On Jun 30, 2015, we issued an updated research report on Genworth Financial, Inc. GNW.
Genworth continues to witness better performing U.S. Mortgage Insurance. Lower new delinquency development and effective loss mitigation programs along with changes in aging of existing delinquencies particularly aided the improvement in U.S. Mortgage Insurance. Gradual improvement in the U.S. housing market and a growing private mortgage insurance market helped to write more insurance and lower losses. Further, delinquencies were lower with new businesses being profitable.
Genworth also remains focused on meeting new GSE capital requirements on U.S. mortgage largely through reinsurance. The company estimates additional capital requirement between $500 million and $700 million to be fully compliant with the final PMIERs. It also expects to comply with Mortgage Insurer Eligibility Requirements by Dec 31, 2015. The proceeds from the divestment of a 14.2% stake in Australia Mortgage Insurance this May can be used partly to meet the requirement.
Meanwhile, Genworth is weighing options that would eventually improve its ability to lower debt levels, increase excess capital as well as improve earnings and return on equity. As such, Genworth is reportedly weighing options for divestitures of Genworth Life and Annuity Insurance Co. (GLAIC) and its lifestyle protection unit. These would free up capital to be deployed in growth initiatives.
Among other positives, Genworth aims leverage of 20–22% over the medium term and paying down $1–2 billion in debt to sustain flexibility. It intends to rationalize costs for annual cash savings of over $100 million in the next couple of years. It is also on track to increase rates.
Nonetheless, investment results continue to witness a downturn on lower reinvestment rates and unfavorable foreign exchange. Given a soft interest rate environment, we do not expect any immediate turnaround in investment results.
Genworth also is witnessing sales decline in Long Term Care Insurance and Life Insurance. Management does not expect the increase in permanent life product sales to exceed the moderation of sales in term Life Insurance products in the near term. Also, loss ratios of Long Term Care Insurance have been increasing.
With respect to earnings performance, the Zacks Rank #3 (Hold) life insurer delivered a positive surprise in the first quarter of 2015, after failing to do so for three straight quarters.
The Zacks Consensus Estimate has seen mixed estimate revisions over the last 60 days. It rose 5.9% to $1.07 for 2015 as 5 of 6 estimates were raised but decreased 9.7% to $1.12 for 2016 as 2 of 6 estimates moved south. The expected earnings growth rate is currently pegged at 6.3%.
Stocks to Consider
Some better-ranked life insurers are Sun Life Financial Inc. SLF, China Life Insurance Co. Ltd. LFC, and StanCorp Financial Group Inc. SFG. While Sun Life sport a Zacks Rank #1 (Strong Buy), China Life and StanCorp carry a Zacks Rank #2 (Buy).
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