I can see the frustration of shareholders here due to the stock's lackluster performance but management cannot be blamed because:
1) They cannot really buy back shares, because the stock is not liquid. Volume is low and as soon as they attempt a buy back, the stock will rise. Increasing the stock price should not be management's primary goal. Run a good business and the price will follow. Also share buybacks will reduce the company's cushion and make it a less conservative company.
2) NWLI is not like a Ben Graham "cigar butt". They are trading at a discount but they are also making very good money. They are not just undervalued based on their book value (what Graham loved), they are also undervalued based on cash generation (what Buffett loves). Unlike "net-nets", time is the friend of undervalued companies that generate cash.
3) No dividends is no reason to criticize management. I'd rather have management re-invest the profits if they can rather than distribute it to me. As far as I can see they are not wasting their profits. Berkshire has done very well by retaining all the proftis over the years.
I hear shareholders' frustration, but perhaps we should all be quietly snapping up shares while we can at these prices. Remember, in the short term the market is a voting machine, but in the long term it is a weighing machine. So buy now while the scales are still hidden away.
Another way to think about Deferred Acquisition Costs is to recall that the policies generated by their sales force have a life of about 10 years when they go on the books. There are surrender charges if a policyholder chooses to cash out of his annuity ahead of time, which covers the sales costs should the customer bail out of the investment. The salesman is paid around 10% of face up front when the contract closes. That expense is deferred and amortized over the life of the policy. The offsetting income is a spread between the investment income from the portfolio over the cost of funds that is earned each year by the policyholder on his annuity.
This is necessarily a 10,000 foot view, but if you look at the amortization charged to expenses this year, it shows that the DAC would disappear over 8-9 years if they stopped writing policies. In other words, the deferral makes common sense. As mentioned before, it states in NWLI’s 3Q11 10-Q that the changes in DAC accounting aren’t material, and unless Sarbanes –Oxley certifications mean nothing I’d take them at their word.
New policies add to DAC as the new sales have salesmen who need to be paid. As they are growing, the DAC expense increases. It also means that they need equity capital to support the newly written business.
To me, dividends are not important. What I don’t get is why it seems to be so foreign an idea to reinvest capital in the business. Berkshire Hathaway does the same thing! It is best understood as a conservative, family owned business. That’s why it has unaggressive DAC accounting, and roughly a match book investment portfolio to its policy liabilities, and equity options that cover their equity index liability.
The only thing seriously wrong with NWLI is that their ROE is low, in large part because they aren’t as leveraged as others in the business. Then again, they didn’t blow up over variable annuities like HIG did a few years ago!
And remember, it’s just a bear market!
>>i don't know how this isn't an issue for these guys but everyone else is talking about a 15-30% hit to DAC.<<
NWLI claims they are already accounting for DAC's in the way the new rules require.
according to the company they believe their dac numbers are conservative. i trust them but we will be able to verify this when the financials come out for the year end.
for folks hoping for a share buyback to drive the stock up, i doubt that it will happen. and for long term holders i don't think it's the right thing to do.
now, if a holder needed to sell some shares and the company could repurchase it in a block transaction at or below today's values then that would be a smart thing to do. that i would be very supportive of.
but going out and buying $10mm of stock which would cost them 160 per share isn't the smartest thing versus buying someone's 10mm holdings at 130.
do we have any proof that their Dac numbers are conservative?
as the next poster highlighted, this isn't cheap if the DAC charge is coming. i am pretty sure if the DAC gets written down, the stock is sub 100 as it should be.
More DAC Comps.
AFLAC INC (AFL)DAC's are 83% of both Stockholders' Equity, and Tangible Stockholders' Equity.
GENWORTH FINANCIAL INC (GNW) DAC's are 45% of Stockholders' Equity, and 49% of Tangible Stockholders' Equity.
LINCOLN NATIONAL CORP (LNC) DAC's are 54% of Stockholders' Equity, and 68% of Tangible Stockholders' Equity.
PHOENIX COMPANIES INC/DE (PNX)DAC's are 117% of both Stockholders' Equity, and Tangible Stockholders' Equity.
PROTECTIVE LIFE CORP (PL) DAC's are 98% of Stockholders' Equity, and 101% of Tangible Stockholders' Equity.
REINSURANCE GROUP OF AMERICA INC (RGA) DAC's are 67% of both Stockholders' Equity, and Tangible Stockholders' Equity.
TORCHMARK CORP (TMK) DAC's are 82% of Stockholders' Equity, and 91% of Tangible Stockholders' Equity.
UNUM GROUP (UNM) DAC's are 27% of Stockholders' Equity, and 28% of Tangible Stockholders' Equity.
I still need to compile the following companies:
>>NWLI is quite conservative. They expense unsuccessful efforts and the accounting change won't have an effect on their balance sheet or earnings.<<
How do you derive at your assumption that NWLI is conservative?
Here is some data I have collected.
DAC's are 68% of Stockholders'Equity, or $196.71 per share. In 2002 they were 81% of Stockholders' Equity.
As a comparison, Met Life DAC's are 46% of Stockholders' Equity, and 57% of Tangible Stockholders' Equity.
Pru DAC's are 44% of both Stockholders' Equity, and Tangible Stockholders' Equity.
AIG DAC's are 66% of both Stockholders' Equity, and of Tangible Stockholders' Equity.
ANAT DAC's are 37% of both Stockholders' Equity, and of Tangible Stockholders' Equity.
PLFE DAC's are 5% of both Stockholders' Equity, and of Tangible Stockholders' Equity.
AEL DAC's are 193% of both Stockholders' Equity, and of Tangible Stockholders' Equity.
If NWLI's DAC's were reduced to 20% of Stockholder's Equity, book value would be reduced to $224 per share.
Book Value $351.
20% of Book Value would be $70.20.
Current DAC at $196.71.
Hence, Book Value reduction would be $126.51. Current book value would be $224.49 (351.00 - 126.51).
In the theoretical example above, current price of $134 would be 60% of book value.
I do not mean to indicate or imply that DAC's should be reduced to 20% of book value.
Acquisition costs occur for life companies whether a life policy is sold or isn't. A company that has an expensive sales effort on an ongoing basis can justify that the entire cost of that effort should be spread over the stream of revenue that the salesmen generate.
The change in accounting is that unsuccessful efforts have to be expensed as incurred, rather than being deferred along with the successful effort. Life companies who have less conservative accounting and wish to show better earnings will defer as much of those expenses as they reasonably can. Those firms will need to write down the unsuccessful efforts Deferred Acquisitions Costs when they adopt the new accounting rule, and will also take an earnings hit depending on the extent of the past deferral.
NWLI is quite conservative. They expense unsuccessful efforts and the accounting change won't have an effect on their balance sheet or earnings.
i don't know how this isn't an issue for these guys but everyone else is talking about a 15-30% hit to DAC.
the relative value would improve if that's the case. but i still have problems seeing this trade well. but the company is doing fine which should be all that matters.
"No dividends is no reason to criticize management" and "they can't really buy back shares because the shares are so illiquid"?
Here's an idea: pay a decent dividend ($5/share would be easy to swing) and let the NWLI stockholders re-invest the proceeds as trading conditions warrant in these illiquid NWLI shares. Then the job of buying these illiquid shares at a wide discount to book value falls on the owners, and they can do it at their convenience and not as part of a company buy-back program.
I did email management earlier this year and here is their reply:
Thank you for your email inquiry. Regarding your questions:
· The Board of Directors is aware of the disconnect between the market value per share and the book value of share. Repurchase of shares is discussed from time-to-time. There are no current plans in this regard as the policy remains to reinvest earnings internally to fund new business.
· The Company’s capital position is main driver of our ratings with the outside rating agencies and is a primary focus of the Board of Directors. The Company always remains open to acquisition possibilities but does not actively seek them.
I hope the above addresses your concerns.
Brian M. Pribyl
Senior Vice President, CFO & Treasurer
National Western Life Insurance Company