GNW - Genworth Financial

[StevieV]

The deal closing is hard to handicap.  But, as you suggest, I think the odds have gone up recently.  I used to think it was more likely than not that the deal wouldn't close.  I haven't reconsidered recently, but I think that may have flipped.

 

Importantly, the business seems to be doing ok.  GNW's operations don't need to be that great to justify the current stock price.

 

Putting that together, I would tend to agree that the expected value of GNW is above today's price.

[johnpane]

CFIUS is allowing the transaction to go forward.

 

I estimate a 95% probability the deal closes now that this hurdle is passed.

 

 

 

 

http://investor.genworth.com/investors/news-releases/archive/archive/2018/Committee-on-Foreign-Investment-in-the-United-States-Completes-Review-of-Proposed-China-Oceanwide-and-Genworth-Financial-Transaction/default.aspx

 

[StevieV]

CFIUS is allowing the transaction to go forward.

 

I estimate a 95% probability the deal closes now that this hurdle is passed.

 

 

 

 

http://investor.genworth.com/investors/news-releases/archive/archive/2018/Committee-on-Foreign-Investment-in-the-United-States-Completes-Review-of-Proposed-China-Oceanwide-and-Genworth-Financial-Transaction/default.aspx

 

I also think it is very likely the deal goes through now.  Obviously, the market (correctly, IMHO) saw this as the big hurdle.  Now there is about a 12% discount to the buyout price.

 

 

[StevieV]

The price is drifting back down a bit from the post-announcement bump.  Buyout price is now a little bit more than 16% above the current price.

 

I am looking for about $5.20 to dispose of my small stake (depending on the timing).  Not sure if that is the right number.

[Richard]

I apologise for thread necromancy, but in case there are still masochists left or if you want to join the club, the merger might finally complete after umpteenth extensions: Genworth and Oceanwide Provide Transaction Update

[Patmo]

I'm curious if anybody is still interested in this stock. The deal is finally falling apart and the stock could re-rate to a going concern valuation instead of a merger arbitrage discount, once it is finally definitively terminated. And if COW comes back with financing, the waiting time to close will then be significantly shortened as most of the legwork is already done, so a solid annualized gain from here.

 

As a going concern, valuation is completely out of whack. Qualitatively, the company's main thorn is being dissipated - the LTC unit continues to recover at a nice pace. The US mortgage insurance business continues to deliver, though I'd expect it could hit a wall soon with the COVID stuff. Corporate overhead cuts were made to the tune of about $50mil annually mostly at the holdco level. I expect these cuts to be "trim the fat" cuts rather than "chew through the bone" given the circumstances. They're going to IPO 20% of USMI to maintain a reasonable liquidity buffer while they satisfy near term obligations - there seems to be a strong appetite for it in the markets, they already received an offer for a 100% private takeout.

 

Quantitatively is where the valuation makes no sense, at $3.2ps price is at ~10% of book value - all the assets are marked to market, and the liabs include quite conservative provisions. It's going to earn over $1ps next year, so about 3x earnings. Worse performing comps are trading at 3x the valuation. Essentially the price has been super depressed artificially to enact a spread for merger arbs and there is still overhang since the transaction is not definitively terminated.

 

It's been a painful few years as I originally viewed it as a "heads I win, tails I win a little less" stock, and the worst case scenario that I envisioned has happened: deal just refused to either close or terminate. It looks like it might start to pay off, at a slightly more attractive price than originally to boot.

[johnpane]

I wouldn't count on a quick payoff. Isn't most of that book value in the GLIC subsidiary and its subs, which won't pay any dividend to the holding company for the foreseeable future. A key question is, if GLIC is essentially a zero, what is the rest of the company worth? To pay upcoming debt, GNW is banking on an IPO of USMI, but that unit is not in a position of strength, hobbled by forbearance and unknown delinquency cure rates. If OW comes back to the table, the never ending cycle of seeking regulator approvals will resume, yet the refusal to cancel the merger means the transaction price acts as a cap on share price. Same regulator issue, even worse, if some other white knight swoops in for the whole corp. If they completely sell off USMI to some interested party, power to generate holding company cash flow will be almost gone.

 

[StevieV]

Here is what I wrote on the Favorite Ideas of 2021 thread:

 

"

From the headlines, it doesn't seem like they totally killed the deal today.  Why not?

 

Isn't the management a big problem?  Failed to execute a sale for more than 4 years and apparently created no value over that time as they claim that is still the best deal.  I don't know how there could be a much clearer case for the CEO losing his job, but he remains.

"

 

 

[Patmo]

I wouldn't count on a quick payoff. Isn't most of that book value in the GLIC subsidiary and its subs, which won't pay any dividend to the holding company for the foreseeable future. A key question is, if GLIC is essentially a zero, what is the rest of the company worth? To pay upcoming debt, GNW is banking on an IPO of USMI, but that unit is not in a position of strength, hobbled by forbearance and unknown delinquency cure rates. If OW comes back to the table, the never ending cycle of seeking regulator approvals will resume, yet the refusal to cancel the merger means the transaction price acts as a cap on share price. Same regulator issue, even worse, if some other white knight swoops in for the whole corp. If they completely sell off USMI to some interested party, power to generate holding company cash flow will be almost gone.

 

If COW returns with financing it won't be a quick payoff, but still not a 5+ year grind. Call it 2 years, annualized it's a good return from here. Definitely not the ideal scenario nevertheless. They're discussing moving towards a JV into China instead. I'm not sure how I feel about this.

 

GLIC assumption of a zero is overly conservative nowadays, rate increases continue to be approved and the life insurance unit is recovering materially. There is no point operating on that basis a priori.

[Patmo]

Here is what I wrote on the Favorite Ideas of 2021 thread:

 

"

From the headlines, it doesn't seem like they totally killed the deal today.  Why not?

 

Isn't the management a big problem?  Failed to execute a sale for more than 4 years and apparently created no value over that time as they claim that is still the best deal.  I don't know how there could be a much clearer case for the CEO losing his job, but he remains.

"

 

I might be wrong, but I opine the deal is dead in the water and all parties are posturing a little right now to save face. GNW knows the business is not where it was years ago, and even then the deal wasn't a cracker according to the market, it was barely above trading price on the day of announcement and shares had been trending upwards significantly at the time. On the other side, COW doesn't have the funding to close it in the first place so it's a nonstarter.

 

I agree the length of time it took for this deal to close only to be surprised at the last minute by the buyer turning out too broke is quite ridiculous. But that's rear view mirror stuff and right now shares are trading on the low end of average since merger arbs took over the stock.

 

Just a return to the market's natural valuation pre-merger is still a 60% gain from here and you get the last 4-5 years for free (aka PAIN free).

[johnpane]

GLIC assumption of a zero is overly conservative nowadays, rate increases continue to be approved and the life insurance unit is recovering materially. There is no point operating on that basis a priori.

 

Maybe. Did you notice the sudden increase to $22B from $16B in the NPV of necessary premium increases, and that the rate at which regulators are approving these has been decreasing over the past 3 years?

[Patmo]

I wouldn't count on a quick payoff. Isn't most of that book value in the GLIC subsidiary and its subs, which won't pay any dividend to the holding company for the foreseeable future. A key question is, if GLIC is essentially a zero, what is the rest of the company worth? To pay upcoming debt, GNW is banking on an IPO of USMI, but that unit is not in a position of strength, hobbled by forbearance and unknown delinquency cure rates. If OW comes back to the table, the never ending cycle of seeking regulator approvals will resume, yet the refusal to cancel the merger means the transaction price acts as a cap on share price. Same regulator issue, even worse, if some other white knight swoops in for the whole corp. If they completely sell off USMI to some interested party, power to generate holding company cash flow will be almost gone.

 

Another thought that sprung to mind as I wrote my last post, is that the market naturally valued GNW at $5.20ish standalone, including GLIC at 0. You don't even have to decide how much GNW is worth under that scenario, the market already said what it thinks.

 

So in a vacuum, your only risk here would be opportunity cost from other investments compared to the annualized yield you expect from further delays/merger overhang, as you make 60% profit whether the (or a) deal finally closes or GNW continues as a going concern. Waiting another, say, 5 years for a 60% gain would suck, but on an absolute basis, it wouldn't make sense not to take the bet.

[johnpane]

The company does seem considerably better off than when the market "naturally" valued it at $5.20. Can they pay off their 2021 and 2022 obligations without having to do something dilutive?

 

[Patmo]

GLIC assumption of a zero is overly conservative nowadays, rate increases continue to be approved and the life insurance unit is recovering materially. There is no point operating on that basis a priori.

 

Maybe. Did you notice the sudden increase to $22B from $16B in the NPV of necessary premium increases, and that the rate at which regulators are approving these has been decreasing over the past 3 years?

 

Rates increased 34% over prior year, still very large even compared to the 45% 2018 average which was anomalous. The 2020 increase was nevertheless higher than historical average. On an absolute basis, they also increased more than the 45% back then (eg. $1.45 x 34% =$.49) - correct me if I am wrong.

 

I'm not sure what to make of the sudden increase in NPV necessary, in fact I missed it. I could provide some speculation as to why, but that would just be that, speculation. The fact remains that rate increases have been approved for a number of years now, and the program will be tilted back into balance within a couple years if it hasn't already.

 

 

[Patmo]

The company does seem considerably better off than when the market "naturally" valued it at $5.20. Can they pay off their 2021 and 2022 obligations without having to do something dilutive?

 

From the MD&A and judging from current position, it appears that they could pay off 1 or the other, but likely not both. They could always try refinancing but I presume the debt markets would not be hot on it. They don't seem keen on the idea themselves, strategically speaking deleveraging has been a cornerstone of their plan.

 

In that sense, the IPO is a risk as flopping would be bad news and alternatives are not fleshed out currently. On the flip side, MD&A commentary suggests there is more than sufficient appetite for it - after all, it would be the piece that investors would want the most out of GNW right now. Like you, I have concerns as to USMI's true long term value, but not everybody sees eye to eye.

 

[johnpane]

Rates increased 34% over prior year, still very large even compared to the 45% 2018 average which was anomalous. The 2020 increase was nevertheless higher than historical average. On an absolute basis, they also increased more than the 45% back then (eg. $1.45 x 34% =$.49) - correct me if I am wrong.

 

Those rate increases do not compound unless the same policies are in both rate actions. The 2018 set of policies acted upon may be mostly disjoint from the 2020 set which impacted about 38% of their in-force premiums.

 

 

 

[johnpane]

I'm not sure what to make of the sudden increase in NPV necessary, in fact I missed it.

 

This was mentioned on the earnings call, "We now project the need for $22.5 billion in LTC premium increases and benefit reductions on a net present value basis."

 

I had to go back a bit to document that this was $16B, but they said this in the 2018 10K, "$10.5 billion, on a net present value basis, or approximately 65% of the total amount required under our multi-year in-force rate action plan in our long-term care insurance business."

[Patmo]

Rates increased 34% over prior year, still very large even compared to the 45% 2018 average which was anomalous. The 2020 increase was nevertheless higher than historical average. On an absolute basis, they also increased more than the 45% back then (eg. $1.45 x 34% =$.49) - correct me if I am wrong.

 

Those rate increases do not compound unless the same policies are in both rate actions. The 2018 set of policies acted upon may be mostly disjoint from the 2020 set which impacted about 38% of their in-force premiums.

 

Indeed, thanks for the clarification.

[johnpane]

The company does seem considerably better off than when the market "naturally" valued it at $5.20. Can they pay off their 2021 and 2022 obligations without having to do something dilutive?

 

From the MD&A and judging from current position, it appears that they could pay off 1 or the other, but likely not both. They could always try refinancing but I presume the debt markets would not be hot on it. They don't seem keen on the idea themselves, strategically speaking deleveraging has been a cornerstone of their plan.

 

From 10K:

 

On January 13, 2021, Moody’s took additional action and downgraded the credit rating of Genworth Holdings’ senior unsecured debt from “B3” (Speculative) to “Caa1” (Speculative). The additional downgrade reflects the stalled deal with China Oceanwide and the need to raise additional liquidity to address debt maturities due in 2021 and beyond. (p. 23)

 

We may decide to take additional measures to increase our financial flexibility, in the absence of the China Oceanwide transaction, including issuing equity at Genworth Financial which would be dilutive to our shareholders, or additional debt at Genworth Financial, Genworth Holdings or GMHI (including debt convertible into equity), which could increase our leverage. The availability of any additional debt or equity funding will depend on a variety of factors, including market conditions, regulatory considerations, the general availability of credit and particularly important to the financial services industry, our credit ratings and credit capacity and the performance of and outlook for our company and our businesses. Market conditions may make it difficult to obtain funding or complete asset sales to generate additional liquidity, especially on short notice and when the demand for additional funding in the market is high. Our access to funding may be further impaired by our credit or financial strength ratings and our financial condition. See “—Our internal sources of liquidity may be insufficient to meet our needs and our access to capital may be limited or unavailable. Under such conditions, we may seek additional capital but may be unable to obtain it.” (p. 49)

 

In connection with repaying our senior notes maturing in September 2021, Genworth Holdings expects to have a cash shortfall of approximately $15 million which raises doubt about our ability to meet our financial obligations within the next year. While conditions and events occurring and expected to occur raise doubt about our ability to meet our financial obligations, management’s plans alleviate this doubt. We believe that our plans, along with existing cash and cash equivalents, will provide Genworth Holdings sufficient liquidity to meet its obligations and maintain business operations for one year from the issue date of the consolidated financial statements. (p. 196)

 

 

 

 

[Patmo]

With Q1 out, curious what are people on here still following GNW's thoughts.

[Patmo]

I guess I'll get the discussion going, my view is still the same as before, the life segment is not a 0 as everybody assumes a priori but proof is about 4 years away still, and despite a trend of premium increases that spans almost a decade now, the remaining requirement's too long of a timeframe for skeptics to change their excel input for (and also skepticism over whether that would be enough in the first place). In a couple years from now, the value guys will start warming up to this thesis, and eventually the suits will start following into the ticker.

But that's just my outlook on the life insurance division and I'm naturally alone on this. Even considering life a 0, the shares are still discounted. Mark USMI at ~5b in line with comps (about to IPO so we'll get a confirmation on market valuation - big catalyst & resolves any and all upcoming obligations), capitalize corporate at ~-1b  and runoff at ~.5b, for a valuation just shy of $9ps. If life doesn't pan out as I claim with my crystal ball, it's still 50 cents on the dollar anyway...

[johnpane]

At the midpoint of the IPO range the implied value of USMI is $3.58B. 

If we take corporate assets - liabilities, plus this value for USMI, the implied value of GNW is $6.51 at the midpoint of the IPO range. Spreadsheet attached.

This assumes the other subs have no value, which is conservative. Interested in how to improve this calculation of the implied value of GNW stock.

ACT GMHI IPO.xlsx

Edited May 4, 2021 by johnpane
clarify wording