Value Investors Club / KANSAS CITY LIFE INS CO (KCLI)

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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			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 (in $M):	440	TEV/EBIT	0	0