Quick Look - Genworth Financial

An American Insurance Company

Welcome back to another entry in the “Quick Look” series, today we’re going to be taking a quick look at an American Insurance company Genworth Financial.

What is “Genworth Financial”

From their annual report, we can see that Genworth Financial is an American insurance company dealing primarily in mortgage insurance. 

In addition to their existing mortgage insurance business, Genworth also has a substantial amount of liabilities related to their legacy and now discontinued life insurance business. This business which has been discontinued for some time has become a large drag on the company in general, and Genworth is looking into ways to reduce such a burden.

In addition to their US operations, Genworth has previously done business in Australia and Canada, though they have recently divested themselves from those businesses.

Why its interesting

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger with Asia Pacific Global Capital Co., Ltd., a subsidiary of China Oceanwide, a Chinese insurance company with global operations.

China Oceanwide agreed to acquire all of Genworth's outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

Unfortunately the merger never took place, and after 4 years and multiple extensions to the deadline with no signs of China Oceanwide being able to acquire the funds required to finalize the merger, Genworth announced on April 6th 2021 that the merger agreement had been terminated.

With the merger agreement terminated, Genworth is now free and able to pursue its revised strategic plan without restrictions and without uncertainty regarding its ultimate ownership, which might impact the Company's ability to successfully execute the plan.

The Company's revised strategic plan includes a potential partial initial public offering (IPO) of its U.S. Mortgage Insurance business subject to market conditions as well as the satisfaction of various conditions and approvals.

Genworth has already executed important steps under its revised strategic plan, including the sale of Genworth's interest in its Australian mortgage insurance business and actions to align its expense structure with current business activities.

These steps expand on actions the Company has taken over the last several years to strengthen its financial position, including the sale of its Canadian mortgage insurance business, the completion of a $750 million debt offering at the U.S. MI holding company and the negotiation of a settlement with AXA S.A. 

Finances

That strengthened financial position is what initially attracted me to the company, or to be more specific, the unusually low price to book ratio.

You see, Genworth Financial is trading at around one fifth of its book value.

In other words, if you were to buy the whole company, pay off all of its liabilities and shut it down, you would be making 5 times your money.

Such a huge disparity is not often seen, and indeed here it is the result of the double whammy of unusually bad liabilities related to their legacy and now discontinued life insurance business, combined with the drawn out and disastrous failure of the China Oceanwide merger.

Most of the assets owned by Genworth are corporate fixed rate maturities issued by US companies, indeed of the roughly $61 billion of their assets around 60% are in such U.S. corporate fixed maturity securities, with the remainder coming from either non-US corporate, or US government securities.

Their remaining assets are equally “hard” and result from their regular operations.

In other words, the majority of their assets are effectively cash, or fairly easily converted into cash without too much “deadweight loss”.

Their liabilities too result primarily from their day to day operations, namely future policy benefits, policy account holder balances, and so on. 

Their debt levels are high, but their divestment of Australian and Canadian businesses have been able to keep them afloat, and they now have an opportunity to either bring back the company, or close it down entirely. 

The Opportunity

Ultimately a discerning, courageous and knowledgeable investor may be able to make an investment in Genworth that may be able to make back his money, and then some!

This is an asset play through and through, and investors would be purchasing the company in order to own huge amounts of corporate fixed rate maturities that Genworth owns, in the hopes that at some point in the future either the market in general, or a private equity firm will look into this pile of “gold” Genworth is sitting on, and make a suitable offer for it.

If you’re interested in more information on these assets, I would suggest you have a look at their latest anual report, where those assets are broken down.

Here’s a quick preview:

That being said, this is a distressed company, that may well go out of business, and anyone thinking of investing would do well to dig deeper than I have before putting any money in it.

To me, I’m not investing yet. 

Genworth may well be a wise investment, but the amount of effort and domain related knowledge that it would take for me to be sufficiently informed about the company to feel comfortable investing is too high for me to justify.

I may lose out on a 5-bagger, but that’s alright with me.

What about you? Are you interested in Genworth? Do you think this is a suitable asset play? 

Let me know what you think!

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