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Fairfax's insurance subsidiaries - what are they worth?


glider3834
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I thought this topic deserves to have its own thread.

 

In 2020 AR shareholder letter, Prem wrote

 

image.png.dc8fea238f2c3acf104201498c568a3d.png

Prem believes insurance subs are worth much more than their carrying value of $15bil or $572 per share at 31 Dec-20.

 

Here is the breakdown at 31 Dec-20

 

image.png.d8bba85f1dc766c33ea09ac500e45eee.png

 

I have in previous posts put up a chart showing P/BV multiples for 15 of Fairfax's insurance peers. The median multiple was 1.3x shareholders' equity & I think thats reasonable to use on the basis Fairfax's CR (excl Covid) over last 3 years is close to peer median & Fairfax's NPW growth rate is at higher end of its peers.

 

Fairfax doesn't break out by reporting segment its insurance subs carrying value at 30 Jun-21 - there are moving parts here such as divs to the holdco. Lets just assume 10% growth in shareholders equity to 30 Jun-21.

 

I am then adding the $1.8 bil revaluation of Digit (Jul-21) that is subject to approvals expected Q4-21 which is Fairfax's share of Digit.

 

1. Estimate Carrying value at 30 Jun-21 = $15 bil x 1.1 = $16.5 billion

2. Apply 1.3x multiple to estimate market value of insur & reinsu subs = $16.5 bil x 1.3 = $21.45 billion

3. Add Fairfax's share of Digit revaluation = $1.8 bil

 

Estimate Market value (attributable to Fairfax equity holders) at 30 Jun-21 = 21.45 bil + $1.8 bil = $23.25 bil

Estimate Carrying value (attributable to Fairfax equity holders) at 30 Jun-21 = $16.5 billion

 

Estimate excess fair value over carry value (excluding Digit revaluation) = $6.75 billion ( or $260 per share pre-tax based on 26 mil shares  outstanding)

 

So Prem believes the insurance subs are worth a lot more than their carrying value (or book value). I am estimating based on peer median multiples a number of around $6.75 billion.

 

What does everyone else think?

 

(Edit note I am assuming the 16.5 bil carrying value does not include the Digit revaluation. If we include the Digit revaluation as if it happened at 30 Jun-21, then you could add $1.8 bil to carrying value to get $18.3 bil , then subtracting this from market value estimate = $4.95 bil excess of fair value over carrying value which will make more sense if you read my post below where I try & tie these numbers back to book value per share) 

 

 

 

 

 

 

Edited by glider3834
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1 hour ago, glider3834 said:

I thought this topic deserves to have its own thread.

 

In 2020 AR shareholder letter, Prem wrote

 

image.png.dc8fea238f2c3acf104201498c568a3d.png

Prem believes insurance subs are worth much more than their carrying value of $15bil or $572 per share at 31 Dec-20.

 

Here is the breakdown at 31 Dec-20

 

image.png.d8bba85f1dc766c33ea09ac500e45eee.png

 

I have in previous posts put up a chart showing P/BV multiples for 15 of Fairfax's insurance peers. The median multiple was 1.3x shareholders' equity & I think thats reasonable to use on the basis Fairfax's CR (excl Covid) over last 3 years is close to peer median & Fairfax's NPW growth rate is at higher end of its peers.

 

Fairfax doesn't break out by reporting segment its insurance subs carrying value at 30 Jun-21 - there are moving parts here such as divs to the holdco. Lets just assume 10% growth in shareholders equity to 30 Jun-21.

 

I am then adding the $1.8 bil revaluation of Digit (Jul-21) that is subject to approvals expected Q4-21 which is Fairfax's share of Digit.

 

1. Estimate Carrying value at 30 Jun-21 = $15 bil x 1.1 = $16.5 billion

2. Apply 1.3x multiple to estimate market value of insur & reinsu subs = $16.5 bil x 1.3 = $21.45 billion

3. Add Fairfax's share of Digit revaluation = $1.8 bil

 

Estimate Market value (attributable to Fairfax equity holders) at 30 Jun-21 = 21.45 bil + $1.8 bil = $23.25 bil

Estimate Carrying value (attributable to Fairfax equity holders) at 30 Jun-21= $16.5 billion

 

Estimate excess fair value over carry value = $6.75 billion ( or $260 per share pre-tax based on 26 mil shares  outstanding)

 

So Prem believes the insurance subs are worth a lot more than their carrying value (or book value). I am estimating based on peer median multiples a number of around $6.75 billion.

 

What does everyone else think?

 

 

 

 

 

 

Going back to looking at the above in terms of Fairfax's book value per share (BVPS)

 

BVPS (adjusted for Eurolife consol etc) was $545 at 30 Jun-21

Add estimated $46 net gain on Digit (approval expected Q4)

 

BVPS = $591 (incl Digit net gain on revaluation)

 

Estimated CV at 30 Jun-21 of Insur/Reinsur subs (excl Digit revaluation) = $16.5 bil (my estimate of 10% increase in shareholder equity from 31 Dec-20 - see above post)

Apply x 1.3 multiple = 21.45 bil

Subtract Estimated CV at 30 Jun-21 of $16.5 bil

 

Excess FV over CV estimate = $4.95 bil (or $190 per share pre-tax)

Subtract tax at 18% estimate or $0.9 bil

Excess FV over CV estimate (excl Digit revaluation) = $4.05 bil (or $156 per share after tax)

 

So if the insurance/reinsurance subs were all sold -  estimated BVPS would increase to US$591 + $156 = US$747 (or US$771 adjusted BVPS for excess of FV over CV of non-insurance subs of around US$24 after tax at 30 Jun-21)

 

I am not suggesting we should value Fairfax on the basis that all their insurance subsidiaries are going to be sold, but it further underlines I think the replacement value of the insurance subs using a market based multiple.

 

Another way to think about it, if Fairfax wanted to start from scratch & acquire the whole business again paying market values - I am estimating they would need to spend US$771 per share (using adjusted BVPS) & that compares pretty favourably to share price of US$404.

 

 

 

 

 

Edited by glider3834
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21 minutes ago, glider3834 said:

Another way to think about it, if Fairfax wanted to start from scratch & acquire the whole business again paying market values - I am estimating they would need to spend US$771 per share (using adjusted BVPS) & that compares pretty favourably to share price of US$404.

 

Yep, at the moment, the market seems to hold the view that Fairfax is worth more dead than alive.  This too shall pass.

 

 

SJ

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17 hours ago, StubbleJumper said:
18 hours ago, glider3834 said:

Another way to think about it, if Fairfax wanted to start from scratch & acquire the whole business again paying market values - I am estimating they would need to spend US$771 per share (using adjusted BVPS) & that compares pretty favourably to share price of US$404.

Expand  

 

Yep, at the moment, the market seems to hold the view that Fairfax is worth more dead than alive.  This too shall pass.

 

 

+1. The market is too fearful of FFH. And too exuberant on others. 

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By the way, I ripped off Prem when I used the "more dead than alive" comment.  That's what he wrote in the 2000 annual letter....

 

There's nothing new under the sun. [EDIT: Oops, now I've just ripped off Ecclesiastes.  I should be better at attribution!]

 

 

SJ

Edited by StubbleJumper
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