Security National Financial (SNFCA)- Part II
Now that you have verified the capital structure, we are able to proceed wiht the actual story.
At 54.3 million equity, the book value per A equivalent share is in the range of 6.60 to 7.00 to be very conservative.
The shares currently trade at 4.35. Thus at a significant discount to this very hard and tangible book value.
The company is a holding company engaged in currently 3 principal type of activities:
1) Life Insurance & Specialty Insurance Underwriting (incl. Divers Insurance)
2) Cemetery and Mortuary Services (insurance services, and the actual grave digging and cermonial servcies- they own 6 cemeteries and 12 mortuaries)
3) Mortgage Lending.
The company has some miscellaneous businesses and assets that are part of Insurance and Cemetary operations. For instance they own approximately 400 acres of land, some of which has substantial developmetn potential. They own also several office buildings. They own also several factoring businesses. The breadth of their specialty financial services is best understood by attentively reading the 2006 annual report that describes in detail the timeline on the company and its various divisions and tangible assets.
The interesting part of all captive real estate and land asset is that they are recorded at historical cost, which goes back many years.
So while the book value of the company currently stands at 54 million, the Net Asset Value is substantially higher. Probably a good 20 million higher without engaging in complicated calculations.
This could be independently verified by just looking at the Sandy/Utah real estate and land assets. We leave it to the reader to solve that NAV riddle with precision.
In our own estimations that NAV of the company is at least $75 million, or slightly north of $9 per shares.
The managing Quist family in my opinion has the trait of beign empire builders. There is no intention to sell off assets for a quick profit. I would expect them to accumulate assets and more of them over time. The company has a track record of using cash flow to acquire other companies and assets. Thus we do not encourage investors to think that NAV will be here surfaced and converted into book value through a bold transaction of sorts. The land and real estate is there with a purpose. to produce cash flow and this cash flow will in due couse be employed and be resurfaced.
The company for instance has plans for some of its excess land assets. It is too early to tell when the best time is for the company to move forward with its plans.
However some indications of the companys plans were given in the glossy annual report sent in 2006 to shareholders. The 10K filed with the SEc makes no mention of the companies plans with regard to excess land assets, but the glossy annual report sent to shareholder tells shareholders the potential game plan..
Management is reasonably conservative. so we are talking right now about possibilities what they could do with the land. It is not guaranteeed that they will go forward with their plans as the markeet conditions have to be right.
recent turmoil in housing markets suggest they might delay implementation of their plans. They seem like a conservative family. thus it is not expected that they will bet the farm for anything. They are empire builders and as such they wont turn over the empire due to hasty miscalculations.
So in conclusion the company has a solid book value and even more solid net asset value, which far exceeds its current trading price.
The life insurance operations make very good money, and so do the cemetary operations. The mortgage operations have also made in the past decent chunks of money but have now entered a slower phase.
The reason why SNFCA is trading now at a bargain price is that some observers are getting scared abotu the turmoil in the subprime mortgage and mortgage backed securities markets.
And by association, any lender is thrown into the same category.
SNFCA has lost about 35% of its value since peaking north of 6 dollars sometime earlier this year. The loss in value has been most profound in the past 1 week as the stock started to trade at 5.85 and reached today a lowpoint of 4.06, before recovering to 4.35.
The really odd part of the story is that SNFCA is not a subprime lender or lender of non-conforming loans.
The troubles thus far have existed with lenders originating mortgages and offloading risk into MBS markets relating to subprime borrowers. And also relating to non conforming borrowers.
The distinction between conforming and non-conforming and prime and subprime is very important, as it defines the remarketing venues for the originated loans.
What do we mean?
A conforming loan can be sold without problems to Fannie Mae and other GSE,s but it has to meet strict requirements of size and underwriting standards.
We will in a future post indicate here what the difinition of a conforming loan is. But not right now.
it suffices to say here that SNFCA's mortgage origination operations have barely any subprime exposure and are very much focusing on conforming loans. Those loans that are easy to selloff to the goverment.
The whole debate about subprime and non conforming loans only exists because underwriters of such loans cannot sell their mortgages to GSE under automatic agreements. . If they want to offload risk they have to offload it to third party investors and via financial insituttions structure Mortgage backed securities. originators of subprime and non conforming loans are very much stuck with fickle capital markets and dependent on their appetite for risky papers..
right now the appetite for risky papers such as subprime and non conforming has disappeared.
This is a problme that direcly afflicts lenders exposed to non conforming and subprime loans.
SNFCA does not have much exposures to these lending practices. Most of its loans are in the conforming and prime loan category. only about 4% of 2006 originated loans were subprime and were offloaded to investors.
The company only holds 1.6 million in subprime assets on its balance sheet, out of a total asset base of abotu 380 million.
It makes no sense to lump SNFCA together with the currently troubled lenders.
SNFCA is a small company with 54 million in equity but its core operations are totally different from the risky lenderes and hedge funds that imploded.
SNFCA doesnt have a leveraged balance sheet. Its a life insurance operation. The lending company is a separate subsidiary and company with a total identifiable asset base of only 24 million. The subsidiary equity base of the mortgae sub is much smaller.
If the mortgage division bites the dust, which we deem as highly unlikely, only up to 24 million can be lost. Actually only the amount of equity relating to this sub can be lost. So being extremely conservative, you can say that the company in a worst case scanario sees its equity go to 30 million and its residual NAV got to 50 million.. this is really worst case thinking.
the nature of a holding company is that the life insurance and cemetery busienss have nothting to do with mortgage and neither has the parent company, the holding co umbrella.
thus the association. of these subprime issues with the mortgage company and with SNFCA are a bit far fatched and just a sign of panick selling.
To us the stock at 4.35 looks like a screeming buy. . it has to be said that the volume isnt great in SNFCA.. there are abotu 8.2 million equivalent A share outstandign. in the past 2 weeks a very small amount of shares has changed hands. I would estimate abotu 200,000 shares.
Thus most shareholders of SNFCA generally do not associated the company with troubled lenders, but the few who do are enough to bring down the stock price with their exit stampede.
Since this is a very illiquid company, or the trading action is illiquid, this could be a great time to accumulate shares at bargain prices. A price like todays, 4.06 is irresistible. unfortunately I missed that early mornign price action.
its all panick selling of uninformed investors. This will lead to opportunities for those investors who really care about spending a few hours at examining the company.
To us the risks do not look like SNFCA is about to go belly up. the risk is also not SNMC going belly up. the risk is also not SNMC being hit by bad loans in its lending division. We aggregate the total risk here at only maximum 5 million. The skeletons are not many. The company has 1.6 milion in subprime loans in its investmetn portfolio and owns 9.5 million Mortgage backed securities. Lets say that these assets combined ahve a value of 11.1 million and let us say that their estimated fair value has dropped by 25%, then this is only an adjustment in value of 2.8 million.
All of this adjustment in value would go through Other Comprehensive Income category in teh equity account. It would not be a direct hit to earnings. It woudl be an adjustment in the carrying value in the balance sheet.
Since the majority of SNMC,s loans are conforming type loans, we do not anticipate collection problems from teh offloading of these loans to Fannie Mae et al. at December 31, 2006, the company had commitments from financial institutions to purchase 306 millino of their loans. all other laons are sold to fannie mae et al shortly after origination.
Such are the advantages of being an origiinator of mostly conforming loans. there isnt much uncertainty abotu who will buy the assets. the GSE will.
none of this applies to jumbo mortgages, ALT A mortgages and subprime lonas. the GSEs dont want anything to do with them. and right now the markets dont want either.
The real risk to SNFCA and SNMC is that the mortage lending frenzy will be over and that a lending downcycle will begin where less borrowers are out there in the market, and the remaining lenders will vie more competitiveyl for teh remaining business.
SNMC/SNFCA could even be gaining market share in thsi process but it may not be as profitable a busines as it used to be in the past.
So the good times for the SNMC busienss are probably over, but we do not see a bankruptcy filing imminent. our worst case scenarios is that in a matter of 2 years SNFCA shuts down SNMC, or otherwise curtails its operations. We actually think that SNMC will stay in business and continue to underwrite conforming loans wherever it gets a chance to undewrite them.
For detailed analysis of SNFCA and SNMC issues, a report is available.
At 54.3 million equity, the book value per A equivalent share is in the range of 6.60 to 7.00 to be very conservative.
The shares currently trade at 4.35. Thus at a significant discount to this very hard and tangible book value.
The company is a holding company engaged in currently 3 principal type of activities:
1) Life Insurance & Specialty Insurance Underwriting (incl. Divers Insurance)
2) Cemetery and Mortuary Services (insurance services, and the actual grave digging and cermonial servcies- they own 6 cemeteries and 12 mortuaries)
3) Mortgage Lending.
The company has some miscellaneous businesses and assets that are part of Insurance and Cemetary operations. For instance they own approximately 400 acres of land, some of which has substantial developmetn potential. They own also several office buildings. They own also several factoring businesses. The breadth of their specialty financial services is best understood by attentively reading the 2006 annual report that describes in detail the timeline on the company and its various divisions and tangible assets.
The interesting part of all captive real estate and land asset is that they are recorded at historical cost, which goes back many years.
So while the book value of the company currently stands at 54 million, the Net Asset Value is substantially higher. Probably a good 20 million higher without engaging in complicated calculations.
This could be independently verified by just looking at the Sandy/Utah real estate and land assets. We leave it to the reader to solve that NAV riddle with precision.
In our own estimations that NAV of the company is at least $75 million, or slightly north of $9 per shares.
The managing Quist family in my opinion has the trait of beign empire builders. There is no intention to sell off assets for a quick profit. I would expect them to accumulate assets and more of them over time. The company has a track record of using cash flow to acquire other companies and assets. Thus we do not encourage investors to think that NAV will be here surfaced and converted into book value through a bold transaction of sorts. The land and real estate is there with a purpose. to produce cash flow and this cash flow will in due couse be employed and be resurfaced.
The company for instance has plans for some of its excess land assets. It is too early to tell when the best time is for the company to move forward with its plans.
However some indications of the companys plans were given in the glossy annual report sent in 2006 to shareholders. The 10K filed with the SEc makes no mention of the companies plans with regard to excess land assets, but the glossy annual report sent to shareholder tells shareholders the potential game plan..
Management is reasonably conservative. so we are talking right now about possibilities what they could do with the land. It is not guaranteeed that they will go forward with their plans as the markeet conditions have to be right.
recent turmoil in housing markets suggest they might delay implementation of their plans. They seem like a conservative family. thus it is not expected that they will bet the farm for anything. They are empire builders and as such they wont turn over the empire due to hasty miscalculations.
So in conclusion the company has a solid book value and even more solid net asset value, which far exceeds its current trading price.
The life insurance operations make very good money, and so do the cemetary operations. The mortgage operations have also made in the past decent chunks of money but have now entered a slower phase.
The reason why SNFCA is trading now at a bargain price is that some observers are getting scared abotu the turmoil in the subprime mortgage and mortgage backed securities markets.
And by association, any lender is thrown into the same category.
SNFCA has lost about 35% of its value since peaking north of 6 dollars sometime earlier this year. The loss in value has been most profound in the past 1 week as the stock started to trade at 5.85 and reached today a lowpoint of 4.06, before recovering to 4.35.
The really odd part of the story is that SNFCA is not a subprime lender or lender of non-conforming loans.
The troubles thus far have existed with lenders originating mortgages and offloading risk into MBS markets relating to subprime borrowers. And also relating to non conforming borrowers.
The distinction between conforming and non-conforming and prime and subprime is very important, as it defines the remarketing venues for the originated loans.
What do we mean?
A conforming loan can be sold without problems to Fannie Mae and other GSE,s but it has to meet strict requirements of size and underwriting standards.
We will in a future post indicate here what the difinition of a conforming loan is. But not right now.
it suffices to say here that SNFCA's mortgage origination operations have barely any subprime exposure and are very much focusing on conforming loans. Those loans that are easy to selloff to the goverment.
The whole debate about subprime and non conforming loans only exists because underwriters of such loans cannot sell their mortgages to GSE under automatic agreements. . If they want to offload risk they have to offload it to third party investors and via financial insituttions structure Mortgage backed securities. originators of subprime and non conforming loans are very much stuck with fickle capital markets and dependent on their appetite for risky papers..
right now the appetite for risky papers such as subprime and non conforming has disappeared.
This is a problme that direcly afflicts lenders exposed to non conforming and subprime loans.
SNFCA does not have much exposures to these lending practices. Most of its loans are in the conforming and prime loan category. only about 4% of 2006 originated loans were subprime and were offloaded to investors.
The company only holds 1.6 million in subprime assets on its balance sheet, out of a total asset base of abotu 380 million.
It makes no sense to lump SNFCA together with the currently troubled lenders.
SNFCA is a small company with 54 million in equity but its core operations are totally different from the risky lenderes and hedge funds that imploded.
SNFCA doesnt have a leveraged balance sheet. Its a life insurance operation. The lending company is a separate subsidiary and company with a total identifiable asset base of only 24 million. The subsidiary equity base of the mortgae sub is much smaller.
If the mortgage division bites the dust, which we deem as highly unlikely, only up to 24 million can be lost. Actually only the amount of equity relating to this sub can be lost. So being extremely conservative, you can say that the company in a worst case scanario sees its equity go to 30 million and its residual NAV got to 50 million.. this is really worst case thinking.
the nature of a holding company is that the life insurance and cemetery busienss have nothting to do with mortgage and neither has the parent company, the holding co umbrella.
thus the association. of these subprime issues with the mortgage company and with SNFCA are a bit far fatched and just a sign of panick selling.
To us the stock at 4.35 looks like a screeming buy. . it has to be said that the volume isnt great in SNFCA.. there are abotu 8.2 million equivalent A share outstandign. in the past 2 weeks a very small amount of shares has changed hands. I would estimate abotu 200,000 shares.
Thus most shareholders of SNFCA generally do not associated the company with troubled lenders, but the few who do are enough to bring down the stock price with their exit stampede.
Since this is a very illiquid company, or the trading action is illiquid, this could be a great time to accumulate shares at bargain prices. A price like todays, 4.06 is irresistible. unfortunately I missed that early mornign price action.
its all panick selling of uninformed investors. This will lead to opportunities for those investors who really care about spending a few hours at examining the company.
To us the risks do not look like SNFCA is about to go belly up. the risk is also not SNMC going belly up. the risk is also not SNMC being hit by bad loans in its lending division. We aggregate the total risk here at only maximum 5 million. The skeletons are not many. The company has 1.6 milion in subprime loans in its investmetn portfolio and owns 9.5 million Mortgage backed securities. Lets say that these assets combined ahve a value of 11.1 million and let us say that their estimated fair value has dropped by 25%, then this is only an adjustment in value of 2.8 million.
All of this adjustment in value would go through Other Comprehensive Income category in teh equity account. It would not be a direct hit to earnings. It woudl be an adjustment in the carrying value in the balance sheet.
Since the majority of SNMC,s loans are conforming type loans, we do not anticipate collection problems from teh offloading of these loans to Fannie Mae et al. at December 31, 2006, the company had commitments from financial institutions to purchase 306 millino of their loans. all other laons are sold to fannie mae et al shortly after origination.
Such are the advantages of being an origiinator of mostly conforming loans. there isnt much uncertainty abotu who will buy the assets. the GSE will.
none of this applies to jumbo mortgages, ALT A mortgages and subprime lonas. the GSEs dont want anything to do with them. and right now the markets dont want either.
The real risk to SNFCA and SNMC is that the mortage lending frenzy will be over and that a lending downcycle will begin where less borrowers are out there in the market, and the remaining lenders will vie more competitiveyl for teh remaining business.
SNMC/SNFCA could even be gaining market share in thsi process but it may not be as profitable a busines as it used to be in the past.
So the good times for the SNMC busienss are probably over, but we do not see a bankruptcy filing imminent. our worst case scenarios is that in a matter of 2 years SNFCA shuts down SNMC, or otherwise curtails its operations. We actually think that SNMC will stay in business and continue to underwrite conforming loans wherever it gets a chance to undewrite them.
For detailed analysis of SNFCA and SNMC issues, a report is available.
posted by Christopher Schulz @ 9:58 PM
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