In 2017 Genworth (GNW) posted its second best year since the financial crisis and the shares are currently undervalued. The company helped reduce concerns regarding the 2018 debt payments by recently adding a credit facility at the holding company. This brings the GNW holding company cash, borrowing capability, 2018 dividends and transfer payments to over $1.5 billion. This compares to roughly $800 million in maturities and interest due in 2018. However, the shares have declined 18% since 2016 year end giving investors an opportunity. The decline is partially due to the acquisition of Genworth by China Oceanwide for $5.43 per share. This has limited the upside of the shares and dampened investor enthusiasm. Also, investors are concerned about the (GLIC) long term care subsidiary, although there is no requirement for Genworth or its other subsidiaries to support GLIC. Please see our November 2016 report for further information on the corporate structure and the subsidiaries of Genworth. We do not believe GLIC poses a threat to GNW shareholders but as we said in 2016: “The main problem is the accounting annoyance from a GAAP basis.” We value GNW as being worth $8 per share.
GNW owns three insurance subsidiaries: Genworth Life Insurance Co. (GLIC), Genworth Life Annuity Insurance Co. (GLAIC) and an insurance subsidiary referred to as “other.” GLIC owns GLAIC and removing GLAIC from GLIC is part of the effort in the recent years and a requirement for the China Oceanwide buyout. This would deliver valuable assets to the holding company and allow for dividends. We value all of the insurance subsidiaries as being worth $1.3 billion. Genworth has three mortgage insurance subsidiaries that we value at $6.1 billion. Two are publicly traded, Australia and Canada, and the third U.S. mortgage Insurance (USMI) is wholly owned. We value USMI at $4.1 billion (9 X 2018 earnings and 1.8 X book value). Below is our sum of the parts analysis.
|GNW Component Value Subsidiary||Value in billions $|
|As of December 31, 2017|
|Genworth Canada (MIC.TO)||1.500|
|Genworth Australia (GMA.AX)||0.475|
|Holding Company Cash||0.870|
|GLIC, GLAIC & Other||1.300|
|Holding Company Debt||3.500|
|Sum of the Parts||4.745|
|Per share Value||$9.55|
Fourth quarter included a large tax reversal, a change in premium recognition at the Australia sub and a truing up of the reserves at the Life insurance sub. We estimate the normalized adjusted net income for the fourth quarter to be 19 cents and $1.13 for the year. Below is our estimate of various adjusted numbers for 2017
|2017 year adjusted||Amount|
|Proportional Subsidiary Operating Income|
|$ 1,154 mm|
|Proportional Subsidiary Net Income|
|$ 745 mm|
|Net Income||$ 545 mm|
|2017 EPS Diluted||$1.13|
Here are our comparisons to Genworth’s mortgage subsidiary with the two publicly traded comparisons as of March 9, 2018
|Price to book||1.63||1.8||1.75 est.|
|Forward PE||9 X||10 X||9 X est.|
|Enterprise Val.||$ 5.9 B||$ 6.2 B||$ 4.1 B est.|
|Market Cap||$ 4.8 B||$ 5.47 B||$ 4.1 B est.|
GNW is currently in attempts to sell itself to China Oceanwide for $5.43 per share but we believe that this is unlikely due to the lack of regulatory approvals and the increase in the payment for the “unstacking”. The unstacking is the removal of the Life insurance and annuity sub (GLAIC) from the LTC sub (GLIC) and the placement of GLAIC at the Holding Company and is required for the buyout to be completed.
On a good note, GNW also resumed conference calls after a one year lapse (partially due to our letter to the board). Overall the conference call was positive. USMI will begin to pay dividends this year and there will be special dividends from Australia. In our letter to the board we stated: “This acquisition was couched in terms of needed liquidity and failed bids. This false picture was presented, in order to create the ecosystem necessary to complete the deal and is costing the shareholders hundreds of millions if not billions of dollars”. We encouraged the board and management to act decisively and project a positive outlook. So, although the 2018 maturity has been mentioned as a challenge we believe this was part of the “false picture.” The bond market agrees because the 2018 bonds have never really traded below par or 100 in the last year. If we include the publicly traded shares at the holding company and the possibility of selling part of USMI the Genworth holding company has always had over $3 billion in available liquidity.
At this point GNW, is a healthy viable company with operating income growth of 100% from 2016 to 2017 but the shares trade at an 80% discount to the market and a ridiculous 2.75 X earnings due to misconceptions on Long Term Care Liabilities and the upside limiting China Oceanwide buyout. The average analyst earnings estimates for 2018 is 99 cents. GNW owns $125.00 in bonds per share and will be an extreme beneficiary as interest rates rise. A 1% higher portfolio yield would have produced an additional $1.25 in pre-tax net income in 2017. If interest rates rise we should see a corresponding rise in Genworth’s investment income over time. We value the shares at $8, which is our price target, but we caution investors not to buy shares above the $5.40 level in case somehow the buyout is consummated.
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. I have no business relationship with any company whose stock is mentioned in this article.