Genworth Financial (GNW) is not doing well. The LTC business is their performing asset; they are losing a lot on mortgage insurance. Apparently there is a shareholder bloc that wants the company to be split up.
Quicktake Dynamic Landing Page
Analyst Note 02/02/11
Genworth Financial GNW added $350 million in reserves to cover claims liability in its U.S. mortgage insurance operations, turning an otherwise profitable quarter into a loss of $0.33 per diluted share. An increase in late-stage mortgage delinquencies from foreclosures, largely in the sand states, along with a slowdown in cures was responsible for the negative reserve development. Net operating income from the retirement and protection segment, which includes wealth management, life insurance, retirement income, and long-term care, increased 7% in the quarter on a year-over-year basis while international operations were up 16% on a comparative basis.
In its quarterly conference call, which the firm combined with the previously canceled investor day update, management responded to criticism from some investors over certain strategic issues. Regarding the call to split up the company, management said doing so would negate a large portion of the benefit it will derive in the future from its deferred tax asset, which it currently carries as a $1.9 billion asset. Furthermore, any sale of the troubled U.S. mortgage insurance unit would not have as much value to a buyer as it does to Genworth today for this reason. Management also responded to investor demands for immediately returning capital to shareholders through share repurchases or increased dividends by pointing out the negative effect this would have on capital preservation and possible reduced credit ratings. Instead, the firm argues that shareholders will be better served in the long run by riding out the storm with its more than adequate capital resources as it works through the challenges over the next year or so. Genworth announced that it intends to strategically focus on the retirement and protection and global mortgage insurance operations.
While the case advocated by management may be Genworth's best alternative in the current environment, we think the firm will be challenged to meet its cost of capital at any time in the near future. Claims from the U.S. mortgage insurance operations will probably continue to increase for at least a year, maybe longer, and counting on earning excess returns from life insurance and related products is an extremely uncertain proposition, in our opinion. We'll stick with our fair value estimate, which is roughly half of year-end book value per share.