Life Insurance Company of Alabama

There is an interesting situation to highlight at Life Insurance Company of Alabama (tickers: LINSA, and LINS; disclosure long).

This company has been written about by my friends at the Oddball Stock blog here, here, and here. I initially read about the company in an issue of their newsletter Oddball Stocks Newsletter, which is an excellent newsletter that I have subscribed to for many years now.

While I own shares, and I think the stock is cheap, this is a very illiquid stock (bid is ~$11.75, ask is ~$17, and on average only 300 shares trade a day) and it certainly isn’t appropriate for all investors. I highlight this situation not because the stock is cheap or as an investment idea, but because it is interesting to observe the way shareholders, led by the Oddball guys, are trying to realize value.

For some background, LINSA provides both health and life insurance. The split between those types of insurance is ~75%/25% (I believe, disclosure isn’t great). 

Over the past six years premiums have been pretty stable at ~$37mil, insurance costs (including commissions) have generally been ~$29mil (implying that the company has decent underwriting), and the company earns a reasonable investment return just shy of $5mil (although this will be challenged going forward by persistently low interest rates).  These decent operating metrics have only led to pedestrian returns for shareholders. The reason for this appears to be excessively high G&A costs.  Between 2013 and 2017, LINS had a net income of ~$2.5mil with G&A costs of ~$10mil per year.  Since then, G&A costs have increased to ~$12.5mil per year, and LINS has lost a small amount of money over the past two years (a total of ~$0.8mil).

The $2.5mil the company historically earned was underwhelming given the company’s equity of $40mil (implying an ROE of 6.25%). But at least it was a return. For the past two years ROE has been -0.25% and -1.75%. This is well below the general rule that banks and insurance companies should have ROE’s of at least 10%.

Shareholders frustrated by these low returns have set-up a website called Concerned Shareholders of Life Insurance Company of Alabama (LICOA) and are asking the company tough questions.  Like, why are the results so poor?  Why is the CEO spending $4.7k on a desk chair when the company is losing money?  Why are insiders (most of whom are related) paying themselves 84% of 2018 pre-compensation income? The website contains all of this shareholder correspondence, and also financial reports from the company, different documents of interest, and links to some of the shareholder lawsuits.

Not only has the website been set-up, there are also two lawsuits being brought against the company by shareholders.

These actions may spur change.

If shareholders succeed and the company’s costs are brought in line, ROE’s could increase to 10%, and then it wouldn’t be inconceivable that shares would rally from their current depressed price of ~0.3x book (using last traded price) to something like ~1x book.  However, insiders have 60% of the voting shares (while they have only ~35% of the economic interest) and forcing any kind of change may be very difficult or could take a very long time.

I always find it interesting when a group of nanocap shareholders try to close the discount a stock trades at, particularly if insiders have voting control. It will be interesting to see if the methods used in this case will prove to be successful.

Disclosure: long LINSA

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