Buying the Correction: KCLI

I first bought Kansas City Life Insurance (KCLI) almost three years ago simply based on cheap price to book ratio. The stock has yoyo'ed between 38-50 for about 2.5yrs that I owned it. I bought and sold it twice but in July last year they did a odd-lot tender so anyone with less than 250 shares will be bought out for $52.50. It was selling at $44 around the time of announcement. Management did the tender to reduce the number of investors so that they could delist from the NASDAQ. The company began trading OTC on January 1. The company generated a lot of buzz on the blogsphere because it was an easy way for a trader to make up to an $8 spread on 249 shares in short time. That is up to $2000 on each open account. I failed to do so because I was out of my KCLI position and failed to notice it until it was too late!

I am sure many who took advantage of the tender thought it was a really neat trick they pulled on a big corporation. But I bet KCLI management thought they got the last laugh. They were consistently buying their shares back last several years and getting a whole bunch at $52.50 was a steal.

The management hasn't revealed how many share were tendered but their estimate was for about 600,000 shares. That would bring down the outstanding shares down to 10M shares, and raise equity per share to about $70.50. This is an 3.5% annualized growth over the last five years. In addition the company pays 1.5% of equity as dividend. Which brings a total 5% return on equity. And Berkshire Hathaway grew equity by only 4% last year. Still that is pretty sub par for a business but then again, life insurance is like that. KCLI operates with a 6.5% after tax margin. I think KCLI is an average performer. But the stock recently traded in the $36-38 range, which is just 52% of equity. That was the catalyst for me to jump back into KCLI for the third time. If feel the current price is just too cheap. Clearly the management feels the stock is worth more than $50. And there is no reason for it to fall so much lower than before the tender. The company is basically still the same. It now trades on OTC and in its first month there, the trading volume is actually higher than before on NASDAQ. So liquidity is not an issue. The company no longer files with the SEC, which was to save about $1M a year, or about $0.10 per share. But I am sure the quarterly reports and shareholder communication will be the same quality as before.

The half price share discount means the 5% per share equity return is 10% shareholder return. Admittedly this is helped greatly by stock buybacks. The company has reduced share count by 13% in the last 5 years, so it isn't shy about using cash for buybacks. But at 50% of book, buying back shares is getting even more effective.

Deciphering the risk of the company's insurance policies is difficult for me. But I sense the company is extremely conservative. The company is run by the fourth generation of Bixby's. The company separates their policies into two types. The first is premiums on traditional life insurance and immediate annuities, plus a small portion of disability and dental. These have guaranteed payout. The immediate annuity, which has longevity risk, is historically less than 10% of yearly premiums. The second is deposits type insurance such as universal life, variable life, variable annuities which have a surrender value and depend on market conditions. These have guaranteed interest rates which may cause KCLI losses if interest rates change violently. But that is a very unlikely scenario.

The company's investment portfolio is also very conservative with 77% in fixed-income.

Overall, this is a very conservative company that is at the virtual bottom of any reasonable valuation. So, I think of this as a very safe investment with upside, almost like cash with benefits. Such an alternative for cash is very useful in this down market where I want liquidity handy to buy really depressed stocks in case the markets drop further.