Genworth Financial Inc., the Richmond, Virginia-based insurer, plunged the most in almost a year after posting a surprise quarterly loss on “worsening trends” in its mortgage-guarantee business.
Genworth fell $1.26, or 13 percent, to $8.21 at 4:15 p.m. in New York Stock Exchange composite trading. The second-quarter net loss was $92 million to $112 million, the company said late yesterday. The firm had an operating loss of 14 cents to 18 cents per share, missing the average estimate of 14 analysts surveyed by Bloomberg, which was for a profit of 24 cents.
Genworth posted its second loss in three quarters as homeowners fell further behind on their mortgage payments. The company added to reserves as it tallied more than 39,000 insured borrowers who had slipped into default by 12 or more payments. That’s an increase of about 7,000 from a year earlier.
“The older delinquencies are up,” said Steven Schwartz, an analyst at Raymond James & Associates Inc. “The older a delinquency, the more you have to reserve against it.”
Genworth, which posted net income of $42 million a year earlier, had declined 28 percent this year through yesterday in New York trading. The company also sells life insurance and retirement products and said it will use assets with a market value of $375 million to add to reserves in its U.S. mortgage-guarantee business.
Genworth had the credit ratings of two mortgage insurance subsidiaries cut two levels by Standard & Poor’s to BB-, or three levels below investment grade. S&P said today in a statement the insurer may add further to reserves. The outlook on the units remains “negative,” the rating firm said.
Genworth’s mortgage insurance business “now has one of the highest reserve levels in the industry,” S&P said. “However, the mortgage insurance industry generally continues to be affected by the fluid movements of a host of variables that make reserving inherently volatile.”
MGIC Investment Corp., the biggest U.S. mortgage insurer, had a second-quarter loss as fewer borrowers caught up on loans.
The cost to protect Genworth’s debt from default for five years surged to the highest since September 2009. Credit-default swaps on the company’s debt jumped 40.6 basis points to 510.6 basis points as of 3:31 p.m., after adding 93 basis points yesterday, according to data provider CMA.
Credit-default swaps, which typically fall as investor confidence improves and rise as it deteriorates, pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Genworth said the boost in reserves “was the result of worsening trends” in mortgage insurance. It also cited “continuing weakness in the U.S. residential real estate market.”
The number of so-called cures, in which insured borrowers caught up on payments, dropped to 17,908 from 25,868 a year earlier, Genworth said. New delinquencies fell to 21,272 from 26,034. Mortgage insurers reimburse lenders when homeowners stop paying and foreclosure fails to recoup costs.
Genworth, led by Chief Executive Officer Michael Fraizer, reported its first annual profit since 2007 last year as investments recovered from the credit crunch. The stock quadrupled in 2009. The company is scheduled to report complete second-quarter results on July 28.