[ELF Annual Report]

hi all,

 

Thanks for all the great posts on ELF . I think its a good value at current prices.

 

Here is my take on the earnings power of ELF . They have $1 bil in equities at the corporate level and 1 billion thru their insurance subs - making around $2 bil

 

Assuming they can average over time 7% capital appreciation annually that would equal around $140 mil

 

If you change that 10%, 20% etc you can get all kinds of great potential scenarios but I'm being conservative.

 

Empire Life has earnings power of around 63 mil . Lets assume Dominion can break even & Corporate does 32 mil net (including equity investees). I've worked these figures from the last few years of financials.

 

So that would put the net operating income at around 90-100 mil

 

If we see a genuine hard market as ELF are predicting then the results for Dominion could improve substantially back to where they were some years back (ie from break even to 50 to 100 mil plus). Alternatively substantial apopreciation in their equity investments OR the consolidation of their "United" investment(which trades at a big discount to book value) could also provide a big potential boost.

 

Going back to comprehensive earnings power - assuming 7% capital appreciation on equity investments - I would guess around $200-$250mil . At current market cap of 1.7 bil (using their diluited shares of 3.8 mil factoring in preference shares) thats a good price- now if Dominions results substantially imrpove or we get a 30% appreciation in their equity investments then book value and comprehensive income could be substantially higher. So there is a good downside with a potentially a realkicker on the upside.

 

The shares are trading at around 2/3 of book value so they are definitely being priced with downside protection

 

I am flying from Sydney to Toronto for the Fairfax dinner & meet up - really looking forward too - so if anyone else is going & wants to have a coffee & talk about ELF & other ideas let me know my email is tarn.crowe@cci-recruit.com

 

cheers

 

 

 

 

[Prem thinks Berkshire has a better balance sheet than the US govt!!]

I am really pleased with Fairfax's move selling all its treasuries into Muni bonds 87% insured by Berkshire Hathaway. The yields are enormous - i also demonstrates Fairfax's growing concern that yields have to go up on treasuries - they are way too low- the US govt cannot continue to borrow infinitum into teh trillions and continue to pay 2.6-2.8% interest - the yield of over 5.5% on Munis is a much stronger risk reward proposition particularly when backed by Berkshire whose balance sheet is unquestionably strong.

 

The purchase of over 2bil in equities is also an excellent move

 

All in all I am pleased with Fairfax's investment strategy to a more offensive stance.

[Fairfax Financial 13F]

if there is a theme they are going after the industry leaders in each area with their equity investments - I knew they would step up but not this much this quickly - I am prepared to bet that the world is not going to end & Fairfax will end up making a lot of money buying at rock bottom prices!