Finance

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Genworth Financial's 80 percent stock plunge over the past two years has left its top brass with much to mull in plotting a future course for the insurer. Here's a radical idea for them to chew on: Why not sell the U.S. mortgage-insurance division?

Sure, the unit is one of Genworth's most profitable businesses, and its earnings are finally improving as delinquencies from pre-crisis policies decline. But a sale, which would require the blessing of various regulators, would help the debt-laden company raise needed cash fast. And it makes sense as rumblings of consolidation in the mortgage-insurance industry get louder. 

Genworth is already just a shadow of its pre-crisis self, with a market value on Friday of $1.8 billion compared with $16 billion in 2007. Its operations are shrunken down, too, after it sold assets including blocks of life insurance policies, its European lifestyle protection insurance business and part of its Australian mortgage insurance business to help shrink its debt load. 

Honey, I've Shrunk the Insurer
Genworth has already sold assets to combat its dramatic decline. It will need to sell even more.
Source: Bloomberg

In order to repay a $600 million slab of debt maturing in 2018 that Genworth has acknowledged could be tough to refinance, the junk-rated company said it could shed more assets, likely blocks of life and annuity insurance policies. Once that's out of the way, focus will turn towards scraping together $1.8 billion to repay lenders over 2020 and 2021. 

Paying the Price
Investors demand higher yields on Genworth's bonds compared with other insurers after depressed earnings led rating companies to downgrade the company's debt.
Source: Bloomberg

Selling the U.S. mortgage insurance business would be a quick way for Genworth to raise that amount. The likes of Arch Capital and Essent Group can afford to pay book value for the business, which is roughly $1.8 billion, according to Genworth's statutory statements.  Arch and Essent trade at 1.4 and 1.6 times their respective book values, while Genworth shares are valued at a multiple of less than 0.2.

Arch may be motivated to pounce since it's been targeting a double-digit share of the mortgage insurance market. A deal with Genworth would enable it to leap to 17 percent versus its current 2.7 percent. 

Consolidation Ahead?
Mortgage insurers seeking scale may consider sizable acquisitions
Source: Bloomberg Intelligence, Fannie Mae & Freddie Mac filings
*PMI and Republic are in "run-off" mode

Essent, a $1.8 billion company that BTIG analysts have suggested could target the larger $2.6 billion Radian as its CEO departs, may prefer Genworth's business due to its more digestible size. 

Without its U.S. mortgage-insurance arm, Genworth would be able to focus on its profitable offshore operations, stabilize its long-term care unit (which would prove many skeptics wrong) and manage the runoff of its suspended life and annuity arm (worth $1.25 billion based on a discounted multiple of book value ). 

Still, selling the U.S. mortgage-insurance business would be a bold move. It might take a shareholder activist or an approach from a suitor for Genworth to consider giving it up. Perhaps it's time one of the two surfaces. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Book value calculated by adding Genworth mortgage companies' statutory policyholders' surpluses with contingency reserves.

  2. Calculation based on Genworth's book value per share, excluding accumulated other comprehensive income (loss) as at 3/31/2016.

  3. Any deal would come as another mortgage insurer, United Guaranty, prepares to be spun out of AIG via an initial public offering following breakup calls from activists Carl Icahn and John Paulson.                        

  4. Assumes a 0.5 multiple of book value (based on statutory statements), a discount to the likes of CNO Financial and even larger life insurers like Metlife.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net