Description

Opportunity 

National Western Life Group (ticker: NWLI) presents a unique investment opportunity as its valuation is currently undermined by its excess capital position.

National Western Life Group, Inc. is the parent holding company of National Western Life Insurance Company and various non-insurance subsidiaries. National Western Life Insurance Company is a stock life insurance company offering a broad portfolio of individual universal life, whole life and term insurance plans, annuity products, and investment contracts meeting the financial needs of its customers in 49 states, the District of Columbia, and certain U.S. Territories or possessions. Please refer to previous write-ups from thrive25 and spike945 for a detailed overview of the business

NWLI has had a quite stable financial performance and accumulated book value per share over the years ($575.26 as of Q3 2019), but it is trading at a very low 0.5x Price to Book given its low ROE (6.3% in 2018)

The ROE is impacted by the unique excess capital position of NWLI. At the end of 2018 NWLI had company action level RBC of $255mm and capital and surplus of $1,442mm.

Based on these numbers, we assume NWLI has excess capital of $422mm (we assume core RBC ratio of 400% as of end of 2018) which is currently invested in NWLI general account yielding on average 3.98% as of Q3 2019.

Adjusted Financials

If we adjust NWLI financials and separate: i) the core life insurance business and ii) the excess capital we can see how the current market valuation is undermined.

Separating the excess capital from the core business, the  Q3 2019 TTM ROE would raise to 6.3%. Applying a 0.6x multiple to the core $459.20 BVPS could lead to a core valuation of $275.52. Total valuation, including $116.06 per share of excess capital would be $391.58 (34.6% upside vs. current price).

If we would apply a conservative 0.5x P/BV multiple to the core business, we would have a core valuation of $229.60. Total Valuation would be $345.66 (18.8% upside vs. current price).

Main Question

The main investor question is what would be the catalyst to realize the value of the excess capital in light of the extremely prudent capital management strategy historically adopted by NWLI.

Management lack of action on this topic may impede the market to recognize the hidden value in NWLI and have the stock price linger at a very low multiple of P/BV as it has in the last several years.

That said, there have been a few signals that Ross Moody, which succeeded his father in 2016 may adopt a more proactive approach. This year’s acquisition of Ozark National Life appears like a step in the right direction. Hopefully additional capital allocation activities including value creating M&A, dividends and share buyback will follow.

In a scenario where management will not demonstrate to be able to allocate capital properly, downside appears limited at a current purchase price of 0.5 P/BV and 9 P/E.

Main Risks

·     Stock is illiquid 

·     Persistent low interest rate environment affecting investment income and sales of annuity products

·     Inability to profitably grow us domestic business as international insurance block runs off

Catalyst

·     Deployment of excess capital

·     Gradual interest rate increase, providing tailwind to investment income and annuity sales