A Decent Move for This Insurance Company

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Genworth Financial (NYSE: GNW) just popped as much as 14% in one trading day right after announcing its plan to separate the mortgage insurance business. I personally considered Genworth as a mis-priced insurance company, which had a near-term upside potential. The plan might be initiated by Thomas J. McInerney, who was recently appointed to be a President and CEO last month. Should investors get excited about the business separation plan? Is Genworth a good investment opportunity at the current price?

US Mortgage Business Has Been a Drag

Genworth is a financial security company that was incorporated ten years ago. The company provides wealth management, investment, and insurance services to 15 million customers in 25 countries. The biggest revenue contributor was the US Life Insurance segment, with $6.13 billion in 2011. International Mortgage Insurance and International Protection came second and the third, with $1.5 billion and $1 billion in revenue, respectively. Genworth had a low operating income due to its mortgage insurance unit. US Mortgage Insurance generated nearly $720 million in revenue, but it had an operating loss of around $477 million. Indeed, the mortgage insurance business has been a drag for Genworth’s consolidated financial statements.

A Capital Plan – The Right Move

In the middle of January, Genworth announced a plan for its US Mortgage Insurance business to decrease the risk to capital in the Genworth Mortgage Insurance Company, or GMICO, by 12 to 15 points. Thus, US Mortgage Insurance would be less likely to require additional capital in the near future. The plan includes several details. First is the ownership transfer of its European insurance businesses to GMICO. These subsidiaries would provide around $200 million in additional statutory capital to GMICO. Second is to implement a “NewCo” type structure, which would allow for writing new business in all 50 states. A new US mortgage insurance company would have no legacy obligation to GMICO. Genworth has also agreed to add $100 million of cash to GMICO, and another $100 million in the event that GMICO might not have enough resources to pay for claims. Kevin Schneider, the president of Genworth’s Global Mortgage Insurance Division said:

One of Global Mortgage Insurance's strategic priorities was maintaining the ability to write new profitable business in U.S. Mortgage Insurance while focusing on a return to profitability. One of Global Mortgage Insurance's strategic priorities was maintaining the ability to write new profitable business in U.S. Mortgage Insurance while focusing on a return to profitability”.

Many famous hedge fund managers have shown their confidence in this insurance company through their positions. Edward Lampert owned more than 12 million shares in the company, while Seth Klarman had more than 15 million shares. David Einhorn initiated a long position in Genworth in the second quarter, with nearly 660,000 shares. Ray Dalio purchased nearly 250,000 shares in the second quarter.

Lowest Valuation Among Peers

Compared to other insurance peers, including Metlife (NYSE: MET) and Prudent Financial (NYSE: PRU), Genworth had the smallest market capitalization. Genworth had only $4.5 billion in total market capitalization, whereas Metlife had $39.62 billion in market cap. Prudential Financial is worth $26.78 billion in the stock market. Genworth is trading at $9.15 per share. The market is valuing Genworth at 5.8x forward earnings and only 30% of its book value. Metlife is trading at 6.8x forward earnings and 60% of its book value. Prudential has the most expensive valuation, with 8.1x forward earnings and 0.7x book value. 

Foolish Takeaway

The business separation plan was definitely the right move for Genworth to clean up its operating businesses. The shares have gone up significantly, from $4.32 per share in August 2012 to $9.15 per share now. However, I would still think Genworth is a good investment opportunity at the current price for value investors. 


hoangquocanh has a position in Genworth Financial. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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