Gains on Investments Lead to improved Profitability: Fairfax Financial Holdings Limited (TSX: FFH) is engaged in property and casualty (P&C) insurance and reinsurance along with the associated investment management. The company operates through several subsidiaries located across America, Europe and Asia. During FY19, the company has paid a cash dividend of US$ 10 per share, unchanged from FY18.

FY19 Financial Highlights: FFH declared its full-year results, wherein the company posted its net premiums written of US$ 13,835.6 million, representing a 10.3% growth over FY18. Operating income stood at US$ 1,107.5 million, as compared to US$ 956.1 million in the previous financial year. The growth was primarily driven by higher interest and dividends and underwriting profit. The group incurred interest expense of US$ 472 million, higher from US$ 347.1 million in FY18. The higher interest expense was on account of an increase in the borrowings by the holding company and the insurance and reinsurance companies. Net earnings soared to US$ 2,004.1 million, from US$376 million, due to a higher gain on investments of US$ 1,716.2 million, as compared to US$ 252.9 million in the previous financial year. The company reported its total assets of US$ 70,508.5 million, as compared to the total assets of US$ 64,372.1 million in the previous financial year. Book value per share improved to US$ 486.10 million from US$ 432.46 million in FY18.

FY19 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: P/B Multiple Approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of FFH is quoting at CAD 401.28 per share, with a market capitalization of CAD 11.14 billion. The stock price corrected ~34% in last one month. The insurance business is directly corelated with the economic conditions and the recent stock market volatility has resulted in stiff correction of the stock price. The company is a leading player within the insurance segment and has a world-wide presence. We believe this correction has provided a decent entry point to take position in the stocks which are fundamentally sound and FFH is one of them. We have valued the stock using the price to book (P/BV) based relative valuation methodology. We have taken peers like Great-West Lifeco Inc (TSX: GWO), Sun Life Financial Inc (TSX: SLF), Hartford Financial Services Group Inc (NYSE: HIG), and American International Group Inc (NYSE: AIG), etc. and arrived at a target price of lower double-digit upside potential (in% terms). Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 401.28 as on April 08, 2020.

FFH One-Year Daily Price Chart (Source: Thomson Reuters)

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