Banks aren’t the only financial stocks on the Toronto Stock Exchange. Insurance companies like Intact Financial (TSX:IFC) and Fairfax Financial Holdings (TSX:FFH) are a key component as well. Currently, one is a better buy for incredible returns.
Intact is the largest home, auto, and business insurer in Canada. It takes the lead with roughly 16% of market share. The industry remains fragmented, so there are opportunities for further growth through acquisitions.
To date, Intact has collected a number of brands, including Belair, Brokerlink, and OneBeacon, which is its U.S. platform. Intact grows through its businesses. Last year, its direct premiums written were diversified across personal auto (37%), commercial lines in Canada (26%), personal property (22%), and commercial lines in the U.S. (15%).
Intact’s annual direct premiums written are now $3 billion, while its combined ratio remains in the low 90s, meaning that its profitability is top-notch in the industry. In fact, it has consistently achieved returns on equity that are 5% greater than the industry average.
As a result, it has been increasing its net operating income by 10% per share. This growth has translated into a dividend growth rate of 9% over the past 12 years.
The quality stock is just about fully valued and offers a safe yield of 2.3%. The stock is a hold currently. Should the stock correct by 5% to 15%, interested investors should consider buying.
Fairfax Financial Holdings
Fairfax offers a similar yield to Intact, specifically, 2.1%, but it trades at a much better valuation.
The company has increased its book value per share over time. However, there’s a huge disconnect between the stock price and what the business is really worth, such that it trades at a dirt-cheap valuation of less than its book value.
FFH Price to Book Value data by YCharts
Based on a more normalized price-to-book, the stock should trade closer to $739 per share, which implies upside potential of approximately 26%.
Investors should note that Fairfax is a more complex company than most. It uses the float it generates from its subsidiary insurance businesses and the income/gains from its investment portfolio for reinvestment.
Its investment portfolio is valued at about US$39.5 billion. As well, it’s highly diversified with cash, bonds, preferred stocks, common stocks, derivatives, and a meaningful exposure (US$2.75 billion) to India and Africa via stakes in Fairfax India and Fairfax Africa.
As a result, Fairfax’s earnings are highly unpredictable, as there can be big swings up or down depending on how it fares in the financial markets.
For total returns investors, Fairfax today offers a much better opportunity than Intact. At the current valuation, FFH stock is simply low-hanging fruit.