Genworth Mortgage Insurance Unit Must Rebound or Wind Down, Haines Says
Genworth Financial Inc. (GNW)’s mortgage insurance business will either improve results or cease writing new coverage, according to analysts at CreditSights Inc.
The unit “faces a binary outcome,” Rob Haines and Eric Axon of CreditSights said in a note to clients today. “Either the MI business becomes more viable as recent vintage business offsets deterioration in the older vintages, or the business is placed into run-off. We believe that either outcome would improve market perception of the company’s credit profile.”
Genworth Chief Executive Officer Michael Fraizer has faced investor pressure to prevent mortgage insurance losses from draining capital at the Richmond, Virginia-based company, which also sells life and long-term care insurance. The worst U.S. housing crash in seven decades has hurt mortgage insurers, increasing claims to reimburse lenders when homeowners default and foreclosures fail to recoup costs.
The cost to protect Genworth’s debt from default for five years is more than 700 basis points, compared with less than 300 basis points in October of last year, on investors’ concerns that loses tied to home loans are putting the insurer at risk, according to the analysts.
Current credit-default swap prices “meaningfully overstate potential holding company default risk,” the analysts said.
Genworth is unlikely to make capital contributions to the mortgage insurance unit in the near-term, Haines and Axon said, citing a conversation with the insurer’s senior management. They said the unit’s future may be resolved within the next 12 months, causing spreads to tighten.
Fraizer said in July that any additional capital support will be based on a review that includes an analysis of risk, competitors’ performance and policy changes that may affect the industry.
“We’ve made our position regarding U.S. mortgage insurance capital very clear,” said Al Orendorff, a spokesman for the company.
Highfields Capital Management LP, the hedge fund run by Jonathon Jacobson, doubled its stake in Genworth in August after Fraizer said on a conference call that he was considering separating the mortgage insurance division from the rest of the company. Jacobson had told his fund’s investors before Fraizer’s remarks that he was “fatigued” with the insurer’s management.
Genworth has fallen more than 50 percent this year in New York trading. The insurer plunged 13 percent on July 21, after it reported a surprise second-quarter loss on “worsening trends” in its mortgage insurance business. The company is scheduled to announce third-quarter results next month.
Rivals including PMI Group Inc. and Triad Guaranty Inc. were forced by regulators to stop selling new mortgage insurance after capital fell short of required levels. MGIC Investment Corp., Radian Group Inc. and American International Group Inc. (AIG) compete with Genworth guaranteeing home loans.
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.
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