KANSAS CITY LIFE INS CO KCLI
January 03, 2018 - 10:35am EST by
ladera838
2018 2019
Price: 45.20 EPS 2.38 0
Shares Out. (in M): 10 P/E 19 0
Market Cap (in $M): 440 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 440 TEV/EBIT 0 0

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Description

In the current expensive stock market environment, it is challenging to find securities with a very low risk of permanent capital loss, combined with significant upside that would result solely from a normalization to peer-level valuation.  Kansas City Life Insurance Company (KCLI), written up once before on VIC in February 2016, appears to provide just such an opportunity.

 

Kansas City Life Insurance Company was established in 1895 in Kansas City, Mo.  The company markets individual life, annuity and group products through general agencies located throughout the United States. The agency force of more than 2,500 serves 48 states and the District of Columbia. Variable life and variable annuity options are distributed through Sunset Financial Services Inc., Kansas City Life’s wholly owned broker/dealer subsidiary.  KCLI insures more than half a million policyholders from coast to coast, with its HQ located in Kansas City, Mo.

 

KCLI has been family managed and majority-owned for a few generations, and decided in 2015 to de-register with the SEC and de-list with NASDAQ via a Reverse/Forward Stock Split.  In addition to saving money on public costs, a side-effect was to reduce the visibility enjoyed by the company, which is one explanation for its attractive valuation.

 

The stock trades in small volume, so this idea is better suited for PAs and smaller investment accounts.

 

 

FINANCIALS

 

Balance Sheet

 

 

9/30/17

12/31/16

12/31/15

 

ASSETS

       
   

Investments:

       
   

Fixed maturity securities available for sale, at fair value

       $2,530,100

       $2,530,907

       $2,580,845

 
 

Equity securities available for sale, at fair value

                    20,769

                    23,996

                    25,325

 
 

Mortgage loans

               651,621

               630,889

               589,960

 
 

Real estate

               195,238

               195,621

               168,097

 
 

Policy loans

                    78,343

                    79,893

                    81,392

 
 

Short-term investments

                    38,529

                    27,526

                    22,474

 
 

Other investments

                      1,931

                      1,388

                         380

 
 

Total investments

           3,516,531

           3,490,220

           3,468,473

 
 

Cash

                    11,014

                      9,630

                      7,851

 
 

Accrued investment income

                    32,583

                    31,586

                    33,023

 
 

Deferred acquisition costs (DAC)

               273,949

               271,089

               267,936

 
 

Reinsurance recoverables

               183,116

               187,941

               198,834

 
 

Property and equipment

                    16,163

                    15,853

                    16,580

 
 

Other assets

                    74,528

                    69,838

                    56,252

 
 

Separate account assets

               403,199

               373,256

               372,924

 
 

Total assets

           $4,511,083

           $4,449,413

           $4,421,873

 
 

LIABILITIES

       
 

Future policy benefits

          $953,564

        $943,643

        $926,385

 
 

Policyholder account balances

           2,052,638

           2,051,728

           2,056,126

 
 

Policy and contract claims

                    36,122

                    34,553

                    37,959

 
 

Other policyholder funds

               170,912

               178,806

               174,353

 
 

Other liabilities

               190,224

               181,844

               190,295

 
 

Separate account liabilities

               403,199

               373,256

               372,924

 
 

Total liabilities

           3,806,659

           3,763,830

           3,758,042

 
 

STOCKHOLDERS’ EQUITY

       
 

Common stock, par value $1.25 per share

       
 

Authorized 36,000,000 shares, issued 18,496,680 shares

                    23,121

                    23,121

                    23,121

 
 

Additional paid in capital

                    41,025

                    41,025

                    41,025

 
 

Retained earnings

               877,637

               868,054

               856,196

 
 

Accumulated other comprehensive loss

                      3,942

                    (5,316)

                  (15,210)

 
 

Treasury stock, at cost (2016 and 2015 - 8,813,266 shares)

             (241,301)

             (241,301)

             (241,301)

 
 

Total stockholders’ equity

               704,424

               685,583

               663,831

 
 

Total liabilities and stockholders’ equity

           $4,511,083

           $4,449,413

           $4,421,873

 
 
         

 

Noteworthy:

1) With 9.683 million outstanding shares, BV per share equals $72.75 as of 9/30/17

2) With total investments per share of $363, a 1% net improvement in yield would result in a pretax EPS improvement of $3.63.  In a rising rate environment, where paid returns on policies should lag earned returns on assets, this is a leveraged wind at their backs.

 

 

 

 

LTM

 

Year Ended December 31

 

9/30/17

 

2016

2015

2014

REVENUES

         
 

Insurance revenues:

         
 

Net premiums

  $178,566

 

   $171,819

    $160,175

    $165,548

 

Contract charges

  113,821

 

      111,134

      112,030

      118,649

 

Total insurance revenues

  292,387

 

      282,953

      272,205

      284,197

 

Investment revenues:

         
 

Net investment income

  147,474

 

      150,608

      157,150

      164,968

 

Net realized investment gains, excluding

         
 

other-than-temporary impairment losses

       3,704

 

           5,509

           6,248

           4,902

 

Net impairment losses recognized in earnings:

         
 

Total other-than-temporary impairment losses

              -  

 

            (563)

         (2,189)

         (2,176)

 

Portion of impairment losses recognized in other comprehensive income (loss)

             (7)

 

               (57)

            (292)

              643

 

Net other-than-temporary impairment losses recognized in earnings

             (7)

 

            (620)

         (2,481)

         (1,533)

 

Total investment revenues

  151,171

 

      155,497

      160,917

      168,337

 

Other revenues

       6,705

 

           6,572

           7,729

        12,485

 

Total revenues

  450,263

 

      445,022

      440,851

      465,019

 

BENEFITS AND EXPENSES

         
 

Policyholder benefits

  209,689

 

      211,866

      198,721

      202,946

 

Interest credited to policyholder account balances

     72,872

 

        72,814

        74,326

        76,463

 

Amortization of deferred acquisition costs

     33,924

 

        27,833

        28,348

        40,888

 

Operating expenses

  102,129

 

      101,465

        97,260

      101,738

 

Total benefits and expenses

  418,614

 

      413,978

      398,655

      422,035

 

Income before income tax expense

     31,649

 

        31,044

        42,196

        42,984

 

Income tax expense

       8,597

 

           8,728

        12,970

        12,994

 

NET INCOME

$23,052

 

    $22,316

    $29,226

    $29,990

 

 

Basic and diluted earnings per share:

         
 

Net income

$2.38

 

$2.30

$2.75

$2.74

 
           

 

Noteworthy:

1)    The company earns an unsatisfactory ROE of approximately 3.3%, which should improve as interest rates rise.

 

 

 

Valuation Metrics:

 

Using the competitors listed below in the fairness opinion provided by Duff & Phelps on 7/24/15 associated with the de-registering process:

https://www.sec.gov/Archives/edgar/data/54473/000101410815000203/kcli-ex1.htm

 

 

7/24/15

12/31/17

%

12/31/17

 

Dividend

Competitor

Adj* Price

Price

Change

Price/Book

P/E

Yield

             

AEL

25.76

30.71

19%

0.99

10.6

0.9%

ANAT

97.65

128.25

31%

0.70

16.5

2.6%

FFG

49.74

69.65

40%

1.37

15.7

2.5%

FGL

24.22

31.10

28%

0.86

9.5

0.8%

LNC

55.41

76.87

39%

1.05

12.1

1.7%

NWLI

238.82

331.02

39%

0.68

12.9

0.1%

Symetra

Acquired in 2016 by Sumitomo Life

     

TMK

60.95

90.71

49%

2.01

19.2

0.7%

Average

   

35%

1.09

13.77

1.3%

             

KCLI

39.99

45.20

13%

0.62

19.0

2.4%

 

*   Adjusted for dividends

 

The company was active in repurchasing shares prior to the de-registering:

 

 

Number of

 

Range of

Average

Quarter Ended

Shares Purchased

 

Prices Paid

Purchase Price

December 31, 2013

15,670

 

43.38 - $45.00

44.44

March 31, 2014

--

 

--

--

June 30, 2014

--

 

--

--

September 30, 2014

78,908

 

42.91 - $46.85

45.65

December 31, 2014

63,830

 

43.97 - $48.97

46.53

March 31, 2015

44,967

 

45.01 - $48.51

46.41

June 30, 2015

145,414

 

44.08 - $46.25

45.33

September 30, 2015

25,167

 

45.39 - $46.19

45.82

December 31, 2015 (through October 26, 2015)

--

 

--

--

Total

388,626

 

42.91 - $48.97

45.73

 

 

Also, note that the de-registering was accomplished by repurchasing shares from small shareholders at $52.50 per share; management, which owns 70% of the shares was unlikely to overpay, indicating their view of KCLI’s per share value in 2015.

 

 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Rising Interest rates

As described above, rising interest rates should help KCLI earnings.

 

Buybacks/Acquisitions

The company is overcapitalized, as shown by the following table:

https://www.kclife.com/_assets/pdf/Standard_Analytical-KCLife.pdf

 

 

The KCLI Board authorized in January 2017 the repurchase over one year of one million shares, but the company has not completed any purchases since then, which could indicate that they are keeping their powder dry for the acquisition of a competitor, or may be considering being acquired.

    sort by    

    Description

    In the current expensive stock market environment, it is challenging to find securities with a very low risk of permanent capital loss, combined with significant upside that would result solely from a normalization to peer-level valuation.  Kansas City Life Insurance Company (KCLI), written up once before on VIC in February 2016, appears to provide just such an opportunity.

     

    Kansas City Life Insurance Company was established in 1895 in Kansas City, Mo.  The company markets individual life, annuity and group products through general agencies located throughout the United States. The agency force of more than 2,500 serves 48 states and the District of Columbia. Variable life and variable annuity options are distributed through Sunset Financial Services Inc., Kansas City Life’s wholly owned broker/dealer subsidiary.  KCLI insures more than half a million policyholders from coast to coast, with its HQ located in Kansas City, Mo.

     

    KCLI has been family managed and majority-owned for a few generations, and decided in 2015 to de-register with the SEC and de-list with NASDAQ via a Reverse/Forward Stock Split.  In addition to saving money on public costs, a side-effect was to reduce the visibility enjoyed by the company, which is one explanation for its attractive valuation.

     

    The stock trades in small volume, so this idea is better suited for PAs and smaller investment accounts.

     

     

    FINANCIALS

     

    Balance Sheet

     

     

    9/30/17

    12/31/16

    12/31/15

     

    ASSETS

           
       

    Investments:

           
       

    Fixed maturity securities available for sale, at fair value

           $2,530,100

           $2,530,907

           $2,580,845

     
     

    Equity securities available for sale, at fair value

                        20,769

                        23,996

                        25,325

     
     

    Mortgage loans

                   651,621

                   630,889

                   589,960

     
     

    Real estate

                   195,238

                   195,621

                   168,097

     
     

    Policy loans

                        78,343

                        79,893

                        81,392

     
     

    Short-term investments

                        38,529

                        27,526

                        22,474

     
     

    Other investments

                          1,931

                          1,388

                             380

     
     

    Total investments

               3,516,531

               3,490,220

               3,468,473

     
     

    Cash

                        11,014

                          9,630

                          7,851

     
     

    Accrued investment income

                        32,583

                        31,586

                        33,023

     
     

    Deferred acquisition costs (DAC)

                   273,949

                   271,089

                   267,936

     
     

    Reinsurance recoverables

                   183,116

                   187,941

                   198,834

     
     

    Property and equipment

                        16,163

                        15,853

                        16,580

     
     

    Other assets

                        74,528

                        69,838

                        56,252

     
     

    Separate account assets

                   403,199

                   373,256

                   372,924

     
     

    Total assets

               $4,511,083

               $4,449,413

               $4,421,873

     
     

    LIABILITIES

           
     

    Future policy benefits

              $953,564

            $943,643

            $926,385

     
     

    Policyholder account balances

               2,052,638

               2,051,728

               2,056,126

     
     

    Policy and contract claims

                        36,122

                        34,553

                        37,959

     
     

    Other policyholder funds

                   170,912

                   178,806

                   174,353

     
     

    Other liabilities

                   190,224

                   181,844

                   190,295

     
     

    Separate account liabilities

                   403,199

                   373,256

                   372,924

     
     

    Total liabilities

               3,806,659

               3,763,830

               3,758,042

     
     

    STOCKHOLDERS’ EQUITY

           
     

    Common stock, par value $1.25 per share

           
     

    Authorized 36,000,000 shares, issued 18,496,680 shares

                        23,121

                        23,121

                        23,121

     
     

    Additional paid in capital

                        41,025

                        41,025

                        41,025

     
     

    Retained earnings

                   877,637

                   868,054

                   856,196

     
     

    Accumulated other comprehensive loss

                          3,942

                        (5,316)

                      (15,210)

     
     

    Treasury stock, at cost (2016 and 2015 - 8,813,266 shares)

                 (241,301)

                 (241,301)

                 (241,301)

     
     

    Total stockholders’ equity

                   704,424

                   685,583

                   663,831

     
     

    Total liabilities and stockholders’ equity

               $4,511,083

               $4,449,413

               $4,421,873

     
     
             

     

    Noteworthy:

    1) With 9.683 million outstanding shares, BV per share equals $72.75 as of 9/30/17

    2) With total investments per share of $363, a 1% net improvement in yield would result in a pretax EPS improvement of $3.63.  In a rising rate environment, where paid returns on policies should lag earned returns on assets, this is a leveraged wind at their backs.

     

     

     

     

    LTM

     

    Year Ended December 31

     

    9/30/17

     

    2016

    2015

    2014

    REVENUES

             
     

    Insurance revenues:

             
     

    Net premiums

      $178,566

     

       $171,819

        $160,175

        $165,548

     

    Contract charges

      113,821

     

          111,134

          112,030

          118,649

     

    Total insurance revenues

      292,387

     

          282,953

          272,205

          284,197

     

    Investment revenues:

             
     

    Net investment income

      147,474

     

          150,608

          157,150

          164,968

     

    Net realized investment gains, excluding

             
     

    other-than-temporary impairment losses

           3,704

     

               5,509

               6,248

               4,902

     

    Net impairment losses recognized in earnings:

             
     

    Total other-than-temporary impairment losses

                  -  

     

                (563)

             (2,189)

             (2,176)

     

    Portion of impairment losses recognized in other comprehensive income (loss)

                 (7)

     

                   (57)

                (292)

                  643

     

    Net other-than-temporary impairment losses recognized in earnings

                 (7)

     

                (620)

             (2,481)

             (1,533)

     

    Total investment revenues

      151,171

     

          155,497

          160,917

          168,337

     

    Other revenues

           6,705

     

               6,572

               7,729

            12,485

     

    Total revenues

      450,263

     

          445,022

          440,851

          465,019

     

    BENEFITS AND EXPENSES

             
     

    Policyholder benefits

      209,689

     

          211,866

          198,721

          202,946

     

    Interest credited to policyholder account balances

         72,872

     

            72,814

            74,326

            76,463

     

    Amortization of deferred acquisition costs

         33,924

     

            27,833

            28,348

            40,888

     

    Operating expenses

      102,129

     

          101,465

            97,260

          101,738

     

    Total benefits and expenses

      418,614

     

          413,978

          398,655

          422,035

     

    Income before income tax expense

         31,649

     

            31,044

            42,196

            42,984

     

    Income tax expense

           8,597

     

               8,728

            12,970

            12,994

     

    NET INCOME

    $23,052

     

        $22,316

        $29,226

        $29,990

     

     

    Basic and diluted earnings per share:

             
     

    Net income

    $2.38

     

    $2.30

    $2.75

    $2.74

     
               

     

    Noteworthy:

    1)    The company earns an unsatisfactory ROE of approximately 3.3%, which should improve as interest rates rise.

     

     

     

    Valuation Metrics:

     

    Using the competitors listed below in the fairness opinion provided by Duff & Phelps on 7/24/15 associated with the de-registering process:

    https://www.sec.gov/Archives/edgar/data/54473/000101410815000203/kcli-ex1.htm

     

     

    7/24/15

    12/31/17

    %

    12/31/17

     

    Dividend

    Competitor

    Adj* Price

    Price

    Change

    Price/Book

    P/E

    Yield

                 

    AEL

    25.76

    30.71

    19%

    0.99

    10.6

    0.9%

    ANAT

    97.65

    128.25

    31%

    0.70

    16.5

    2.6%

    FFG

    49.74

    69.65

    40%

    1.37

    15.7

    2.5%

    FGL

    24.22

    31.10

    28%

    0.86

    9.5

    0.8%

    LNC

    55.41

    76.87

    39%

    1.05

    12.1

    1.7%

    NWLI

    238.82

    331.02

    39%

    0.68

    12.9

    0.1%

    Symetra

    Acquired in 2016 by Sumitomo Life

         

    TMK

    60.95

    90.71

    49%

    2.01

    19.2

    0.7%

    Average

       

    35%

    1.09

    13.77

    1.3%

                 

    KCLI

    39.99

    45.20

    13%

    0.62

    19.0

    2.4%

     

    *   Adjusted for dividends

     

    The company was active in repurchasing shares prior to the de-registering:

     

     

    Number of

     

    Range of

    Average

    Quarter Ended

    Shares Purchased

     

    Prices Paid

    Purchase Price

    December 31, 2013

    15,670

     

    43.38 - $45.00

    44.44

    March 31, 2014

    --

     

    --

    --

    June 30, 2014

    --

     

    --

    --

    September 30, 2014

    78,908

     

    42.91 - $46.85

    45.65

    December 31, 2014

    63,830

     

    43.97 - $48.97

    46.53

    March 31, 2015

    44,967

     

    45.01 - $48.51

    46.41

    June 30, 2015

    145,414

     

    44.08 - $46.25

    45.33

    September 30, 2015

    25,167

     

    45.39 - $46.19

    45.82

    December 31, 2015 (through October 26, 2015)

    --

     

    --

    --

    Total

    388,626

     

    42.91 - $48.97

    45.73

     

     

    Also, note that the de-registering was accomplished by repurchasing shares from small shareholders at $52.50 per share; management, which owns 70% of the shares was unlikely to overpay, indicating their view of KCLI’s per share value in 2015.

     

     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Rising Interest rates

    As described above, rising interest rates should help KCLI earnings.

     

    Buybacks/Acquisitions

    The company is overcapitalized, as shown by the following table:

    https://www.kclife.com/_assets/pdf/Standard_Analytical-KCLife.pdf

     

     

    The KCLI Board authorized in January 2017 the repurchase over one year of one million shares, but the company has not completed any purchases since then, which could indicate that they are keeping their powder dry for the acquisition of a competitor, or may be considering being acquired.

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