Breakups seem to have become activists’ favorite tools when faced with an underperforming company.
Following John Paulson’s pressure to Hartford to spin off its life business, Highfields Capital has disclosed it is in talks with Genworth Financial(GNW) with options that may include a spinoff of its mortgage insurance business. Highfields, a Boston-based hedge fund still run by co-founder Jonathan Jacobson, has of late also been involved in an activist fight over what it believes is poor management at recent spin CoreLogic(CLGX)
Genworth could certainly use a shot in the arm. Its stock took a hit in April, quickly falling 35% after the company said it would delay a planned IPO of a minority stake of its Australian mortgage insurance division. Its Price-to-Book fell from an already-depressed .3 all the way down to .2; the CEO left in the aftermath.
Genworth is a grab-bag of relatively unrelated insurance businesses, spun off from General Electric(GE) in 2004. A spinoff of some of those marginal businesses seems like a natural course of action to create value. In fact, the company had previously embarked on a slimming-down effort, IPO-ing a minority stake in its Canadian mortgage
insurance, sold off its Medicare supplement business, and had intended to IPO a minority stake of its Australian mortgage insurance business. We also reported last summer that the company was exploring a split following withering criticism from Steve Eisman. Their U.S. mortgage insurance division has been a perennial drag on the company’s results – its losses masking the profits from their other lines of business. The company insists, however, that the longer-term picture for mortgage insurance is bright – post-crisis vintages are very profitable and older vintages are in runoff, with the bulk of those losses having already occurred. A spin here could make sense: it would eliminate the unit’s drag on Genworth’s current earnings – thus boosting the parent’s valuation – while allowing investors with a longer-term view to benefit from the SpinCo’s improving mix of mortgage insurance vintages, or even from a potential recovery in U.S. residential real estate prices.
In contrast, Genworth’s international mortgage insurance units are currently profitable. However, real estate markets in those countries have been booming recently, raising long-term concerns about the stability of prices and the effects of a possible correction.
A spinoff of US Mortgage Insurance might not be entirely clear-cut, however. The company is operating above regulatory capital-to-risk ratios. They have been able to obtain waivers from most states, due in part to the parent’s implicit support. A spinoff would have to meet with regulatory approval and it is not clear what kind of financial footing a mortgage insurance SpinCo would need in order to begin its independent course. Genworth has repeatedly said it will not need to downstream capital to its mortgage insurance subsidiary, but if spun off, regulators may force their hand.
If Genworth spins its mortgage insurance businesses – what would be left? Life insurance and long-term care insurance (primarily North America, with a smaller business in Europe). These too are challenging businesses right now. The company has retreated from its riskier annuity business, and life insurance in a zero-interest rate environment is challenging. Long-term care insurance has proven to be notoriously difficult to price, and previous underpricing has led other insurers to a mass exodus from the segment.
Should be an interesting situation to watch!
Disclosure: The author holds no position in GNW
- Why Genworth’s Shares Popped Up And Could Go Even Higher(seekingalpha.com)
- Activist Gets More Active Against Genworth Mortgage Insurance Operations(247wallst.com)
- Genworth Rallies as Highfields Discloses Talks – Bloomberg(bloomberg.com)