Monday, May 13, 2013

Why I Own Kansas City Life Insurance

I have been watching Kansas City Life Insurance (KCLI) because it is a profitable company that trades at 55% of book value. KCLI is a insurance company that offers life insurance and annuities. It is a hundred year old company.

The first thing I ask myself is why is it so cheap. To me, it is cheap because it is a boring company in a very regulated industry. Life insurance companies are long-term businesses with little growth prospects. The following chart shows the growth in book value per share with and without dividend reinvestment.

Period Annualized Equity Growth Annualized Equity Growth
w/ reinvested Dividends
Last 5 yr 3.4%5.5%
Last 10 yr3.4%5.7%
Last 14 yr  2.7%4.8%

The data shows the company also does not have ambition to grow beyond its area of competency. We all know that Berkshire Hathaway touts it's own equity growth at more than 20%, while KCLI is growing at 5.5%. But the plus side is that it trades at 55% of book. So the growth relative to market cap is 10% ( 5.5% / 55%). That's the earnings yield.

Other than the above, there is not a lot of noteworthy things about KCLI. KCLI is a small cap company with a market cap of about $400 mil. The company is run by the Bixby family. The company trades with a very little volume.

The company has a large balance sheet and so I was concerned about the consistency of its earnings during a downturn. Looking back, the company only had one losing year in the last 15 years: in 2008 it lost $1.50. This consistency makes KCLI a very defensive stock for downturns. And this is the biggest reason I am holding this stock now.

As a final note, the following table compares KCLI with some of its competitors.

Company Ticker P/E Dividend Yield % Price / Book
Torchmark CorporationTMK11.660.970.72
Assurant IncAIZ9.091.771.41
MetLife IncMET19.672.921.41
American Equity Investment Life Holding CompanyAEL14.280.951.71
Citizens IncCIA81.9700.83
FBL Financial Group IncFFG11.991.031.21
Kansas City Life InsuranceKCLI16.082.861.85
Unum GroupUNM8.771.851.13

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