how big of a position they will take in a given company as a % of FFH's equity and it isn't reassuring that Prem gives a poor seat of the pants answer. With that said, however, there is a large difference between another $500 million in BBRY equity and another $500 million in BBRY debt.

I just don't get it. They have now invested 1.38bln! Think about the opportunity cost of that money in todays market. Opportunity cost? Where else are they getting seven year notes at 6% that are effectively first lien notes with an equity kicker? As a total aside, maybe not relevant to this discussion maybe it is, FFH now has over $1 billion invested in Bank of Ireland.

1.) You are correct. They are unlikely to redeem. Also, I think they think low rates are here to stay, so the option to convert the prefs isn't worth much. 2.) I contend that these prefs are an inexpensive way for them to 1.) get capital and 2.) short the Canadian dollar.

Why? They went from being a 10% equity holder to being a holder of $500 million in what are effectively first lien notes and 10% equity holders. This thing goes belly up the whole EV only needs to be $1.25 billion for them to be whole on the notes.

Perhaps smaller position sizing is the way to go w longer duration. I'm a chicken for the long bond duration trades! 10 year CD w/ a coupon 60 bps over treasuries is scary enough!

I'm looking at buying some ten year US government guaranteed instruments as a hedge against deflation. I can get: 10 year zero: 2.82% (10 year duration) 10 year treasury: 2.69% (8.8 year duration) 10 year FDIC backed CD: 3.307% (CIT or GE; 8.6 year duration; fully saleable on the secondary market) I'm shocked by the huge spread CD's trade to treasuries. I like the CD option but am afraid that this spread to treasury's won't close (or could rise) if deflation hits and I won't get the same price appreciation on the CD as I might on a treasury if 10 year treasury yield decline say 100 bps. Any thoughts here? Thank you. AHamilton