GNW Drops Post Earnings

GNW announced their earnings last night (Genworth Financial Announces Second Quarter 2013 Results).  In happy hour trading, they dropped about 5%.  Reading through it, I was trying to understand why the decline. 

My first thought was that they have really run up, so I do believe the expectations were for a blow out.  They are up 24% since the start of June.

Then I wondered if it was something they did not say.  I know one potential catalyst was the spin-off of their Australian Mortgage Company.  And I saw no comment on that firing back up.

Part of the issue may be the drop in book value. They did not say anything about it (that I saw), but it went from 32.90 to 29.76 in just a quarter.  That is a 9.5% free fall. Actually, the more I think about it, the more I think this is the reason for the drop, although Wall Street Cheat Sheet says it is the miss on revenues.

Recall in many ways a life insurer acts like a bond as by far their largest asset is typically bonds. And as interest rates went up about 100 bps in the quarter (and have gone even further this quarter), the value of bonds drops. A lot of insurers I am looking at are seeing about a 5% drop in BV from this issue.  GNW is clearly more leveraged to it,  which would suggest more of their bonds are in longer durations (I expect they provide some detail about this in financial supplement and I will dig in more).  So if you do some back of the envelope math and say interest rates moved 100 bps and they lost $3 in BV.  I suspect over the next year or two, we have another 200 bps to go up, so they could lose another $6.  Now the flip side is that as interest rates move back up to "normal" levels, GNW will start increasing their income as new cash will get invested at higher rates (though I was surprised to see their annualized yield was 4.8%, which struck me as high, suggesting a lot of their investments have been held pre 2008).  So I think over the next couple of years, you may see GNW book value steadily declining (even with positive operating income); perhaps to the $23 area. Still, they are trading at $13, so if we can see them move closer to a $23 par value, that would be sweet.

Long story short, I am going to do a little more digging regarding their investment portfolio.  I still think they are a good stock to hold.  Not looking to buy more, but I think people looking to buy may get a decent entry point.