Genworth Financial Inc. (GNW) has taken a beating in the past several years, losing nearly 80% of its market value from August, 2006 to August 1, 2011. In the past year alone, Genworth's stock has gone from a 52 week high of $14.77/share to trading at $7.74/share at the present time, which is a 48% decrease in market value per share. The recent quarter's net loss of $.20/share, which comes from a $300 million dollar loss attributed to an increase in their U.S. Mortgage insurance reserves, has done nothing to help matters either. However, there are a few fundamental and macroeconomic factors that lead me to believe that Genworth is extremely undervalued.
According to the company overview, Genworth is:
...a financial security company engaged in providing insurance, wealth management, investment and financial solutions to more than 15 million customers, with a presence in more than 25 countries. These life security products and services include payment protection coverages in Europe, Canada and Mexico, and in the United States, life insurance products, as well as care coordination and wellness services. As of December 31, 2010, the Company operated three segments: Retirement and Protection, International and U.S. Mortgage Insurance.
Genworth Financial Inc. is a huge financial services provider with over $100 billion dollars worth of assets under management. Its core operations are divided into three segments: Retirement and Asset Protection, International, and U.S. Mortgage Insurance. Let's take a look at their second quarter results, and see how they impacted Genworth's business prospects.
Retirement and Asset Protection
This segment includes wealth management, retirement income, life insurance, and long-term care insurance. Net operating income for retirement and asset protection are up 31% to $149 million, compared to $114 million from Q2, 2010, with their life insurance business contributing $72 million, almost half of that total. Genworth is also raising its long-term care premiums by 18%, this has already been approved by most states, and it is estimated to generate an extra $60 to $70 million dollars a year in revenue by the end of 2012.
Genworth has also agreed to sell its Medicare supplement business to Aetna for $290 million dollars. Management says that this deal should be closed by the end of Q4, 2011. The Retirement and Asset protection ended the quarter with a strong 385% RBC ratio, which means they have $3.85 in capital for every dollar in risk-based capital.
Genworth's International business segment provides mortgage insurance mainly to Canada and Australia. Net operating income only increased $2 million from a year ago to $107 million, and actually decreased 11% from last quarter's $120 million in net operating income. Management cited several reasons for the sequential decline including an increase in taxes in Canada, and increased delinquencies in Australia due to the major floods, high interest rates, and a strong Aussie dollar.
On the upside, both Australian and Canadian housing markets are expected to maintain their stability, and offer continued opportunities for Genworth International. The Canadian and Australian based mortgage insurance operations had 158% and 152% RBC ratios, respectively.
U.S. Mortgage Insurance
With the Great Recession and the crash of the U.S. housing market, this business segment has yet to have a good quarter. The overall $96 million net loss this quarter can be attributed to the $300 million dollar strengthening of the U.S. Mortgage Insurance reserves, which occurred in order to offset a weak U.S. housing market, a weak economy, and an expected decrease in cure rates (rate of delinquent mortgages that return to current payment status). However, loan delinquencies are down by 2% from last quarter, and new delinquencies are down 18% Y/Y.
During the second quarter conference call, Genworth's CEO, Michael Fraizer, stated that mortgage insurance issued after 2008 is extremely profitable, generating $400 million in pre-tax premiums to date. This is due to an increase in the credit standards required for home loans, and lower delinquencies on those loans.
Here are some reasons why I believe there is huge potential upside for this stock over the long-term.
In the Q2 conference call, Genworth's CFO, Martin Klein, stated that Genworth has implemented a loss mitigation plan which is estimated to cut between $400 and $500 million dollars worth of expenses in 2011 alone.
It is trading at an exceedingly cheap .263 of Book Value/share.
Analysts estimate mean earnings of $1.49/share in 2012 and $2.09/share in 2013. Even with a conservative multiple of 8 that would mean a share price of $11.92 in 2012, and a share price of 16.72 in 2013. With a current share price of $7.74 this comes to a 54% return in 2012, and a 116% return in 2013 with respect to the current share price. Keep in mind that the average Price to Earnings ratios of five of Genworth's industry peers, Assurant Inc. (AIZ), CNO Financial Group (CNO), Lincoln National Corporation (LNC), Torchmark Corporation (TMK), and UNUM Group (UNM) is 8.79. See relevant data here
In the quarterly conference call, CEO Michael Fraizer indicated a potential share repurchase program in 2012 (probably using the influx of cash from the sale of their Medicare supplement business) in order to take advantage of Genworth's undervalued stock price, and to increase shareholder value.
CEO Michael Fraizer also admitted that if U.S. Mortgage Insurance becomes too much of a financial burden on the other two business segments, if it was absolutely necessary, he would consider separating it from the rest of Genworth. This would reduce Genworth's exposure to the risk and volatility of the U.S. housing market, and earnings would become more stable.
Stable housing markets in both Canada and Australia will continue to offset U.S. Mortgage Insurance losses until it turns profitable again; Standard & Poor's expects late 2012.
Consumer demand for fixed retirement income, life insurance, and long-term health care will only increase as our population gets older and age longevity is increasing.
The bottom line is that this stock is extremely undervalued, has high future earnings potential, and competent management. This makes it a great stock for any long-term value investor. Genworth has hit rock bottom, and may continue to falter in the short-term, but it has no where to go but up from a long-term perspective.
Disclosure: I am long GNW.