Will Kansas City Life Ever Go Up?

Kansas City Life Insurance (KCLI) is a conservatively family-run company that has been in business for over a hundred years. The company does mostly life insurance and annunities with some health insurance.  It has paid $1.08 in annual dividends for the last two decades.  Currently it is trading at $37.65.  So its  dividend yield is almost 3%, a full 50% higher than the 2% of the S&P500 as a whole.

I've added to my position significantly in the past two years because of its attractive price to book ratio.  In other words, this is the classic 50 cent dollar.

During the market crash this spring, the market braced for a wave of corporate defaults. Life insurance companies were considered really vulnerable because of their large corporate bond holdings. KCLI had $2.1B of investment grade corporate bonds out of $3.9B in investments on its balance sheet. The stock cratered to $23 and I feared the company was going under. The yield on investment grade corporate bonds was usually a little over 2%, but it doubled to almost 5% at the worst time of the crisis. Thankfully, though, the Fed pulled out all the stops and declared it was going to purchase investment grade bonds to prop up the market.

Since that announcement in march and the massive market trough and peak, the company's book value now is at its highest ever. The tangible book value per share is $88, but the stock price is $37.65. Go figure!

The following chart shows the relationship of the book value per share and the share price for the last 15 years. Note that right now the spread between the book value and the price is the biggest ever. I am simply hoping (or better yet praying) that this spread will return more to "normal".

But how is it possible for a company  to be this cheap in such a raging bull market? There are some obvious explanations. This is a value stock which is very much out of favor.  The company is a private smallcap in a very boring industry. It is also very much a value stock in a time when value is out of favour.

But I think the most convincing reason for the depressed valuating on KCLI is its poor earnings performance. The company consistently earns no more than 4% on equity in the past decade. I feel this is in part the result of a very conservative investment strategy. The investments in turn earn ever lower returns due to ever lower interest rates.  To illustrate, the following chart shows the total annual insurance revenues and the dividend and interest income.  Note the underwriting is fine but income has steadily declined. Note also that when company's book value appreciates due to the big unrealized gains on investments. However, such appreciation is not counted as regular earnings but as comprehensive income. Therefore, it doesn't count as part of earnings per share.

So what to do with KCLI? Recently, I have leaned more towards diversification and taking a more long term view of my holdings. I can afford to be patient with safe companies like KCLI because the company's dividend payout is about the same as my borrowing costs. So, for now, I will just sit and wait for some company surprise or market sentiment to change.

Lastly, before I conclude, I want to give a shot out to the provider of tikr.com. The website is the best fundamental research tool for the retail investor that I've come across. It provides very detailed financial data for every market worldwide going back 15 years.  The above two charts was made possible with data from the website. The site is beta and I am a trial user. If you want to be a beta customer like me you can search around or contact the website.