Description

Financial Industries (FNIN: $12.60 per share) is a small cap life insurance company that specializes in mortgage life insurance (essentially a policy designed to pay off your home mortgage if you die) and universal life policies.

FNIN recently merged with a previously 48% owned insurance holding company, InterContinental Life (ILCO), whose inforce block of business is mainly universal life policies. The resulting holding company, Financial Industries, has two main insurance subsidiaries now, Family Life (the mortgage life writer) and Investors-NA (the UL writer). FNIN and ILCO have always shared the exact same management team, have operated out of the same offices in Texas and are both strongly influenced by Roy Mitte, the founder and largest shareholder of the FNIN. So, obviously, the merger went smoothly.

When all is said and done, FNIN has a market cap of around $120 million and is expected to have net income in 2001 in the ballpark of $17-20 million. Essentially, the company sells for around 6x earnings. Additionally, the book value for FNIN, after the merger was completed in May, is around $19 per share. FNIN currently is trading around $12.60 or 66% of book. From a valuation perspective, regardless of the fact that this isn’t exactly a growth company, it is cheap. But that is only part of the reason I like it.

Roy Mitte is 70 years old and had a stroke that resulted in partial paralysis which impairs his ability to move around and his speech is so bad that he only communicates via memos. He is still able to make the decisions necessary to run FNIN and has been doing so for quite some time. None of his children are involved with the business and he holds the majority of his stock in the Roy F. and Joann Cole Mitte Foundation. The possibility of the sale of the company is very real. In the past 6 months, a possible acquirer approached FNIN and Roy Mitte asked an investment banker to pursue the possibility of selling out. I believe that part of the reason for the FNIN-ILCO merger was to simplify the structure of Roy Mitte’s holdings and to facilitate the eventual sale of the company. On May 24, 2001 FNIN announced that talks fell apart and they “would not pursue any further discussions with any party that has submitted an indication of interest to acquire the company.” My discussions with the company lead me to believe that price was the sticking point (Mitte’s investment banker had told him that he should be able to get $25, when book value seems more appropriate considering the fundamentals of the businesses). Additionally, FNIN realizes the acquisition market for small insurance companies is a different game than 5 or 10 years ago when FNIN was growing via acquisitions. Prices have increased and bidding competition has increased, essentially icing out the FNINs of the world. To me, given the circumstances, a sale seems imminent. When? I don’t know. Price? Near book value (which is growing about $1.50 per year, since they pay a $0.50 per share dividend).

To sum up: FNIN is selling at 66% of book, and currently trades at around 6x earnings for 2001 with a 4% dividend yield to boot. Roy Mitte is 70 years old and not in good shape. The management team isn’t deep and the insurance acquisition market is not in FNINs favor as an acquirer. Even if they don’t sell, the valuation of this relatively predictable business is compelling. The fundamentals of the business are sound and steady with a long track record of profitability for both ILCO and FNIN. It is a simple, well-run, conservatively managed business at a bargain price.

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Catalyst

To sum up: FNIN is selling at 66% of book, and currently trades at around 6x earnings for 2001 with a 4% dividend yield to boot. Roy Mitte is 70 years old and not in good shape. The management team isn’t deep and the insurance acquisition market is not in FNINs favor as an acquirer. Even if they don’t sell, the valuation of this relatively predictable business is compelling. The fundamentals of the business are sound and steady with a long track record of profitability for both ILCO and FNIN. It is a simple, well-run, conservatively managed business at a bargain price.