Shareholder Activism at Life Insurance Company of Alabama

We posted in November 2019 about Life Insurance Company of Alabama (LICOA), a micro cap insurance company with two share classes, one of which (LINS, the fully voting shares) trades at a modest discount to book value and the other of which (LINSA, with limited voting rights) trades at a gigantic (70%) discount to book value.

As we mentioned in that post, the State of Alabama Department of Insurance periodically examines the insurance companies that are licensed there and publishes a report about them, and the examination report on LICOA from May 2005 had some interesting revelations on the conduct of the family that controls and manages the company. In particular, we thought it was amazing that the report referred to "an issue with nepotism" and said that "this issue stands to harm the Company due to potential shareholder and/or policyholder lawsuits".

Well, there are now two lawsuits against the company and directors by LICOA shareholders. The first one was filed on August 28, 2019 in the US District Court for the Northern District of Alabama and it is Trondheim Capital Partners LP et al v. Life Insurance Company of Alabama et al.

The second lawsuit was actually a proposed complaint in intervention filed on April 29, 2020 in the same case; it has claims by a second group of LICOA shareholders that includes Mitchell Partners, LP and Jeffrey Herr. The company did not oppose the complaint in intervention and the court has ruled that it will proceed. Here is an excerpt from the opening of that second complaint:
This lawsuit arises from the gross mismanagement and nepotistic practices of the Director Defendants and their oppression of the shareholders of LICOA and suppression of share values for their own purposes. Plaintiffs now sue to enforce their statutory rights, for breaches of fiduciary duty, for securities law violations, and for dissolution of LICOA. [...]

As detailed below, these massive salaries that cripple LICOA’s income are part of sham “compensation structure” that is really a family jobs program for LICOA’s Directors and their families. They are unqualified and wasteful and these salaries are completely unjustified. Moreover, they have purposefully overcapitalized LICOA to keep share value down so they can repurchase them cheap and to keep a nest egg to perpetually fund their exorbitant salaries, luxury offices, and lifestyle while the LICOA shares do not even trade at liquidation value.
There is also a website with information called Concerned Shareholders of Life Insurance Company of Alabama with all kinds of details. The shareholders discovered that the company paid $4,787 for a "desk chair" for President and Chairman of the Board Clarence Daugette last year.

One very interesting thing mentioned on the website was that "LICOA has made offers to settle litigation with some of the plaintiffs via buying them out. In March 2020, they offered some plaintiffs the equivalent of $25 per LINSA share." The LINSA shares are currently offered for $12.00 per share on the OTC...

Obviously there is no way of knowing whether that deal is still on the table or not, or whether it would apply to all comers or not. But it is interesting. Presumably it was not taken because the shareholder plaintiffs thought it was a "lowball" offer.

This reminds us of a dynamic we have seen in micro cap activism, which is that shareholders are rarely well-served by sitting passively on the sidelines while these things are going on. One thing that can happen is management will settle with unhappy shareholders by buying them out, and the remaining shareholders will be stuck in the company. At that point, they have fewer potential allies, and management will probably view them as oblivious or acquiescent.

We'll have more on this situation, and other activist investing situations, in the upcoming June Issue (#30) of the Oddball Stocks Newsletter.

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