Grenville

Here is a link to the most recent Q2 2011 report. If you scroll to the end of the report, you'll find all the specific numbers and composition of exposure. http://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf Also here is the general link for other quarterly reports from the OCC. http://www.occ.treas.gov/publications/publications-by-topic/capital-markets/index-capital-markets-pubs.html

Moving this topic from the "Berkowitz on Consuelo Mack" thread to make it easier to find in the future.

Hi Turar, Here is the thread: http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=5190.0

The interview is posted: http://www.gurufocus.com/news/146628/gurufocus-interview-with-fairfax-ceo-prem-watsa#

I would like to understand this risk better because it's making me hesitant to invest in the major banks. In terms of the interest rate and currency derivatives, I agree the notional amounts tend to over estimate the exposure. However, banks like Wells Fargo are writing a decent amount of credit protection. They mitigate some of this risk with purchased credit protection for some of the their written exposure but not all of it. They are sticking themselves in the middle of the derivative chain instead of following the insurance approach where they just act like brokers. The exposure to credit derivatives looks like it will continue to grow along with all the other exposure through interest rate, fx, and commodities at the banks. Why do you think a similar event like AIG where they can't come up with collateral won't happen at another bank or someone in the derivative web defaults upsetting the balance? I want to understand how people are getting comfortable with this growing (what I think) is a big risk in the major banks. I also attached WFC latest annual derivative exposure to credit protection sold and purchased. Credit_protection_sold__purchased_WFC_2010_AR.pdf

Re-posting my message from another thread here for anyone who looks at PNC. Summary: PNC Financial shows too much risk. Not the right vehicle. Status: Based on further analysis of PNC Financial’s financial statements, it appears that the company is taking on sizable risk outside of its traditional business model. The company has begun to write sizable amounts of reinsurance tied to third party insurance policies offered to its customers. In the past, PNC’s two wholly owned insurance business’s would write policies and limit risk with external reinsurance. The amount of reinsurance exposure is large and looks to be growing quite rapidly. Maximum reinsurance exposure 2009- 1.736 billion 2010- 4.543 billion 2011 Q1- 4.894 billion 2011 Q2 – 5.713 billion Despite the quantitative discount that the share price offers, the increasing risk exposure along this avenue needs to be further studied and warrants avoiding the shares. One would prefer the bank to stick to banking and serve as an insurance broker instead of developing businesses outside of its circle of expertise. Disclosure in the financials: The disclosure in the financial has improved in the latest 10Q but still raises many questions. From 2011 Q2 10Q p. 127: REINSURANCE AGREEMENTS We have two wholly owned captive insurance subsidiaries which provide reinsurance to third-party insurers related to insurance sold to our customers. These subsidiaries enter into various types of reinsurance agreements with third-party insurers where the subsidiary assumes the risk of loss through either an excess of loss or quota share agreement up to 100% reinsurance. In excess of loss agreements, these subsidiaries assume the risk of loss for an excess layer of coverage up to specified limits, once a defined first loss percentage is met. In quota share agreements, the subsidiaries and third-party insurers share the responsibility for payment of all claims. These subsidiaries provide reinsurance for accidental death & dismemberment, credit life, accident & health, lender placed hazard, and borrower and lender paid mortgage insurance with an aggregate maximum exposure up to the specified limits for all reinsurance contracts as follows: REINSURANCE AGREEMENTS EXPOSURE In millions June 30, 2011 & December 31,2010 Accidental Death & Dismemberment $ 2,372 & $ 2,367 Credit Life, Accident & Health 973 & 1,003 Lender Placed Hazard (a) 1,987 & 709 Borrower and Lender Paid Mortgage Insurance 381 & 463 Maximum Exposure $ 5,713 & $ 4,542 Percentage of reinsurance agreements: Excess of Loss – Mortgage Insurance 6% & 8% Quota Share 94% & 92% Maximum Exposure to Quota Share Agreements with 100% Reinsurance $ 973 & $ 1,001 (a) Lender Placed Hazard contract including stop loss provision expired in the third quarter of 2010. Stop loss provision not available on replacement contract. A roll forward of the reinsurance reserves for probable losses for the first six months of 2011 and 2010 follows: REINSURANCE RESERVES – ROLLFORWARD In millions 2011 & 2010 January 1 $150 & $220 Paid Losses (73) & (43) Net Provision 16 & 21 Changes to Agreements nil & (3) June 30 $ 93 & $195 Changes to agreements only represent entering into a new relationship or exiting an existing agreement entirely. The impact of changing the terms of existing agreements is reflected in the net provision. There is a reasonable possibility that losses could be more than or less than the amount reserved due to ongoing uncertainty in various economic, social and other factors that could impact the frequency and severity of claims covered by these reinsurance agreements. At June 30, 2011, the reasonably possible loss above our accrual is not material.

Summary: PNC Financial shows too much risk. Not the right vehicle. Status: Based on further analysis of PNC Financial’s financial statements, it appears that the company is taking on sizable risk outside of its traditional business model. The company has begun to write sizable amounts of reinsurance tied to third party insurance policies offered to its customers. In the past, PNC’s two wholly owned insurance business’s would write policies and limit risk with external reinsurance. The amount of reinsurance exposure is large and looks to be growing quite rapidly. Maximum reinsurance exposure 2009- 1.736 billion 2010- 4.543 billion 2011 Q1- 4.894 billion 2011 Q2 – 5.713 billion Despite the quantitative discount that the share price offers, the increasing risk exposure along this avenue needs to be further studied and warrants avoiding the shares. One would prefer the bank to stick to banking and serve as an insurance broker instead of developing businesses outside of its circle of expertise. Disclosure in the financials: The disclosure in the financial has improved in the latest 10Q but still raises many questions. From 2011 Q2 10Q p. 127: REINSURANCE AGREEMENTS We have two wholly owned captive insurance subsidiaries which provide reinsurance to third-party insurers related to insurance sold to our customers. These subsidiaries enter into various types of reinsurance agreements with third-party insurers where the subsidiary assumes the risk of loss through either an excess of loss or quota share agreement up to 100% reinsurance. In excess of loss agreements, these subsidiaries assume the risk of loss for an excess layer of coverage up to specified limits, once a defined first loss percentage is met. In quota share agreements, the subsidiaries and third-party insurers share the responsibility for payment of all claims. These subsidiaries provide reinsurance for accidental death & dismemberment, credit life, accident & health, lender placed hazard, and borrower and lender paid mortgage insurance with an aggregate maximum exposure up to the specified limits for all reinsurance contracts as follows: REINSURANCE AGREEMENTS EXPOSURE In millions June 30, 2011 & December 31,2010 Accidental Death & Dismemberment $ 2,372 & $ 2,367 Credit Life, Accident & Health 973 & 1,003 Lender Placed Hazard (a) 1,987 & 709 Borrower and Lender Paid Mortgage Insurance 381 & 463 Maximum Exposure $ 5,713 & $ 4,542 Percentage of reinsurance agreements: Excess of Loss – Mortgage Insurance 6% & 8% Quota Share 94% & 92% Maximum Exposure to Quota Share Agreements with 100% Reinsurance $ 973 & $ 1,001 (a) Lender Placed Hazard contract including stop loss provision expired in the third quarter of 2010. Stop loss provision not available on replacement contract. A roll forward of the reinsurance reserves for probable losses for the first six months of 2011 and 2010 follows: REINSURANCE RESERVES – ROLLFORWARD In millions 2011 & 2010 January 1 $150 & $220 Paid Losses (73) & (43) Net Provision 16 & 21 Changes to Agreements nil & (3) June 30 $ 93 & $195 Changes to agreements only represent entering into a new relationship or exiting an existing agreement entirely. The impact of changing the terms of existing agreements is reflected in the net provision. There is a reasonable possibility that losses could be more than or less than the amount reserved due to ongoing uncertainty in various economic, social and other factors that could impact the frequency and severity of claims covered by these reinsurance agreements. At June 30, 2011, the reasonably possible loss above our accrual is not material.

Here is a link to the most recent Q2 2011 report. If you scroll to the end of the report, you'll find all the specific numbers and composition of exposure. http://www.occ.treas.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf Also here is the general link for other quarterly reports from the OCC. http://www.occ.treas.gov/publications/publications-by-topic/capital-markets/index-capital-markets-pubs.html

Yep, those are the numbers I'm referring too. The notional amounts are scary.

Great interview, finally watched it. CM does a great job of revisiting things that BB said in their last interview. One that was memorable about his worst nightmare of being forced into a corner with concentrated investments and very little cash. Also the huge drop in available cash in the fund. This will be a trying time for BB given the concentration in financials and his quickly dwindling cash. It should cause increased price volatility in many of his financials if he's force to trim pro-rata in his high conviction names. It was nice to watch this interview after reading his 1990 piece on WFC. My worry today in comparison to the past is the heavy amount of notional derivatives on the books of many of his financial names. I worry about the effect when various parties of those contracts can't meet their obligations especially in light of high volatility in the underlying assets from commodities to interest rates. 2008 to 2009 was one test of those derivatives and now we enter another test.

"Buffett is back, to invest in Gujarat chemical JV" http://www.business-standard.com/india/news/buffett-is-back-to-invest-in-gujarat-chemical-jv/450080/

I was wrong, I really thought Berkshire would increase its bid since it is far below book. I wonder if their book isn't as good as they say it is....

Thanks for the transcript link!

Very nice and well organized. Thanks!

Thanks Alex for taking the time to post your notes!

Goal: Create 1bln dollars of shareholder value for Fairfax Financial Holdings Vehicle: PNC Financial Group - James E. Rohr, CEO of PNC Financial, looks to be built in the mold espoused by Roberto C. Goizueta in an essay from Coca-Cola Company's 1997 Annual Report. Valuation: 50% discount from intrinsic value Attachments: 1. PNC's focus on all stakeholders and a one page valuation case 2. UBPR data derived comparison between Wells Fargo & PNC Financial (eff. calculation corrected) PNC_Financial_9-10-11.pdf UBPR_WFC_vs_PNC_9-11-11.pdf

Crazy! I hope you guys are all right. http://earthquake.usgs.gov/earthquakes/recenteqsww/Quakes/usc0005rsj.php

A_Hamilton, Thanks for the additional details! That is quite a bit of change, but it looks like they are paying less than 50% of par and if they are still buying probably lower. It's nice to see the bond gurus in action, moving out of Treasuries and US govt to Sovereign debt. I sleep well knowing that Fairfax has an experienced bond team.

Much appreciated!

Hi A_Hamilton, Could you provide a little more color regarding your comment? How much is a staggering amount? Also what % of par are they buying the debt at? I imagine you're finding this info in the NAIC filings. Thanks for the heads up on the developments in ORH's portfolio!

According to the last Q: Credit default swaps . . . . . . . . . . . . . .not: 3,754.4 fair value: 40.8 The info will probably be in Odyssey's NAIC filing

The deflation bets in Europe and US should gain back some ground too!

turar, I'm a buyer of PNC. Their tangible equity is 21.6 bln at Q2 and there's about 1.5bln in equity value associated with Blackrock & Visa that doesn't show up on the balance sheet due to equity method accounting for those two positions. I'm still doing my diligence, but based on just numbers it looks cheap.

Here's the list of trust preferreds that are being redeemed: http://sec.gov/Archives/edgar/data/72971/000119312511239166/d8k.htm If someone knows where in the prospectus the line about Capital Treatment event is for these specific securities, that would be helpful. I haven't looked, but it would help when cross referencing other securities.