Genworth Financial, Inc., is a financial services company in the insurance industry that operates in four segments: US mortgage insurance, Australia mortgage insurance, US life insurance, and runoff.
From a variety of valuation measures, the company has been cheap for a while. This is likely due to a handful of reasons. Genworth put together bad polices in the past that they’re currently paying the price for. Along with this, Genworth planned to sell off their Enact subsidiary to China, but that deal has repeatedly fallen through. I’m assuming this has left a sour taste in investor’s mouths, and on top of that, it’s not a terribly exciting company.
It has long been a goal of their management to get ahold of the debt situation. To do this, they have spun off the Enact subsidiary as an IPO. As of 9/20/2021, GNW successfully completed the IPO of their subsidiary Enact Holdings, now trading under the ticker ACT. Enact Holdings is a leading provider of the private mortgage insurance. Genworth sold 19.9% of their shares, resulting in net proceeds of $535 million. With this money, they are working to reduce their debt situation, and Genworth still owns 81.6% of ACT. At the current (10/1/2021) price, this puts their ownership worth around $2.65 billion. This development is very interesting considering that figure is higher than GNW’s current market cap. To my understanding, ACT will be offering $200 million in dividends to its shareholders. With this dividend and future dividends, Genworth will continue to further reduce its debt situation, allowing GNW to pay back shareholders.
The Enact portion of Genworth was valuable; it was responsible for around 50% of Genworth’s operating income. I would typically be worried about holding GNW after they have lost 50% of their operating income, but GNW is currently discounted to a point that it still remains an attractive company to me. Over the past five years, they have been able to average around $2 billion in FCF. Cut that number in half and GNW is stuck with $1 billion in FCF. To be conservative, let’s say half a billion dollars in FCF. Doing a DCF on a MC/FCF = 4 company produces some nice returns, especially at a better debt position. Running a DCF the IRR is very attractive as long as they can maintain at least half a billion in FCF for the foreseeable future. Genworth definitely isn’t the coolest company to hold and it has its drawbacks, but, I'm intrigued by this special situation and have allocated a small portion to this investment.
Note: Disclosure: I do have a position in this company at a $3.63 cost basis. I usually don’t state if I have a position, but I thought this was a unique situation. See disclaimer at the bottom of blog.
Links:
https://www.investopedia.com/terms/r/runoff-insurance.asp
https://newsroom.genworth.com/2021-09-20-Genworth-Financial-Announces-Completion-of-the-IPO-of-Enact-Holdings,-Inc
https://www.yahoo.com/now/genworth-financial-announces-completion-ipo-201700840.html
https://d18rn0p25nwr6d.cloudfront.net/CIK-0001276520/7c5c3723-79be-4f08-8d79-722946c5db12.pdf
http://s2.q4cdn.com/240635966/files/doc_financials/2021/q2/2Q21-Earnings-Presentation_Final_080521.pdf
https://www.investopedia.com/terms/r/runoff-insurance.asp
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