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

Sign up for free guest access to view investment idea with a 45 days delay.

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    
      Back to top