ERICOPOLY

The point I am making is that HWIC only manages Fairfax subsidiaries. Now, suppose another buyer (not Fairfax) made an offer for ORH. Yeah, that's what I'm talking about -- HWIC's performance needs to be ignored when determining what an independent buyer would pay for ORH. At that point, HWIC would cease to manage ORH's portfolio for the new owner as HWIC only manages investments for Fairfax... period. ORH is only worth 20% ROE if you have HWIC managing the show. So how common is it for an insurance company to have HWIC's numbers? I think any independent buyer should be assuming average investment returns. It's only a 20% hindsight grower if HWIC runs the investments. This implies that HWIC is worth a massive chunk of that 20% ROE, but then Fairfax already owns HWIC and need not pay for it twice. So it's not in the ORH sale. ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece. Not exactly talking my book am I. I am a little disappointed with the initial price but I think we'll get another 5% or 10%. I am not yet a month into it so I guess I'll be an easy lay for Prem. A 20% pop to $60 felt good going into the weekend. Let's make it to 30% at least.

The point I am making is that HWIC only manages Fairfax subsidiaries. Now, suppose another buyer (not Fairfax) made an offer for ORH. Yeah, that's what I'm talking about -- HWIC's performance needs to be ignored when determining what an independent buyer would pay for ORH. At that point, HWIC would cease to manage ORH's portfolio for the new owner as HWIC only manages investments for Fairfax... period. ORH is only worth 20% ROE if you have HWIC managing the show. So how common is it for an insurance company to have HWIC's numbers? I think any independent buyer should be assuming average investment returns. It's only a 20% hindsight grower if HWIC runs the investments. This implies that HWIC is worth a massive chunk of that 20% ROE, but then Fairfax already owns HWIC and need not pay for it twice. So it's not in the ORH sale. ORH is just canvas on which HWIC paints. I think some of you are trying to sell blank canvas to Picasso at the price of a completed masterpiece.

Except HWIC isn't for sale, only ORH.

I think Cardboard really helped sell me on the buyout thesis. Anyway, they were pretty full of shit weren't they, but then... they were acting in the best interest of the FFH shareholders. It would be stupid to tell everyone that they want to buyout ORH... so instead you tell people at the annual meeting that there would really be no point to a buyout, and when you raise $400m you issue a press release that it's just for a rainy day, you know. Like I said before, "Fool me once shame on you, fool me twice shame on me." Yes, props to Cardboard, Vinay and probably some others who also pointed out the oddities in Fairfax's recent actions. This was so good it was practically trading on insider information.

I agree that the only relevant book value in this discussion is the present one, as of September 4th. June 30th??? Pfftt!!. I think ORH's book is understated by about $1.50 due to accounting on ICICI. Adding in equity portfolio gains of 10.3%, and $1 in operating income puts book value per share at roughly $57.50. $66.70 would be the price using 1.16x against real book. June 30th book is too out of date. It's not worth a multiple of June 30th, or March, or December last year, or June five years ago. It's worth a multiple of what it is fu*** currently at. Obviously.

I think Cardboard really helped sell me on the buyout thesis. Anyway, they were pretty full of shit weren't they, but then... they were acting in the best interest of the FFH shareholders. It would be stupid to tell everyone that they want to buyout ORH... so instead you tell people at the annual meeting that there would really be no point to a buyout, and when you raise $400m you issue a press release that it's just for a rainy day, you know. Like I said before, "Fool me once shame on you, fool me twice shame on me."

CHA CHING !!!!!!!!!!!!! :) :) :) :)

Remember the stress tests, the govt made them raise capital even though more competent analysts like Warren Buffett said that it was ridiculous. The dividend cut was a means of avoiding yet even more capital to be raised. So, in that light what do you dislike about their dividend cut?

WFC is still down for the year. JNJ is down slightly. I think a core criteria for frothiness is that great companies at least trade in the black. BRK is up less than 1% this year.

Let's follow that through with a real example: Is my house going to double in price simply because of Bernanke's quantitative easing doubling the quantity of dollars? Here is what I think: In order for the house to double in price, the buyer needs to be able to afford twice as much right? Okay, have incomes doubled? No. So there is not twice the dollars chasing my house. The number of dollars chasing my house has not changed, in fact there are likely fewer dollars chasing my house because there are more unemployed people and people who are earning smaller paychecks. So, the price of housing is not set by the total number of dollars that Bernanke doubled via his policies. Rather, the price of housing is set by what the buyer can afford -- and in this recession he can afford less. Screw the quantitative easing causing inflation -- that house's price isn't going to budge until the buyer can afford to make it budge, and that means that his supply of dollars needs to double, which isn't happening. Wages need to spiral upwards before that home price goes up. That's not what we have... we have rising unemployment and wages are certainly not skyrocketing. Where is the money? If it's not in the consumer's hand, the price won't go up. Anyways, that's just an example. Other things priced in the economy might behave differently. So far though I can't figure how quantitative easing is going to raise prices unless those consumers get their grubby hands on it... but the quantitative easing program hasn't done that. There's been cash for clunkers, but that's about it.

Buffett may have that opinion publicly, however his biggest disclosed portfolio move last quarter was to sell COP and buy JNJ. I'm only saying that because it doesn't look like he is backing up the truck on metals or commodities. The only move I've seen him make is to lighten up on commodities (oil) via that COP sale.

And it's 4.53x the 1974 number. I guess, being born in 1973, I have always assumed that inflation is a given. That it's just a part of life as I know it. My thinking is always taking into account inflation. This is why I think only a lunatic would buy 30 year bonds at 2.5% or 3.5%. After taxes, that's 2.3% return at best... and who in their right mind is thinking inflation over the next 30 years will be just 2.3%? I think it's the older folks who have a harder time accepting it. I have trouble believing that Hoisington is going to make a real return after-tax for his investors on that money that he kept invested in 30 yr bonds when the market for them offered only a 2.5% yield late last year. He thinks the yield is going even lower... but if it doesn't he will be depending on the inflation rate remaining under 2.5% for a long time. Seems far too risky.

$0.75 in 1950 $1.60 in 1974 $2.30 in 1976

Barron's also said that SHLD breakup value is perhaps $300 per share... and it hasn't even been two years since they said that Two years from now I wonder what they will say.

$24.9m cost -- that is 6.225% already that this has cost them, or 13.725% pre-tax over the next 12 months. Considering that they don't need any more money at holdco per Greg Taylor's Aug 1st comments, that is bizarre.

The appropriate fair price for FFH is only about $300, if an offer was made 30 days ago. Forget tangible present book value (reflecting investment gains since last reporting period) and intrinsic value... that stuff doesn't determine what a fair price is. No, Mr. Market is the analyst to be relied on. If he pulls that kind of a stunt right now, I'm afraid the buyout price would be about $55... or present book value. Very fair of course!

Increased flexibility to do what, eh? Spend a big chunk of the money already in holdco ;) Then, the new slug of money is useful for debt repayement, and other obligations from time to time. Come on, they just told us (on August 1st) that they were already comfortable with holdco... I call as my witness Greg Taylor: http://seekingalpha.com/article/153023-fairfax-financial-holdings-limited-q2-2009-earnings-call-transcript?page=6 our holding company liquidity remains very strong, almost no change from the first quarter. We have cash and marketable securities at the holding company up $880 million, $863 million net of liabilities. This $880 million or the $863 million, just note for you, is greater than the $858 million and Fairfax bonds that are outstanding, very important to note. All of our capitalization ratios remain very strong. At the operating companies, as I have shown you all the companies have very strong capital ratios. On a consolidated basis Fairfax’s shareholder’s equity increased to $5.6 billion from $4.9 billion at the year-end. That is up 13% year-to-date. As a result, you'll see that Fairfax's debt-to-capital ratio improved to 22.6% that was 23.7% at 2008 year-end. And then finally our debt maturity profile, you will see that we have no major debt maturities until 2017. Obviously, we have very low refinancing risk in these markets in addition to our very substantial cash resources at the holding company.

I think if you gobble up 2.5M shares on a nibble by nibble basis, and then sell it in one big block, it shows you having zero net activity in this report.

Yeah, well like Smazz said, when asked about taking the subs private Prem said something like, "Well why would we want to do that if we already control the float?". I remember a couple of annual meetings back UCCMAL told us about that line. Then he marches right out there and snags NB at 1.3x. I missed out on the NB takeover. The saying goes, "Fool me once, shame on you. Fool me twice, shame on me.".

You are dead right about that. They should invest in whatever they think will put in the best returns. But as long as they are going to be investing in equities, then ORH makes the most sense because they already have ORH's investments allocated to this other universe of best equities that you presumably speak of. So buying ORH is actually the same thing as buying the best things that are not ORH. HWIC is Picasso, and ORH minority interest is more canvas. The paint they will put on the canvas are these other investment opportunities that they tell us they are finding all over the place in the global equity/bond markets. Plus, as long as they are managing the investments at ORH they might as well get the full benefit from it instead of basically providing some of it for free to minority shareholders. At the end of the day, you issue debt at 7.5% which after tax is 5%. You invest it in ORH where, according to boardmember ReturnOnMyCapital equity is compounding at 20% after tax. These past six months would have provided ripping returns from a buyout that only costs them 5% per annum... waiting and sucking thumbs while nibbiling at ORH shares below book did not pay off in the big picture. They are still bullish about their prospects for their current holdings... this implies the train still hasn't left the station... or at least there is still time to scramble after it and hop on before it gains too much speed. They are seeing great values in the stock and bond markets today... this is the time you want more float, but the market is soft and they can't grow their float organically... so it must be bought. Or the other approach is to wait until equity markets no longer provide terrific value -- just like buying it today isn't as great a deal as buying it in March, it might be a better time to buy it today rather than a couple of years down the road when the investments at ORH have already delivered terrific returns.

I spent a long time thinking about that possibility. The self-serving conclusion I dreamed up is that they need to retire shares at a fast enough pace to offset the speed at which the total cost of a buyout keeps rising, driven by HWIC's success at growing the book value at ORH. Since end of Q1, they have not met that goal. Book value grew by 17% but they retired fewer than 10% of the remaining shares. They either need to tone it down a bit at HWIC, or take it private soon.

The other thing I would like to add... $1,300 invested in FFH will likely outperform $1,000 invested in ORH. I am happier at the moment to have $1,000 in ORH rather than FFH, because like you said their float looks to be less expensive and on top of that I think the discount to book looks far better. But to have an extra 30% of equity... hmm, I don't think ORH will beat FFH anymore if you handicap FFH/ORH like that with a 30% boost. FFH dropped with the NB takeover and I expect it will be worse when ORH gets taken over. I think that's because it's better to be getting the premium than giving it. In a post ORH takeover world, FFH will have a considerable amount of goodwill on it's books -- offsetting the ICICI Lombard hidden value. So assuming the deal was announced this week (in a pretend world), you would be looking at ORH trading today at maybe 92% of tangible Q2 book, and FFH trading at 1.08x tangible Q2 book. That means FFH is trading at a 17% premium to ORH, and that's without even accounting for ORH's fair share of ICICI Lombard hidden value which we need to add to ORH's Q2 book to be fair.

You can go back to 2001 and see that ORH recorded a 103.1% combined ratio even if you exclude 9/11 and Enron. You aren't giving FFH enough credit for FFH's turnaround -- focusing on historical cost of float is fair as long as you remember ORH's historical cost of float. If you exclude a few recent years, ORH doesn't look good historically either. Having no cost float doesn't make it equity. Their hands are tied -- they can't put it 100% or 80% in equities like they can regular equity. It is there to pay claims and for painfully clear reasons you just can't take on too much risk with it.

Eric, you've convinced me. Somewhat. After a good pop in FFH already I've sold some (15%) and put it in ORH. Mostly common and a handful of Feb 45 calls. As with you if we get a pop due to a buyback/privatization I will put it right back into FFH. I'm doing this transaction in my registered accounts. I hate friction and I hate paying the taxman too soon. If it doesn't happen I'm perfectly content owning these ORH shares for quite some time. They are a great value regardless. I hope to end up owing you a beer. Cheers. I hate friction and taxes too. There is no certain success here, but I like the odds. Worst case, I pay the taxes and hold ORH long term -- the taxes would erode the gap in value that I presently see in favor of ORH, but it won't completely erode it.

After the quick 30% pop, put it in FFH. That's what. Regarding your treatment of float as equity. Fairfax has more float per share, you should be happy with the switch. Truly though, I think your reasoning there is highly flawed -- what about a life insurer with a much higher float/equity ratio? Float is not equity.