We came across a bullish thesis on Genworth Financial, Inc. (GNW) on Substack by Taylor Nichols. In this article, we will summarize the bulls’ thesis on GNW. Genworth Financial, Inc. (GNW)’s share was trading at $7.19 as of March 24th. GNW’s trailing P/E was 10.27 according to Yahoo Finance.
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Genworth operates in the insurance industry, offering solutions to help individuals manage financial risks related to housing, aging, and end-of-life needs. The company’s primary business segments include mortgage insurance through Enact Holdings, long-term care insurance, legacy life and annuity policies, and senior care services through CareScout. Mortgage insurance, Genworth’s most profitable segment, provides coverage to lenders when borrowers default, particularly for loans with small down payments. This business has been a steady cash generator, contributing substantial capital to Genworth. The long-term care insurance segment, historically a source of significant financial strain, was plagued by faulty actuarial assumptions that underestimated claim frequency, policyholder longevity, and rising care costs. Meanwhile, the life and annuities segment consists of older policies that are no longer actively marketed but remain on the balance sheet. Lastly, CareScout aims to provide a modernized approach to senior care, offering a network of providers and consulting services.
Genworth’s financial struggles in the past were driven by two key factors: the mispricing of long-term care insurance and an excessive debt load that peaked at $4 billion in 2018. The long-term care policies, written under outdated assumptions, required massive reserve increases to cover escalating claims, pushing this segment into sustained operating losses. At the same time, the company’s high debt burden led to costly interest expenses, restricting financial flexibility. In response, Genworth undertook a significant strategic shift, highlighted by the 2021 IPO of Enact Holdings. Selling 19% of Enact generated approximately $534 million in proceeds, which was used to retire over $1.2 billion in debt. This move resulted in a dramatic reduction of Genworth’s total debt, which now stands at $1.56 billion, improving its credit rating from bb- to b+ and enhancing its ability to access lower-cost capital. Despite divesting part of Enact, Genworth retained an 81% ownership stake, ensuring it continues to receive substantial capital returns. Since its IPO, Enact has returned approximately $740 million to Genworth through dividends and share repurchases, providing a consistent and growing source of cash flow.
While Genworth has made strides in improving its financial health, its core insurance operations remain under pressure. The company’s underwriting profitability metrics highlight ongoing struggles, with a loss ratio of 136% and an expense ratio of 36%, leading to a combined ratio of 173%. In contrast, most profitable insurers maintain combined ratios below 100%. These figures indicate that Genworth relies heavily on investment income and Enact’s capital returns to offset underwriting losses. The silver lining is that any improvements in core insurance operations could significantly boost overall profitability. The company’s net income has averaged $474 million over the past five years, a strong figure compared to its $2.9 billion market cap. However, earnings have been inconsistent, with weaker years such as 2023 ($76 million in net income) pulling down the average.
To further enhance shareholder value, Genworth launched its first share buyback program in over a decade in 2022, initially authorizing $350 million in repurchases and later expanding it to $700 million. Since then, the company has repurchased $565 million in stock, reducing its share count from 514 million in 2021 to 439 million in 2024, a nearly 20% reduction. This aggressive buyback strategy demonstrates management’s confidence in the company’s future and its commitment to enhancing shareholder value. The impact of these buybacks will be increasingly evident in earnings per share growth over time.
Despite its past challenges, Genworth presents a compelling investment opportunity, particularly due to the disconnect between its market capitalization and its ownership stake in Enact Holdings. The 81% stake in Enact is currently valued at $4.15 billion, which alone exceeds Genworth’s entire market capitalization of $2.9 billion. This stark valuation gap suggests that even without considering the value of Genworth’s other businesses, the market is significantly underpricing the company’s assets. The potential for a rerating is further supported by the company’s ability to continue returning capital through share repurchases and dividends.
Looking ahead, Genworth has several growth opportunities, including its planned re-entry into the long-term care insurance market through CareScout Insurance. While this move carries inherent risks given the company’s prior struggles in this segment, Genworth appears to have learned from past mistakes. Additionally, the ongoing capital returns from Enact, combined with improvements in its core insurance operations, provide a strong foundation for earnings stability. The company’s valuation also remains attractive, with a trailing P/E ratio of 9.90. Even with modest profit margin improvements, a significant upward revaluation of the stock could occur. A conservative valuation model estimates a fair value of $10.26 per share, factoring in flat earnings growth and a high discount rate due to historical volatility.
Genworth remains largely underfollowed by analysts, with only one covering the stock. This lack of coverage may be contributing to its undervaluation. Increased analyst attention and improved financial results could serve as catalysts for a higher share price. While volatility persists, long-term momentum remains positive. Overall, Genworth offers a compelling investment opportunity, driven by its undervalued Enact stake, aggressive share buybacks, improving financial health, and the potential for an eventual market rerating.
Genworth Financial, Inc. (GNW) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 36 hedge fund portfolios held GNW at the end of the fourth quarter which was 33 in the previous quarter. While we acknowledge the risk and potential of GNW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GNW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.