Genworth Maintained at Neutral


We are maintaining our Neutral recommendation on Genworth Financial Inc. (GNW). Better performances at the segments are dwarfed by the rating downgrade by Moody’s.

After incurring losses over an extended period, the mortgage business in the second quarter posted a profit. The segment rebounded from loss largely on the heels of substantial lower loss at U.S. Mortgage Insurance. Also, in the second quarter, the company ended an external reinsurance contract that benefited it by $12 million. Further, total flow delinquencies declined by 15% year over year besides a dip in new delinquencies.

Better performances at the divisions of Genworth enable it to remain on track of paying dividend to the parent company. Insurance and Wealth Management has paid $120 million in dividend at the end of second quarter with an interim dividend of $45 million paid in August.

In total, it represents $165 million, more than half of the $300 million goal slated for 2012 from this division. From the international mortgage division, Genworth estimates dividend between $50 million to $110 million for 2012.

However, Moody’s Corp. (MCO) lowered the insurance financial strength rating of U.S. life insurance subsidiaries to “A3” from “A2.” The senior debt presently carries a “Baa3” rating, the lowest investment grade rating. Genworth remains apprehensive as it believes these actions will weigh on the performance of the company, particularly lowering sales in life insurance businesses.

Genworth is scheduled to release its third quarter earnings results on October 31, after the bell. The Zacks Consensus estimate is currently pegged at 20 cents. It represents a year-over-year decline of 5.3%.

Genworth currently holds a Zacks #2 Rank, translating into a short-term Buy rating. MetLife, Inc. (MET) and Prudential Financial, Inc. (PRU), which closely compete with Genworth, carry Zacks #3 Rank translating into a short-term Hold rating.

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