2023-06-16 11:44:57 ET
Summary
- Activist investor Michael Gorzynski has recently accumulated a 5.5% stake in life insurance and annuity products provider National Western Life Group.
- Shortly after the activist’s involvement, the company has launched a strategic review, with company sale among the potential outcomes.
- A company sale might be likely given the activist’s track record in the insurance space as well as National Western Life management’s background.
- The company might be worth north of $560/share in a sale, implying a 40%+ upside from current share price levels.
This is an interesting situation shaping up in the insurance space. The company has for a long time been a value-trap, with an entrenched controlling family. However, several recent developments, including the involvement of an experienced activist and a recently launched strategic review, suggest substantial value might finally be realized here through a business sale.
National Western Life Group ( NWLI ) is a $1.4bn market cap insurance provider selling life insurance and annuity products. In April '23, activist Michael Gorzynski disclosed a 5.5% stake in the company, noting intentions to push the company to explore changes in its governance, capital allocation, operations as well as potential transactions. Subsequently, in mid-May the company announced a review of strategic alternatives, hiring Goldman Sachs as its financial advisor. Interestingly, the company's press release kind of implied that a company sale is among the potential strategic review outcomes. While a company sale is by no means guaranteed here, I think several aspects, including the activist's track record and NWLI's management background, might point to a business sale either to Gorzynski or other interested industry players. My valuation based on a comparable industry transaction suggests NWLI might reasonably be worth over $560/share in a sale scenario, implying 40%+ upside from current price levels. Downside to pre-strategic review announcement levels stands at 32%.
What gives some confidence in a favorable outcome here is the activist's decent track record in the insurance space. In 2020, Michael Gorzynski acquired a stake in a business conglomerate HC2 Holdings, arguing that the company was too levered and lacked expertise to manage its insurance arm Continental Insurance Group. The activist went on to win a seat on Continental's board and became its chairman and president. Eventually, in 2021 Gorzynski's investment vehicle MG Capital acquired Continental for $90m. The activist has quite a reputable background - before launching his fund in 2011, Gorzynski worked at Dan Loeb's Third Point.
Another aspect pointing to a potential company sale here is NWLI's management decision to launch the strategic review. NWLI has been controlled by the Moody family which owns 33% of outstanding shares and due to a dual class structure has the right to appoint the majority of the company's directors. Historically, the Moody family has been highly unwilling to pursue shareholder-friendly actions, such as share buybacks and dividends, among others, with a very conservative management of the business as evidenced by excessive risk-based capital ratios. The fact that management recently decided to launch a strategic review seems to indicate that the family might finally be open to selling the business. This is speculation on my side, however the potential sale process might help resolve the ongoing family succession dispute where Robert Moody has sued his brother Ross in a multi-million dollar lawsuit after Ross took over the helm of NWLI in 2016 after the father's disease. Worth noting that in 2021 the Moody family agreed to sell its majority-owned life insurance and annuity provider American National Group ( ANAT ) to Brookfield Reinsurance in a $5.1bn transaction. Interestingly, the BAM-ANAT merger proxy mentioned that the sale process was initiated due to concentration of the Moody family holdings as well as diminishing role of the family in the leadership of ANAT.
There would likely to be no shortage of potential acquirers if the sales process is launched. The insurance/annuity space has in recent years seen significant M&A activity from the largest private equity firms, including Brookfield, Apollo Global Management (merged with annuity provider Athene in 2022), KKR (acquired annuity provider Global Atlantic Financial Group in 2021 for $4.7bn), Carlyle Group (bought specialty insurer NSM Insurance Group for $1.8bn in 2022) and Ares Management (acquired Global Bankers Insurance Group in 2021). This seems to have been driven by long-term nature of annuity and insurance contracts, implying that through the acquisitions the PE firms can gain access to the so-called permanent capital from policy premiums that can be reinvested in higher-yielding securities. An acquisition of NWLI would be strategic for either of the above-mentioned PE firms given their already existing presence in the space, implying potentially significant cost synergies. It's worth highlighting that during a recent conference call, Brookfield Asset Management has explicitly stated that it sees insurance as a highly lucrative space in the upcoming years and is currently in the process of building out its insurance business:
Right now we're building out an insurance business, and I think it will be highly, highly successful over the next 15 years, but it's possible it's not.
[…]
So as the asset management business, we identified years ago that what we wanted to do was continue to build out the products we have for insurance channel. These products -- the alternatives businesses are exceptionally good for insurance companies. The risk weighted capital are very good for infrastructure, credit, and real estate particularly. And so what we do is very good for them. What we weren't very good at years ago was understanding how to tailor those products to put into the insurance businesses. And 3 years ago with our balance sheet up top, we bought, we've now bought 3 insurance companies, not BAM, but we're managing capital for those 3 insurance companies. But for the manager, what it's done is it's allowed us to really understand how to tailor these products for insurance businesses. So I think, firstly, the money we'll manage for the Brookfield insurance companies will increase very substantially over the next number of years. But also, I think we're going to be a way, way better counterparty because we truly now understand the insurance channel, how to create products for them, how to partner with them, and how to bring them investments. And I think that will be exciting all around.
While valuing insurance/annuity businesses is inherently difficult, a glance at relative valuation suggests there might be significant upside above current share price levels. NWLI currently trades at 0.53 P/BV multiple (book value excludes AOCI). My thoughts on where the stock might be valued in an acquisition scenario:
- I think the best reference point here is the above-mentioned Brookfield acquisition of ANAT which valued the target at a 0.76x multiple (ex-AOCI). Both companies have generated a significant portion of their revenues from life insurance and annuity product sales. While ANAT displayed a slightly higher ROE of 10% and 7% in 2021 and 2020 vs 4% and 6% for NWLI, both companies have been managed conservatively, boasting the same financial strength rating issued by AM Best (see here and here ). Using the same multiple, NWLI would be valued at $561/share or 44% above current share price levels. It's also worth noting that the S&P Insurance Select Industry Index is flat (up 3%) since Brookfield's acquisition of ANAT.
- Other acquisitions of fixed rate/index annuity-focused peers Athene Holding (acquired by Apollo in January '22) and Global Atlantic (bought by KKR in February '21) were both performed at 1.0x P/B (ex-AOCI).
- Likewise, Deloitte's insurance industry M&A overview suggests that the price/book multiples hovered around 1x in 2022.
National Western Life Group
NWLI operates as a holding company with two subsidiaries - National Western Life Insurance Company and Ozark Life Insurance Company (acquired in 2019). The company's revenues come from the sale of annuities (primarily fixed-index-deferred) and life insurance products (primarily single premium life) as well as investment income. The majority of NWLI's revenues come from investing the premiums received from life insurance policy holders and annuity buyers. The company is subsequently entitled to pay benefits upon the policy holder's death (in the case of life insurance) or provide a regular income stream (in the case of annuities). The company has historically been managed highly conservatively, with no debt and a high risk-based capital ratio (717% as of 2022). Conservativeness is also indicated by the fact that NWLI's investment portfolio is comprised primarily of available-for-sale and trading debt securities which accounted for 80% and 11% of the portfolio's total carrying value as of December '22.
Over the last decade, NWLI's investment yields have been negatively impacted by the Fed's low interest rate policy, with the annual yield on average invested assets (excluding derivatives) steadily declining from 4.75% in 2013 to 3.65% in 2020. Despite the macroeconomic headwinds, the company has continued to display fairly stable operational performance (EBT of $112m-$165m in 2013-2020), allowing it to accumulate book value over the years (from $398.36/share in 2013 to $639.09 in 2021). More recently, in 2022, NWLI's topline contracted markedly (-32%) driven by a sharp decline in net investment income which was impacted primarily by decreases in the fair value of debt securities.
Risks
- A notable risk here is that the activist might pursue an acquisition of NWLI's individual assets as opposed to an outright company sale. Also worth noting is that in March '23 Gorzynski's Continental acquired a block of long-term care policies from a health insurance provider Elevance Health. Another possibility here is Gorzynski pushing for a reverse merger between NWLI and Continental Insurance to give the acquirer a public listing. However, given the Moody family's control of the business, I think a company sale would be a more likely outcome if the family decides to dispose of its holding.
- Another aspect here is uncertainty regarding NWLI's valuation in a sale scenario. Insurance/annuity companies are generally black boxes, implying that comparing different industry players is complicated without deep insight into and familiarity with industry dynamics and company portfolios. One of my concerns here is NWLI's comparability to ANAT. Aside from life insurance and annuity segments, ANAT also operated a property & casualty insurance business. Transactions involving P&C insurance providers have generally been performed at higher valuation multiples compared to acquisitions of solely life insurance and annuity providers. Another aspect is that Brookfield's acquisition of ANAT was completed when insurance industry M&A multiples have generally been higher. However, I think that in a potential acquisition scenario NWLI would likely fetch at least a low-double-digit premium to current share price levels for the potential buyer to secure equity holder approval.
- Another item of note is that since January '23, publicly traded life insurance companies have been required to adopt a new accounting standard. The accounting change requires life insurance providers to report the market risk benefits liability at fair value, causing fluctuation in the company's earnings and book value. This has been reflected in NWLI's book value (ex-AOCI) which increased from $667/share as of December '22 to $737/share as of March '23. Having said that, even using the company's December-end book value (ex-AOCI) and applying the Brookfield-ANAT valuation multiple, NWLI would be valued at $508/share or 30% above current share price levels.
Conclusion
NWLI currently presents an interesting investment setup with a potential near-term catalyst. Given the involvement of an experienced activist and management's recently launched strategic review, a company sale might be brewing here. I think that in a sale scenario NWLI might be valued at a significant 40%+ premium to current share price levels.
For further details see:
National Western Life Group: Is This The Time For The Company Sale?