Genworth Financial Inc (NYSE:GNW) has been a good play on the housing recovery so far this year. Indeed, the company still trades at a discount to book value, which, excluding accumulated with other comprehensive income, stood at $23.4 per share at the end of the second quarter. Earnings per share are expected to grow 10% this year and on a forward earnings basis, that makes the company one of the cheapest within the life insurance sector, which trades at a forward P/E of around 10, compared to Genworth’s ratio of 9.
Genworth is the company’s exposure to international markets
However, what concerns me about Genworth Financial Inc (NYSE:GNW) is the company’s exposure to international markets, the same exposure that prevented the company from following the paths of its peers, MGIC and Radian, during the 2008 crisis.
Genworth’s operations extend to international mortgage insurance, which as I have already mentioned, previously allowed the company to avoid the worst of the U.S. housing crash. Broken down, income from international mortgage insurance is split roughly 50:50 between Australia and Canada, two economies and housing markets that have grown strongly over the past five years. (The company does insure mortgages in other countries but at the end of the second quarter these operations were not profitable.)
International mortgage lending accounted for 60% of Genworth Financial Inc (NYSE:GNW)’s net operating income during the first half of this year. Individually, Canadian mortgage insurance accounted for 24% of overall revenue for the second quarter and Australian insurance accounted for 31% of revenue for the same period.
Unfortunately, these markets could be heading into stormy waters.
Recent data released for the month of June showed that building permits for residential Canadian housing fell 13% month-on-month, while permits for multi-unit dwellings fell 19%. Of even more concern are the figures coming out of large cities, where residential land investments for future building have fallen more than 50% in both Toronto and Vancouver. Unfortunately, home prices are still rising, up 10% this year so far, taking the total rise across Canada to 52% since 2006, despite the global recession. Additionally, personal debt has ballooned to 160% of net income, as a result of the meteoric rise in home prices as consumers rapidly snap up homes that are continually rising in value. The Canadian government has stepped in, placing severe restrictions on mortgages, but prices keep rising sparking concern amongst many analysts, some of whom are now predicting a 25% correction.
Elsewhere, there are concerns about the Australian housing market. Home prices in Australia are on average only 1.4% away from the all-time high reached back in 2010. In particular, prices in Melbourne expanded 5% during the second quarter. Meanwhile, mining spending, which has been driving force behind most of the housing boom for the past 5 or so years, is starting to slow, as costs rise and the price of commodities drop. Furthermore, analysts note that the countries retail sector is starting to feel the pinch as retail spending only expanded 0.1% in May – below consensus estimates. Of course, the Australian economy is heavily linked to China and the market is well aware of the uncertainty currently surrounding the Chinese economy.
What is really interesting however, is the recent disposal by the Commonwealth Bank of Australia (ASX:CBA), seemingly distancing itself from the countries property market, by starting the process of selling $20 billion in rights to real estate investment trusts and some wholesale property assets.
Genworth is cheap compared to its peers
All in all Genworth Financial Inc (NYSE:GNW) is cheap compared to its peers and the company has been a good play on the U.S. housing recovery so far this year. However, there are storms brewing within international property markets where Genworth is heavily involved and this could prove to be the company’s Achilles heel.