Genworth (GNW) Takes Further Action on Turnaround

Our Genworth Investment Thesis [Source] noted a lot of moving parts both at the company and macroeconomic level; “the company will likely continue selling at a discount pending further resolution of the many issues that need to be monitored. However, it seems turnaround is underway on both a macro and micro level but largely overlooked by the investment community.”

Since that time several key accomplishments include:

  • The selection of Thomas J. McInerney as the company’s president and chief executive officer [Source]
  • Genworth’s announcement of a resourceful capital plan [Source]
  • Operational improvements prioritized by new CEO during the 4Q12 conference call [Source]

CEO McInerney stated in the 4Q12 conference call just a month after joining the company; “My focus will be to improve operating performance, generate more cash and capital from the businesses and increase return on equity.” Of course a key question is will the discussions translate into action under the new leadership. Developments since the 4Q12 earnings release and conference call offer further encouragement that management is walking the talk and we should see continued improvement in this unfolding story.

Additional key steps were taken recently:

Genworth announced temporary suspension of long term care insurance in California. On March 6, 2013 the company announced [Source]:

“We continue to invest in developing and implementing smart, sustainable products built for the future,” said Pat Kelleher, President and CEO of Genworth Life Insurance Company.  “We believe the suspension of our individual long term care products in California, pending approval of our new Privileged Choice® Flex product in California, is appropriate in light of the return profiles on both the California Choice and Choice Partnership products.  It is important that the products we offer are priced to balance the needs of our consumers with our desire to achieve long-term profitability.”

Genworth has filed a new individual long term care insurance product; Privileged Choice® Flex in California when approved will replace current products. The current product represented about 12% of Genworth’s 2012 long term care insurance sales. They continue to work with the California Department of Insurance to approve Privileged Choice® Flex with the goal of resuming sales in the near future.

How can voluntarily suspending 12% of sales be viewed as an encouraging development? The company has received approval of the new more sustainable (and profitable) products in several states but California is taking longer to approve. Faced with the choice of maintaining market share with unprofitable products or suspending sales until approval of more sustainable products they chose the later.

The nemesis of many insurers is the reluctance to walk away from unprofitable businesses. Warren Buffett explains on page 11 of the Berkshire Hathaway Letter to Shareholders, underline added for emphasis [Source]:

At bottom, a sound insurance operation requires four disciplines: (1) An understanding of all exposures that might cause a policy to incur losses; (2) A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does; (3) The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered; and (4) The willingness to walk away if the appropriate premium can’t be obtained.

Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. “The other guy is doing it so we must as well” spells trouble in any business, but none more so than insurance.

CEO Tom McInerney passed the fourth, the real test of management discipline. This discipline is needed at Genworth or any company for that matter. The proper focus on Genworth’s Long-term Care business is what many critics felt was still missing at GNW, and what we hoped to see continue. The market apparently agrees too, along with positive news out of Washington for mortgage insureres, Genworth share price increased about 13% for the week.

Genworth named CFO Martin Klein Executive Vice President: On February 23, 2013 Genworth announced [Source]:

Klein will continue in his role as CFO. His new responsibilities as executive vice president include operational responsibility for Genworth’s International Protection and Wealth Management segments, part of Genworth’s Corporate and Other Division, as well as for Genworth’s Corporate Development activities.

“As CFO, Marty helps drive our turnaround priorities that are designed to increase our financial strength and flexibility, such as our recently announced U.S. Mortgage Insurance Capital Plan,” said Tom McInerney, Genworth chief executive officer.  “Now, he also will lead the related priorities of increasing International Protection’s and Wealth Management’s value and exploring options to realize that value.  Marty’s new responsibilities will include supporting International Protection’s efforts to navigate the tough European environment through pricing and expense actions, as well as pursue growth in new markets.  Marty will also help the Wealth Management team continue to develop new product offerings and related services to foster the business’s growth and enhance its ability to serve its financial advisors.  Given the integral role Corporate Development will play in creating long-term value for Genworth, it makes sense to align that function under Marty.”

Chief Financial Officer Martin Klein will take on the operational responsibilities of international protection and wealth-management, units the company targeted for sale. The sale of these non-core assets are intended to increase shareholder value through improved focus and by raising cash for strategic businesses and debt reduction.

Martin Klein served as acting chief executive officer until Tom McInerney started in January and was a key player in the development of GNW’s resourceful capital plan announced during January. His priorities are to increase the non-core units’ value and explore options to realize the value. It is encouraging to see a senior leader assigned to implementing this aspect of GNW’s turnaround strategy.

Disclosure: Long GNW

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