ELF vs FFH

[mranski]

Anyone have an opinion on this company as an alternative or in addition to Fairfax.

[returnonmycapital]

Yes, I have owned ELF in the past.  The Jackman family runs it respectably, but they do control it so it is their way or 'on your bike'. 

 

The insurance business is so-so.  The underwriting is okay.  Their investment returns are okay.  They have some closely held investments (United Corporations as an example) which are held in their portfolio securities.

 

My attraction to the company was one of massive discount to book value.  Which appears to be the case at present.  I get book value of CAD 750.00 per share, yes?

[mranski]

I like the Jackman aspect. I believe S Jarislowsky runs the United Corp Portfolio which is good. I haven't looked at numbers but i would say closer to $600 for book.

[scorpioncapital]

They are not adventurous enough for me, too conservative. Great for certain people, like those who are already rich :) The control issue could result in a perpetual discount at least that has been the evidence of the last few decades and unlikely to change unless the ownership structure changes.

[returnonmycapital]

Jackman definitely has an owner mentality; not a lot of wastage at ELF, just not run to grow like FFH/BRK/MKL.

Jarislowsky ran less than 1/2 of United Corporations when I last checked - they are competent.

I am reducing the share count by close to 700,000 due to cross ownership; I get 3.3mln effectively outstanding.  Is that wrong?

 

[Alekbaylee]

It's also thinly traded. Might not be easy to resell when you want.

[ubuy2wron]

I have owned this for a long time. I was wondering when it was going to come up this is a pretty seriously undervalued co it unfortunately is likely to stay that way until Hal Jackman passes. They control two closed end investment trusts Economic Investment Trust and United Corporations. The trusts also have large positions in ELF and vice versa.  The trusts trade at big discounts to NAV  and NAV is accounted for on a fully tax paid basis .The trusts are managed by Jarislowsky and Sanford Bernstein. This is definately run with an owners mentality however Hal Jackman has sold off every public entity he has owned at some point and I expect the insurance companies may be sold at some point as well. I always thought they would be great additions to the Fairfax stable pretty decent insurance -underwriting not terrible on the investment side. As an aside Tim Mcelvaines father was for many years the CEO of one of the insurance co's. Sorry for the ramble but its late in the day and I have to take my wife for dinner its her birthday .

[mranski]

It looks like Sanford Berstein was replaced recently

[returnonmycapital]

I have now had a proper look at ELF and I suggest it has distinct advantages over other insurance businesses, including FFH, at present.

 

A brief synopsis:

 

Assets, float, investments, and shareholders equity at ELF have grown at 9-10% per annum since 1998, without issuing shares. Over the last 5 years, those same line items have grown closer to 12% per year, again without share issuance.

 

P&C insurance combined ratio (what they define as general insurance) has been 102.6% since 1998 and has been 98.1% over the last 5 years.  So, recently, float and its growth has been cost-free. ELF also has a life insurance business which distorts the company-wide underwriting ratios (all life insurers seem to operate with some cost to their float).

 

Operating income margins (excluding capital gains) are very high, at close to 9% since 1998 and even higher over the last 5 years. Those are BRK-type operating margins. 

 

The valuation is cheap, at 0.67X estimated Sept 30/09 book value of $735, not to mention that it is 0.23X its investments per share (growing at 10%/yr).

 

The one weakness is their past equity investment management. But, with Jarisklowsky, Fraser taking more responsibility and their addressing underperforming managers, they look to be turning the boat around.  They recently hired ValueInvest for some of their equities and they have a very good long-term record.  If they can get equities right and if we are heading into a brighter overall equity market trend, book value should out-grow assets, investments, and float handsomely.

 

The company is operated by shareholders for shareholders and is growing responsibly faster than I had thought.  There is a lot of margin for error in its price.  I cannot see why this company's market value is not at least equal to its book value.  This looks like an obvious idea to me.

 

If anyone wants a copy of my analysis, let me know.

[gurjot]

hi,  yes i would love to see your analysis for elf. please send it if you like to my email  [email protected]

 

thanks

 

 

[returnonmycapital]

Gurjot, you should have it in your inbox now.

[omagh]

Are you comfortable with the long-tail risk in an inflationary scenario?  Not just CPI inflation, but other factors can cause payouts to increase.  Earnings in insurance companies are opinions and you'll notice that the P&C industry that Buffett and Watsa use to generate float to finance their investments are all relatively short-term risks.  You'll notice that they both avoid this insurance segment...

 

-O

I have now had a proper look at ELF and I suggest it has distinct advantages over other insurance businesses, including FFH, at present.

 

A brief synopsis:

 

Assets, float, investments, and shareholders equity at ELF have grown at 9-10% per annum since 1998, without issuing shares. Over the last 5 years, those same line items have grown closer to 12% per year, again without share issuance.

 

P&C insurance combined ratio (what they define as general insurance) has been 102.6% since 1998 and has been 98.1% over the last 5 years.  So, recently, float and its growth has been cost-free. ELF also has a life insurance business which distorts the company-wide underwriting ratios (all life insurers seem to operate with some cost to their float).

 

Operating income margins (excluding capital gains) are very high, at close to 9% since 1998 and even higher over the last 5 years. Those are BRK-type operating margins. 

 

The valuation is cheap, at 0.67X estimated Sept 30/09 book value of $735, not to mention that it is 0.23X its investments per share (growing at 10%/yr).

 

The one weakness is their past equity investment management. But, with Jarisklowsky, Fraser taking more responsibility and their addressing underperforming managers, they look to be turning the boat around.  They recently hired ValueInvest for some of their equities and they have a very good long-term record.  If they can get equities right and if we are heading into a brighter overall equity market trend, book value should out-grow assets, investments, and float handsomely.

 

The company is operated by shareholders for shareholders and is growing responsibly faster than I had thought.  There is a lot of margin for error in its price.  I cannot see why this company's market value is not at least equal to its book value.  This looks like an obvious idea to me.

 

If anyone wants a copy of my analysis, let me know.

[returnonmycapital]

Omagh,

 

ELF has a short-tail P&C business and a life business.  They do not have a re-insurance business which is where long-tail underwriting risk typically resides.  They are based in Canada, where we suffer less mega-natural disaster situations (wind, tremors) that can mess with underwriting.

 

If you are referring to their life business being long-tail risk, then yes, I am pretty comfortable.  You mention inflation but as I understand life contracts, inflation doesn't work against the insurer but for it.  Standard life contracts are fixed in payout.  Whereas the premiums go to work better as investments in an inflationary environment (i.e. grow faster on a nominal basis against a depreciating payout).  Also, medical technological advancements generally require that actuarial assessments of life expectancy need be lengthened every few years (i.e. we keep living longer) which works to the insurer's benefit as well since additional premiums vest for longer.

 

This one seems a lay-up.  But, it wouldn't be cheap if everyone agreed with me.

[NormR]

Count me as liking both FFH & ELF.

 

Irwin is also keen.