GNW - Genworth Financial: Valuation Update

2023-08-08 09:00:00 ET

Summary

• Genworth reports Q2 earnings this week.
• Heading into earnings, the company is fairly valued at $6.24/sh.
• Shareholders would benefit from a more aggressive reduction in the company's debt.
• Things to watch for in the report are progress on MYRAP, CareScout updates, and AXA litigation.
• Overall, Genworth receives a Hold recommendation.

Genworth Financial, Inc. ( GNW ) is set to release Q2 earnings on August 8th after delaying by a week for additional time to finalize accounting related to the recently adopted LDTI accounting standards. Not much has changed with the business strategy since my last article published last year. Genworth had a Buy rating at that time as the company removed solvency concerns by retiring debt, initiated a share repurchase program, and began to benefit from interest rate hikes. Valuation, however, has significantly improved over that period. Below is a concise update on that topic. Overall, Genworth is fairly valued and receives a Hold recommendation.

Valuation update

Applying a sum-of-the-parts valuation, Genworth is presently worth $6.24/sh, up from $5.20/sh previously estimated :

• 81.6% ownership stake in Enact ( ACT ) - $3,613m (ACT 162.17m diluted S/O @$27.31/sh (Book value))
• DTAs - $0
• Net debt - $635m (=$868m - $233m)
• SOTP = ~$6.24/sh (477.96m May 1, 2023 S/O)

DTAs are valued at $0 despite holding $386m on the balance sheet because the Company expects sometime this year, or possibly next, to become a taxpayer.

The only foreseeable catalyst that could positively impact valuation in the near term (aside from its equity stake in Enact) is a favorable outcome in the pending AXA v. Santander litigation. Just recently, Euro ES Euro reported AXA reduced its claimed amount from Santander by 21%, from 781m Euros to 643m Euros. Genworth previously settled with AXA for ~90% of the latter's losses of mis-priced insurance products. As part of that settlement, the parties agreed Genworth will receive a substantial portion of any award AXA recovers from Santander. The matter is still awaiting a trial date.

Longer term, continued progress under MYRAP and positive developments in the Company's growth initiatives should benefit the share price. The board's recent expansion of Genworth's share repurchase program will also be a net positive in the long run (but only if management is successful in pivoting Genworth's business model as it does very little for the share price today).

Arguably, it would be more beneficial to use cash to reduce Genworth's debt instead of buying back shares. In doing so, the Company would remove the only impediment to spinning off Enact to shareholders and be the quickest way to unlocking the dislocation between Genworth's and Enact's respective market caps:

Earnings Expectations

Things to watch for in the earnings report and call commentary are progress on MYRAP, updates on CareScout's results in Texas, and AXA litigation. At the end of Q1, Genworth achieved ~$300m on a net present value towards its $30.3b goal - a goal set by management as its current best estimate for achieving breakeven in Genworth's LTC business. It will be interesting to see how the recent legal settlement with Choice II policyholders (Genworth, largest LTC block) impacts progress towards its goal.

Updates on CareScout and how that business is evolving will also be beneficial for shareholders. Expect management to have a fair amount of commentary on this topic as it is the only green shoot in the works at Genworth. Management initially launched the business in Texas as the state has a large constituency of Genworth policyholders. It will be interesting to hear about adoption of the service.

The last item investors should be anxious to hear from management on is how the AXA v. Santander litigation is progressing, although do not expect much mention of it as Genworth is not a party to the proceeding.

In summary, Genworth is fairly valued and receives a Hold recommendation.

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