A key catalyst for the shares of Genworth Financial Inc (NYSE:GNW) is the timing of any resumption of capital return. Genworth has not commenced capital management through share buybacks or common stock dividend payments since the onset of the financial crisis.
Richmond, Virginia-based Genworth offers services such as life insurance, long term care insurance, and mortgage insurance. Any resumption of one or both of these capital management strategies would be a clear positive catalyst for the stock, which gained 77 percent in the last year, and 19 percent in the last month.
Moreover, the company is positioned to consider a modest resumption of capital return in 2014, with more aggressive actions in 2015, and significant above-peer growth in 2015 driven by improvements in U.S. Mortgage Insurance and Long-Term Care.
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The company could get additional capital in the following ways, which may be used for dividends and share repurchases.
In the past, management has indicated it would like to build unassigned surplus in its U.S. Life subsidiary to roughly $500 million. The company's fiscal 2013 statutory results indicate year-end unassigned surplus of $440 million.
UBS analyst Suneet Kamath said to the extent this trend continues, the implications could be sooner than expected achievement of the $500 million unassigned surplus target, and by extension, a higher ordinary dividend from its U.S. life insurance subsidiaries in 2014 relative to guidance of $175 million - $225 million.
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Meanwhile, reduction in leverage could occur sooner than expected. Genworth's current debt leverage ratio is 26.8 percent, above the company's 2016 target of 20-22 percent. Reviewing the company's debt maturity schedule, it is likely that it will aim to call the $300 million of debt maturing in 2016, which has an annual coupon of 8.625 percent, as soon as it can.
Kamath feels that Genworth could redeem this debt without utilization of any potential proceeds from business unit sales.
Improvement in interest coverage could also beat expectations. Genworth's current interest coverage ratio is 3.9x, which could improve to about 4.3x pro forma for the repayment of the $485 million of debt maturing this year.
On the company's fourth quarter earnings call, management highlighted a 2016 target of 6x. Assuming Genworth is able to execute an early redemption of the $300 million of debt maturing in 2016 using excess holding company cash later this year, its pro forma coverage ratio could increase to 5.0x at the end of 2014.
While still below the 6x target, GNW has stated a 5-7x statistic would be consistent with levels required for a "one-notch" ratings upgrade. Clearly, one of management's goals is to achieve one-notch ratings upgrades for both its holding company and U.S. life insurance subsidiaries. At present, these ratings are Baa3 / BBB- and A3 / A-, respectively.
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Kamath said the situation suggests that management is positioned to start discussing the timing of the resumption of capital return to shareholders with greater clarity and certainty by year-end 2014.
As such, Genworth could achieve its medium-term targets for leverage and interest coverage organically in 2014-2015, suggesting any proceeds from business unit sales could be used for other purposes, such as capital infusions in U.S. Mortgage Insurance, if needed, or capital return to shareholders.
While GNW is focused on a ratings upgrade, management argued at a recent meeting that it potentially could begin returning capital to shareholders before achieving an upgrade.
However, for this to occur, the company should show progress towards improving its capital profile, run the proposed capital return by the rating agencies and potentially be placed on review for an upgrade.
Kamath said, based on 2013 finalized statutory results and projections for near-term statistics related to leverage and interest coverage, the company is well positioned to meet internal targets for both by 2015-end.
As such, Genworth's capital returns could be sooner-than-expected, and every $250 million in share buybacks could add 4 percent to 2015 EPS growth and at least 1 percent to 2015 book value per share growth.
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