Sunday, December 31, 2017

Micro Cap: Life Insurance Company of Alabama (LINSA)

Here is something that looks cheaper and much better than the three micro caps I wrote about in August: the Class A shares of Life Insurance Company of Alabama. This is a little life & specialty health insurance company in Gadsden, Alabama that's been in business for 65 years.

They have two classes of stock and the summary financial statement they send out to shareholders does not explain enough about their economic interests to tell what they are worth. (The financials are not posted publicly and they are not SEC reporting.)

However, the annual statement that they file with insurance regulators explains the share structure and reveals that the limited voting share class (LINSA) trades at half of book value and 9x net income.

There are 87,563 of the LINS (voting) shares outstanding and then 595,179 of the LINSA shares with limited voting rights and 1/5 the economic interest of the LINS shares.

As of  June 30, 2017, the capital & surplus (akin to book value) was $41.3 million. Divide that by 1,032,994 (which is the sum of 595,179 outstanding A shares and five times 87,563 outstanding regular shares which have 5x economic interest) and you get capital and surplus of $40 per A share. The A shares are currently trading for less than half of this.

The LINSA shareholders get an annual report in the mail that does not indicate how many of each class of shares are outstanding, so it would be difficult for them to figure out the book value and earnings per share. They may be trading at a substantial discount to book because the 40 cent annual dividend on the A shares makes it difficult to justify a price as high as $20, even though book is $40.

They appear to have excess capital (can't find enough profitable business to write) so it would make sense for them to buy back the A shares.

On an earnings basis, in the first half of 2017 the company earned $1.04 million. (In the first half of 2016 it earned $1.44 million.) So annualized earnings are $2 a share for the A shares which means the stock trades for under 10x earnings - also cheap.

The way that the actual insurance operation seems to function is that the company goes around to small employers and offers group policies that employers pay for via payroll deduction. Some of the business is small life policies, but the majority are accident & health lines which you can read about on their website. Then, about 90% of the float is invested in a portfolio that is mostly corporate bonds.

The economic profit seems to come from profitable pricing of these small policies. During the period from 2009-2012 for example, the incurred claims divided by earned premiums have been in the 50-60% range. And premiums actually shrank about 9% over that time period, so the favorable ratio was not being driven by a lag between premium growth and subsequent claims.

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