Standard Management SMAN
August 11, 2004 - 10:03pm EST by
2004 2005
Price: 3.18 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 26 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Standard Management Corporation owns Standard Life Insurance Company of Indiana, a life insurer with nearly $2 billion in gross assets, and US Health Services Inc, a pharmaceutical distributor which commenced operations in 2002. In a development that appears to have gone largely unnoticed by investors, SMAN entered a non-binding letter of intent in April 2004 to sell Standard Life Insurance Company of Indiana to an unidentified third-party buyer. The company plans to use the proceeds of the sale to retire debt and focus on growth of its US Health Services distribution business. This transaction is still contingent on completion of due diligence by the acquirer, and management has so far not disclosed any information about the exact price or terms of the deal. However, at current levels of $3.18, SMAN is currently trading at less than one third of its book value of $10.37 per share. After subtracting goodwill and intangible assets, tangible book value is still $7.40 per share, the vast majority of which is attributable to Standard Life. Acquisitions in the insurance industry typically take place at a slight to moderate premium to book value. During 2002, SMAN successfully sold its international subsidiary, Premier Life, to a division of Credit Suisse group for $25.1 million in cash, representing a gain on sale of $6.9 million in excess of book value. If the Standard Life sale is completed at anything other than a very extreme discount to recorded book value, SMAN would appear likely to receive a cash payment greater than its current market value per share.

Standard Life reported a statutory surplus of $63.2 million in March of 2004. 99% of the company's fixed-maturity asset portfolio is classified as investment grade; and in what turns out to have been a savvy move, the company repositioned its portfolio of mortgage-backed securities during 2003 in the expectation of higher interest rates going forward. Over the past two years, multiple SMAN officers and directors have purchased a total of approximately 44,000 SMAN shares on the open market. Although I have no personal familiarity with the SMAN portfolio, I have been unable to find any clear evidence of asset quality or insurance risk impairments that would justify the large discount to book value at which SMAN shares currently trade.

Unfortunately, proceeds from the planned sale will apparently not be distributed directly to shareholders by a return-of-capital special dividend -- management plans to retire outstanding debt and use remaining cash to support expansion of the US Health Services business, which it sees as having significantly greater growth potential than its previous insurance operation. The short operating history of the US Health unit make it difficult to make a definite and meaningful forecast of the prospects for this business, which was launched only recently and is not yet profitable. If you are willing to make the assumption that US Health will achieve a reasonable long-term rate of return close to that of typical firms in the industry such as Priority Healthcare (NASDAQ: PHCC) and McKesson (NYSE: MCK), I believe the extreme discount to the likely realizable cash value of Standard Life should justify at least a moderate position in SMAN shares. Although management has declined to disclose to me anything about the status or timeline for the Standard Life transaction, the recent hiring of several new US Health executives, as well as the August 2 acquisition for $16 million in cash of SVS Vision (an optical company with $35 million in sales and $4 million in earnings), make me believe that a final sale could be fairly imminent. If they are able to continue to make acquisitions on terms comparable to the SVS Vision transaction, I'll happily forget my dreams of a special dividend.


Sale of the Standard Life subsidiary for any amount close to book value.
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