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Genworth Financial, Inc.: Great Time To Buy

Apr. 05, 2021 10:26 AM ETGenworth Financial, Inc. (GNW)137 Comments


  • Genworth's planned U.S. mortgage insurance IPO alleviates liquidity concerns at the company's holding company and will unlock value for its shareholders.
  • A market comp of Genworth's U.S. mortgage insurance peers implies it is a good time to take the company's subsidiary to market.
  • The planned IPO is expected to be accretive to Genworth's share price and shareholders could potentially see share value increase north of 60 percent in the next 12 months.

Genworth"s National #LetsTalk Tour Visits Chicago
Photo by Timothy Hiatt/Getty Images Entertainment via Getty Images

For the longest time, Genworth Financial, Inc. (NYSE:NYSE:GNW, hereinafter "Genworth") has battled to shore up deficiencies at its life insurance subsidiaries and reduce the amount of debt

This article was written by

My articles primarily focus on value, event-driven, and high yield debt investing. I have a background in managing a small family portfolio as well as military and government service.

Analyst’s Disclosure: I am/we are long GNW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (137)

why not use the book value of USMI for a base line?
whitehead1 profile picture
GNW has been left behind, fundamental looks pretty good. I bought some at 3.4. Hope someone notices how cheap GNW is. However I am surprised they were ready to get bought around 5
I'm not a dumb guy. I'm a professional statistician. Math is my strong suit.

I've spent 3 hours on this company's financials, read all these SA pieces, and still have no idea wtf is going on with this company.
airlarr profile picture
@auroramonk I also have a strong career. I spent many hours studying GNW. Three complex businesses with some overlap. I should have spent my time practicing my golf game. I'm long GNW but the outcome is not predictable. Roll the dice!
@airlarr but what's the distribution of possible outcomes? that's what i'm trying to boil it down to.
airlarr profile picture
@auroramonk I'm sure your familiar with the term: business turnaround. Look at the stock price over the last 5-6 years or longer.
Investors who bought during that time were hoping for much better results than where things are. Those who sold moved on.
Turnarounds are impossible to predict. I'm long but only in small amounts. If you to invest in an insurance business with a solid past, check out GL and RGA. They are more predictable.
Steve Fischer profile picture
Since the article has been published the stock has declined. The people who said if the merger doesnt go through the stock will soar are gone or sharing their "expertise" on other stocks. its probably worth about $5 a share- not a bad investment - but nothing that special.
David Orr profile picture
Can someone please explain why their life insurance is worth $0 or some very low number?
Anthony H. Steinmetz profile picture
@David Orr It's unclear how large Genworth's policy liabilities are--only time will tell. Presently, life liabilities are greater than its assets. Therefore, a zero dollar valuation has been assigned.
David Orr profile picture
@Anthony H. Steinmetz Is that according to GAAP accounting? I'm trying to figure out how accurate that is for life insurance companies generally.
airlarr profile picture
@David Orr David, the life business includes the long term care business, LTC. Historically this LTC business has had enormous jumps in reserves as customers live longer in nursing homes. The year 2020 saw a brief reversal which the company says is temporary. GNC also says that they were allowed to increase premiums, and hopefully we will see no more of these "reserve adjustments."
The life business itself is paying huge claims due to the covid virus. Investment returns continue low.
I am long for the very reason that you suggest. The price to book is ridiculous. If the gaap reserves (both businesses) are any where near correct, the stock is a bargain.
I assume that you have followed the mortgage insurance pending issuance.
Few investors want to mess with this complex company. I've been in and out of the stock for five years. Now long.
Good luck, Larry
5x EBITDA once the debt is handled
Will C*vid and v*ccine deaths affect this company? Because I think there is some truth to the message on the Georgia Guidestones. Ag*nda 2030 might result in a bunch of us dying... How will that affect Genworth's life insurance and mortgage insurance businesses? Because if it weren't for that concern, I'd invest in this company in a heart beat.

Do their life insurance policies make exceptions for c*vid and v*ccine injuries or deaths? Imagine if 5 years from now, the families of millions of insured folks are cashing out on their insurance policies... That could be a nightmare for an insurance investor.
MarionPolk2017 profile picture
@ssanghera187 Vaccine will never result in any significant increase in deaths. Covid has already killed a significant number of long-term care residents, reducing GNW's losses on long-term care policies.
@MarionPolk2017 Covid actually didn't result in a significant increase in deaths in 2020 compared to 2019. About the same number of old folks died.

Also, germ theory is still a theory so it could be wrong. It's not a set in stone fact that there are these evil little dudes flying around, getting into our bodies via mouth and sinuses, infecting us, and that injecting ourselves is the way to fight them... All that is still theory.

I'm just playing devil's advocate here. If a bunch of people start dropping like flies 6-7 years from now, I want to know if it will affect Genworth's mortgage and life insurance payments. Because Genworth is already struggling with things as they currently are...
@ssanghera187 Genworth has stopped selling life insurance for many years. Most LI policies are 10 or 20 years term life insurance and many of them end last year and a lot will end this year. 6-7 years from now, it will have little impact on GNW.
If a lot of old people die in 6-7 years, it will be vey good for GNW LTCI business. That is the part most people are worried about. If LTCI claims turn out to be lower than expected, the shareholders may be able be to cash out significant portion of the equity (over $20/share). The would be a jackpot for shareholders.
So USMI is not even worth 4B.

And what about what they owe to AXA? I didn't see it in the above chart.

Shares may be $2B although the life company is a kicker that might be worth something some day.
Usmi worth 4 to 5 billion. Debt 2 billion. Net worth 2 to 3 billion or $4 to $6 a share. Not really undervalued. 5 billion is optimistic. 4b is prob base case.
Just Myself profile picture
@kenberthiaume There is entirely too much focus on USMI book value. Some focus is warranted...but where is the attention to earnings? We know many research and buy stocks on earnings first while looking at book value.

We know USMI earning a bit over $125 million per quarter or $500+ million per year. Put a 8 P/E on that and you get $4 billion. With a 10 P/E, it is $5 billion.

The real key is when some of those earnings get paid out as a dividend.
Insiders have the first dip of the cheap shares:
"At our request, the underwriters have reserved up to 1,128,807 shares of the common stock offered by this prospectus for sale at the initial public offering price to certain of our and our Parent’s directors, officers and key employees through a directed share program."
@Alpha$ituations I am interested in how you get to $6.30 fair value for GNW based on a $24 pricing for the approx 20% of the USMI. I agree there should be good interest as it seems to me the underwriters have priced the IPO to move and get a good first day bump - based on its value to the peer group.
Alpha$ituations profile picture
@beak They May be selling less than 20%, but the GNW value assumes that 100% of USMI is then worth $24. I agree that it is priced to go up post IPO market conditions permitting
Alpha$ituations profile picture
Genworth Financial Inc Cl A (GNW US) has announced that its US Mortgage Insurance, Genworth Mortgage Holdings, Inc. (to be named ENACT with the Ticker ACT), has commenced an initial public offering of 22,576,140 shares of common stock with the initial public offering price is expected to be between $20.00 and $24.00 per share (there is also the usual 30 day greenshoe option granting underwriters to purchase an additional 3,386,420 shares.

In addition to the shares being sold in the initial public offering, certain investment funds managed by Bayview Asset Management, LLC have agreed to purchase 4,000,000 shares of Enact’s common stock in a concurrent private sale at a price per share equal to the initial public offering price less the underwriting discount per share.

The S1 filing indicates that Enact will have 162,840,000 shares outstanding, meaning that 16.3% shares will be in public hands without greenshoe exercise or 18.4% with greenshoe exercise. On this basis, Enact will have an initial market value of $3.26BN -$3.91BN against a book value of $3.88BN as at end 2020.

I would deem this attractive pricing implying close to book value at the top end vs a peer group range of 1.1X-1,6X. Based on 2021 projected earnings for Enact (my estimate implying a conservative 30% rebound in earnings on 2020 vs 33% average for the peer group referencing consensus estimates), @$24, Enact would be trading at 8X vs a peer group range of 9X-11X.

Given the current rebounding environment, I'd be surprised if this did not attract strong interest. I think it is likely to be priced at the top end of the proposed range, implying a fair value of ~$6.30 for GNW, and that's assuming zero value for the US life businesses..
@Alpha$ituations You need to subtract the USMI debt load to obtain the implied value.
Alpha$ituations profile picture
@MPGGRB555 The book value is equity (net of debt)
Anthony H. Steinmetz profile picture
@Alpha$ituations I'm eager to see what the roadshow does for this initial valuation.
looks like you made a good call. How does $20/share for the mortgage unit figure into your analysis of value?
Anthony, you are a person of reason and thought, which is refreshing. I realize that Genworth values their life insurance unit at zero. Do you believe that if inflation hits hard, the life insurance unit could be valued at less than zero? Insurance is typically not a great business in a high inflation environment.
Anthony H. Steinmetz profile picture
@MPGGRB555 Thanks for the compliment.

In short, no I don't think the life business could be valued at less than zero. First, Genworth and its subsidiaries are corporations and as such the ownership liability is amount invested and nothing more (absent certain exceptions). Therefore, no one, not even government, can force owners to pay for, or into, the life business in addition to what has already been invested. In other words, our investment is worth something or nothing.

Second, one could posit that as a going concern the carrying value of the life business is negative (i.e., Genworth would have to pay for another company to take the business off its hands); but in reality would Genworth ever actually pay someone to take the business off its hands? Doubtful. It would likely make more financial sense to let the life business go into conservatorship at no cost to the parent.
@MPGGRB555 Contrary to your point, high inflation is actually good for insurance company. Insurance companies collect premium and invest most of them in fixed income investments. With high inflation, the interest rate would be higher and return from the fixed income investments would be higher too. However, the benefit does not change with the inflation. For example, if you buy a 20-year term life insurance with payout of a half million, your family will collect a half million regardless the inflation. That is also the same of a lot of LTCI policy, the daily benefit is fixed too.
That is why insurance companies prefer high inflation and high interest rate environment. The current model has been adjusted due to the persistent low interest rate environment. If it changes, insurance companies will do well.
Good work with the first prediction of $3.82! Time to march toward your second prediction of $5.47. However, I don't agree that $5.47 is the best case. The upside is $7-$8 when the USMI reaches a market cap of $5 billion or more.
What is your opinion on the run-off segment that generates $50 million annual earning? The book value was $477 million on 12/31/2020. It seems too big for it to be valued at 0.
"On a per share basis, this exercise implies that Genworth's common is worth $3.82, ... (Best Case), the per share price of Genworth's common is worth $5.47 per share"
Incoming ratings upgrades...
airlarr profile picture
Yes, the life business has been a dog. But you believe that business has zero value? That their liabilities on the balance sheet are still greatly understated?
Anthony H. Steinmetz profile picture
@airlarr That is what management believes. They've expressed that opinion many times.
Alpha$ituations profile picture
@airlarr I think the company looks at it from a worst case scenario perspective for the HoldingCo, meaning that it has no obligation to inject additional capital to support it.
airlarr profile picture
@Alpha$ituations Several years ago the company talked about raising LTC rates. And someday, some year, they should get a handle on LTC liabilities. Ditto for life insurance. Someday, some year, the overall life business should have some value. Or maybe I'm too optimistic. The track record is horrible. I did buy some GNW recently, purely speculative.
But the company is considering issuing a convertible, where will this money go? Discouraging.
Anthony H. Steinmetz profile picture
Aside from the IPO, management is also contemplating the issuance of convertible debt. They just filed a self registration to that end: www.sec.gov/...
Alpha$ituations profile picture
@Anthony H. Steinmetz I'm not sure I would read too much into this as such filings are routine. Shelf registration filings are filed every 3 years by the company.
@Anthony H. Steinmetz what are the implications of convertible debt? Dilution? The exact opposite of maximizing shareholder value?
@Alpha$ituations I don't recall seeing shelf registrations being filed.
Genworth recently annouced the deal is dead.
Sergi Medina profile picture
Very useful and interesting info, thank you. GNW has to be the most undervalued stock currently! I have a pretty big position. Very bullish. Potential tenbagger here.
@Sergi Medina I love the optimism! Right or wrong I'm all for a 10 bagger!
Steve Fischer profile picture
@Sergi Medina @@BrewerB all you have to do is call Management. They spent over 20 minutes with me on the phone and went over each piece. GNW is worth about $4 or $5. The information is there - why not look? Even at $4-5 its a good buy but there are more undervalued companies SMLP is one of them and see what management says about their book value. Go ahead so a tiny bit of research if you can. ( hint -see their conference call transcript) Im long both stocks but way more into SMLP
Sergi Medina profile picture
@BrewerB Glad! Just because of fundamentals, even assuming a more than realistic growth rate... It will generate strong returns for shareholders.
Maybe more now that the OW deal is done...
It's also trading currently far below book value.
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