Update on My Insurance Holdings

Kansas City Life Insurance (OTC:KCLI) is a smallcap life and health insurance company with a long and stable history. In the company's Q1 earnings report their investments were down $38 M due to the market downturn. Consequently the company equity dropped $3 per share but book value is still $81 per share.

	KCLI	EUPIC
Price	$29.4	€ 3.69
Marketcap M	$282.24	€ 101.47 ($ 114.97)
ROE %	2.6	11.8
PE	14.11	6.55
PTBV	0.36	0.78
Div Yield %	3.67	6.5

KCLI makes 30% of its revenue from investments, therefore investment income is critical to be profitable. But in this low interest environment the company must sacrifice safety to get decent yield. The company has more than half of its assets in corporate bonds. Virtually all of its bonds are investment grade, but there is still a lot at the bottom tier of investment grade. When the downturn happened, there was a big fear that we would see a wave of corporate downgrades and defaults. Fortunately, the Fed pulled out the bazooka and said it was willing to buy up corporate debt to shore up the market.

In the report, the company still has $779 M of equity, even after factoring in Q1 losses. That may seem like plenty but the company's capital and surplus (equity) for statutory regulation purposes is only $260 M at 2019 year end. This $260 M amount is used by regulators determine if the company is solvent and can do more business. So a deep downturn in the bond market can be very scary for the company. But they dodged a bullet, maybe, as the bond market has been quite bullish recently.

KCLI is a really conservative old insurance company. The Bixby family has run it for four generations! Philip Bixby CEO has run the company for the last two decades. Because the company is so stable, past data can be very useful to understand the company and its management intentions.

In the last 15 years, their overall book value has gone from $692 M to $779 M. Over the same period, their shares outstanding have gone from 11.9 M to 9.6 M, as they have consistently tried to buy their shares back, mostly in the $40-$50 range. So the net result is that their book value per share has gone from $51 to $81 in 15 years. That's a paltry 3.13% return.

Along with equity growth, shareholders also get a steady dividend. Sadly, since the current CEO has taken over the company twenty years ago, they have never increased the dividend, although one year, they did distribute a special dividend of $2 per share.

The stock is right now at $29.40 after the recent market drop, but at this level it still hasn't recovered like the favoured US large caps. If the company could return to around $36, that is a 3% dividend. Add the dividend to the 3.13% equity growth and overall, shareholders can expect around a 6.13% return.

This isn't a great return, but I just live with KCLI as a steady source of income. If I have spare cash, I can put it to work at KCLI. Or if I want to get adventurous, I could borrow money to buy KCLI. With interest rates so low, I can pocket the spread between the dividend and the interest cost.

My second insurance holding is European Reliance (ATH:EUPIC). This company is similar to KCLI. It does life, health and auto insurance for the Greek market. EUPIC had a great 2019, the company earned € 17.5 M, and € 22.4 M pre-tax. Of the pre-tax profit, € 7.3 M was from underwriting, and all other was € 15.1 M. As expected however, Q1 2020 was bad news. The company's book value dropped by € 13 M. Again, it was better than I feared, because I saw that they have downside exposure to € 30 M of Greek mutual funds. The ratios in the table are as of Q1 2020, so they still aren't bad. If that is the worst of it, EUPIC is a good company selling for really cheap. And it is very generous with the dividends. I added to my position during this downturn.

That's the second update of my holdings. Next post I will update my cigarette stocks.

Adding More Japanese Value Stocks

In the last entry I described my view that the way to win in this market is to arbitrage across time and markets.

I've described here that right now the US largecap market is the most overpriced ever. But many overseas markets are reasonable. I am quite heavily invested in Japan and South Africa. I feel quite strongly the coming decade is going to be all about emerging markets and value stocks.

Japan is a value country. It is a very developed country that has been heavily discounted for a generation. But, whereas in previous times Japanese companies mainly disregarded the minority shareholders, now they are much more generous. One can find dozens and dozens of companies that pay more than 3% dividends, and are growing dividends around 10%.

Yes, the persistent explanation for stocks being so cheap is the aging population and their ballooning debt. But look at the US. Their debt is getting up there, and the dollar is stronger than ever. And the same goes for the euro.

In March this year, the US market fell 35% off the peak. And I took the opportunity to add to my Japanese holdings. The table here shows the four stocks I currently own. The latter two I have had for 7 years. Both are up more than 3x when factoring in dividends.

	San	Takamatsu	Tachibana	Riken
Price	¥ 1234	¥617	¥ 1760	¥2402
Marketcap (M)	¥ 13820.80 ($ 127.38)	¥ 6663.60 ($ 61.42)	¥ 45760.00 ($ 421.75)	¥ 56687.20 ($ 522.46)
ROE %	6.8	9	6.3	8.7
PE	7.45	4.71	10.42	13.78
PTBV	0.51	0.42	0.66	1.27
Div Yield %	2.59	4.05	2.73	1.67
P/NCAV	‐	0.6	0.71	‐

I also added two new stocks. My main criteria are

• little or no debt
• high dividend yield
• growing dividends
• low PE

The first, is San Holdings (TSE:9628) a smallcap funeral home operator. One might think I bought it because of the recent coronavirus death toll. But not so. The funeral business is hardly a growing business. Coronavirus or no coronavirus, the death toll hardly changes from year to year meaningfully. There is one negative that concerns me. Management said that attendance is lower at funerals because of the dwindling population and cultural trends, This may result in less spending on funerals. I will be paying attention to the number of funerals and the total revenues in the future. But right now San Holdings is the kind of stock that I am looking for: stability during the market turmoil. Yet San Holdings is down 25% off the peak! That 25% is my margin of safey.

The other stock is Takamatsu (TSE:6155) , which is a small niche manufacturer of sophisticated lathes. Now I know very little about lathes in the same way I know little about funeral homes. But their products look very complicated and expensive, as seen below. And they must be very expensive. If there is anything we learned from the current crisis, it is that the coming decades we need to rely more on automation. We need automation to serve the sick and to reduce overcrowding in factories. When you have this kind of a backdrop and the company sells for less than 5x earnings and pays 4% dividends. That's all I need to know to decide to buy.

A reader may think my analysis is very simplistic. But I make no apologies! My analysis will never mention fancy terms like enterprise value (EV), bullshit earnings (EBITDA) or sharpe ratio. My investment theme is based on simplicity, as explained best by this video. I highly recommend watching it.

That's it for Japanese stocks. In my next post I will go into some other new stocks that I acquired during the recent crash. Right now is an exciting time to invest, and I've been busy!