AET Aetna Inc. (delisted)

We are upgrading our recommendation on Genworth Financial Inc (GNW) to Neutral from Underperform to reflect the company’s continued focus on fueling growth and strong rating affirmation from credit rating agencies.

To focus more on its Retirement and Protection segment, Genworth has agreed to sell its Medicare supplement business and related blocks of in-force business. The company has agreed to sell the Medicare business to Aetna Inc. (AET). The company also remains focused on fueling growth in its Wealth Management business through acquisitions.

Genworth is acquiring Altegris, a specialist in alternative investments, to expand its offerings to financial advisers. Also, it is launching new services to continue to deliver solid growth. It recently launched its Cash Advantage service to provide custody services for the clients of independent financial advisors. Genworth aims to grow revenue in its leadership lines by 6% to 8%.

Genworth scores strongly with the credit rating agencies. A. M. Best has affirmed the financial strength ratings of “A” and issuer credit ratings of “a” of Genworth major life and health subsidiaries. The rating agency also affirmed the ICR of “bbb” of the company.

The rating agency eyes Genworth favorably, taking into account its strong business position in term life, long-term care, retirement and wealth management markets. The company is also favorably positioned with respect to liquidity and stable capital levels.

During the financial crisis, Genworth had aggressively taken steps to improve profitability across many of its segments. These actions include price increases across several lines, introduction of high-margin products, distribution expansion and strict underwriting standards. We expect these measures to support the company’s growth going forward.

On the flip side, Genworth’s mortgage insurance business is still experiencing losses as a result of the stressed economic conditions combined with elevated unemployment rates, which will further weigh on the company’s mortgage insurance business.

Genworth’s investment portfolio remains another area of concern. The company experienced significant losses and impairments in its investment portfolio in the last several quarters. Though management has taken steps to reduce investment losses and the equity market recovery inspires our confidence, we expect the company to experience modest investment losses and impairments in the next couple of quarters given its significant exposure to commercial mortgage loans and mortgage-backed securities.

Genworth’s first-quarter operating income lagged the Zacks Consensus Estimate by a penny led by a substantially higher year-over-year loss at the U.S. Mortgage Insurance segment, which was partially offset by better results at Retirement & Protection and at International.

The Zacks Consensus Estimates for second-quarter 2011 is 25 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, $1.00 and $1.66 per share.

The quantitative Zacks #3 Rank (short-term Hold rating) for Genworth indicates no clear directional pressure on the shares over the near term.

Based in Richmond, Virginia, Genworth Financial offers a variety of products to customers in areas such as life insurance and lifestyle protection, long-term care insurance, annuities, asset management and mortgage insurance through financial intermediaries, advisors, independent distributors and sales specialists.

 
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