Hartford and Genworth: One Investor's Risk is Another's Reward

On May 14, The Wall Street Transcript interviewed A. Mark Finkelstein, Vice President of Cochran Caronia Waller and an Equity Research Analyst covering the life and multi-line insurance sectors. Key excerpts, including his sector pick, follow:

TWST: What are you telling investors to do in this space? What names do you like?

Mr. Finkelstein: On the larger side, we like Hartford and Genworth (GNW), which we recently upgraded to Outperform. It is a stock that has traded within a pretty narrow band over the last year and half, and is a capital redeployment story. They should continue to grow their ROE and, in our view, there is a little too much emphasis in terms of some of the risks in the business and not enough positives attributed to the areas where they are growing the fastest. So on a risk/reward basis, we see that as one of the more interesting ones.

TWST: You said capital redeployment. What are they doing?

Mr. Finkelstein: Since they have older blocks of business that are low return and are amortizing down, they are using the capital to invest in growth, buy back stock and make strategic acquisitions. They have been relatively successful in each of those.

TWST: Where are their growth opportunities?

Mr. Finkelstein: A lot of them are on the international side. They are a large player in the international mortgage insurance business, which has been a strong growth area for them. They are in the payment protection business mainly in Europe, which has also been a strong growth engine for them. They are also building up their managed money business, as well as income or fee-based annuities - those are their highest margin products that are growing the fastest. When you put the equation together of the highest margin products growing the fastest, with the stock trading at a relatively low valuation at 1.3 times book and with an ROE expansion story, it is a pretty good entry point here.

TWST: Why the valuation pressures? Is it because people are waiting for it to happen?

Mr. Finkelstein: We were talking about long-term care a few minutes ago. They are a long-term care player and one of, if not the best in that business. That block hasn't deteriorated quite the way that some others have. They are also a big player in the US mortgage insurance business. You know all the concerns regarding slowing housing, higher delinquencies and greater severity of loss. So the valuation has been kept down by some of the perceived higher risk areas, and once investors get past the fact that these businesses aren't collapsing, the company's valuation should respond accordingly.

GNW 1-yr chart