National Western Life and it s Deferred Acquisition Costs

I often read in the yahoo message board about a stock, i own myself. National Western Life Group (NWLI). There is much critic at the major shareholder (Robert Moody and his Children). I m from Germany and so forgive me my english, but i want to add an few points(that are important from my point of view) to the discussion:

Deferred Acquisition Costs (DAC)/ Deferred Sales Inducements

I sometimes think in the discussion about the National Wester Life/National Western Life Group stock is often a misunderstanding of this balance sheet position.

Wikipedia says to this balance sheet position „It describes the practice of deferring the cost of acquiring a new customer over the duration of the insurance contract. Insurance Companis face large upfront costs incurred in issuing new business, such as commissions to sales agents, underwritting, bonus interest and other acquisition expenses.“…

…So DAC is in the balance sheet as an asset. But it s an asset that is not really short term available. It becomes available (over time) because the insurance company thinks the gain on the insurance contracts is larger than the upfront costs (DAC) over time.

An example: I m the owner of a life insurance company. In your town is a insurance agent and he sells annuity policies of my company. He sells you a policy of my company and i give him 500$ for his work of selling you the policy.
Derferred Aqcuistions costs in the National Western Life Group Balance sheet
Of course; i calculated that i will make an gain of „over“ 500$ over the period of your contract (over 5 years, 8 years… whatever). Now i take the 500$ upfront cost in my balance sheet and every time i make an gain on your contract i reduce my Deferred Sales Inducements asset or/and DACosts.
Amortisation of Deffered Aqcuistion Costs in National Wester life
Risks: The risk of „Deferred aqcuistion costs and Deferred Sales Inducements“ is that the insurance company made failures in the calculation of the sold insurance contract. In the life insurance sector this problem is of some importance in the moment; because interest rates are at an very low point and so contracts with fixed interest promises of the past are producing lower gains than thought 10 years ago.

About National Western Life: I think National Western life is here in a better risk position than some other insurance companies.

1)First of all there is an history of conservatism in the calculation of DACs in the history of the company.

  1. National Western has reduced their business mix away from fixed interest promises much earlier than many other insurance companies.

Deferred Deferred Acquisition Costs and Deferred Sales Inducements are a big part of National Western Lifes Equity:

So the Shareholders Equity is much larger than the market capitalisation of National Western. But a big part of this Shareholder Equity is not available for dividends or stock buybacks, because this money will (hopefully) be availabe in the future (not now).

So i have to take position for the Moodys

Most shareholders of National Western know that the Moody Family controls this company and that the stock trades under 50% book value and the company earns around 100 million Dollar per year. But i don t know if a big dividend or a big stock buyback would really be a good thing in the moment.

The future of inflation and interest rates is very cloudy. The catalyst with this stock will be an upswing in interest rates and not a big dividend hike or share buyback (in my opinion). The risk of loosing the „A“ is too big in my opinion.

You can make the point that the Moody are not very open in the information policy. But really have you read the annual report of American National Insurance (ANAT, another Moody Insurance company). They are not in the business of making things plausible to outside shareholders. I think they do a good job business wise, but they are in a very difficult business environment because of interest rates at an 60 years low.

Personally: I m still holding my National Western Life stock, because the company is profitable, has an conservative balance sheet and a good business mix. And of course the stock price is far under book value.

Ein Gedanke zu “National Western Life and it s Deferred Acquisition Costs

  1. Ulrich,
    Thank you for your excellent explanation of DAC as related to NWLI. I am sorry I don’t speak German but I really enjoyed reading your explanation. I am also an NWLI shareholder and have written about them on Seeking Alpha in the past ( Recognizing DAC as an asset in the balance sheet makes valuing the company for investors a bit challenging. To me NWLI looks very undervalued but I am not so confident in valuing Life Insurance companies. Property and Casualty Insurance companies are easier to value since they collect premiums for policies that typically expire within a year. Life insurance companies write policies for much longer periods. So although I, as an investor, know that the Moodys have a very conservative investment portfolio, I have no idea how conservative their underwriting is. For Property and Casualty insurance, investors can look at the company’s „Combined Ratio“ to get an idea how conservative the company is at underwriting. Do you know of a way to evaluate how conservative a Life Insurance company is at underwriting? Do you have any recommendations on further reading on this topic? Like you, I am encouraged by the Moodys‘ history of conservatism, but I wish I could evaluate their underwriting quantitatively.
    Thank you again for your excellent blog!
    Houman Tamaddon
    Seattle, WA

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