E-L Financial (TSX: ELF) is a Canadian investment holding company controlled by the wealthy Jackson family of Toronto. The intrinsic value of the company is close to $1,550 a share (after tax), and the stock trades at $740 a share.
Over the last 50 years, the company has grown book value by 12.4% a year, easily outperforming the S&P 500 by two percentage points per year. The company has opportunistically sold assets in the holding company and created value for shareholders. For example, in 1997 National Trustco, a profitable part of the Jackman group, was sold to Scotiabank for $1.25 billion. Similarly, in 2013, E-L Financial sold The Dominion of Canada General Insurance Co. to the Travelers Companies Inc. for $1.125 billion. So, the real question is, what is left of E-L Financial?
E-L Financial owns 80% of Empire Life Insurance Company, a Canadian-based life insurance and financial services company that is headquartered in Kingston, Ontario. The company was incorporated in 1923 and is a subsidiary of E-L Financial. The company provides individual life, health, and investment products as well as group life and health products through independent distribution partners, including financial advisors, insurance general agents, national account corporations, and employee benefit underwriters. Empire Life is the parent corporation of Empire Life Investments, a Canadian investment management company launched in 2011 and controlled by E-L Financial.
E-L Corporate is an important part of E-L Financial. It owns a majority stake in United Corporations, a closed end fund that has been around for nearly 100 years and which is now consolidated at the E-L level; and it owns Algoma Central Corp., a shipping company, and Economic Investment Trust, a closed end trust formed in 1927 with approximately $480 million in net assets.
E-L Financial now trades at less than half after-tax value, which can be easily calculated based on the market value of assets owned. Adjusted for estimated taxes, this yields about $1,550 a share — around 51% discount to net asset value. Broadly, E-L Financial owns the following assets equivalent to about $3.1 billion: 52% holding of the United Corporations, an investment closed end fund; 36.9% holding of Algoma Central, a shipper; 24% holding of an investment fund, Economic Investment Trust, which cross-owns 9.7% of E-L Financial; 99.5% of Empire Life; and other miscellaneous assets less liabilities and preferred shares.
Empire Life’s larger competitors — Sun Life, Great West Lifeco, and Manulife — trade at an average of 1.25 times book value, ranging from 1.15 times book value (Manulife) up to 1.6 times (Sun Life). Assuming a 1.25 times book valuation — reasonable based on an improved return on equity numbers at Empire over the past five years — would value Empire Life at approximately $2.43 billion, or $600 per E-L Financial share (versus book value of approximately $1.9 billion, or $450/share to E-L Financial).
United Corporations trades at a 36% discount to net equity value, while Economic Investment Trust trades at a 30% discount to net equity value but with 40% of net assets comprised of the 9.8% holding of E-L Financial. Many of the investments within E-L Financial, United Corporations Limited, and Economic Investment Trust are diversified value stocks managed by a large number of third-party investment professionals, so these are assets that compound at a 10-15% rate of return.
So, what are the catalysts that could narrow share price and intrinsic value? Share buybacks, a sale of Empire-Life, a sale of corporate owned assets, a special dividend, acquiring United Corporation or acquiring Economic Investment Trust could unleash value. E-L Financial’s discount is now at historically high levels, and architect of the company Henry Jackman is 88 years old. Expect exciting things from E-L Financial in the future!
