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

[no_free_lunch]

The valuation is now close to 1/3 book (Based on dec 31/2019 numbers).  The special dividend is therefor 1.7% of NAV but almost 5% of the share price!  If management can take any action to return equity this could be very rewarding for shareholders.  One scnenario, if they do the special $25 dividend every year for 10 years you would have received half of the current share price and yet still hold an investment trading at about 40% of book (assuming book in 10 years in comparable to end of 2019 numbers, e.g. a completely stagnant decade).

 

I am just trying to figure out where NAV is now.  Any bonds should be up but of course equities are going to be in the toilet.  Still I would like some insight into the numbers to see how it balances out.  I am having a hard time tracking down their financials, is there a good source?

[wisowis]

The valuation is now close to 1/3 book (Based on dec 31/2019 numbers).  The special dividend is therefor 1.7% of NAV but almost 5% of the share price!  If management can take any action to return equity this could be very rewarding for shareholders.  One scnenario, if they do the special $25 dividend every year for 10 years you would have received half of the current share price and yet still hold an investment trading at about 40% of book (assuming book in 10 years in comparable to end of 2019 numbers, e.g. a completely stagnant decade).

 

I am just trying to figure out where NAV is now.  Any bonds should be up but of course equities are going to be in the toilet.  Still I would like some insight into the numbers to see how it balances out.  I am having a hard time tracking down their financials, is there a good source?

 

I don't know if it is helpful, but a while back I shared this spreadsheet of their equity holdings (via Algoma, United, and Economic), as of March 31, 2018. Looks like they are down ~11% from those levels (assuming no portfolio changes). Check it here: https://docs.google.com/spreadsheets/d/1F1Pk-vQKZVXX4X2UESABcpliKFGdki0Ip5NQCOxiTaY/edit?usp=sharing

[SafetyinNumbers]

The valuation is now close to 1/3 book (Based on dec 31/2019 numbers).  The special dividend is therefor 1.7% of NAV but almost 5% of the share price!  If management can take any action to return equity this could be very rewarding for shareholders.  One scnenario, if they do the special $25 dividend every year for 10 years you would have received half of the current share price and yet still hold an investment trading at about 40% of book (assuming book in 10 years in comparable to end of 2019 numbers, e.g. a completely stagnant decade).

 

I am just trying to figure out where NAV is now.  Any bonds should be up but of course equities are going to be in the toilet.  Still I would like some insight into the numbers to see how it balances out.  I am having a hard time tracking down their financials, is there a good source?

 

I don't know if it is helpful, but a while back I shared this spreadsheet of their equity holdings (via Algoma, United, and Economic), as of March 31, 2018. Looks like they are down ~11% from those levels (assuming no portfolio changes). Check it here: https://docs.google.com/spreadsheets/d/1F1Pk-vQKZVXX4X2UESABcpliKFGdki0Ip5NQCOxiTaY/edit?usp=sharing

 

You could also use the decline in the UNC.TO NAV YTD (last update is Thursday) as an estimate for non-Empire Life NAV.

 

https://www.ucorp.ca/sites/default/files/pdfs/ucl_2020navhist_10.pdf

[mranski]

Algoma Central 10 yr numbers on Morningstar are flat by most metrics. It seems to be a dividend with debt.

 

[no_free_lunch]

The valuation is now close to 1/3 book (Based on dec 31/2019 numbers).  The special dividend is therefor 1.7% of NAV but almost 5% of the share price!  If management can take any action to return equity this could be very rewarding for shareholders.  One scnenario, if they do the special $25 dividend every year for 10 years you would have received half of the current share price and yet still hold an investment trading at about 40% of book (assuming book in 10 years in comparable to end of 2019 numbers, e.g. a completely stagnant decade).

 

I am just trying to figure out where NAV is now.  Any bonds should be up but of course equities are going to be in the toilet.  Still I would like some insight into the numbers to see how it balances out.  I am having a hard time tracking down their financials, is there a good source?

 

I don't know if it is helpful, but a while back I shared this spreadsheet of their equity holdings (via Algoma, United, and Economic), as of March 31, 2018. Looks like they are down ~11% from those levels (assuming no portfolio changes). Check it here: https://docs.google.com/spreadsheets/d/1F1Pk-vQKZVXX4X2UESABcpliKFGdki0Ip5NQCOxiTaY/edit?usp=sharing

 

Thanks for this. 11% isn't bad at all.  However, I see $5.2B of common share investments at corporate alone.  I don't know how to reconcile those numbers.  There is also $7B bonds, $0.5 options, $0.5b preferred shares, $.7b common shares under insurance investments.  I also see $8.5B under segregated funds, which is about 75% common/preferred shares and the rest bonds.

 

This thing is difficult to understand but I think their total equity exposure is around $12B vs $7B equity, both year end numbers.  With the high equity exposure and a significant amount in the liability side they could be worse off than I first realized.  I have to hope those options were in puts that are kicking ass right now but otherwise this could be ugly.

[JPerez]

I have modeled NAV per share as per the end of Q1 (see attachment)

I get a NAV per share of 1308 CAD at the end of Q1 that would be a decline of 12% YTD (10% excluding the dividend).

The numbers are based on the sensibilities provided in the Annual report.

They provide sensibilities to 20% declines in equity markets for the Life insurer and the E-L corporate, interest rates sensibility for the Empire life, currency sensibility to USD and  sensibility to fair value change in associates (Algoma and economic)

Empire life has a big corporate bond book as you would expect although quality seems to be quite high (only 15% are BBB or lower), despite this the bond prices would have deteriorated and the increase in the value of the bonds due to the decrease in interest rates is most likely overstated in the model.

This book value changes are all based on expected balance sheet changes and do not take into account the P&L for empire life for the quarter as I have no idea what this would be.

I see in their annual report that they have increased retention of the individual life policies, using less reinsurance (not great timing on this to say the least).

They guide to a loss of aprox. 12 million CAD for every 2% increase in mortality.

I don't know what their insurance contracts look like and if they have some kind of pandemic protection, if any of you have any idea on this and can comment would be great.

I assume that the 2% is a long term increase not a spike and i don't think that it would be material to this quarter in any case.

It looks like the shares are selling at a 48% of NAV. This would be the widest it has been as far back as I have looked.

Any feedback would be great.

ELF_Q1_model.xls

[JPerez]

they just filed their first month of buybacks and the numbers are incredible, they bought back 160000 shares during march, that is 4% of the outstanding shares.

 

[JPerez]

They bought 140 thousand shares at an average of 573 dollars, that is at a nearly 60% discount to what NAV per share should have been for the end of the quarter.

This buyback alone should have added 2% to  NAV per share.

See Q1 NAV estimation updated for buybacks attached.

The Jackmans now own over 75% of the company but i still don't think they will try to buy it all in the short term.

Any thoughts?

ELF_Q1_model.xls

[SafetyinNumbers]

They bought 140 thousand shares at an average of 573 dollars, that is at a nearly 60% discount to what NAV per share should have been for the end of the quarter.

This buyback alone should have added 2% to  NAV per share.

See Q1 NAV estimation updated for buybacks attached.

The Jackmans now own over 75% of the company but i still don't think they will try to buy it all in the short term.

Any thoughts?

 

140k shares is like 14% of the float at the time. Pretty remarkable. It will be interesting if the discount begins to close as sellers stop needing liquidity.

 

I don’t think they want to take it private anytime soon but I also didn’t think they would or could be this aggressive on a NCIB.

[JPerez]

It looks like they have been lucky with the timing.

Most of the transactions didn't seem to have gone through the public markets, it looks like the bulk of it were 3 separate private transactions.

I guess funds under pressure trying to sell what they could and they were able to provide liquidity.

They only have left another 60k shares in the NCIB after this.

Can they expand the NCIB amount or is it limited to 5% in 12 months?

The float now should be 850-900k shares.

My guess is that most of it is owned by value mutual funds and they have been under real pressure the last few years.

A discount to NAV is warranted here, but even UNC and EVT are trading at 30-40% discounts to NAV, if we apply the same discount to ELF it should be trading at a range of 795 to 925 CAD, the discount here is crazy in my opinion.

[SafetyinNumbers]

It looks like they have been lucky with the timing.

Most of the transactions didn't seem to have gone through the public markets, it looks like the bulk of it were 3 separate private transactions.

I guess funds under pressure trying to sell what they could and they were able to provide liquidity.

They only have left another 60k shares in the NCIB after this.

Can they expand the NCIB amount or is it limited to 5% in 12 months?

The float now should be 850-900k shares.

My guess is that most of it is owned by value mutual funds and they have been under real pressure the last few years.

A discount to NAV is warranted here, but even UNC and EVT are trading at 30-40% discounts to NAV, if we apply the same discount to ELF it should be trading at a range of 795 to 925 CAD, the discount here is crazy in my opinion.

 

They traded on public exchanges / ATS just not the TSX.

 

You can where they traded on stockwatch.

 

https://www.stockwatch.com/Quote/Detail?C:ELF&snapshot=SX

[BroKon]

Can you post a copy of the filing please, as I can't seem to find it.

[SafetyinNumbers]

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

[wisowis]

I have modeled NAV per share as per the end of Q1 (see attachment)

I get a NAV per share of 1308 CAD at the end of Q1 that would be a decline of 12% YTD (10% excluding the dividend).

The numbers are based on the sensibilities provided in the Annual report.

They provide sensibilities to 20% declines in equity markets for the Life insurer and the E-L corporate, interest rates sensibility for the Empire life, currency sensibility to USD and  sensibility to fair value change in associates (Algoma and economic)

Empire life has a big corporate bond book as you would expect although quality seems to be quite high (only 15% are BBB or lower), despite this the bond prices would have deteriorated and the increase in the value of the bonds due to the decrease in interest rates is most likely overstated in the model.

This book value changes are all based on expected balance sheet changes and do not take into account the P&L for empire life for the quarter as I have no idea what this would be.

I see in their annual report that they have increased retention of the individual life policies, using less reinsurance (not great timing on this to say the least).

They guide to a loss of aprox. 12 million CAD for every 2% increase in mortality.

I don't know what their insurance contracts look like and if they have some kind of pandemic protection, if any of you have any idea on this and can comment would be great.

I assume that the 2% is a long term increase not a spike and i don't think that it would be material to this quarter in any case.

It looks like the shares are selling at a 48% of NAV. This would be the widest it has been as far back as I have looked.

Any feedback would be great.

 

I think the view that mortality will increase is probably wrong. With all the closed business and many staying at home, not commuting, etc, mortality has gone down (saw a chart on this, can't find it right now). If mortality does go up from COVID-19, it will go up substantially in older populations, while at least partially offset by decreased mortality in younger populations. My suspicion (I am not an expert by any stretch) view is that this would be a benefit to life insurers, since the payouts to older cohorts are likely to be less than payouts to younger cohorts...

[BroKon]

Thanks Safety

[wisowis]

I had another question (that I asked in the Knight thread as well, but didn't get an answer). As mentioned above, they repurchased 140k shares since the NCIB started on March 9, 2020. Their NCIB says they may "purchase up to 1,000 Shares on the Exchange during any trading day." Obviously they've bought well in excess of that. Are the NCIB limits not binding?

[JPerez]

Thanks Safety

Total mortality in Spain has double for March compare with last year and it has nearly triple for the last.2 weeks of march.

Now you are right the worst affected age cohort Vs expectations was 65 to 75 followed by over 75s.

This is during the worst of the epidemic and will go down over the next few weeks.

But your point stands that life insurers are affected more by mortalities in the younger cohort

[SafetyinNumbers]

I had another question (that I asked in the Knight thread as well, but didn't get an answer). As mentioned above, they repurchased 140k shares since the NCIB started on March 9, 2020. Their NCIB says they may "purchase up to 1,000 Shares on the Exchange during any trading day." Obviously they've bought well in excess of that. Are the NCIB limits not binding?

 

Under the NCIB rules, a company is allowed one block trade a week that is above the daily limit. They used the block trade option 3x last month.

[SafetyinNumbers]

UNC and EVT also bought some stock back

 

https://www.canadianinsider.com/company-insider-filings?ticker=UNC

 

https://www.canadianinsider.com/company-insider-filings?ticker=EVT

[StubbleJumper]

UNC and EVT also bought some stock back

 

https://www.canadianinsider.com/company-insider-filings?ticker=UNC

 

https://www.canadianinsider.com/company-insider-filings?ticker=EVT

 

 

 

Any way of seeing whether United or Economic grabbed a few more ELF shares during this decline? 

 

 

SJ

[SafetyinNumbers]

UNC and EVT also bought some stock back

 

https://www.canadianinsider.com/company-insider-filings?ticker=UNC

 

https://www.canadianinsider.com/company-insider-filings?ticker=EVT

 

It would show up on the link to ELF posted previously. They have to file within 5 days so it would have shown up if they did.

 

I think the more interesting thing is if the family hold cos that get the special dividend use it to buy more stock too and shrink the float even more.

 

Any way of seeing whether United or Economic grabbed a few more ELF shares during this decline? 

 

 

SJ

[SafetyinNumbers]

I have modeled NAV per share as per the end of Q1 (see attachment)

I get a NAV per share of 1308 CAD at the end of Q1 that would be a decline of 12% YTD (10% excluding the dividend).

The numbers are based on the sensibilities provided in the Annual report.

They provide sensibilities to 20% declines in equity markets for the Life insurer and the E-L corporate, interest rates sensibility for the Empire life, currency sensibility to USD and  sensibility to fair value change in associates (Algoma and economic)

Empire life has a big corporate bond book as you would expect although quality seems to be quite high (only 15% are BBB or lower), despite this the bond prices would have deteriorated and the increase in the value of the bonds due to the decrease in interest rates is most likely overstated in the model.

This book value changes are all based on expected balance sheet changes and do not take into account the P&L for empire life for the quarter as I have no idea what this would be.

I see in their annual report that they have increased retention of the individual life policies, using less reinsurance (not great timing on this to say the least).

They guide to a loss of aprox. 12 million CAD for every 2% increase in mortality.

I don't know what their insurance contracts look like and if they have some kind of pandemic protection, if any of you have any idea on this and can comment would be great.

I assume that the 2% is a long term increase not a spike and i don't think that it would be material to this quarter in any case.

It looks like the shares are selling at a 48% of NAV. This would be the widest it has been as far back as I have looked.

Any feedback would be great.

 

Bang on analysis!

 

https://www.newswire.ca/news-releases/e-l-financial-corporation-limited-announces-march-31-2020-financial-results-817480841.html

[SafetyinNumbers]

ELF bought all 200,970 shares allowed under the NCIB plus the family hold co (which ELF indirectly owns a piece) bought another 17k+ shares.

 

 

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

 

It’s only 5% of shares outstanding but it’s also 20% of the float. It might matter at some point.

[JPerez]

My estimation of book value as per the close yesterday is at 1486 CAD per share after all the buybacks.

That is the same as it was at year end and that is after the 26.5 CAD per share dividend it distributed at the end of March.

It is now at close to a 55% discount to NAV.

I watched the Shareholders meeting online, it was the first time I have watched Duncan Jackman speaking and my impressions were good in general as he seems to be a good CEO and the team around him seems quite competent as well, on the other hand I had the impression that they do not care much about minority shareholders.

It isn't so much about what Mr. Jackman said as his tone. Somebody commented about having 100% of their assets in ELF and he was adamant that nobody should have 100 % of their wealth in any one company including ELF. Also somebody thanked them for the stewardship of the company through the years and It seemed to me that he was a bit uncomfortable with the praise.

This is only my subjective impression reading the tone and the body language.

While it is, of course, very good advise not to keep all your wealth in any one company ELF is very similar to a diversified close end equity fund with a modest amount of leverage so it is not as risky as investing in the equity of a company operating in one sector of the economy.

They have completed their 5% buyback in less than 3 months and it was nearly all of it in blocks so they almost didn't buy anything in the open market.

It seeems like there were quite a few institutional investors keen to get out at nearly any price due to the widening NAV discount over the years and the lack of liquidity in the shares.

To me it looks like the Jackmans are delighted with the discount and they would pay as little as they can for the rest of the float. This is of course normal to a certain extend but in some other companies minority shareholders are treated more like partners while here they are just the patsy that holds the remaining chips on the table.

The company at this point is more a family office than a public company.

I wonder what are the incentives of Jackmans to keep this company public.

To me the most likely scenario is if the discount remains attractive, the Jackmans (through buy backs and direct purchases) will aim to control 90- 95% of the company (currently they own around 80%) and at that point they will try to take it private. Probably not offering even NAV at that point.

So in my most likely scenario the return would still very attractive in the next 3-5 years if this plays out.

Any thoughts on this?

Full disclosure: I don't own any ELF shares anymore, I had bought them during the March panic and I sold them just after the shareholder meeting for the reasons I exposed here and I moved the capital to BRK shares  because I was impressed with Buffett's comments and presentation at the Berkshire meeting and i thought the negativity in BRK was really overdone after the meeting

 

[SafetyinNumbers]

My estimation of book value as per the close yesterday is at 1486 CAD per share after all the buybacks.

That is the same as it was at year end and that is after the 26.5 CAD per share dividend it distributed at the end of March.

It is now at close to a 55% discount to NAV.

I watched the Shareholders meeting online, it was the first time I have watched Duncan Jackman speaking and my impressions were good in general as he seems to be a good CEO and the team around him seems quite competent as well, on the other hand I had the impression that they do not care much about minority shareholders.

It isn't so much about what Mr. Jackman said as his tone. Somebody commented about having 100% of their assets in ELF and he was adamant that nobody should have 100 % of their wealth in any one company including ELF. Also somebody thanked them for the stewardship of the company through the years and It seemed to me that he was a bit uncomfortable with the praise.

This is only my subjective impression reading the tone and the body language.

While it is, of course, very good advise not to keep all your wealth in any one company ELF is very similar to a diversified close end equity fund with a modest amount of leverage so it is not as risky as investing in the equity of a company operating in one sector of the economy.

They have completed their 5% buyback in less than 3 months and it was nearly all of it in blocks so they almost didn't buy anything in the open market.

It seeems like there were quite a few institutional investors keen to get out at nearly any price due to the widening NAV discount over the years and the lack of liquidity in the shares.

To me it looks like the Jackmans are delighted with the discount and they would pay as little as they can for the rest of the float. This is of course normal to a certain extend but in some other companies minority shareholders are treated more like partners while here they are just the patsy that holds the remaining chips on the table.

The company at this point is more a family office than a public company.

I wonder what are the incentives of Jackmans to keep this company public.

To me the most likely scenario is if the discount remains attractive, the Jackmans (through buy backs and direct purchases) will aim to control 90- 95% of the company (currently they own around 80%) and at that point they will try to take it private. Probably not offering even NAV at that point.

So in my most likely scenario the return would still very attractive in the next 3-5 years if this plays out.

Any thoughts on this?

Full disclosure: I don't own any ELF shares anymore, I had bought them during the March panic and I sold them just after the shareholder meeting for the reasons I exposed here and I moved the capital to BRK shares  because I was impressed with Buffett's comments and presentation at the Berkshire meeting and i thought the negativity in BRK was really overdone after the meeting

 

I wouldn't necessarily assume institutions selling is some sort of rebuke on ELF's strategy. The fact is that a lot of shareholders needed liquidity at that time due to redemptions or to buy something else they owned that was going down faster. Those shareholders might be back and the float is now 20% smaller.