GNW - Genworth Financial

[Olmsted]

My mention of Genworth Financial killed the thread on "how to profit from a housing bottom," but I'd still like to bring it up.  Despite its being up healthily over the last month, I think it's still cheap.

 

What about mortgage insurers?  Genworth looks interesting, partly because they are diversified and could jettison the mortgage insurance if it made sense to, and it looks like the rest of the company could support a valuation north of today's with normalized earnings.  But if housing turns around, the mortgage insurance subsidiary would contribute a lot of upside.  They are also more conservative with reserving than some peers.  I haven't done a rigorous sum-of-the-parts, but it is something I'm looking into.

 

My biggest concern with GNW is its exposure to Canada and Australia MI.  More on that later - for now I'll focus on US operations.

 

Even after a recent run-up it trades at pretty depressed levels (like .3 book value). Insurers as a group are cheaper than normal (~.95 book value), but GNW is depressed even below that. I think it is largely due to overhang from their mortgage insurance division. Their other divisions (retirement and protection, international) are looking good. Management is divesting non-core businesses and focusing, which I always like to see (recently sold medicare supplement business, upcoming IPO of Australian mortgage insurance).

 

They recently had a special call and presentation on their MI division that I think is unusually transparent and cogent:

 

http://phx.corporate-ir.net/phoenix.zhtml?c=175970&p=irol-irhome

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTI2MDkyfENoaWxkSUQ9LTF8VHlwZT0z&t=1

 

Their new MI being written is conservative and very profitable, and they are working through their book of problematic vintages. They are much better-reserved than other MI companies (RDN, MTG).  Their MI division is bumping up against regulatory capital ratios, but they’ve gotten waivers in every state where this has been the case. The scenario that they are reserving to seems somewhat pessimistic (but not drastically so); any upside surprises to the housing market would result in reserve releases.

 

So what’s it worth?  Last quarter the company did $104m in net income. A PE of 10 on that makes it fairly valued right now. However, this income included a mortgage insurance unit loss of $79m. So let’s strip out the mortgage insurance unit, value the rest of the company, and add in MI in a way that is not based on current income.

 

Add $79m and $104m, PE of 10 indicates a GNW ex-MI value of ~$15/share.

If you believe their MI runoff analysis (slide 22), there is $910m of net present value in their MI division (with no new business written). That’s $1.86/share of value, bringing us up to ~$17/share.

 

But they are keeping MI, and writing new business. From their presentation, it looks like each year of MI written has a NPV of a bit more than $170m (embedded value of 09-11 vintages, divided by 3). Incidentally, $170m is the income from their MI division the last year before it blew up. Previously it was higher, so this may be conservative. At any rate, $170m a year discounted between 10% and 15% implies a present value for the MI division at least twice their runoff analysis value. ~$19/share.

 

So that’s a quick and dirty ballpark valuation. It does not include certain upside scenarios, like a return to a more-normalized investment income environment (their retirement and protection unit is still earning below their pre-2007 numbers), or divestiture of non-core business, or gaining MI market share from less-healthy competitors and from defunct former competitors.  If the MI overhang lifts and the market trades them up to around book value, it’s worth a lot more.

 

What I don’t like: They do life insurance and annuities, which are problematic in the current ZIRP environment (they have stopped writing the more risky annuities).

 

What I really don't like: Their international mortgage insurance business comprises Australia and Canada, with frothy real-estate markets to say the least.  It looks like they're trying to monetize these somewhat and separate them from the U.S. operations (Genworth MI Canada has already had a portion IPO'ed, Australia IPO should happen soon).  Plan has pointed this out to me, plus Genworth's Australia and Canada operations have come up on this board before.

 

Genworth Canada as a short candidate:

 

Anyone else short Genworth MI Canada? The stock price is up a fair bit since the end of its Dutch auction to repurchase $325 million worth of shares. I am sure that Genworth Financial was quite happy to see $187 million of cold hard cash coming in the door.

 

Canadian housing is clearly cooling down and fast. Sales down 45% year over year in many bubbly areas. First we heard it was due to the end of tax credits, then it was due to harmonized sales taxes in B.C. and Ontario. What is going to be the next excuse to explain the decline? The average Canadian homeowner is more levered in housing than the Americans were at the top. We keep hearing that it can't happen here, but it seems to be in progress.

 

Even if we have no collapse, a slowdown is not good for MIC. They need new policies since showing earnings by only using unearned premiums is not creating any cash. Also, how can they compete with CMHC without offering lower policy pricing and accepting lower quality profiles? Time will tell, but reading the Annual Information Form gave me good data on their competitive situation vs CMHC.

 

Cardboard

 

And with regard to Australia:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQxMjcyfENoaWxkSUQ9NDYzMzA1fFR5cGU9MQ==&t=1

 

Genworth opinion on australian  real estate market

 

It's funny you posted that -- I was reading it yesterday after I noticed that Westpac uses Genworth for mortgage insurance.

 

Genworth says: "Strong demand drives prices"

I wonder:  "Why aren't rents driven up in unison by strong demand"

 

Genworth says:  "Borrower recourse".

I say:  "This puts you on even terms with Florida's rules".

 

Genworth says:  "Mortgage interest not tax deductable"

I say:  "No property tax in Australia"

 

So the big question here is how big of a hit does GNW take if Canada and Australia MI start to turn south?  Can they separate themselves from those operations, or continue to monetize them before the bottom falls out? 

 

That's the next step.

 

Thoughts anyone?

[Olmsted]

And now right back down to my cost basis.  Crickets from the board.  Did I give one of the board's short-sellers a really good idea?  Anyone want to weigh in? 

[PlanMaestro]

And now right back down to my cost basis.  Crickets from the board.  Did I give one of the board's short-sellers a really good idea?  Anyone want to weigh in?

 

Olmstead, you know my comments along the objections you anticipated in the post and did not want to repeat them.

 

There might be value here but even their best businesses are mediocre. Also, for insurance holdings is not that easy to let go subsidiaries without enraging the insurance regulators. But, despite the disruption, the MI division is just one of the divisions of Genworth. You also have heard my comments regarding MI Australia and Canada

 

Anybody else wants to jump in?

[racemize]

(Slight Hijack), Plan--how in god's name are you keeping up with this many companies/threads?  I thought I read a lot!

[PlanMaestro]

(Slight Hijack), Plan--how in god's name are you keeping up with this many companies/threads?  I thought I read a lot!

 

Focus, 80/20, and Mrs has not threatened divorce yet? Others read more, just check Marginal Revolution's Tyler Cowen. That guy must be reading at least two books a day, has one of the most successful and updated blogs, and keeps up with a full time job.

[Olmsted]

Ugh. Bad news out of Australia:

 

http://mobile.reuters.com/article/idUSL3E8FH8S720120417?irpc=43

[PlanMaestro]

Ugh. Bad news out of Australia:

 

http://mobile.reuters.com/article/idUSL3E8FH8S720120417?irpc=43

 

Thanks for the update Olmstead

[PlanMaestro]

CEO resigns and results not so great.

http://online.wsj.com/article/SB10001424052702304868004577378540962145440.html

 

[prevalou]

http://www.reuters.com/article/2012/05/02/markets-ratings-genworthaustralia-idUSL4E8G21L920120502?feedType=RSS&feedName=bondsNews&rpc=43

 

[PlanMaestro]

http://brontecapital.blogspot.mx/2012/05/thoughts-on-berkshire-meeting-and.html

 

Long term care insurance is the worst business I have ever seen. Warren of course never told us that - but somehow he wound up re-insuring it. I guess he did not want to explain his stupidity.

 

But then long term care doesn't need to be that awful. Indeed there is (at least) one company that does it well. That doesn't make long term care a good business - but it might make it an acceptable business.

 

That company is (and this will be a surprise to many of my readers) Genworth. The same Genworth that was a spin-out of crappy long-tailed insurance businesses from GE Capital. It includes a mortgage insurance company (with what is probably a toxic Australian exposure) and a long term care business.

Here is what they do to make the long term care business acceptable. They employ a sales force of 60-65 year old people on salary not commission. Because they are on salary not commission they have no incentive to write bad risks. They do not troll for business in nursing homes.

 

This sales force visits the home of leads and has a cup of tea or coffee and a social chat. They might spend twenty minutes having a chat. They will find out what the lead's husband or wife is doing. They will find out whether the lead is doing the New York Times crossword or reading sophisticated books. And whether they play golf or do some exercise. They will look for pictures of the grandchildren and ask questions about them. They will observe and ask about the pile of toys and children's games in the corner.

 

And only then will they ask anything that looks like an underwriting question but they will have already decided whether to underwrite the business. Here is what is going on.

 

People who have stable relationships into old age tend not to wind up in nursing homes. They look after each other. Singles are the biggest risk and asking about a spouse is the critical question.

Doing the New York Times crossword or reading sophisticated books indicates no Alzheimer's disease. That removes another major insurance risk. Golf suggests some physical fitness - and removes more risk. The children's toys however are - after a solid marriage - the next largest risk mitigating factor. If the grandparents look after the grandchildren that creates a reciprocal obligation. The children are far less likely to put granny in a nursing home if granny is a part of their own kid's lives.

 

Warren knows all this. He knows why some insurance businesses are better than others. He knows why their life reinsurance business is good (I have no idea). He knows why their long-term care reinsurance business is bad (and after this post so do you).

[Olmsted]

Highfields talking to Genworth about spinning off units.  Spinning mortgage insurance seems the natural option - as long as it's capitalized not to fail too quickly.  Could get interesting...

 

http://www.bloomberg.com/news/2012-06-28/genworth-rallies-as-highfields-discloses-talks.html?cmpid=yhoo

[Olmsted]

Klein saying the right things about simplifying the business:

 

“We need to address the complexity of our business portfolio so it is simpler for investors to understand and more attractive for them,” Klein said today in a conference call discussing second-quarter results at the Richmond, Virginia- based company. He said the company’s share price and bond spreads are “unacceptable.”

 

http://www.bloomberg.com/news/2012-08-01/genworth-seeks-to-limit-complexity-as-share-price-unacceptable-.html?cmpid=yhoo

 

 

But he seems to say they don't have many good options to actually simplify the company.  For example, he admits the reality of spinning of mortgage insurance might be difficult than investors anticipate:

 

"The cost of winning bondholder approval may be high and a spinoff may not be viable, Klein said in a conference call today. The unit posted a $25 million operating loss in the second quarter, the Richmond, Virginia-based company said yesterday.

 

The insurer plunged 8.1 percent to $4.63 at 9:58 a.m. in New York and is the biggest decliner this year in the 81-company Standard and Poor’s 500 Financials Index. Moody’s Investors Service said in June it may cut the company’s debt from the lowest investment-grade level after losses tied to U.S. home loans drained capital. "

 

http://www.bloomberg.com/news/2012-08-01/genworth-plunges-as-ceo-cites-spinoff-obstacles-new-york-mover.html?cmpid=yhoo

 

 

So much for the 20% pop it got when Highfields went active to get it to spin off mortgage insurance.  It's now lower than before their 13D.

 

At some point this has to become a buy, but in the meantime it just seems like GNW is one never-ending clusterf__k. 

[link01]

i have a question that maybe someone here can answer:

 

what happens to the various genworth mutual funds (for example, they own altegris & some others) if parent co, genworth, goes bankrupt?

 

are holders of genworth mutual funds protected, or their money locked up during bankruptcy?

[Olmsted]

Should be completely segregated, barring something illegal like at MF Global.

[Olmsted]

Earning from GNW, MTG, and RDN are out now.  GNW and MTG are losing share - NIW at GNW was slow and they are already at a risk-capital of 33, MTG needs to pump capital into its MI unit (dropping the stock >40%).  RDN's NIW numbers were killer - they're winning the race there.  I have a hard time with their reserving, though.  They have more optimistic reserving assumptions than GNW - more dependant on denying claims.  Losing that battle is why MTG needs to pump capital into MI, and why they cannot write as many new policies.

 

Things are looking good for AIG on this front - two of the biggest competitors are crippled.  Should be interesting to see United Guaranty's numbers this afternoon.

[link01]

Should be completely segregated, barring something illegal like at MF Global.

 

thx, olmsted. thats what i thought too, but when you have actual $ committed doubts come knocking at the door

[Buddy0807]

fwiw, looks like baupost has taken a stake in gnw...they may like the spin angle...

[PlanMaestro]

fwiw, looks like baupost has taken a stake in gnw...they may like the spin angle...

 

I am still on phase I, we are still buying cigar butts ... I think that Buffett is a better investor than me because he has a better eye towards what makes a great business - Seth Klarman

 

 

Genworth is one of those picks that I scratch my head. It is cheap but not good quality. Genworth is a composite of all the crappy insurance businesses that GE did not want: MI USA, MI Canada, MI Australia, variable annuities, long term care, you name it. And most Genworth investors until now have been under the illusion that MI was ring fenced and that is no longer true.

 

To retreat from the MI spinoff is a strong signal that regulators were not keen on it ... and regulators always win. Old Republic, that is a stronger and better insurer, also was stopped from spinning off their MI division. And there are reasons for it, PMI already cracked and MTG is on the verge of collapse. AIG and RDN seem to be the only ones navigating the issues.

 

And after a long twitter chat with David Merkel, it seems they Genworth has all the signals of an insurance company testing the limits of regulatory constrains. His words: "Underreserving, capital stacking, capital interlacing, intercompany reinsurance, intercompany surplus notes and preferred stock too". In other words, similar signs as AIG's pre-crisis of pushing the limits.

 

So Genworth is capital constrained but at the same time I am not saying it WILL collapse, it is just crappy.

 

One thing of US insurance accounting is that it worked wonderfully the last crisis, w/ AIG the notable exception finding a crack for the parent company. After learning the lessons of the early 2000s I think the accounting can be trusted. 

 

BUT ... Genworth doesn't have a lot of degrees of flexibility if things go sour: Australia, Canada, variable annuities, long term care, Europe. The company also has considered "attracting outside capital to the business,"  It is a cigar butt but don't go crazy with it

 

 

 

[Buddy0807]

baupost's gnw investment looks to be around $90mm.  15mm shares times assumed $6 price per share.  maybe they got in lower, who knows.  for perspective, on a $20bn fund, that's 50 basis points.  unless they have continued to acquire shares, they could be looking at it as an "option value" situation.  the bonds probably look uninteresting to them at these levels, but a moody's downgrade may change that.  fwiw, some of the crappier MI companies (MTG, GNW, etc.) are so cheap (notwithstanding the quality, market share loss, etc. issues that plan and others have pointed out), looking at these names like asymmetric options seems interesting provided you size it right in the portfolio. 

[snowball82]

Well, i would have you're advice about this investment idea. The stock price is 5 $ and the company has 12 $ cash per share. The book value is 33 $. The company has alot of issues. Do you think the margin of safety is real ?

 

http://www.reuters.com/article/2012/11/16/idUSWNA965720121116?type=companyNews&feedType=RSS&feedName=companyNews&rpc=43

[Olmsted]

I'd refer to the entirety of Plan's post of August 13, 2012 concluding "cheap, but not good."  Poor MoS.  Maybe if we see some catalysts really start to unfold it would be time to reassess, but I long ago moved on to greener pastures.

[snowball82]

We can buy this company 7.18 $, intrinsic value 14 $ ?

 

News catalysts here :

 

1) New Chief, Thomas J. McInerney, who was appointed on a permanent basis as from 1 January 2013;

2) 3 non-strategic activities were identified, their sales could increase the capital stock of the parent company (ref. p. Recent MD 99);

3) Increase margins in progress (page 89 * Extract last quarterly report);

4) Institutional investors start to buy the title. Investors values ​​(Seth Klarman, Ray Dalio, David and Edward Lampert Einhorm) has already somewhat begun;

5) In the longer term, higher interest rates will raise the profitability through better returns that can be generated.

 

Do we have a sufficient margin of safety to cover the risk discount credit agencies?

 

 

 

[constructive]

Genworth is a lousy company, but 0.25x tangible book (below every other life insurer and mortgage insurer) is way too cheap. I put current fair value around 0.6x book, with more upside if McInerney is effective.

 

I guess the market applies a large conglomerate discount since Genworth has several non-strategic lines of business. However, my main problem with them is not foreign MI or asset management - it's life insurance. Life and LTC are their core businesses, earning pitiful returns on capital.  Selling non-core business to raise cash would be positive, but the main thing I want to see is cost cutting in life.

[CorpRaider]

I was looking at this one closely, but I think I missed it.  Darn Barron's article.  I like the shareholder base too.  Lots of smarties bought/owned it during Q4 2012.  ESL, Greenblatt and Klarman; oh my.

[ScottHall]

I haven't looked at their capital structure much, but I spent a bit of time trying to figure out a way to short Canadian real estate and look a look at their Canadian mortgage insurance subsidiary (it trades in Canada). The thing is so heavily leveraged that it's unbelievable.