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Back of the envelope stab at valuation


Scunny Bunny
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All care, no responsibility and will be mistakes, hopefully not double counted or omitted too much, but here goes. All figs in US$ and I haven't left in every piece of individual detail. I reckon the current share price values the core insurance  business - and that is really what you are buying given the recent bizarre changes in investment thinking - at about 1.3x tangible BV. That compares to something like Everest Re (NYSE:RE - I own) which has fabulous LT track record and is currently at about 1.2x and Allied World at a similar multiple. How do I get there? Based on the 31 December 2016 balance sheet, I strip the affiliates and associates from the insurance business together with goodwill, and +/- to the parent and get a tangible book value of ~US$7.048bn for the insurance component (all the figures are on p128 of 2016 annual report). With the common equity priced at $10.2bn, load in the preferred, net debt in the parent and capitalised remaining corporate expenses to give an "enterprise value" of ~$14.7BN. From that we need to take out the value of the associates (at fair value - p58 Annual report), value the affiliates (CARA, other restaurants, FIH, Thomas Cook India etc) at the PW valuation on the AGM slides or share price.  On my estimation, that leaves you paying ~$9.1-$9.2BN for the insurance businesses (inc run off). Hence, 1.3x NTA. Any big addition to the value of ICICI Lombard (say +$500m uplift) would just reduce the price paid for insurance by that amount.  Fully loaded with corporate overhead, interest deductions, and removing associate company earnings, insurance made pretax OPERATING profit of $751M in 2016 and $835M in 2015 (p106/p107 annual report). Take the average of the two years and tax at 26.5% gives you net of just over $550m or a taxed P/E of 15.7x. Don't forget you should get uplifts from higher yields, a lower P/E from some of the additions to value, which can be channeled to the parent and reduce my "enterprise value" numerator, and have the free option of a massive uplift if CPI breaks out. On that basis, the shares look pretty reasonable (not dirt cheap) to me for a quality large insurer, and are way cheaper than BRK on a similar basis.  I haven't factored in Allied World, or updated for Q1 as the detail is not there. I have recently initiated a small position, and have been encouraged by the more NEGATIVE comments on here and folks giving up. I understand the distress of seeing hedges on equity markets which were not crazy expensive & then removing them when valuations really started to get out of hand, all because of Trump. But as someone who has not had to hold and watch the shares trade back to levels of 2.5years ago, these events are to my benefit. The biggest issue is Prem tells you the shares are below intrinsic value but is giving away 5.2m of them as part of the Allied World deal, albeit at a similar multiple of BV that my numbers suggest.

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I reckon the current share price values the core insurance  business - and that is really what you are buying given the recent bizarre changes in investment thinking - at about 1.3x tangible BV.

 

I certainly agree with that. 

 

Nice work and thanks for sharing.  Probably irrationally,  I am also willing to pay up a little for the  opportunity to participate in India. 

 

cheers

nwoodman

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For Green King:

All care, no responsibility and will be mistakes, hopefully not double counted or omitted too much, but here goes. All figs in US$ and I haven't left in every piece of individual detail.

 

I reckon the current share price values the core insurance  business - and that is really what you are buying given the recent bizarre changes in investment thinking - at about 1.3x tangible BV. That compares to something like Everest Re (NYSE:RE - I own) which has fabulous LT track record and is currently at about 1.2x and Allied World at a similar multiple.

 

How do I get there? Based on the 31 December 2016 balance sheet, I strip the affiliates and associates from the insurance business together with goodwill, and +/- to the parent and get a tangible book value of ~US$7.048bn for the insurance component (all the figures are on p128 of 2016 annual report). With the common equity priced at $10.2bn, load in the preferred, net debt in the parent and capitalised remaining corporate expenses to give an "enterprise value" of ~$14.7BN.

 

From that we need to take out the value of the associates (at fair value - p58 Annual report), value the affiliates (CARA, other restaurants, FIH, Thomas Cook India etc) at the PW valuation on the AGM slides or share price.  On my estimation, that leaves you paying ~$9.1-$9.2BN for the insurance businesses (inc run off). Hence, 1.3x NTA.

 

Any big addition to the value of ICICI Lombard (say +$500m uplift) would just reduce the price paid for insurance by that amount. 

 

Fully loaded with corporate overhead, interest deductions, and removing associate company earnings, insurance made pretax OPERATING profit of $751M in 2016 and $835M in 2015 (p106/p107 annual report). Take the average of the two years and tax at 26.5% gives you net of just over $550m or a taxed P/E of 15.7x.

 

Don't forget you should get uplifts from higher yields, a lower P/E from some of the additions to value, which can be channeled to the parent and reduce my "enterprise value" numerator, and have the free option of a massive uplift if CPI breaks out. On that basis, the shares look pretty reasonable (not dirt cheap) to me for a quality large insurer, and are way cheaper than BRK on a similar basis.  I haven't factored in Allied World, or updated for Q1 as the detail is not there.

 

I have recently initiated a small position, and have been encouraged by the more NEGATIVE comments on here and folks giving up. I understand the distress of seeing hedges on equity markets which were not crazy expensive & then removing them when valuations really started to get out of hand, all because of Trump. But as someone who has not had to hold and watch the shares trade back to levels of 2.5years ago, these events are to my benefit. The biggest issue is Prem tells you the shares are below intrinsic value but is giving away 5.2m of them as part of the Allied World deal, albeit at a similar multiple of BV that my numbers suggest.

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