ERICOPOLY

I don't know what's going on with the market for 2011 SHLD puts, but you can effectively write the $40 strike SHLD put and use the volatility premium to buy the same amount of notional upside in the 2011 $330 strike FFH call. Which is riskier, SHLD at $40 or FFH at $330? At the March bottom SHLD was going for about $35, FFH was about $211.

Catastrophe -- I suppose in that category one can include 20% pullback in the stock markets. That's not a terribly unlikely outcome IMO, and might easily wipe out the $40 call too, however that call doesn't expire until Feb. Personally, I'm in the $40 strike Feb call, but I can afford delivery on 100% of the shares without getting into leverage -- so really I've bought a put at $40 so that I can go 100% net worth notional into the trade without catastrophic risk of loss. However, philosophically I think we need to separate out buyout from non-buyout. In the non-buyout case, I think your position is far too risky. You wouldn't normally be risking 100% loss from merely a 10% 3 month stock price pullback would you? Okay then, you would only do this for the buyout scenario -- then in that case, I think the $50 call you wrote weakens your trade. You seem to be making yourself feel more comfortable about your downside, and in the process severely capping your upside if your thesis works out, yet your downside doesn't look safe to me at all. Anyhow, that's what I think. I'm only being critical because 1) I think you should rethink this and 2) you are advocating it to others

The amount of capital being tied up doesn't matter. 78% return on every dollar invested is all that matters. Katrina will wipe you out 100% -- really believe stock will hold above $45 if Katrina happens? Really??

Anyhow, I'm not leveraged in my ORH position. I don't believe in the buyout enough to do that. I'm curious though why you wrote the $50 strike calls -- if you are bullish enough to risk losing 100% at $45, why did you write the covered calls at $50 strike? Buyout is going to be for at least a 1.1x book multiple, IMO. Under 1.1x book, your move hurts yourself. Under 1.2x or 1.3x, serious impairment occurs. Risking 100% for a max 78% return just seems not the best idea.

You are going to lose 100% if the stock closes at $45. Instead you could buy the Feb $40 for $10 and only lose 50% if the stock is at $45. And gain 72% if buyout at 1.1x, or 98% if the buyout happens at 1.15x book, or 167% if it happens at 1.3x book. I see more downside protection while at the same time more potential upside.

I didn't know if you were implying you felt that it was a fraud and the 30% annual gains were not actually there. I didn't get that idea from his post. Rather, I understood the meaning to be that it took more than just "proprietary trading" to post those numbers -- like he is getting an edge from somewhere else.

They don't get the float anyway is more like it -- we're talking about buying the part that they don't own. No his comment was something to the effect that they get the float and Im assuming he means control of the float. Ah, HWIC is in charge is his point. That's true. However in the past they have grown their float in soft markets via acquisition. That's what they get from a buyout.

Perhaps I just didn't understand Prem's comment. Anyhow, he might have misspoke because he bought NB, despite having the float anyhow as he put it. Perhaps when you want to acquire a company, you don't tell people ahead of time. Something about tipping your hand maybe?

They don't get the float anyway is more like it -- we're talking about buying the part that they don't own.

Fully agree. Somebody earlier said that because of ORH's 20% ROE, then it's worth some massive multiple. Well, there's no way that Fairfax should have to pay for HWIC's talent given that they already own HWIC. So you have to back out HWIC's talent from ORH's ROE, then value it.

1) Reward the ORH management and other large holders for sitting tight. In late 2006, ORH did a share issue and Andy wrote in the Annual Report that it was terrific that ORH shares would trade at a higher premium with the new larger float. But since then they've been buying the shares back, so it stands to reason this would piss him off now that the float is going down and thus... by Andy's logic.... the P/B premium. So to reward his patience (and those of others but I think Andy is a key enough player to focus on here). Andy's shares are worth about $20m -- putting an extra $8m in his hands at a P/B of 1.3x. I'm sure the NB management for example was very grateful to get that cash at a time when it could be reinvested. How painful can it be to reward key employees with stock and have that stock trade at a pathetic valuation despite excellent business performance? Think back to 2001 where there were combined ratios of 103.1% at ORH (excluding cat losses). It traded at a big premium then (1.37 at IPO) and today it's regularly trading at a sizable discount. I think Andy might, from time to time, wish he could sell a little bit for somewhat of a fair price. Anyhow, this is but one good reason to take it back. Not big enough in it's own right perhaps, but if you were Andy and saw NB get treated similarly, you might be clearing your throat "Ahem... what about me?".

Read the Northbridge buyout announcement: The proposed transaction also represents a 31.8% premium over the 30-trading day volume-weighted average closing price for the period ended November 28, 2008 of $29.59 Clearly, it was a selling point that the premium was 31.8% over the 30-trading day volume-weighted average closing price. So, they aren't going to want to wait another 30 trading days from today for ORH given that they are tipping their hand already and the price has/will rise accordingly (if you believe in the buyout thesis). It would not be a great press release to say that the price is only 5% or 10% over the average 30-trading day period -- it's better to make the offer sound as generous as possible. The $400 million note offering is scheduled to be completed on August 18th (Tuesday). I would expect they would wait to be certain they have the cash in hand first... then pounce. Don't forget I'm heavily long ORH now so my mentality is obviously self-serving at this point.

First named Atlantic storm today: Ana.

Yes, there is a tax management strategy that I think you are missing out on. Here is a short description of the strategy: http://www.thestreet.com/story/769361/hedging-technique-opens-a-pandoras-box-of-tax-concerns.html Basically, instead of selling your shares, you can sell short "against the box", or buy puts, or write deep-in-the-money calls. You will be hedging your gains against a pullback in the market, but won't owe any tax on the position you are protecting as long as you close out your hedge within 30 days of the end of the tax year and then hold your position fully unhedged for the next 60 days. It also resets your holding period (treated as if you bought the shares the day you close out your hedge I believe). Read the constructive sale rules. See "Constructive Sales of Appreciated Financial Positions" http://www.irs.gov/publications/p550/ch04.html#en_US_publink100010318 So, if you borrow shares and sell them short, you have a bunch of cash to play with. Use that cash to buy ORH or ORH calls. Or instead you can write fairly deep in the money long dated calls on FFH (to protect from exercise, use a long date and don't go too deep) and use the cash from the premium to buy ORH calls.

That's what I think too, but then like I said once I switched to the ORH bench yesterday I've been a huge fan of a premium buyout ;) Maybe it's affecting my judgement. Wow, after taking FFH for a ride in recent weeks... to get the ride back-to-back from ORH will be amazing.

I switched to ORH yesterday, and it's amazing... I nearly instantly had a change of heart regarding ORH buyout. Premium! I switched because: 1) backing out the goodwill from FFH balance sheet, the apples-to-apples comparison to ORH on a P/B basis is pretty big 2) takeover lottery ticket 3) financial markets -- will they pull back? FFH more vulnerable. 4) underwriting profits

Regarding ORH: June 30, 2001: Shareholders equity: $862,848,000 Shares outstanding: 65,527,029 BVPS: $13.16 IPO price $18 So I'm finding that the public offering was done at 1.37x book. Wow, that was a pretty good deal.

Andy Barnard has 412,715 shares of ORH. I can imagine he will need to be kept happy with any buyout price.

About to close on an insurer in China? There was a lot of discussion about why Fairfax is raising money today, but nobody remembered to mention this one.

I'm not sure if I'm right about this, but I suspect if HWIC were managing Chubb's portfolio identically to FFH's then the ratings agencies would cut Chubb's rating due to investment risk (heavily in equities). Can you have both the credit rating and the freedom to go heavily into equities? Or do the ratings people not care (can't imagine this to be the case).

Regarding the margin requirements, you do get the put premium upfront and that cash helps you out with the margin borrowing power. This is most obvious with the deep in the money puts. Like if the stock is at $29 and you write the $60 strike put for $33. You can write that put without it impacting your margin buying power at all. Your margin buying power would be impacted of course if the stock went down, but initially the cash from the put premium is more than 50% of the strike price. I believe in that example writing the put would actually increase your margin borrowing power.

I agree, ignoring 2009 and 2008 results makes all of the above companies look like very good, and MKL the best by far. Cardboard layed into FFH pretty thick for not being a Chubb with a CR in the mid 80s today. Doesn't it seem equally fair to sling that at MKL? A couple of days ago when I posted that, MKL traded at a 60% premium to ORH's Q2 book. 60%!!!!! So a person with $1,000 in ORH gets the same amount of equity as somebody with $1,600 in MKL. This means that you had better be earning at least $60 from the $600 premium you are paying for MKL if you slap a P/E of 10 on their underwriting advantage. So let's say the expected advantage is 9 full points of combined ratio, which after tax is something like the $60 that you are paying the P/E of 10 for. That's assuming premium volume is equal in size to 86% of book value. But roughly that's how I think it works out. Anyways, they are completely different companies. As I've been saying for over a year now, I think of ORH and FFH as a hedge fund or mutual fund, and by contrast I think of MKL as more a company where you pay a big multiple for an earnings stream. Now, is insurance that good a business such that a P/E of 10 makes sense during a time when a JNJ trades at 12x?

The 2008 AR claims that runoff owns 17.8% of ORH -- at TIG I think.

No that isn't the case. No tax is due. That's only for recourse loans. However, you might be thinking of loan modifications -- if debt is reduced/cancelled but the owner stays in the home, then it's taxable. So they let the person turn in the keys and walk away without tax penalty, but the person who stays in the home with forgiven debt is hit with a bill. See page 11. http://www.irs.gov/pub/irs-pdf/p4681.pdf "If you are not personally liable for repaying the debt secured by the transferred property, the amount you realize includes the full amount of the outstanding debt immediately before the transfer. This is true even if the FMV of the property is less than the outstanding debt immediately before the transfer."

Housing construction is important in the US and it is down temporarily. But in two years time the demographics (rising population) will support new construction. This is not Japan for at least that very reason. That was Warren's point.