Genworth Posts $34 Million Profit as Strategy Talk Looms

Genworth Financial Inc. (GNW), the insurer seeking a chief executive officer, reported a profit as losses narrowed at the unit backing U.S. home loans and investment results improved.

Net income was $34 million, or 7 cents a share, compared with a loss of $16 million, or 3 cents, a year earlier, the Richmond, Virginia-based insurer said in a statement today. Operating profit, which excludes some investment results and a goodwill impairment, was 25 cents a share, compared with the 19- cent average estimate from 10 analysts in a Bloomberg survey.

Mortgage insurance losses drained capital at Genworth and pushed the company’s credit grade down to one level above junk at Moody’s Investors Service, which said isolating the unit could help the rating. Acting CEO Martin Klein has said there are obstacles to a separation, and the company is scheduled to discuss “action plans” on a conference call tomorrow after completing a review of the insurer’s strategy.

“If they can get through the next several quarters, the U.S. mortgage insurance business could start getting attractive,” Sean Dargan, an analyst at Macquarie Group Ltd., said in an interview before results were released. “Things are improving in the U.S. housing market, so there’s a hope that that would be reflected.”

Klein said Aug. 1 that Genworth, which also sells life insurance and long-term care coverage, had finished reviewing its businesses and that implementation of plans could begin before a permanent CEO is named. He didn’t disclose details during a conference call, prompting Suneet Kamath, an analyst at UBS AG, to say the lack of specifics was “frustrating.”

Goodwill Impairment

The insurer recorded an $86 million goodwill impairment in the third quarter at its international protection segment as a slump in the European economy weighed on the prospects for the business that helps consumers pay debt if they become unable to meet their obligations after an accident or job loss. Genworth changed its definition of operating income to exclude goodwill impairments, it said in today’s statement.

Net investment gains were $9 million, compared to losses of $157 million a year earlier. Book value, a measure of assets minus liabilities, climbed to $33.40 per share at the end of the quarter from $32.17 on June 30.

The U.S. mortgage-insurance unit, which covers losses when homeowners default and foreclosures fail to recoup costs, reported an operating loss of $38 million, compared with a loss of $79 million a year earlier. The business had losses of more than $1.3 billion in the past six calendar years.

Australia Unit

Operating profit at the international mortgage insurance division widened to $94 million from $68 million. At the Australia unit, operating profit improved to $57 million from $36 million.

Genworth has declined 16 percent this year as CEO Michael Fraizer resigned in May after delaying a public offering of part of the Australia mortgage insurance business and Moody’s put the company on review for a downgrade to junk status. The 24-company KBW Insurance Index (KIX) has gained 16 percent since Dec. 31.

“Valuation appears attractive, but our fundamental outlook remains cautious,” Jimmy Bhullar, an analyst at JPMorgan Chase & Co., wrote in an Oct. 11 research note. The stock may not rally until the U.S. and Australia mortgage-guaranty businesses improve, he said.

Genworth in April postponed an initial public offering of the Australia unit to 2013 amid elevated losses in the nation, sending the shares lower by 24 percent the following day. The insurer had targeted a sale in the second quarter of this year.

Financial Flexibility

Moody’s placed the firm’s debt on review for a downgrade to junk status in June and extended the evaluation in September, saying it would weigh management’s “actions and plans to enhance financial flexibility” and steps to isolate the mortgage insurance business.

Standard & Poor’s cut Genworth to one level above junk this month, citing volatility in the insurer’s results and pressure on profits from a weak global economy.

Holding company cash was $1.4 billion as of Sept. 30, up from $1.2 billion on June 30. The figure, which is monitored by investors as a measure of liquidity, had been about $950 million at the end of 2011.

Defending Genworth’s investment-grade status at Moody’s may be more costly than a cut to junk, Klein told Mark Palmer, an analyst at BTIG LLC, in September. A downgrade wouldn’t be “the end of the world,” Palmer said at the time.

To contact the reporters on this story: Zachary Tracer in New York at ztracer1@bloomberg.net;

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net

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