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

[SafetyinNumbers]

Duncan bought 100 shares yesterday so that’s something

 

https://www.canadianinsider.com/node/7?menu_tickersearch=ELF+%7C+E-L+Financial

[SafetyinNumbers]

ELF has a website now.

 

It's not very useful but at least it exists.

 

https://www.e-lfinancial.ca/general-information

[woodstove]

Thanks for the pointer to website.  Some good info there including annual reports for past decade.  Info previously available but helpful to have it all gathered together. 

[wisowis]

They reported last month, and NAV was up to $1,397.35, with the stock trading as low as $720 in the past couple of weeks. A record discount (?) of 52% of NAV.

 

Continue to be shocked that they don't buyback some of their shares, would be so accretive at these levels.

[SafetyinNumbers]

They reported last month, and NAV was up to $1,397.35, with the stock trading as low as $720 in the past couple of weeks. A record discount (?) of 52% of NAV.

 

Continue to be shocked that they don't buyback some of their shares, would be so accretive at these levels.

 

I heard a theory that they like the discount because they will avoid a bunch of taxes when Henry Jackman passes away. I think he is 87 now. I assume they already did an estate freeze once when they sold the Dominion back in 2013. The NAV was $872.45 at the end of 2013 and the share price was $725.

 

I have suggested that they should sell down the equity portfolio to buy back stock. It would reduce risk while being accretive to NAV and increasing our ownership in Empire Life on a per share basis.

[ColdandRich]

They reported last month, and NAV was up to $1,397.35, with the stock trading as low as $720 in the past couple of weeks. A record discount (?) of 52% of NAV.

 

Continue to be shocked that they don't buyback some of their shares, would be so accretive at these levels.

 

I heard a theory that they like the discount because they will avoid a bunch of taxes when Henry Jackman passes away. I think he is 87 now. I assume they already did an estate freeze once when they sold the Dominion back in 2013. The NAV was $872.45 at the end of 2013 and the share price was $725.

 

I have suggested that they should sell down the equity portfolio to buy back stock. It would reduce risk while being accretive to NAV and increasing our ownership in Empire Life on a per share basis.

 

Safety, that is an interesting theory and maybe could have some truth.  I guess there are two possible takeaways from it if that is true:

 

1 - The family has incentives that are different from the average shareholder and that could cause them to act a certain way that furthers their own interests

2 - The share price could potentially be artificially low right now and after Henry passes they will be free to pursue more shareholder friendly moves

 

Right now I have a chunk of money to deploy and am trying to decide between going with Canadian General Investments (TSE:CGI) or Economic Investment Trust (TSE:EVT).  I think I will go with Economic as I think there are lots of levers for EVT/ELF to pull to unlock value.  I plan to attend the shareholder meeting and add my voice to yours to try and get management to unlock value.

[SafetyinNumbers]

 

 

Safety, that is an interesting theory and maybe could have some truth.  I guess there are two possible takeaways from it if that is true:

 

1 - The family has incentives that are different from the average shareholder and that could cause them to act a certain way that furthers their own interests

2 - The share price could potentially be artificially low right now and after Henry passes they will be free to pursue more shareholder friendly moves

 

Right now I have a chunk of money to deploy and am trying to decide between going with Canadian General Investments (TSE:CGI) or Economic Investment Trust (TSE:EVT).  I think I will go with Economic as I think there are lots of levers for EVT/ELF to pull to unlock value.  I plan to attend the shareholder meeting and add my voice to yours to try and get management to unlock value.

 

I like EVT as well. There is a good argument that EVT will be the first place they could release some value. I would do it by offering to buy it for NAV, thus buying back a lot of ELF at the current share price. Very accretive and relatively simple.

 

I also like TII.V right now if you are looking for a company trading at 0.55x book and is actually trying to close the discount but having no success. They have maxed out the NCIB the last two years, introduced a new dividend (4% yield) that goes ex on Sept 27 and grown the business. ROE is trending towards 10% and should go over which might close the discount or perhaps the buyback will begin to have an impact when its resumed in late November.

[SafetyinNumbers]

East 72 with a new discussion of ELF in quarterly report

 

http://east72.com.au/wp-content/uploads/2019/10/E72-Quarterly-Report-Sept-2019.pdf

[Stuart D]

East 72 with a new discussion of ELF in quarterly report

 

http://east72.com.au/wp-content/uploads/2019/10/E72-Quarterly-Report-Sept-2019.pdf

 

That's great - @SafetyinNumbers thank you for posting!

[mjm]

agreed. good stuff

[sundin]

East 72 with a new discussion of ELF in quarterly report

 

http://east72.com.au/wp-content/uploads/2019/10/E72-Quarterly-Report-Sept-2019.pdf

 

"....the company and its associates stress the fact they do not retire equity and that discounts to net asset value are to be expected however, acquiring EVT outright would make some degree of sense. "

 

Why would they not retire equity w/ such a glaring discount to book value? Is the IRR of acquiring EVT outright is greater than buy backs?

[SafetyinNumbers]

East 72 with a new discussion of ELF in quarterly report

 

http://east72.com.au/wp-content/uploads/2019/10/E72-Quarterly-Report-Sept-2019.pdf

 

"....the company and its associates stress the fact they do not retire equity and that discounts to net asset value are to be expected however, acquiring EVT outright would make some degree of sense. "

 

Why would they not retire equity w/ such a glaring discount to book value? Is the IRR of acquiring EVT outright is greater than buy backs?

 

Yeah, because EVT owns ~10% of ELF, if they acquire EVT for NAV, they can buy back a lot of shares back without paying a premium.

[mjm]

if elf bought evt, would tax basis go to NAV paid by ELF or would ELF still be on the hook for the deferred taxes of EVT?  do any of the knowledgeable have a clue?

[Rod]

if elf bought evt, would tax basis go to NAV paid by ELF or would ELF still be on the hook for the deferred taxes of EVT?  do any of the knowledgeable have a clue?

 

I think ELF would pay NAV or close to it for the remaining EVT the Jackmans don't have, which means the value of the assets less deferred tax. The deferred tax would remain a liability for ELF. EVT would still exist, it would just be private and would continue to carry the deferred tax liability.

[mjm]

thanks

[SafetyinNumbers]

if elf bought evt, would tax basis go to NAV paid by ELF or would ELF still be on the hook for the deferred taxes of EVT?  do any of the knowledgeable have a clue?

 

I think ELF would pay NAV or close to it for the remaining EVT the Jackmans don't have, which means the value of the assets less deferred tax. The deferred tax would remain a liability for ELF. EVT would still exist, it would just be private and would continue to carry the deferred tax liability.

 

They could also liquidate that portfolio (hedged as soon as they announce the acquisition) if they don't want any additional leverage. They would have to pay the tax but they should be indifferent.

[SafetyinNumbers]

Has anyone ever asked them if they would have UNC bid for EVT?

 

I haven't really thought it through but presumably an exchange ratio based on the respective NAVs would work.

 

They would gain efficiencies for things like listing costs and it could be structured tax free.

 

That would dramatically increase ELF's share of the ELF shares owned by EVT. I suppose the risk is that ELF shares would jump a lot on news because it would seem like ELF is trying to create shareholder value. No one thinks they have any interest in doing that right now.

[spartan]

I've taken a closer look at Empire Life's numbers - see attached spreadsheet (two tabs) for numbers going back to 2001.

 

Here is a summary for those interested, along with my key takeaways:

 

Four business segments:

- Wealth Management

- Employee Benefits

- Individual Insurance

- Capital & Surplus

 

Four revenue streams:

- Net premiums

- Investment income

- Fee income

- Net gains/losses from investments

 

Business changed after 2009:

- Investment income began to grow at a higher CAGR driven by individual insurance segment. Since 2009, CAGR has been around 6%. Although wealth management investment income has dropped since then, it is compensated by insurance and capital segments.

- Fee income continues to grow substantially and driven by wealth management segment. Since 2003, when segmented information began to be presented, this has grown at 13% CAGR.

- Excluding net gains/losses from investments, revenue growth has been stagnant. Pre-GFC, revenue was growing at around 10% CAGR. Post-GFC, revenue is only growing at 3% CAGR per year.

- Although revenue is stagnant, it is still growing and buttressed by fee and investment income. Most importantly, Empire’s growth seems to be dropping directly to bottom line. Net income has been growing at a blistering pace – close to 25% CAGR since 2010.

- This is a hidden growth business.

 

 

- Empire Life is a significant contributor to ELF’s bottom line. If revenue continues to grow at a reasonable rate, and bottom line continues to grow at a high rate, Empire Life should be worth roughly $750 per share in the next year or two (entire value of ELF share price today). It could be worth even more than that to the Big 3 insurance companies; synergies could be quite substantial.

 

[($200 Million x 15 Multiple) / 4 Million Shares Outstanding] = $750

 

- Net assets available to common shareholders have been growing at a 12% CAGR since 2013, when numbers began to be segmented. Applying varying multiples (1.1x – 1.7x) implies an intrinsic value per share of $440 – $675. At first glance, this seems too simplistic and undervalues the true growth potential of Empire Life. However, it adds another layer of comfort. As a reminder, the Big 3 insurance companies all trade at similar multiples:

  - Sun Life = 1.65x

  - Manulife = 1.1x

  - Great-West Life = 1.55x

Empire_Life.xlsx

[BroKon]

Thanks for your analysis spartan.

Let me preface my comments with firstly, I think ELF is cheap and I own it, and secondly, that most analysis of Empire Life that I have seen agrees with spartan’s conclusion. However, I just cannot seem to get to there.

I have looked at Empire Life two ways:

• Using Damoradan base case numbers of US life Insurance companies, where the average Life Insurance company trades on price to book of 0.82 and has a ROE of 12% - which would extrapolate Empire Life to somewhere around 0.75 price to book.

• Using Sources of Earnings from their annual report and a multiple of 13 (although I do take spartan’s point around growth in fee income, so maybe you could put a higher multiple, but I just took the average of the three life companies he named) which gives a p/b of 1.04

At around 30% of Net Equity Value, none of the above significantly changes how cheap ELF is, and as I said most analysis I read gives it a minimum valuation of 1.4x, but I thought it was worth giving a counterpoint, to add to the discussion on a company that even the chairman believes cheap by buying…..wait for it……another 100 shares the other day.

 

[SafetyinNumbers]

I agree with both of you. I do think Empire Life in a sale scenario would be worth close to where Standard Life sold for at 1.9x book but it likely won't happen until we have much higher interest rates.

 

The speculation that estate planning is the reason they aren't buying more stock as a family or as a company is the most rational I have heard.

 

 

[mranski]

Ive never been able to understand their holding of Algoma Central, it seems like such a mediocre long term investment, company, and industry. I guess it is small enough overall to not matter enough.

[SafetyinNumbers]

Ive never been able to understand their holding of Algoma Central, it seems like such a mediocre long term investment, company, and industry. I guess it is small enough overall to not matter enough.

 

It's been about a 10 bagger for them so far plus dividends based on EVT's financials. I'm not sure how long they have owned it though I saw it was about a 3 bagger on EVT's financials at the end of 2002. ALC has returned about 9%/yr since then which has beat the S&P/TSX which has had a return of about 5.5%/yr.

 

 

[no_free_lunch]

I own elf and continue to hold. I think it will be fine. They are growing book value slowly and the discount is based on interest rates. It's frustrating and they are missing an opportunity but the long term success isn't impeded by the low share price.

[mranski]

Thanks, Safety, the long term is way better than I thought. I was looking at the 10 year.

[spartan]

Has anyone dabbled in their preferreds? Hal has increased his holdings of Series 2 as of late (around $2.5 Million purchased since August). They currently trade at around $22 - yielding 5.4%. Not great but safe. Here's the excerpt from their latest annual regarding the Series 2:

 

"The First Preference Shares, Series 2 are entitled, if and when declared, to fixed non-cumulative

preferential cash dividends at a rate equal to $1.1875 per share per annum. On and after October 17,

2015, the Company may redeem for cash the First Preference Shares, Series 2 in whole or in part, at

the Company’s option at $25.00 per share, in each case together with all declared and unpaid dividends.

 

On and after October 17, 2011, the Company may convert all or any part of the outstanding First

Preference Shares, Series 2 into that number of Common Shares determined by dividing by the then

applicable redemption price, together with all declared and unpaid dividends to the date of conversion,

by the greater of $1.00 and 95% of the weighted average trading price of the common shares on the

Toronto Stock Exchange for the 20 consecutive trading days ending on the fourth day prior to the

conversion date."