Genworth Financial: Strong Balance Sheet Offers Opportunities (NYSE:GNW)

Despite years of naysayers and disbelievers, Genworth (NYSE:GNW) has pretty much emerged as a healthy company, on its own. Missteps along the way include trying to merge with China Oceanwide and a $400 million + settlement with AXA Insurance. The enterprise value of Genworth is currently below the market value of the Enact (ACT) shares that it owns and no value is ascribed for the life insurance unit (U.S. Life Insurance) which has assets of over $70 billion and a book value of over $14 per Genworth share (not including AOCI). Rising interest rates will have a large positive impact on Genworth Life, which holds close to $60 billion in investments. Other legacy issues such as long-term care have been addressed and at this time the holding company has no guarantees to the LTC subsidiaries.

Currently we are highlighting the Junior LIBOR + notes at Genworth holding company (GNW) against the improved balance sheet and subsequent ratings upgrades from Moody’s and S&P. GNW owns two large independent insurance companies: Genworth Life Insurance and Enact. Genworth Life has total assets of $76 billion dollars and Enact is a publicly traded mortgage insurance company with an equity market cap of over $3 billion. GNW has undergone a financial transformation by deleveraging. This led to the reduction of over $2 billion in holding company debt and upgrades from both ratings agencies.

This year, Enact is expected to earn over $600 million in income and pay dividends of over $200 million. Fourth quarter conference call (CEO Tom McInerney):

“We also expect to receive an additional return of capital from Enact in the fourth quarter of 2022 based on Enact’s expectation to return approximately $250 million to its shareholders in 2022 and adjusting for our majority ownership of 81.6%, we would expect to receive approximately $150 million of additional return of capital to Genworth on top of the quarterly dividend payments from Enact.”

Enact also has a market value of $3.7 billion. Currently, Genworth owns 81.6% or around $3 billion worth of Enact shares. The value of Genworth Life is not as clear. Although Life has improved over the last few years it is not expected to pay any dividends to the holdco in the foreseeable future. And although Life has over $7 billion in GAAP book value, management is unsure of its’ actual value due to legacy issues. We estimate that Life has a low fractional value of its’ GAAP book value, but the value may be close to $1 billion. We expect this to improve further with higher interest income at Life. Although the demise of the company has been predicted numerous times Genworth is stronger than ever and has completed its deleveraging and emerged as a much stronger company.

Genworth Holding Company Bonds

In August, GNW holding company announced the redemption of the remaining 4.8% senior notes. This left the $298 million 6.5% notes due 2034 and the $598 million floating rate junior notes due 2066. The junior notes pay interest at an annual rate equal to three-month LIBOR plus 2.0025% (current estimate 5.59%). This will rise or sink with 3-month LIBOR. Since the junior notes trade at a large discount to par they have excellent call protection. The notes should be viewed as similar to preferred equity due to the facts that Genworth may defer interest payments on the notes for five years and they are subordinated. If payments are deferred the notes continue to accumulate interest and GNW is prohibited from paying dividends or conducting share buybacks. Genworth is required to make a reasonable effort to repay the notes in 2036 under certain circumstances. We recommend the junior notes due to the high current yield, rising interest rate and call protection. We do not recommend the 6.5% notes currently, although they may be attractive at a higher current yield.

Genworth Data EST. as of 9 20 2022 MM
GNW Enterprise Value		$2,915
Enact (ACT) Market Cap		$3,838
GNW ACT Ownership %		81.6
GNW Life est. value		$800
2022 GNW Dividends from subsidiaries Est.		$350
Hold Co. Cash 2022 YE Est.		$200
Hold Co. debt pro forma		$896
Jnr Floating Rate Notes		link
Coupon	3-month LIBOR + 2.0025%
Current LIBOR		3.59%
Current Int Rate est.		5.59%
Last Price		53.75
Current Yield est.		10.35%
Payment Frequency		Quarterly
Maturity		2066
Issued Amount		$600 mm
GNW 2022 EPS est.		$1.22

Click to enlarge

GNW Consolidated Financials
share price	$3.92
PROJECTIONS IN MM	2022	2023	2024
Income Statement
Revenue	$7,832	$7,910	$8,227
Operating Income	$1,032	$1,110	$1,327
Net Income	$629	$712	$872
EPS	$1.22	$1.38	$1.69
Revenue growth	0%	1%	4%
EBITDA	$869	$952	$1,112
Holding Co. Interest	$93	$75	$80
Capitalized Expense	$15	$18	$20
Consolidated Cash Flow	$854	$934	$1,092
Equity Dividends	$0	$0	$0
Cash Flow Dividend Coverage	NA	NA	NA
Consolidated Cash generation	$854	$934	$1,092
Holding Co. dividends received	$350	$300	$250
Revenue Growth	0%	1%	4%
Valuations
Consolidated Cash Flow Vs. Equity	42.3%	46.2%	54.1%
EV/EBITDA	3.36	3.06	2.62
P.E Ratio	3.21	2.84	2.32
Enterprise Value	$2,915
Total Debt	$896
Equity Market Cap	$2,019	$2,019	$2,019
Debt Ratios
Hold Co. Interest Coverage	376%	400%	313%
Debt/EBITDA	NA	NA	NA
Liquidity
Holding Company Cash 6/30	$228
Borrowing Availability est.	$350
Total Current Assets	NA
Total Current Liabilities	NA
Current Ratio	NA
Debt
Borrowings	$896
Total	$896
NOTES:
NA: Not Applicable. GNW reports consolidated financials. Broxton believes that investors should view the company from the standpoint of the holding company only. GNW holding company does not have any guarantees or liabilities to Enact or GNW Life. The holding company may sell shares of Enact to raise liquidity.

Click to enlarge