Intrinsic Calculation For Intact Financial Corporation (TSE:IFC) Shows Investors Are Overpaying

One of the most difficult industry to value is insurance, given that they adhere to different rules compared to other companies. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Emphasizing line items like book values, along with the return and cost of equity, can be beneficial for determining IFC’s valuation. Today I will take you through how to value IFC in a reasonably useful and easy way. View out our latest analysis for Intact Financial

Why Excess Return Model?

Let's keep in mind two things – regulation and type of assets. Financial firms operating in Canada face strict financial regulation. In addition to this, insurance companies tend to not hold large portions of tangible assets on their books. While traditional DCF models emphasize on inputs such as capital expenditure and depreciation, which is less useful for a financial stock, the Excess Return model focuses on book values and stable earnings.

Deriving IFC's Intrinsic Value

The central assumption for Excess Returns is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns above the cost of equity is known as excess returns:

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Putting this all together, we get the value of IFC’s share:

This results in an intrinsic value of CA$93.83. Relative to the present share price of CA$95.36, IFC is , at this time, fairly priced by the market. This means there's no real upside in buying IFC at its current price. Valuation is only one part of your investment analysis for whether to buy or sell IFC. Analyzing fundamental factors are equally important when it comes to determining if IFC has a place in your holdings.

Next Steps:

For insurance companies, there are three key aspects you should look at:

1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
2. Future earnings: What does the market think of IFC going forward? Our analyst growth expectation chart helps visualize IFC’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether IFC is a dividend Rockstar with our historical and future dividend analysis.

For more details and sources, take a look at our full calculation on IFC here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.