The company has approximately 5.5 billion in investment securities which are carried at amortized cost because they are held to maturity.The fair value of these securities exceeds their amortized cost by 458 million or 390 million net of taxes at 15%(long term capital gain rates). This would add another $100 to book value. Thus real book value is closer to $452. The stock can not trade at 145 forever.
Well, my margin does not equal maximum risk because my margin balance is only about 15% of my net worth. I would never go anywhere close to 50%. Therefore, my stocks could still go down a lot before I would be in jeopardy of getting a margin call.
Re BAC, I bought some a few years ago at about $13 and watched it go down considerably. On the rebound, I sold some at about $14 and the rest at about $18. I have been out of it for sometime now and have been a little bit surprised how badly it has done. I agree that NWLI is far superior to BAC, but a person may be able to make a nice short-term profit with a year end dead- cat bounce on it. The big rally today in the market makes me think I should have bought BAC yesterday at $5 or below.
How is it buying on margin does not entail "maximum risk"? On the subject of margin, the very problem is that investors are pretty "irrational" in the short term and any stock that is down on the year can go down further in December. You don't want to lose some or all of your position just because NWLI shares go down $10/share one day because someone needs the tax loss.
On the subject of BAC, it is also selling at a discount to book (although BAC's book is harder to value), but unlike NWLI it is not solidly profitable. I look at BAC as a decent "value investor's speculation" at this point (confession: I own a few BAC shares), but I think NWLI is better. On the subject of your limit order: you might worry that you won't get any shares at $4 (it requires a ~20% decline from here in a widely traded stock), but if you do -- good luck! (We'll both need it.)
I got a fill on a GTC order for NWLI at $131 today. I may have all I can handle since I have been buying on margin. I am in no danger at this point, but today's investors are irrational and I don't want to face maximum risk. I am toying with the idea of buying some Bank of America stock on the idea that it will do a dead-cat bounce after the end of the year. I probably would not place the order until after Christmas and it would be a limit order under the market, maybe $4.00. What do you think? I will have to check the short interest on BAC because some short sellers will be waiting to cover their shorts until after the turn of the year.
I'm in the same boat: NWLI is now a big position, and I own a couple of other insurers because they are so cheap: CB, CNA, MET. Let's hope the world doesn't come to an end and these shares can start trading near book value again. I also believe there is a good deal of tax loss seling that is responsible for the dismal action in these shares lately.
I am in total agreement with your post.
However, since management is not purchasing shares I have been. It is getting to be a large position for me. I hope the selling pressure abates with the end of tax selling on 12-31-11. I can't imagine why almost all insurers are selling so low. The market views them as being worse than the banks. My entire holdings are insurers. They are BRKB, ANAT, KCLI, ITIC and NWLI.
NWLI is not supporting the share price through buy-backs, but maybe they're supporting the share price by "growing the book value"?????
The two are not mutually exclusive when the shares are selling at less than 40% of book value. Do the math:
NWLI book value was about $330/share a year ago. They've since earned roughly $20/share and paid a negligible dividend,l so the book is now about $350/share. Suppose they had re-purchased shares instead of building a "fortress balance sheet." $20/share x 3.5 million shares is $70 million available for buy-backs. Suppose they use the $70 million to purchase shares at an average price of $150/share (roughly the average over the last year), or 467,000 shares. They no longer have the $70 million to invest in their insurance business, but there are now only 3.033 million shares outstanding (3.5million less the 467K re-purchased). The $330/share book value one year ago has now grown to $380/share of book value because you have re-purchased shares at a deep discount to book and there are substantially fewer shares outstanding. If you merely re-invest in the business, the book value has grown to only $350/share ($330+$20 in retained earnings).
Re-purchasing shares selling at 40% of book value is not a "gimmick." It is buying quarters for a dime -- over and over again. It is a good way to get rich.
Shares selling for over $100 on NASDAQ, the punters heaven, can languish. Life insurers are discounted across the broader stock market currently, but NWLI's discount is ridiculous.
>>i assume they make some use of derivatives to hedge rapid declines or advances in interest rates and the concomitant change in their portfolio price? <<
I don't think so at all. They spell out that their greatest risk is rapidly rising interest rates. As of 9/30/11 foreign government debt was an immaterial amount.
agree w/ all your points and buy back was what i was referring to on supporting share price. i assume they make some use of derivatives to hedge rapid declines or advances in interest rates and the concomitant change in their portfolio price?
>>is nwli somehow protected from the problems experienced by japanese life insurance companies in paying out 2-3 % guaranteed returns that looked tame when the policy was written, but with interest rates staying locked near 0% slowly squeezed them and forced them to seek higher rates in more risky investments? am trying to see anymore downside risks in this stock besides management unwillingness to support the share price.<<
NWLI presents most of their investments at amortized cost. In the footnotes of each quarterly or annual filing they present fair value and amortized cost. IIRC, fair value is higher than the amortized cost presented on the balance sheet. Most of their investments are level 1, hence you can somewhat probably rely on the values being presented. On top of that, you have book value of $346, which I think brings in a huge margin of safety.
You mentioned "management unwillingness to support the share price."
Where do you see the lack of support? They have consistently grown shareholders equity. They had their AM Best ratings raised and continually affirmed, even during the financial crisis, when most other life insurance companies were being downgraded. They continue to build a fortress dividend.
I think that most investors make the same claim as you, because a dividend is weak, and certainly could be higher. NWLI claims they keep the dividend low to keep the balance sheet fortress like. I agree with that.
What I don't understand, is why they refuse to buy back their own stock, or at least announce a plan. NWLI is currently trading at 38% of stated book value. If management was confident in the future of the business, it makes no sense to me whatsoever to not buy back shares. I can not see a better use of capital, assuming that all is good under the hood at NWLI.
Management has been stubborn on this, and I just don't get it. The BOD did address this issue, and claim they are just looking to maintain a fortress balance sheet. To me, that is short sited. Unless the reason is that they don't believe in the future of NWLI.
If they announced a share buy back, I think the price would immediately go to $200 per share. NWLI wouldn't even have to buy that many shares, as only incremental demand would probably increase the stock price.
Management could easily make a buy back plan, and indicate that they will buy shares anytime the price to stated book value is for example < 50%.