Description

How would you like to buy a life insurance company at slightly less than 50% of book value and 10.4X ttm EPS? Let me introduce you to a tiny little Utah-based company called Security National.

They sell life insurance, run 6 cemeteries and 13 mortuaries, and originate mortgage loans. SNFCA trades @ $3.47, and has earned $0.31/share for nine months YTD 2004. Share prices have traded as high as $9.34 when they reported 2003 EPS of $1.23 but have plummeted to around $3 when they announced just $0.07 per share earnings for the 1st Quarter of 2004.

Let us look at the divisions, starting with the mortgage business, which deals strictly with residential homeowners. In the boom/bust cycle of mortgage, they are seeing the bust start in the residential mortgage origination business. Mortgage revenues have dropped 35% and are negatively impacting the bottom line. The decline in this division has caused investors to throw the baby (or maybe grandma would be a better analogy) out with the bath water.

The cemetery & mortuary (C&T) business has been flat, although they have seen a slight up-tick in pre-need sales. This has not been enough to compensate for the decline in double indemnity of declining death rates and increased preference of lower revenue cremations over traditional, full burials. The segment is not a large source of revenue, and it is profitable. As some wry pundits have noted, the decline in the U.S. death rate cannot continue forever.

While they are primarily based in Utah, most of the insurance is sold elsewhere. Last year, they bought a small Louisiana life company for slightly more than the value of its statutory surplus (i.e., cheaply). They also announced that they would purchase the remaining 23% of Southern Security Life Insurance Company (SSLIC), a Florida life insurer, that they do not already own at $3.84/share or half of their book price. That deal should close this year. Life insurance companies are fairly cheap now, and they are showing some sense in using the money earned in the mortgage business to build up the life business.

The two largest states where they write life insurance are Mississippi and Florida (when including their stake in SSLIC). Most life insurance sold is pre-need or whole-life pitched to parents of young children. They do not assume more than $75,000 of risk on any one life. Pre-need insurance does not exceed $15,000 per covered life. They also write a little bit of accident & health, which consists of divers accident & death policies sold at sport shops. They also write cancer policies.

While one might see some synergy between the life and C&T, the mortgage business may seem out of place. Actually, it plays an important role in the life segment, as the insurance subs earn investment income by lending money to the mortgage sub. They do not retain the mortgages, which are wholesaled.

The Quist family controls the company through ownership in the “A” and "C" shares that give about 47.3% voting control; factor in the ESOP, and they control the company. In addition, the “C” shares can nominate five directors to the seven member board. The "C" shares have 1/10 the economic interest in the company, but have equal voting with the "A" shares. Converting the "C" shares and factoring in options, fully diluted shares come to 5.8 million. Book value is $41.3 million or about $7.12/share. This is very cheap, even with the controlling family and Utah discounts. One thing that may have kept this company off many screens is that most financial databases give the same economic value to the “A” and “C” shares, which would produce an erroneous P/B ratio of 98%.

"It seemed real. It seemed like our home--if not here, a land not too far away where all parents are strong and wise and capable and all children are happy and beloved. Maybe it was Utah."

Catalyst

- Cheaper book value than it appears on most stock sites
- Mortgage ops bottoming out
- Full addition of SSLIC