Genworth Financial Stock: Relative Strength Through Year End (NYSE:GNW)
Genworth Financial, Inc. (NYSE: GNW) has been relatively resilient in an otherwise dire stock market. The stock is up more than 5% since the start of the year, compared to a 23% drop for the S&P500:
Genworth’s continued strength depends on several factors should run for the remainder of ’22 and ’23. Below is a summary of what investors should look for in the company’s third quarter results on November 1.
Probably the most important item on the agenda is the performance of Enact Holdings, Inc. (ACT) and the likelihood of future dividends. Currently, Genworth relies primarily on dividends from its approximately 81.6% stake in Enact to service debt, fund growth initiatives and return cash to shareholders (Genworth Holding also receives capital via cash tax payments, but these should work out in 23). It is imperative that Enact’s dividends continue to flow until Genworth develops other cash flows.
Despite the recent slowdown in mortgage issuance, Enact is expected to continue to provide its regular quarterly dividend as well as the previously guided special dividend during the fourth quarter. Although not expected, it would not be surprising given the difficult macroeconomic environment if management cut the special dividend by approximately $200 million discussed in the second quarter 2022 earnings call. ‘Enact.
Share buyback program
With all of the 24-year senior notes withdrawn, Genworth can direct the company’s available cash to its $350 million stock buyback plan. Announced in May, Genworth purchased at least $30 million in stock as part of the clearance, leaving about $320 untapped. It is unclear, however, whether the company will have enough cash in the holding company until the end of the year to exhaust the authorization while maintaining a 2x interest cash buffer on the balance sheet. So it’s something to watch closely.
The share buyback program should benefit long-term investors by reducing the excess supply of Genworth shares in the market. As of July 27, there were approximately 503.7 million Genworth N/A. The excessive amount of stock in the market along with Genworth’s penny stock status has made it a haven for speculators and day traders. Currently, more than 22% of Genworth’s stock is held by retail investors (public and otherwise):
Conversely, only ~76% of Genworth shares are controlled by institutions, compared to ~93% among peers:
As the company repurchases shares in the market, it is expected that not only will long-term investors benefit from a higher share price, but also from reduced volatility.
The progress of Genworth’s multi-year rate action plan is one to watch closely over the coming quarters. Indeed, as society and the market assign zero value to life business, as management continues to narrow the gap between the LTC premium and future liabilities, the residual value may become realizable. As of June 30, the company had achieved $20.7 billion in rate increases or benefit reductions toward its target of $28.7 billion. In H22 alone, Genworth received $1.1 billion in net present value approvals.
In the third quarter, investors should expect to see a positive impact from the PCS I and PCS II legal agreements, in addition to additional premium increases permitted by state regulators. Additionally, from 23, Genworth will likely experience (at least temporarily) an acceleration toward its profitability target under MYRAP as the company implements the Choice II legal settlement affecting over $1 billion. dollars in annual bonuses (Choice II is the largest LTC block inherited from Genworth). However, keep in mind that the target is subject to change as it is based on current assumptions which may differ in the future.
Global care solutions
Long-term investors will benefit immensely if Genworth succeeds in implementing its growth initiatives under the Global Care Solutions (“GCS”) umbrella. Currently, GCS consists of CareScout – Genworth’s consulting and services business. There are also talks of launching new SLD products through GCS, but those plans appear to have been postponed due to poor economic conditions.
At this point, little has been disclosed about CareScout’s offerings or pricing, although the company’s website says its first product will be available sometime in 2023. Genworth recently announced the addition of Timothy Peck , a Harvard-educated physician and entrepreneur, to head up GCS.
Investors should expect to hear more details about the initiative in the third quarter report, but at this stage GCS is unlikely to have a material impact on Genworth shares.
Genworth Investment Portfolio
As of June 30, Genworth had $63.2 billion of cash and investments in its portfolio:
Between December 31, 2021 and June 30, the book value of Genworth’s investment portfolio decreased by $10.7 billion due, in part, to lower fixed securities prices. This trend should continue at 2H. However, portfolio returns should fare better in the second half as the cost of borrowing increases as the Fed continues to fight inflation with rate hikes. Genworth reported Q2 HY’22 investment return of 4.8%, compared to 5.0% in the same period a year earlier:
Any sign of rising yields is likely to be welcomed by investors and could possibly bolster market sentiment. After all, better performance will inevitably help Genworth break even in its life business.
Impact of the LDTI accounting standard
It would be productive for investors to get an update on the implementation of ASU 2018-12, or LDTI. Genworth is expected to see a significant decrease in the company’s book value due to the new accounting rule; although, more importantly, it will not impact Genworth’s economic value. It would be helpful to get an idea of where Genworth expects book value to drop after full implementation of LDTI in Q1’23.
Finally, an update on the AXA v. Santander would be helpful. Indeed, Genworth will potentially receive a substantial windfall if AXA is successful in its lawsuit against Santander for mis-selling past insurance policies. In July, the court decided to allow AXA to pursue its claims, resulting in more than $800 million in damages at trial. Therefore, any update on the progress of the litigation could be beneficial for investors.
Genworth’s assessment has not changed from that previously provided ~$5.20/month. The stock remains a To buy.