GENWORTH FINANCIAL INC GNW
January 22, 2009 - 10:47am EST by
jriz1021
2009 2010
Price: 2.00 EPS $1.961 $1.951
Shares Out. (in M): 433 P/E 1.1x 1.2x
Market Cap (in $M): 866 P/FCF NA NA
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT NA NA

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Description

Summary

I am pitching Genworth Financial (GNW) as a compelling risk/reward trade.  No one in this environment can say that a leveraged institution such as a life insurer, can't under some circumstances, be a zero (i.e., unstable capital markets make regulators worry about capital adequacy).  However, I believe there is a reasonable case that GNW can go from $2.00 to $6.00.  I'm going to test out the new VIC formatting and try to paste in as many of my charts and assumptions as possible so that the community may fully vet this contrarian, yet potentially extremely lucrative, idea.  I think it will be best to print out these charts and then read the accompanying commentary.    

Genworth is a life insurer with problems.  Lots of problems.  It has three main divisions - Retirement and Protection, International Mortgage Insurance, and U.S. Mortgage Insurance.  Other VIC members have made the case for some of the other U.S. Mortgage Insurers, and I refer the reader to them for a more fulsome description of this business (MTG, PMI, etc.).  Despite the fact that many of those pitches have not worked out, their reasoning is sound and the ideas are solid.  That said, I am attributing no value to GNW's U.S. MI business.  The R&P and Int'l MI businesses are trucking right along, relatively speaking.  The company wrote international MI in Australia and Canada - two markets structurally different from that of the U.S.

In terms of analytical methodology, I feel the best way to value insurers in this market is to attempt to mark their assets to "real" market, and then make some sort of qualitative judgment of what their earnings power might be going forward in a normalized environment to gauge one's margin of safety.  Below I have laid out GNW's assets and liabilities and tried my best to roughly "mark" the assets.  Undoubtedly there are readers who will disagree with my admittedly rough valuations (5% discount on corporate bonds?  How do you derive that?), but my hope is that all who are interested in this pitch can plug in their own assumptions and gauge the potential return characteristics. 

In terms of valuation, I have 1) marked down the entire "fair value" asset portfolio (from 9/30/2008) by approximately 8% (see below for the breakdown), 2) attributed NO VALUE to the U.S. MI business, 3) subtracted off goodwill and other intangibles, and 4) added back the tax benefits from losses (excluding U.S. MI).  This gives me a tangible book value per share of $5.77.  Each 1% change in the value of the assets changes this valuation by approximately $1.00 of tangible book.  Thus, I feel an investor is paying 1/3 of "real" book value and attributing no value whatsoever to the ongoing cash flow capability of the business, PLUS one has a free option on the company receiving ANY value for the U.S. MI business (through a spin-off or otherwise). 

The company has $1.1 billion in debt maturities in 2009.  The company has $1.3 billion of cash at the HoldCo entity, as well as approximately $1 billion of incremental revolver availability, if needed.  In addition, the company is free cash flow positive.  A few months ago the two 2009 maturities were trading in the mid 50s and 60s on concern that GNW could not pay them off.  As those concerns abated, the bonds have traded to near par once again.  I believe that over the next 12 months, as the company addresses its near-term maturities, people will begin to look beyond the near-term headwinds and examine the real, fundamental value of the business, and we could see a massive repricing of the equity.  All of the large life insurers have announced bad news over the past several months - HIG, PRU, GNW, and others.  Each time one insurer announces a problem, all of the insurers trade down.  GNW has gone down every time one of the other insurers has disclosed something - whether or not GNW has a similar problem or not. 

Not every single financial company in America is a zero.  For GNW, on a probability weighted basis, the risks lie to the upside, not to the downside.  As a final note, unlike many financial companies, GNW gives a great deal of disclosure (almost too much!) and there are a lot of nuances to discuss further if members are interested.  

Capital Structure

Cash



1,365.0 HoldCo only; the CP is collateralized by ~200 mm of cash












$1 billion Revolver A due 2012

465.0 $172 mm of LCs



$1 billion Revolver B due 2012

465.0

















Commercial Paper


200





1.6% Yen Notes due 2011

510





5.23% Senior Notes due 2009     600 5/16/09  



4.75% Senior Notes due 2009     500 6/15/09  



5.65% Senior Notes due 2012

350





5.75% Senior Notes due 2014

599





4.95% Senior Notes due 2015

350





6.50% Senior Notes due 2034

296





6.15% Junior Notes due 2066

598





Other Debt


505





Preferred



100





Total



4,608

















Total Cash


7,130 As of 11/17/2008, PF for revolver drawdown












Share Price


$2.00





Shares Outstanding


433.1





Equity Value


866.3





Consolidating Balance Sheet






Retirement and








Protection Int'l U.S. MI Corporate Total










Assets








Cash and investments

53,836 10,083 3,115 3,077 70,111
Deferred acquisition costs and intangible assets 9,135 1,052 38 96 10,321
Reinsurance recoverable

16,322 136 305 0 16,763
Other assets


158 101 246 764 1,269
Separate account assets

11,097 0 0 0 11,097
Total Assets


90,548 11,372 3,704 3,937 109,561










Liabilities








Future policy benefits

28,017 0 0 0 28,017
Policyholder account balances

35,538 27 0 0 35,565
Liability for policy and contract claims
2,864 597   3 3,464
Unearned premiums


549 4,679 117 0 5,345
Non recourse funding obligations
3,555 0 0 (100) 3,455
Deferred tax and other liabilities

2,008 1,462 50 2,680 6,200
Borrowing and capital securities

0 0 0 4,608 4,608
Separate account liabilities

11,097 0 0 0 11,097
Total Liabilities


83,628 6,765 167 7,191 97,751










Equity








Allocated equity


8,773 4,337 2,358 (3,151) 12,317
Allocated accumulated other comprehensive income (1,853) 270 (133) (103) (1,819)
Total Equity


6,920 4,607 2,225 (3,254) 10,498
Total Liabilities and Equity

90,548 11,372 2,392 3,937 108,249










Book Value Per Share

$15.98 $10.64 $5.14 ($7.51) $24.24

 

Adjusted Book Value - Excluding MI - Q3 08






Retirement and









Protection Int'l U.S. MI Corporate Total











Assets









Cash and investments

49,884 9,321 2,880 2,846 64,931
Deferred acquisition costs and intangible assets 9,135 1,052 38 96 10,321
Reinsurance recoverable

16,322 136 305 0 16,763
Other assets


158 101 246 764 1,269
Separate account assets

11,097 0 0 0 11,097
Total Assets


86,596 10,610 3,469 3,706 104,381











Liabilities









Future policy benefits

28,017 0 0 0 28,017
Policyholder account balances

35,538 27 0 0 35,565
Liability for policy and contract claims
2,864 597 1,312 3 4,776
Unearned premiums


549 4,679 117 0 5,345
Non recourse funding obligations
3,555 0 0 (100) 3,455
Deferred tax and other liabilities

2,008 1,462 50 2,680 6,200
Borrowing and capital securities

0 0 0 4,608 4,608
Separate account liabilities

11,097 0 0 0 11,097
Total Liabilities


83,628 6,765 1,479 7,191 99,063











Equity









Allocated equity








Allocated accumulated other comprehensive income





Total Equity


2,968 3,845   (3,485) 3,328
Total Liabilities and Equity

         











Book Value Per Share

$6.85 $8.88 $0.00 ($8.05) $7.68
















Book Value Per Share   $7.68





Less: Intangible Assets Per Share (6.10)





Plus: Tax Benefits From Losses (Excl. MI) 4.19 35.0%





Tangible Book Value Per Share $5.77



































Discount to Investment Portfolio 8.0%





See Below for Detail on Markdowns to Investment Portfolio

 

 Adjusted Investments

Adjusted Investments - 9/30/2008













Fair Value Adj. Effective Discount



Fixed Maturity Securities:









Investment Grade:










Public Fixed Maturities

23,591 (1,180) 22,411 5.0%



Private Fixed Maturities

9,406 (470) 8,936 5.0%



MBS:











RMBS



2,627 (428) 2,199 From below - reflect subprime/alt-a mark to market
CMBS



4,630 (926) 3,704 20.0% 85% AAA/AA; 2/3s is 2005 and older
ABS:











RMBS



758 (190) 569 25.0%



Other Non-resi Collateral

2,637 (659) 1,978 25.0%



Tax Exempt


2,415 0 2,415 0.0%



Non-Invesment Grade Fixed Maturities
2,660 (399) 2,261 15.0%



Equity Securities:










Common Stocks and Mutual Funds
107 (32) 75 30.0%



Preferred Stocks


202 (61) 141 30.0%



Commercial Mortgage Loans

8,447 (845) 7,602 10.0%



Policy Loans


1,822 0 1,822 0.0%



Cash and Short Term Investments
5,367 0 5,367 0.0%



Securities Lending


1,674 0 1,674 0.0%



Other Invested Assets:









Limited Partnerships

716 (192) 524 26.8%



Derivatives:










LTC Forward Starting Swap Cash Flow
799 0 799 0.0%



Other Cash Flow


41 0 41 0.0%



Fair Value


99 0 99 0.0%



Equity Index Options - Non Qualified
256 0 256 0.0%



Other Non Qualified

43 0 43 0.0%



Trading Portfolio


222 0 222 0.0%



Counterparty Collateral

693 0 693 0.0%



Other



105 0 105 0.0%



Total Invested Assets

69,317
63,936




Less: Cash


(5,367)
(5,367)




Adjusted Invested Assets

63,950 (5,381) 58,569 -8.4%



Subprime Assets by Vintage and Rating

Subprime Fair Value by Vintage and Rating - 9/30/2008
















2004
1H 2H





Prior 2005 2006 2006 2007 2008 Total
AAA
48 74 49 48 35


AA
65 65 16 34 1


A
64 55 9 15 21


BBB
22 11 0 2 10


BB
4 21 1 31 5


B
8 24 18 1 6


CCC and Lower
16 11 5 3


In or Near Default







Total
211 266 104 136 81 0 798 67.3%










Subprime Unrealized Losses by Vintage and Rating - 9/30/2008















2004
1H 2H





Prior 2005 2006 2006 2007 2008

AAA
(9) (7) (7) (12) (11)


AA
(24) (43) (13) (14) (1)


A
(23) (45) (8) (10) (28)


BBB
(9) (9) 0 (3) (8)


BB
(1) (20) (5) (35) (6)


B
(7) (22) (2)
(3)


CCC and Lower
(3) (2) 2



In or Near Default







Total
(73) (149) (37) (72) (57) 0 (388)










Subprime Implied Cost Basis by Vintage and Rating - 9/30/2008















2004
1H 2H





Prior 2005 2006 2006 2007 2008

AAA
57 81 56 60 46 0

AA
89 108 29 48 2 0

A
87 100 17 25 49 0

BBB
31 20 0 5 18 0

BB
5 41 6 66 11 0

B
15 46 20 1 9 0

CCC and Lower 0 19 13 3 3 0

In or Near Default 0 0 0 0 0 0

Total
284 415 141 208 138 0 1,186










Subprime Pricing by Vintage and Rating - 9/30/2008
















2004
1H 2H





Prior 2005 2006 2006 2007 2008

AAA
100.0% 90.0% 83.0% 51.0% 34.0%


AA
75.0% 50.0% 39.0% 14.0% 6.0%


A
50.0% 25.0% 14.0% 5.0% 4.0%


BBB
25.0% 25.0% 6.0% 3.0% 3.0%


BB
25.0% 25.0% 6.0% 3.0% 3.0%


B
25.0% 25.0% 6.0% 3.0% 3.0%


CCC and Lower 25.0% 25.0% 6.0% 3.0% 3.0%


In or Near Default 25.0% 25.0% 6.0% 3.0% 3.0%


Total
180 183 63 41 19 0 486 59.0%

Alt-A Assets by Vintage and Rating

Alt-A Fair Value by Vintage and Rating - 9/30/2008 - SAME pricing assumptions as Subprime












2004
1H 2H





Prior 2005 2006 2006 2007 2008 Total
AAA
114 135 60 11 54


AA
18 66 28 17



A
14 59 2
8


BBB
11 10 8




BB
2 4 1
1


B

7 3
3


CCC and Lower
6 5 3



In or Near Default







Total
159 287 107 31 66 0 650 71.2%










Alt-A Unrealized Losses by Vintage and Rating - 9/30/2008















2004
1H 2H





Prior 2005 2006 2006 2007 2008

AAA
(23) (39) (13) (8) (23)


AA
(7) (46) (13)




A
(8) (41) (3) (17)



BBB
1 (4) (12)
(3)


BB

(5)





B








CCC and Lower
2 (1)




In or Near Default







Total
(37) (133) (42) (25) (26) 0 (263)










Alt-A Implied Cost Basis by Vintage and Rating - 9/30/2008















2004
1H 2H





Prior 2005 2006 2006 2007 2008

AAA
137 174 73 19 77 0

AA
25 112 41 17 0 0

A
22 100 5 17 8 0

BBB
10 14 20 0 3 0

BB
2 9 1 0 1 0

B
0 7 3 0 3 0

CCC and Lower 0 4 6 3 0 0

In or Near Default 0 0 0 0 0 0

Total
196 420 149 56 92 0 913










Alt-A Pricing by Vintage and Rating - 9/30/2008
















2004
1H 2H





Prior 2005 2006 2006 2007 2008

AAA
100.0% 90.0% 83.0% 51.0% 34.0%


AA
75.0% 50.0% 39.0% 14.0% 6.0%


A
50.0% 25.0% 14.0% 5.0% 4.0%


BBB
25.0% 25.0% 6.0% 3.0% 3.0%


BB
25.0% 25.0% 6.0% 3.0% 3.0%


B
25.0% 25.0% 6.0% 3.0% 3.0%


CCC and Lower 25.0% 25.0% 6.0% 3.0% 3.0%


In or Near Default 25.0% 25.0% 6.0% 3.0% 3.0%


Total
170 246 79 13 27 0 535 58.6%

 

 

Catalyst

The company successfully addresses its debt maturities in 2009.

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