The third company from my screener, Empire Life Insurance Co is a Canadian insurance company founded in 1923 and based in Kingston, Ontario with a market capitalisation of CAD $160.6 million, a dividend ratio of 5.35%, a total debt to capital of 24.86%, and a price to cashflow ratio of 0.9519, according to the FT company profile (I’m guessing this last one will also be incorrect, as with CGIC, since the shares it refers to are also preferred shares traded in the Toronto Stock Exchange under the quote EML.PR.A).
The company provides life and health insurance, and segregated funds, mutual funds and annuity products for individuals and groups. Its main product lines are: wealth management, employee benefits, and individual insurance. It is a subsidiary of E-L Financial Corporation Limited.Source: www.empire.ca
2016 Annual Report
- Net income of $152.7 million, up 40.6% from $108.6 million in 2015 (page 4);
- Net premium and fee income of $1,110 million, up 5.5% from $1,052 million in 2015 (page 4);
- Assets under management (AUM) of $16,051 million, up 10.4% from $14,535 million in 2015 (page 4);
- MCCSR (Minimum Continuing Capital and Surplus Requirements) of 248%, which means the company has 1.5x more capital than it needs to meet all obligations to its policyholders. Canadian regulators require a minimum MCCSR of 120% (page 4);
- Sixth largest life insurance company in Canada based on assets (page 6);
- Issued $149.5 million of preferred shares in January 2016 (these are the preferred shares being traded in the Toronto Stock Exchange under the symbol EML.PR.A with a current market value of CAD $160.6 million, therefore the market cap and PCF ratio given by the FT are incorrect) and completed a $200 million subordinated debt issue in December 2016 (page 7);
- The main contributor to the increased net income was the Individual Insurance product line, with net income of $90.2 million compared to $6.8 million in 2015, due to changes in assumptions and improved asset/liability matching, by increasing its investments in real estate limited partnership units and making changes to its bond investments (page 9);
- Return on equity of 13.1%, up from 10.2% in 2015 (page 10);
- Net income increased every year from 2014 to 2016 (page 12);
- Total equity increased to $1,450 million, up 25.9% from $1,152 million in 2015, and this in turn was up 8.5% from $1,062 million in 2014 (page 12);
- Preferred dividend of $1.3183 per share paid in 2016 (page 13);
- Cashflow from operations was $292 million, up 96% from $149 million in 2015. Cashflow used for investing activities was $454 million, up from $179 million in 2015, due to the investment of the proceeds from the issuance of preferred shares and subordinated debt. Cash increased $169 million (page 21);
- EML.PR.A holders are entitled to receive fixed non-cumulative (not good for investors, since the company has no obligation to pay a missed dividend after the fact) quarterly dividends of 5.75% annually over the face value of $25 until April 17, 2021. After that the dividend will be reset every 5 years at 4.99% plus the 5-year Government of Canada bond yield (which now stands at 1.6%). This is a better deal than CGIC, since it has no redemption clause and the dividend rate can be reset (but would be even better if they were also cumulative and if they could be converted into common shares) (page 23);
- Cash and cash equivalents of $369 million, up 84.7% (page 42);
- EML.PR.A is the only preferred share class in the equity structure and is 10.3% of the company’s capital ($149.5 million / $1,450 million). Everything else is common shares, contributed surplus, retained earnings and other comprehensive income. 10.3% of operating cashflow is $30.1 million, for a PCF ratio of $160.6 million / $30.1 million = 5.34 (page 42);
- EPS $155.03, up from $110.22 (985,076 common shares outstanding) (page 43);
- 5,980,000 EML.PR.A preferred shares issued at a $25 face value. Holders will have the right to convert their shares into non-cumulative floating rate preferred shares on April 17, 2021 and on April 17 every five years thereafter, and they will receive quarterly floating dividends at a rate equal to the 3-month Government of Canada Treasury Bill (which now stands at 0.73%) plus 4.99% (page 81);
- Quarterly dividends of $0.359375 per preferred share, for a total of $1.4375 per year. No common shareholder dividends were paid in 2016 or 2015 (page 82);
- 6 shareholders’ directors and 4 policyholders’ directors, plus an honorary chairman and an honorary director, for a total of 12 (much better than CGIC’s 22 directors).
- 111 pages. Why can’t there be small annual reports?
- Total revenue has been volatile ($1,409 million in 2016, $1,287 million in 2015, $1,926 million in 2014) due to the impact of market interest rate movements on the fair value of FVTPL (Fair Value Through Profit and Loss) investments (page 12);
- The company employs put options and short positions on key equity indices to hedge against equity market risk. It had a loss of $28 million in 2016 on these hedges due to the increase in the Canadian stock market, compared to a gain of $2 million in 2015. This program incurs losses if the stock market goes up, but provides relief if it goes down (page 27);
- Empire Life’s MCCSR ratio’s sensitivity to stock market risk is not linear and the ratio decreases much faster when the market goes down (the hedging program helps a bit here) than when it goes up (page 29);
- Investment income of $255 million, down from $259 million in 2015. This is a very low return of 1.59% over AUM (page 43);
- The defined benefit portion of the company pension plan is underfunded by $10.8 million, although it was discontinued on October 1, 2011, being replaced with a defined contribution pension plan (page 72);
- E-L Financial Corporation owns, directly and indirectly through ELFS, 99.2% of the common shares of Empire Life. The company’s ultimate controlling party is Henry N. R. Jackman together with a trust created in 1969 by his father, Henry R. Jackman (page 85).
This is the first company from my screener that I liked. The annual report speaks to the point and gives me a feeling that the company does care about its shareholders. The fact that Empire Life created a rate resetting preferred share class with no redemption clauses shows that they care more about investors than CGIC, even if the dividends are non cumulative and the preferred shares are not convertible to common shares.
The financial performance is good, with net income, AUM, ROE and total equity increasing year on year. ROE is respectable at 13.1% and total debt to capital is lower than 25%. Cash and short-term investments cover almost all this debt, so its financial position is more than solid.
The only two points I’m not comfortable with is the low investment income, for a return of just 1.59% over AUM (hopefully this will increase once interest rates start going up, or they decide to invest a greater portion of their investment portfolio in equities), and the fact that the company is controlled by one single man, Henry N. R. Jackman (but from all I’ve read, I have no reason to think this is being detrimental to other shareholders).
With 19 pros and only 7 cons, Empire Life Insurance Co is a solid ‘Yes’ company.
Since there are no publicly traded common shares, instead of valuing the entire company, I will just evaluate the EML.PR.A preferred shares and see if they are trading at a discount to intrinsic value. Stay tuned for my next post…
August 8, 2017 update: I changed this company from the ‘Yes’ tray to the ‘No’ tray. Read EML.PR.A Valuation to find out why.