Despite trading at a premium to Book Value, Fairfax Financial Holdings Limited (TSX:FFH) trades at up to a 25% discount to intrinsic value (shares are worth up to $630 per share) through a sum of its parts (SOTP) analysis (all values in USD).
FFH is composed of a range of businesses across insurance, reinsurance, restaurants, retail, financial services, industrial and media with no industry limitation. Over the past 32 years through 2017, management has compounded Book Value Per Share at 19.5% per year and Share Price at 18.4% per year.
There are 5 primary components to the SOTP analysis, each of which are discussed below: (1) Insurance and Reinsurance, (2) Affiliates, (3) Associates, (4) Fairfax India, Fairfax Africa, and Thomas Cook India and (5) Cash and Investments, Debt and Preferred Stock.
(1) Insurance and Reinsurance businesses have a fair value range of $11-14B based on a P/B multiple range of 0.9x - 1.1x based on comparables (including Markel Corporation, Berkshire Hathaway, Inc., Alleghany Corporation), where the primary businesses include Northbridge, OdysseyRe, Crum & Forster, Zenith, Brit, Allied World, Fairfax Asia, Subsidiaries and Run-off.
Northbridge is one of the largest commercial property and casualty insurers in Canada based on gross premiums written. OdysseyRe underwrites treaty and facultative insurance as well as specialty insurance globally. Crum & Forster is a national commercial property and casualty insurance company in the US writing a broad range of commercial, primarily specialty, coverages.Zenith is primarily engaged in the workers’ compensation insurance business in the US. Brit is a market-leading global Lloyd’s of London specialty insurer and reinsurer. Allied World is a global provider of property, casualty and specialty insurance and reinsurance solutions. Fairfax Asia is composed of insurance businesses across Asia in all classes of general insurance. The subsidiaries include global insurance and reinsurance companies across emerging and developed markets.
With Fairfax's underwriting history, float has grown by an annualized 10% from 2013 to 2017 through organic growth and M&A activity. The insurance and reinsurance businesses maintain strong performance despite 2017 catastrophe losses. FFH possesses an attractive ROE given its disciplined underwriting, investment discipline and 1.9x Float/Book.
(2) Affiliates have a fair value range of $1.7-1.9B based on a combination of 5 approaches of sales multiple, pre-tax earnings multiple, Fairfax-assessed fair value, acquisition with a reasonable growth rate and share price market value. The sales multiple approach utilized a comparable company’s multiple applied to 2017 Sales. The pre-tax earnings multiple utilized the industry’s multiple applied to 2017 Pre-Tax Earnings. The Fairfax-assessed fair value was the assessment provided by Fairfax in the financial reporting. The acquisition value is held at cost with a reasonable growth rate of MSD YOY. The share price market value is the value of the public traded ownership percentage. These affiliates include restaurants, retail, real estate, financial services and media.
(3) Associates have a fair value of $3.3B based on Fairfax-assessed fair values detailed in FFH's financial reporting, with the exception of the publicly traded companies. These associates include insurance and non-insurance businesses per Fairfax's financial reporting designation.
(4) Fairfax India (OTCPK:FFXD.F), Fairfax Africa (OTCPK:FFXX.F) and Thomas Cook India (BSE:500413) have a current fair value of approximately $1.8B as of 1/27/19 based on the ownership stakes of these 3 publicly listed companies.
(5) Cash and Investments, Debt and Preferred Stock total -$3.6B as detailed in FFH's financial reporting. The holding company cash and investments is net of short sale and derivative obligations, which is added together with holding company borrowings and preferred stock.
Putting it all together, FFH has a SOTP value between ~$14-17B, which results in a share price of up to $630 per share compared to current share price (as of 1/27/19 of $470).
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.