On January 16, Genworth Financial, Inc. (GNW) announced a new U.S. Mortgage Insurance capital plan that it believes will reduce the risk-to-capital at Genworth Mortgage Insurance Company, the company's main U.S. mortgage insurance subsidiary, by 12 to 15 points, decrease its potential need for additional capital, ensure the continued ability to write new business and reduce the risk of a default under the indenture governing Genworth's senior notes.
Genworth's plan will require regulatory approval for various parts of its sweeping plan. Genworth indicated its cash and highly liquid securities position at the holding company totaled approximately $1.0 billion as of December 31, 2012. Genworth will contribute $100 million of this to the GMICO subsidiary as part of the comprehensive capital plan. This will likely occur in the second quarter of 2013. The company noted that it anticipates the combined risk-to-capital ratio of the U.S. mortgage insurance subsidiaries will be reduced by 8 to 10 points from this plan.
Genworth has been one of the better performing financials in the second half of 2012. In 2012, Seth Klarman's Baupost Group acquired a significant position in Genworth. Klarman is well regarded as one of the better value investors. Baupost added 15 million shares of Genworth Financial to its portfolio in the second quarter of 2012.
Genworth is an equity that Baupost has both added and dropped in the last two years, which is contrary to Klarman's normal practices. Baupost had established a position in Genworth in late 2011, but sold out of it in early the first quarter of 2012, likely after financials had an exceptionally strong January. Genworth, which primarily provides life insurance and wealth management services, appreciated by 40 percent within the first month of 2012, but subsequently declined to prices below its 2012 starting price.
In 2013, GNW appears to be retracing some of its prior climbing steps. Apparently, Baupost thought Genworth had overheated in early Q1 and got out, only to later re-enter it at a more opportune price, but the situation is somewhat different this time. Baupost retained its position through Q3 of 2012, when last reported.
In early 2012, Genworth postponed plans to bring public the company's Australian mortgage unit, a book of business valued at around $2 billion, due to performance issues and declining market conditions. Genworth also grappled with increased credit ratings agency scrutiny, and potentially crippling downgrades. Since then, the company continues to make moves to reduce the potential and severity of downgrades, as well as to unlock some of the value in its subsidiaries.
To this end, Genworth's Australian subsidiary will likely go public within the next year or two. Other positive news could also move Genworth. The company continues to trade well below its book value, and shares are now likely still around one third of probable book value. Many financials continue to trade below book value, but Genworth is also undervalued relative to the valuations of its peers and may catch up to them if Genworth can improve its credit quality.
Genworth recently made several new additions at its highest ranks, making the potential for other and further changes entirely possible. In mid-December, Genworth named Thomas J. McInerney the company's President and Chief Executive Officer, and just announced the addition of Michael Derstine as Chief Risk Officer at its U.S. Mortgage Insurance Unit.
This new plan comes about a month after McInerney became CEO, and was likely in the works long before Derstine came on board. Derstine's hiring may have been in contemplation of it. One large question that is out of the control of Genworth's management is the regulatory approval of this new plan. If approved, additional positive tailwinds will likely follow.
Disclosure: I am long GNW.