Has Genworth Financial Risen Too Far Too Fast?
Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Genworth Financial's (NYSE: GNW) stock has been on a roll during the past year. So far this year, shares have gained 75%--but is this too high? Genworth has been bid up as investors note the positive sentiment in the housing market, rising house prices and a recovery in the mortgage-reinsurance market. However, although Genworth's stock has moved higher thanks to a return to risk, the company could have gone too far.
In particular, while Genworth is considered to be a good play on the mortgage-reinsurance market, the company is actually more of a life insurance company than anything else. Indeed, income from Genworth's US mortgage-insurance division only accounted of 14% of net income during the first quarter of this year. In addition, income from the company's life insurance and international mortgage- insurance operations was four times more than the income received from US mortgage insurance.
Genworth is not a pure play on the US housing recovery
Genworth's international mortgage exposure is mostly in the Australian and Canadian housing markets, both of which are considered by some to be in the midst of a housing bubble. So, considering the risks to the housing markets in Canada and Australia, Genworth could be heading for more trouble just as its US- based mortgage business starts to recover.
Indeed, on valuation grounds, it is not possible to compare the company to its mortgage-insurance peers MGIC and Radian. This is due to Genworth's exposure to the life insurance market, which has helped the company stay profitable for the most part during the past five years.
So, based on the grounds that Genworth is more of a life insurer, with significant exposure to the precariously placed housing markets in Canada and Australia, how does the company look on valuation grounds compared to its life insurance peers?
Genworth's valuation compared to life insurance peers
Well, a quick glance at the market quickly reveals that Genworth's significantly larger peers, Reinsurance Group of America (NYSE: RGA) and Prudential Financial (NYSE: PRU), trade on much lower forward valuations (the use of trailing-12 month valuations for Genworth are not relevant based on the poor state of the company's US mortgage division last year.)
On average, it would appear that the market has placed a premium on Genworth and the company now looks slightly overvalued compared to its life insurance peers.
A better outlook
As well as being more expensive, there is also more uncertainty over Genworth's future outlook. From property markets in Australia and Canada to the volatile mortgage markets in the US, Genworth is facing uncertainty over more than half of its net income.
Meanwhile, Reinsurance group of America has a stronger outlook. Yes, the company fell into a loss on higher-than-expected charges from its Australian division, although it is still highly profitable in other regions. Plus the company recently expanded its $400-million buyback program, which should reduce the total amount of stock in issued by around 10%. The buyback is well funded by free cash flow with room to spare.
Prudential also has a bright outlook, which has only been reinforced by Moody's recent upgrade of the company's debt. Like Genworth, Prudential is somewhat of a recovery play. But the company has several intangible assets, such as a strong brand name and market-leading position, which make it stand out from its peers. Furthermore, Prudential operates in key defensive markets such as life insurance, retirement products and international life insurance operations; key drivers for growth.
Indeed, Munich RE expects primary life insurance premiums written to grow by 2.5% during 2013 and 3.6% during 2014 with much of this growth coming from the Eastern European, Latin American and Asian markets, where Prudential has significant exposure -- more than Genworth for example. The gross value of premiums written in some emerging markets is expects to grow between 10% and 15%, and considering Prudential's low valuation, it would appear that investors and the wider market are not fully considering the value on offer.
Overall, it would appear as if Genworth currently looks overvalued compared to its peers in the life insurance sector. Indeed, it would appear as if Genworth has been bid-up on the back of the recovering mortgage market but the company has a very limited exposure to this market. And it seems as if investors have been overly optimistic when considering the company's outlook.
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Fool contributor Rupert Hargreaves has no position in any stocks mentioned. 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!