Re: Security National Financial Corp. (SNFCA)
price in relation to earnings and book value be applied to the choice of companies in these groups (banks, insurance companies, savings & loan companies, mortgage companies, 'investment companies'
Sometimes I wonder how efficient the market is. SNFCA will release earnings Monday and two of their 3 divisions are: mortgage division & insurance division. They are selling 55% below their stated BV, have had positive earnings for 16 quarters (not 10 years as Graham states) but have been acquiring insurance assets w/ their FCF, but still the market prices this stock too cheap (IMO).
I went through in detail reading their 2015 10Q and the only thing I can figure out is that somehow when they acquire these insurance companies, the market is not valuing the policies they acquire at the fair market value even-though appropriate re-insurance policies are made to hedge against future losses.
For just over a $2mln investment in cash, SNFCA purchased First Guarantee a company that reported a $750K loss (for various operating reasons). The purchase also include some real estate assets valued at $150K.
First Guaranty has $55,550,000 in assets and $5,504,000 in collected premiums in 2015 using statutory accounting basis. The Company believes they can achieve improved profitability by integrating First Guaranty into the Company’s existing life insurance operations. Scott Quist, President of Security National commented, “We view this acquisition as strategic in regards to our ability to support and grow the current First Guaranty customer and agent base as well as to grow our overall existing life insurance business in this region. First Guaranty’s products and marketing are similar to our own and we expect to achieve immediate economies of scale.”
The company also signed an indemnification agreement years back (2012) that guaranteed the buyer against any "actual" losses incurred on mortgage loans purchased and subsequently might have foreclosed. The companies set up a reserve account (this s/d have been an independent escrow account) which SNFCA made monthly deposits to for estimated loan losses but was credited to the Buyer rather than being held in an escrow account. (Note: this may/could have been a management oversight).
Over 3 years $4mln of these set aside reserves were accrued to the buyer of these loans which then went into chapter 11 and these monies were claimed as part of the bankrupted assets. SNFCA did get a positive summary judgement claim but as far as I can tell, those monies were never paid back to SNFCA. I believe they were written off and are not included in the stated BV.
Therefore, there is a lot more to GN's valuation, specifically assuming that BV is correct, income, FCF, expenses (SG&A) amounts follow GAPP accounting. SNFCA did hire a new auditor after 2012 but I am finding that both the insurance and mortgage units (especially the small mom & pop companies) may have suspect accounting and/or when rolled up into a larger unit, higher one time charges and perhaps over valued appraisals of assets may occur.
I am not saying that SNFCA management is suspect but rather it is the nature of how these insurance and mortgage products are valued (MSR's from loans acquired can become a valuable hidden asset but overvalued by the acquirer) and/or life insurance premiums may be overstated (especially in a long term low interest rate environment). SNFCA has over $2bln MSRs that they valued at $1.00/share which appears to be about 5% too high but since there is not a liquid market, amounts stated are only best estimates.
One of Buffet's long term bets, GEICO has been quite profitable. But he also stated that the derivative products were/are weapons of mass 'wealth' destruction and are common in the re-insurance business (ie AIG).
These industries are just so complected now (compared to when Grahmn was analyzing them) and difficult to drill down and value the assets and determine w/ certainty future liabilities, I wonder if Grahmn would have the same opinion.
Then there is the whole mess of the too big to fail banks which I do not understand and do not trust their stated BV numbers. I thought it would be easier w/ a company like SNFCA but beginning to wonder it just might be the nature of their products and services (life insurance and mortgages).
FWIW, SNFCA's real estate is carried at cost so I am pretty comfortable their is hidden value there but much of those assets are encumbered w/ debt so even those assets are probably reflected close to market value once you net out the debt and/or debt may/could be slightly overstated.
EKS
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