The objective of this write-up is to examine Genworth Financial (NYSE:GNW) as a true conservative value investment along the lines of Benjamin Graham and early Warren Buffett. To accomplish this goal, we will use a strict definition of tangible book value based on liquid and relatively short-term current assets on GNW's balance sheet as of Q4 2013. Genworth is an insurance company that managed to survive the devastation of the 2008 financial crisis. It predominantly operates in the US, Canada, and Australia, providing life insurance, fixed annuities, long-term care insurance (LTC), and mortgage insurance to its customers. Amongst global insurers, it is relatively small, with a market cap of just $7.5b and 2013 annual revenues of about $9.4b.
The reason we want to use current tangible book value to examine Genworth is because it is an extremely stringent valuation metric that gives first order priority to tangible, liquid, short-term assets. Intangibles on a company's books, such as goodwill, patents, copyrights, and brand value are accorded little to no value in a strict book value evaluation. Longer-term assets such as plant, property, equipment, and long-term receivables are usually discounted by some factor to account for depreciation and uncertainty.
Also, insurance companies are very cash-rich, as they are paid upfront from customers' policy premiums. As a result, insurers usually have massive investment portfolios that they need to invest wisely and conservatively to match assets with liabilities. We will thus be subtracting out any unrealized gains on this investment portfolio, frequently referred to on the balance sheet as Accumulated Other Comprehensive Income.
Below is a snapshot of Genworth's balance sheet for 2013 and 2012. We will take the first two line items, "Cash, cash equivalents and invested assets" and "Deferred acquisition costs" as is, and value them at 100%. Intangible assets and goodwill we will ignore, and thus attach zero value to. Further down the balance sheet, we will attach an 80% value to the longer-term assets line items, "Reinsurance recoverable," "Other assets," and "Separate account assets."
Giving priority to liquid and short-term assets, as well as tangibles, our estimated total assets for Genworth comes to $101.12b, rather than the stated $108b on the balance sheet. From this figure, we will also subtract out any unrealized investment gains on GNW's balance sheet. You will find a total of $2.542b of AOCI under the stockholders' equity section, bringing the total assets to $98.58b.
Once we are finished with the assets side of the business, the liabilities are straightforward. We will take Genworth's total liabilities figure as is, at $92.385b. Subtracting liabilities from assets gives us a total liquidation value of $6.2b.
The final step to coming up with our conservative current tangible book value for Genworth is to divide by the total amount of GNW's shares outstanding. Google Finance lists 494m shares outstanding as of 2/28/14. Dividing our liquidation value by shares outstanding yields us a current tangible book value of $12.55 per share.
At a current share price of about $15.20, GNW's CTBV is thus 1.2x. That being said, finding a large company in today's markets trading below liquidation value, or what Benjamin Graham referred to as a "net-net stock" is virtually impossible. You will find that the 1.2x figure is quite far from the book value stated by Yahoo! Finance of 0.52.
If we were to not subtract out the unrealized investment gains (AOCI) on GNW's balance sheet and assume those gains could quickly be realized at current market rates if liquidated, our new tangible book value per share would come to $17.8, giving a book value of 0.85x.
I would be more inclined to use this conservative middle figure for GNW's book value than either the Yahoo! Finance or strict current non-AOCI value.
For many value investors, a tangible book value of 0.85 would likely be sufficient to warrant an investment in Genworth. Yet, for a legend like Warren Buffett, an attractive valuation alone likely would not suffice. Buffett likes to take Graham's teachings even further, and invest in companies with a significant and defensible moat, an identifiable competitive advantage, strong cash flows, sustainable earning growth and power, and a powerful brand or franchise.
Unfortunately, I do not believe that Genworth has many of these characteristics at the moment, other than the real potential for powerful earnings growth.
GNW is a relatively small and dispersed global insurer. It has no readily identifiable moat in any of its business segments, and its brand is not very well-known and definitely not a household name (compared to the popular AFLAC duck or GEICO gecko).
Furthermore, Genworth has set up a number of holding companies with complex payments schemes in order to allocate capital to areas where increased regulatory capital requirements will likely be needed in the future. It is difficult to project the payments from parent to holding company and vice versa.
Lastly, having a fairly large Global Mortgage Insurance division, Genworth's business, like any mortgage insurer, is sensitive to global interest rates. Should rates rise sharply as a result of the Fed's taper or any other number of reasons, this segment of its business could be rather adversely affected.
Having said all this and highlighted many of GNW's caveats, a current tangible book value of 1.20 and tangible book including AOCI of just 0.85 is very rare in today's markets. One could make a very strong argument that Genworth is trading at a rock-bottom valuation despite a 100% appreciation in the last year.
As is, GNW would probably not warrant a Warren Buffett investment, as Buffett likes to invest in companies with a readily identifiable competitive advantage, moat, pricing power, and strong earnings growth. Buffett's mentor, though, Benjamin Graham would likely be highly interested in Genworth as a true value investment with a built in margin of safety and little downside risk based on a valuation perspective.
As a result, I am bullish on Genworth from a purely valuation angle, but more uncertain and less bullish based on a growth and competitive advantage assessment of the company. I, like Buffett, would like to see a company have a strong defensible competitive advantage in its industry, pricing power, a robust moat, and increasing earnings power.
Given these factors, I am mildly long GNW in my IRA, but would be more interested in investing larger sums of capital in various insurance names with perhaps richer valuations but competitive positions within the industry and stronger earnings growth prospects. A name I am more bullish on is AIG. A discussion on its merits is for another article.
Disclosure: I am long a small number of GNW common in my IRA. I am also short puts on AIG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.