Genworth Credibility Eroded as Australia Plan Shelved: Mortgages
Genworth Financial Inc. (GNW) Chief Executive Officer Michael Fraizer, whose bets on U.S. housing lost about $1.8 billion for the insurer since 2008, is losing credibility with bondholders and shareholders after misjudging Australia’s real estate market.
Credit-default swaps that protect investors in the Richmond, Virginia-based insurer’s debt show a 43 percent chance of default within five years, up from 29 percent in March, according to CMA. Genworth’s shares plunged 24 percent on April 18, pushing its shares below 0.2 times book value for the first time since January as losses at mortgage insurance operations spread to Australia.
Fraizer, 53, told investors in November he would sell part of the company’s Australian unit in an initial public offering and focus on buying back stock. That plan, which five months ago fueled a 17 percent stock gain, was put on hold last week.
“Certainly credibility is an issue, and certainly this is a significant misstep,” said Edward Shields, an analyst at Sandler O’Neill & Partners LP. “There have been a number of missteps over the years. Lots of investors have asked for change.”
Genworth is the third-biggest decliner in the 24-company KBW Insurance Index (KIX) this year. The stock fell 2 cents to $6.04 as of 4 p.m. in New York trading. Its 0.18 price to book value is the lowest ratio among companies in the index, according to data compiled by Bloomberg.
Genworth’s U.S. mortgage insurance unit posted its fourth consecutive annual loss last year, a deficit of $477 million, according to the company’s 10-K filing in February. The result narrowed from the $559 million loss reported for 2010. The unit lost $427 million in 2009 and $368 million in 2008.
“Genworth has taken and continues to take significant actions to sharpen its strategic focus, reduce risk exposures, expand risk buffers, streamline costs, drive capital generation and rebuild value for shareholders,” Al Orendorff, a spokesman for the insurer, said in an e-mailed statement. It has exited businesses, improved pricing, bought reinsurance and executed a “loss mitigation program in U.S. mortgage insurance while writing highly profitable new business,” he said.
Fraizer, also the firm’s chairman, is scheduled to appear before investors at the firm’s annual meeting on May 17. He told shareholders in a March letter the company was “humbled” by its performance in 2011, a year in which the stock fell 50 percent. Fraizer was awarded $750,000 in incentive compensation for 2011, or 33 percent of his target, and hasn’t qualified for his full bonus since 2006.
‘Position of Strength’
The decision to delay the Australian IPO until early 2013 came three weeks after Chief Financial Officer Martin Klein said the sale was on track for the second quarter. Claims exceeded expectations, the company said in a statement last week. That compares with Genworth’s guidance on March 29, when Klein told investors he expected markets in Australia and Canada, where the firm owns mortgage insurance units, “to remain solid.”
“What we wanted to do all along is do this transaction from a position of strength,” Klein said at the investor meeting last month organized by JPMorgan Chase & Co. “I would say this IPO, for a number of reasons, is a very, very important transaction for us.”
The postponement comes after the worst U.S. housing crash in seven decades drained capital at mortgage insurers, including Genworth, that pay lenders when homeowners default and foreclosures fail to recoup costs.
While the housing market is improving by some measures, weak job growth and stricter lending standards are weighing on a recovery. Sales of previously owned U.S. homes fell in March for the third time in the last four months, declining 2.6 percent from February to a 4.48 million annual rate, the National Association of Realtors reported last week.
The S&P/Case-Shiller index of property home prices in 20 U.S. cities fell 3.5 percent in February from a year earlier, the smallest 12-month drop since February 2011. Prices have declined 35 percent since the peak in 2006.
Mortgage insurer MGIC Investment Corp. (MTG) yesterday reported its seventh straight quarterly loss. Genworth, which also sells life insurance and retirement products, is scheduled to release full first-quarter results May 1.
Fraizer, who guided the insurer through its spinoff from General Electric Co. after a 2004 IPO and the financial crisis in 2008, was criticized for a “lack of urgency” in July by Highfields Capital Management LP. In 2010, Steven Eisman, then a fund manager at FrontPoint Partners LLC, joined a conference call to tell Fraizer management had “overseen a massive destruction of shareholder value” and that investor patience was wearing thin.
Genworth reported five straight quarterly losses during the 2008 and 2009 financial crisis and swung back to deficits in the fourth period of 2010 and the second of last year. In July, the company blamed its latest loss on “worsening trends” in the mortgage-guarantee business.
The insurer said the Australian unit had “a modest first- quarter loss” as lenders pushed foreclosures to completion faster than the insurer expected amid economic slowdown and natural disasters in Queensland. The unit reported a $52 million profit in the same period a year earlier.
“Genworth is facing down the barrel of a very tough situation,” said Adam Steer, an analyst at Brookfield Investment Management Inc., whose parent Brookfield Asset Management Inc. oversees about $150 billion in assets. “They were saying it’s one of their most important initiatives and the very fact that that got pushed off until next year, assuming they can even get it done then, is definitely a negative.”
Australian home loan delinquencies rose unexpectedly in the three months ended Dec. 31 as a stalling housing market curtailed financing options for homeowners, Fitch Ratings said last month. Arrears in the country’s prime residential mortgage- backed securities rose to 1.57 percent in the fourth quarter from 1.52 percent in the third, Fitch said. Median home prices fell 4.8 percent last year, according to the ratings firm.
Credit-default swap contracts protecting Genworth debt surged to 5.1 percent upfront today, meaning investors would pay $510,000 initially and $500,000 annually to protect $10 million of the debt, according to CMA, which is owned by CME Group Inc. That level signals the market perceives a 43 percent chance the company will default within five years, based on an expectation that investors would recover 40 percent of face value of the bonds if the company failed to meet its obligations, the data show.
Genworth’s implied volatility, the key gauge of options prices, for 30-day contracts closest to the stock price, was 61.56 as of April 20, the third-biggest level among the KBW Insurance Index. The measure for MBIA Inc. (MBI) was 110.66, the most, and MGIC followed, with 77.95, data compiled by Bloomberg show.
Hedge Fund Ownership
Fraizer has sought since 2009 to reassure investors losses at the U.S. mortgage insurance operations wouldn’t drain funds from other parts of the business. Genworth executives repeated his strategy of running the unit as “self-contained” on a capital basis at least 12 times from February 2009 to October 2010. In July, Genworth said it would contribute $375 million in assets to the U.S. unit.
More than 20 percent of Genworth shares are owned by hedge funds, the second-highest concentration in the KBW Insurance Index, according to data compiled by Bloomberg.
Highfields, led by Jonathon Jacobson, more than doubled its Genworth stake in the second half of 2011 and held about 6.3 percent of the insurer at the end of December. The Boston-based hedge fund is the third-biggest shareholder behind NWQ Investment Management Co. and Dodge & Cox, according to data compiled by Bloomberg.
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