ELF.TO - E-L Financial Corp. Ltd.

[no_free_lunch]

Another change I have seen is that their investment portfolio is substantially larger relative to their equity than in the past.  Maybe this is the result of selling Dominion?  At any rate, it looks like in 2007 equity investments were only 35-40% of NAV, they are now in the vicinity of 100%.  These are invested mostly in equities and quite diversified from what I can tell.  Not an issue but just something to be aware of, perhaps their results will be more volatile go forward as a result.

[Cardboard]

"A counter argument is if this is cheap then why aren't all other similar companies cheap as well?"

 

While Great West trades at a premium, have a look at the discount to NAV constantly experienced by PWF and POW who own most of it. ELF is somewhat similar to PWF and POW and does suffer from a holding discount.

 

Cardboard

[SafetyinNumbers]

"A counter argument is if this is cheap then why aren't all other similar companies cheap as well?"

 

While Great West trades at a premium, have a look at the discount to NAV constantly experienced by PWF and POW who own most of it. ELF is somewhat similar to PWF and POW and does suffer from a holding discount.

 

Cardboard

 

While it's true that the NAV discount on PWF and POW, have averaged about 12.1% and 17.5%, respectively over the past 10 years, they also calculate that based on the premium P/B that GWO, which is the biggest component, trades at. For example, right now GWO trades at ~1.75x book value. If you adjust that to 1x, then PWF is trading at a decent premium to NAV. I'm not saying that's the right way to look at it but it makes it more comparable.

 

Because Empire Life is a smaller component of ELF than GWO is of PWF, perhaps the right thing to do is put a 1.75x multiple on Empire Life. This doesn't seem unreasonable as the Empire would likely sell for a premium to that if it were to be sold. This would take the ELF NAV to over $1500 and increase the NAV discount to 47%. That still seems more attractive than the PWF discount currently at about 15%. One could argue the POW discount is bigger than the ~19% discount it trades at now because it's a double discount as PWF is the biggest component but still materially smaller than the ELF discount.

[bbarberayr]

A more appropriate compare for ELF might be Texas insures National Western Life, a small cap US insurer that is majority family owned.  The other reason I pick this is because it is easier to get long term valuation information on US stocks.

 

If you take a look at" https://www.gurufocus.com/chart/NWLI#&serie=,,id:pb,s:NAS:NWLI

 

You'll see NWLI has traded up near book value for only 3 small periods over the last 20 years - 1992/1993, 1998 and 2007, which is the same time that ELF traded above book value (and don't forget, ELF was half P&C in 2007 and P&C companies generally get higher p/b valuations than life insurers).

 

It seems now a lot of investors are concerned about life insurers because of low interest rates and what happened to the Japanese Life Insurers when they moved to a low interest rate environment in Japan and many of them became technically insolvent.

 

 

[bbarberayr]

Regarding the Jackman family ownership, the son, Duncan, who has now taken over, is more amenable to dividends and has changed the policy of the main family holding company, Economic Value Trust (EVT-T), to now pay out all investment earnings as dividends through an additional special dividend once a year.  My opinion is he wants the cash flow more than his father did, but we will have to see what other changes he makes.  But so far, they are not indicating anything else.

 

The following is from the EVT Annual Report - seem fine with the discount in the market:

 

The Company has been a closed-end investment corporation since 1927 and has never bought back its Common Shares. The Common Shares have traded at a discount to their net asset value, ranging from a 40% discount to a 15% discount over the past 10 years. Management believes that shareholders who have invested in the Common Shares of the Company recognize that the Common Shares of the Company usually trade at a discount to their net asset value.

Closed-end investment corporations have the following benefits: they often allow investors the opportunity to purchase assets at a discounted price; they have management expense ratios which are generally much lower than those for actively-managed, open-ended funds; and the management of a closed-end investment corporation’s portfolio is not impacted by shareholder subscription or redemption activities.

Economic has no plans to become an open-ended investment fund.

[SafetyinNumbers]

ELF reported a tremendous quarter yesterday afternoon.

 

NAV discount is close to 38% vs the historical closer to 33% (admittedly my discount calculation is based on quarterly numbers since 2009 and annual before that so not that scientific).

 

Decent upside if it just gets back to its historical discount. There is a real argument with the ROE being above 10% at Empire Life, that the discount should close significantly. The investment income alone is getting to be pretty big at ELF exclusive of Empire Life earnings.

 

https://www.newswire.ca/news-releases/e-l-financial-corporation-limited-announces-december-31-2017-financial-results-676023213.html

[wisowis]

They reported last week and net equity value was basically flat quarter over quarter ($1324 per share), shares trading at a ~39% discount.

 

Don't see any discussion on the quality of their equity portfolio - these are their large US equity holdings, correct? https://whalewisdom.com/filer/empire-life-investments-inc#tabholdings_tab_link

[SafetyinNumbers]

They reported last week and net equity value was basically flat quarter over quarter ($1324 per share), shares trading at a ~39% discount.

 

Don't see any discussion on the quality of their equity portfolio - these are their large US equity holdings, correct? https://whalewisdom.com/filer/empire-life-investments-inc#tabholdings_tab_link

 

Not necessarily as Empire Life is a subsidiary of E-L and they manage assets on behalf of clients as well. My understanding is looking at the portfolios of UNC and EVT might give a better indication of what they own at the hold co level.

[SafetyinNumbers]

New article on Seeking Alpha

 

https://seekingalpha.com/article/4183685-e-l-financial-38-percent-discount-growing-book-value-potential-catalyst?app=1

[StubbleJumper]

New article on Seeking Alpha

 

https://seekingalpha.com/article/4183685-e-l-financial-38-percent-discount-growing-book-value-potential-catalyst?app=1

 

 

 

Not much new in the article.  In essence, you buy ELF with the notion that it'll grow BV by 7 or 8 percent, and then you hope that the valuation gap will narrow considerably to give you a very profitable exit opportunity.  If that valuation gap narrows quickly enough, life is grand!

 

I'm a little surprised that the Jackman family hasn't just taken this thing private.  Borrow some money, buy back the outstanding shares and be done with the minority holders.  Same with Economic and United -- offer a 15% or 20% premium, buy out the minority holders, collapse the funds and redeploy the capital.  Maybe they'll eventually do it.

 

 

SJ

[bizaro86]

E-L isn't a very complicated opportunity, but seems like a pretty likely case of high single digits return plus upside optionality. Lots of market exposure though, so that's a risk.

 

I agree that since they definitely don't need capital,  there isn't any reason for this to be public.

[Spos]

But what is the incentive for the Jackman family to privatize?  They are in this for the long haul and they can continue to buy shares at a big discount (and ELF can continue to buy discounted EVT and UNC shares).

 

Maybe if the sell Empire Life, but this reminds me of Loews, where the Tisch family's ownership of L has been increasing forever through L's buybacks.

[StubbleJumper]

But what is the incentive for the Jackman family to privatize?  They are in this for the long haul and they can continue to buy shares at a big discount (and ELF can continue to buy discounted EVT and UNC shares).

 

Maybe if the sell Empire Life, but this reminds me of Loews, where the Tisch family's ownership of L has been increasing forever through L's buybacks.

 

 

 

Well, I would say that you are probably right.  There must not be much incentive to take ELF, Economic or United private because the Jackman family could have done it on any number of occasions, but has not chosen to do so. 

 

I guess my mental model would be that the Jackmans borrow ~$1B to buy the ~1m shares of ELF that they currently do not own.  ELF then borrows ~$750m to buy the 6m shares of United that it currently doesn't own.  ELF then collapses United to get full access to the company's $1.7b of assets, which it uses to repay the ~$750m loan.  Of the remaining ~$1B of assets, about $500m could then be dividended to the Jackmans to reduce the $1B that they borrowed to buy ELF (the other $500m remains in ELF to keep capital levels at a stable level).  A similar exercise could then be done with Economic, which would probable allow ELF to access another ~$100m of capital to dividend to the Jackmans, resulting in the ~$1B loan being reduced to ~$400m.  That last ~$400m could probably be repaid through an ELF dividend of excess capital.

 

Bing, bang, boom.  Full ownership of ELF.  No more minority holders, and much of the buyout is financed by the considerable price discount of United and Economic, while the buyout of ELF is probably done at a market premium that is still a discount to book.

 

But, as you said, the Jackmans seem to be very patient.

 

 

SJ

[bizaro86]

From their perspective, if you know you can do something at any time, there maybe isn't a huge incentive to do it now, especially if you aren't planning on spending the money anyway. If you're just going to invest it, why not do so inside ELF as your pseudo-family-office.

[rb]

Here's the thing that seems to be missing which may prevent the whole go private.

 

If they want to go private they'll have to do a tender. Why would the other shareholders tender their shares out for cheap? It makes no sense. The only way for the shareholders to do that is if they are so desperate and beaten down that they gave up any hope. My guess is if the go private doen't happen is because they don't consider that the shareholders are depressed enough so the beatings shall continue.

[SafetyinNumbers]

so the beatings shall continue.

 

Have you been spending a lot of time on Twitter, rb?

 

It hasn’t been that bad. NAV and share price growth continue and buying at a 40% discount to NAV is a nice margin of safety which people, based on this thread and others, don’t seem to care much about these days.

[StubbleJumper]

Here's the thing that seems to be missing which may prevent the whole go private.

 

If they want to go private they'll have to do a tender. Why would the other shareholders tender their shares out for cheap? It makes no sense. The only way for the shareholders to do that is if they are so desperate and beaten down that they gave up any hope. My guess is if the go private doen't happen is because they don't consider that the shareholders are depressed enough so the beatings shall continue.

 

 

 

Well, the quick answer is that ELF could offer a 20% or 25% premium to minority holders and still buy the shares for less than book. Same deal with Economic and United -- you could offer a 20% premium and still buy them for less than book.  It would piss off some hardcore value guys, but most would be happy to grab the 20% return and run.  You don't need everyone to agree, you just need a majority. 

 

That's a little bit like how Prem bought out minority ORH holders for a song.  A few of us hardcore guys are pissed, but everyone else was giddy about the premium.

 

 

SJ

[Spos]

"Well, the quick answer is that ELF could offer a 20% or 25% premium to minority holders and still buy the shares for less than book. Same deal with Economic and United -- you could offer a 20% premium and still buy them for less than book.  It would piss off some hardcore value guys, but most would be happy to grab the 20% return and run.  You don't need everyone to agree, you just need a majority."

 

I think this is it, having to pay the premium.  By doing this slowly through small purchases, you're not paying the premium.  And if your horizon is long and you have control, having the minorities doesn't seem like a large cost.  Some leakage in terms of public company costs and the small dividends, but the minorities also pay a part of your salary. 

 

And if this is the thinking they have no real incentive to close the discount.  I'd like to be wrong on this because I own a little of it, but I think a sale of Empire Life would be a more likely first transaction.

[bizaro86]

Wouldn't a tender for the CEFs at a discount put them at risk of having everyone dissent? It seems likely to me that you could make a pretty good case that your shares in a CEF are in fact worth published NAV.

 

I only own this at the E-L level, because I think that then the discount on the CEFs works at least partially in my favour as they are slowly buying them in. If I was picking one of the CEFs it would definitely be EVT because of the large E-L holding within the fund.

[SafetyinNumbers]

Meanwhile, this is the largest insider purchase I have seen them make.

 

https://www.canadianinsider.com/company?ticker=ELF

 

15k shares @ 815

[StubbleJumper]

Meanwhile, this is the largest insider purchase I have seen them make.

 

https://www.canadianinsider.com/company?ticker=ELF

 

15k shares @ 815

 

 

Yeah, the Jackman family doesn't make many open market purchases.  If they have any aspirations to buy the ~1m shares that they currently do not own, it'll take a hell of a long time when they do it 1,000 at a time.

 

The more effective slow-moving takeover is when Economic periodically adds a few ELF shares and then when ELF periodically buys a few more Economic shares.  If they do that for long enough, it'll effectively be a buyout.

 

 

SJ

[SafetyinNumbers]

I generally see them using ELF to buy UNC and the family holding companies buy ELF and EVT.

 

[SafetyinNumbers]

Australian hedge fund has a blurb on the ELF family (UNC, EVT included).

 

http://east72.com.au/wp-content/uploads/2018/07/E72-Quarterly-Report-June-2018.pdf

[no_free_lunch]

Thanks for the link.  Also a good write-up in there on VNO.

[wisowis]

I just went over the holdings of EVT and UNC (US holdings only for now). Starting to build out a spreadsheet, for fun...

 

42.3% of the UNC portfolio are US holdings.

Value as of Mar 31: $738,761,000

Current: $791,851,509 (+7.2%)

= + $53,090,509

* 0.52 (ELF stake)

= + $27,607,065

 

24.5% of the EVT portfolio are US holdings.

Value as of Mar 31: $219,162,000

Current: $231,561,813 (+5.7%)

= + 12,399,813

* 0.24 (ELF stake)

= + $2,975,955

 

So $30,583,020 increase in net equity value from their US holdings since March 31st (against a net equity value of ~$5.3 billion)?

 

Does it make sense?