Valuing IFC, an insurance stock, can be daunting since these financial firms generally have cash flows that are impacted by regulations that are not imposed upon other industries. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Emphasizing elements like book values, in addition to the return and cost of equity, may be fitting for estimating IFC’s value. Below I will take you through how to value IFC in a fairly useful and straightforward way.
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What Model Should You Use?
Let’s keep in mind two things – regulation and type of assets. Canada’s financial regulatory environment is relatively strict. In addition to this, insurance companies tend to not possess significant portions of physical assets on their balance sheet. So the Excess Returns model is suitable for determining the intrinsic value of IFC rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
Deriving IFC’s True Value
The main belief for Excess Returns is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns above the cost of equity is known as excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (0.14% – 8.4%) x CA$56.27 = CA$3.19
Excess Return Per Share is used to calculate the terminal value of IFC, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= CA$3.19 / (8.4% – 1.9%) = CA$49.47
Combining these components gives us IFC’s intrinsic value per share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= CA$56.27 + CA$49.47 = CA$105.73
This results in an intrinsic value of CA$105.73. Given IFC’s current share price of CA$103, IFC is currently fairly priced by the market. This means IFC isn’t an attractive buy right now. Pricing is only one aspect when you’re looking at 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.
For insurance companies, there are three key aspects you should look at:
- 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.
- 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.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.