Insurance companies are usually modelled using a sum of the parts (SOTP) and book value (BV) multiple. So, something like WRB is at the top range of valuation (approaching 2x BV) while Fairfax (sub 1x BV; use US$ as financials are US$) is at the bottom range of valuation. Your view on BV growth and a range of BV multiples is probably more meaningful than DCFs which are a trickier model to get 'right'.

Fairfax is saddled with a 1xBV valuation because their portfolio management has been atrocious for years. They play the Templeton-style deep value game, in the small percentage of their portfolio dedicated to equities, which hasn't worked for ages. The bulk of their portfolio is in cash and bonds which was great during the bond bull market but tremendously limits their upside going forward. At best, Fairfax will grow their book value by xx% and possibly get a 1.2 or 1.3xBV bump when one of their deep value plays finally pays off. There are easier ways to make money.

DCFs are more appropriate for predictable cash-gushing businesses than insurance companies which have catastrophe years where cash is needed for payouts. Even still, favorable assumptions in DCFs lead to a large tail value which is quite probably wrong. *Caveat emptor.*

Thanks Omagh for your comments. Much appreciated and very helpful. I just want to paraphrase so that I truly understand.

So it seems that premium/discount on book value for an insurance company is quite dependent on the current liquidation value + estimated book value growth. In turn, the book value growth is dependent on float growth from net premiums written annually and underwriting discipline as well as the return on the investment portfolio.

So with the current interest environment, and ASSUMING they can mean revert back to historical 10.9% common stock return, their total return on equity/minority interest would be 8.5% (including common dividends), meaning that they would be deserving to have a valuation around 1x book. Given that their book value CAGR over the past 10 years, has only been 4.5%, this suggests that the market is already giving them the benefit of the doubt despite their recent underperformance.

However, for those that are optimistic about FFH's future, they would be counting on the following optionalities to be recognized:

1) a hard insurance market with the chance to increase float size

2) continued success in FAH and FIH to help generate fees and increase in market value from revaluation and/or book value growth

3) repurchasing of common shares (which is a bit nullified by their options issuance) at a fair price

4) re-evaluating the effectiveness of their current deep value/turnaround investment philosophy and portfolio sizing

To the last point, FFH is very different than BAM which also invests in turn-arounds. It seems to me that FFH has much less operational expertise to turnaround businesses unlike BAM. Given this limitation, it appears to me that strategically it makes more sense to move up the quality chain (especially given the float size) or consider much smaller position sizes with more rapid turnover to minimize the sunk cost fallacy and future opportunity costs. It also appears to me, that their aversion to technology and growth companies should also be re-examined since all investing is a probabilistic exercise (even in deep value situations) anyways.

Would this be a fair assessment of their future?