Tag Archives: EFH

EGI Financial

One of my recent purchases is EGI Financial (EFH on TSX). It is a relatively simple idea.

From their latest AIF:

EGI operates through two Strategic Business Units (SBUs) in Canada, the Personal Lines division and the Niche Products division. The Personal Lines division was created in 2006 to transition the Automobile division into a multi-product, multi-line SBU. Currently, the Personal Lines division focuses on the underwriting of EGI’s non-standard automobile insurance, motorcycle, antique and classic vehicles, trailers, motor homes and recreational vehicles. Through its Niche Products division, EGI designs and underwrites specialized insurance programs, such as higher premium property, primary and excess liability, legal expense and accident and health insurance for a variety of businesses and consumers and extended warranty coverage for homes, consumer products and heavy equipment.

They also operate an “International” line. I will discuss that later.

The company has been hit hard by some several factors:

  • The lingering recession has been a general headwind for the entire P+C insurance industry.
  • Flat to negative equity prices in the last year.
  • Low interest rates on the fixed income part of the portfolio
  • Poor underwriting results in the niche division. This happened twice in the past. They have since left those lines, but the effects are still lingering.
  • The insurance sector in the GTA is for lack of a better word, a gong show. Major underwriting losses are the name of the game (or at least they were).
  • Overall higher costs at EFH from (somewhat lack of scale) and investing in infrastructure.
The good news:
  • GTA market seems to be firming.
  • The company made several remedial actions about a year ago that are working. They include exiting the poor divisions and entering better ones.
  • Steve Dobronyi has joined as CEO this year. He has been given credit for the quite successful Affinity Markets within Manulife. He is quite a conservative CEO.
Here is how their main divisions have been trending…
 
 As you can see the personal lines division is starting to trend back down to an underwriting profit. This coincides with management comments regarding the market hardening.
The niche line is very volatile. Improved results are being masked by continued charges.
Let’s take a look at EFH compared to its competitors. I chose 3 competitors for each segment. All are larger players than EFH.

So EFH isn’t the most efficient. They have made it clear that they won’t focus on being the low cost provider. Their costs are not out of line with the industry. At the very least you could say that EFH is a decent way to ride the hardening market.

International Division
They have some operations in the US, but are losing money now due to lack of scale. They have made it apparent that they are comfortable with an acquisition. Management said it would be dumb to raise equity at a discount to book, so it looks like debt is the avenue. This is not such a bad thing as the CEO is conservative and the company’s balance sheet is strong.

Summary

As you can see, there has been a stabilization in combined ratio (that is likely to improve) and little change in valuation. In fact the company is even cheaper than the chart shows (at 67% of book on August 22, 2011).
I run a few different scenarios with EFH and figure that under $8.20 is a buy. The upside will be determined by the continuation in the positive market trends and management execution.
Potential catalysts include: a full year with no underwriting surprises, dividend, buyback, accretive acquisition, and the general hardening of the P+C insurance market.

Something to keep in mind is that EFH doesn’t have an extremely talented stock-picker managing their float. They have an average one (like most insurance companies). They even took a charge in the last quarter for RIM and TRE. I use a pre-tax investment income margin of 4.25%, even though it has been quite a bit higher on average.

Dean

Disclosure: The author is long EFH at time of writing.

Hat tip to: Chip, Sculpin and DD

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