Thursday, July 28, 2011

The Sum of Genworth

Genworth's MI unit is the second highest rated U.S. mortgage insurer covered by Moody's at Ba1 (after AIG's United Guaranty at Baa1). This junk rated unit has been a considerable drag on the rating and stock price of the entire corporate family, except for the 40% of Genworth MI Canada that trades on the Toronto Exchange. The value of that entire unit based on Wednesday's closing price is 2.45B in Loonies or about US$2.6B. The 60% owned by Genworth US is worth $1.56B. Genworth's wholly-owned Australian MI unit produced more income than the 60% Canadian interest in each of the last 5 quarters but lets say it worth the same amount - $1.56B.

That would make sense except Genworth US is valued at $3.9B, meaning that the remaining international units are worth nothing, the life and retirement division is worth 2.5 times 2010 earnings, and the US MI unit loses everything and the approximately $300M or so of stock in the Canadian MI subsidiary.

The obligations of the US MI unit are not guaranteed or supported by any other Genworth entity. At least theoretically, it is bankruptcy-remote. For the US MI unit's equity to be worth nothing, the entire default inventory would have to go to claim - with no natural cures, modifications or rescission. That would wipe out the unit's equity which is roughly equal to the unreserved default inventory. From there, the unit would have to experience enough claims from new defaults to wipe out over $500M in annual earnings before taxes and claims. Regular readers will guess that we don't think that will happen.

Then there are the other divisions. It is easy to see why Genworth spun off part of its Canadian MI unit. It's the same reason that GE spun off Genworth years ago. The parts are worth more than the sum.

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