Comeback of the Year: Behind Genworth's 700% Rebound

A year ago, few companies were having as tough a time as Genworth Financial (GNW).

Like other life insurers, it had seen its investments decimated by market turmoil. There "was a fear that a lot of these companies weren't solvent," says Standard & Poor's equity analyst Bret Howlett. "Genworth was at the top of that list."

But Genworth had another problem, as one of the only providers of both life and mortgage insurance. Its U.S. mortgage business was seeing big losses as homeowners defaulted on their loans amid the worst housing market.

"Genworth got hit by the worst from both worlds," says Morningstar (MORN) analyst Jim Ryan.

Then, on Apr. 9, the federal government added insult to injury by blocking Genworth's bid to get bailout funds from the Troubled Asset Relief Program.

It turns out Genworth didn't need the help. The company's shares, which hit a low of 84¢ on Mar. 6, 2009, now trade at almost $17.

The stock's performance since Mar. 25, 2009—up 700.5%—leads all stocks in the Standard & Poor's 500 index. It beats the second-best-performing stock, Gannett (GCI), by 101 percentage points and the overall index by 657 points.

Genworth was spun off from General Electric (GE) on May 25, 2004, and its shares remain 13.4% below their price at the initial public offering.

Insurance Rebound

What made Genworth the comeback stock of the year is, first, a drastic improvement in market conditions. Within months, the entire insurance industry rebounded as the credit markets healed and the bonds on their balance sheets recovered value.

From a 2009 low on Mar. 9 to a high on Sept. 16, the insurers in the S&P 500 Life & Health Insurance Index rose 276%.

By July, Genworth had retired its debts due in 2009, and could tell investors that no other long-term debt was due until mid-2011.

Yet even after these improvements became clear, Genworth stock has continued to climb, especially since the new year. (The stock has risen 49% since Jan. 1.) This time the cause appears to be an unexpected burst of optimism about Genworth's U.S. mortgage business.

On Feb. 23, Genworth Chief Executive Michael Fraizer told an investor conference that its troubled mortgage-insurance unit could be profitable by the middle of 2011.

"We've certainly seen some positive signals such as with new delinquencies coming on at a lower rate, the decline in average reserves for delinquencies, the benefits from loss mitigation, and in particular the ramp-up of these federal loan-modification programs," Fraizer said. A Genworth spokesman said top executives were not able for interviews for this story.

Mortgage Delinquencies

Speaking at a conference on Mar. 2, Kevin D. Schneider, the head of Genworth's mortgage-insurance business, heralded the fact that mortgage delinquencies have slowed their growth. In the fourth quarter of 2009, delinquencies grew 7.3%, down from 14.4% the previous quarter.

On Mar. 24, the stock hit its highest level since July 2008, surging 4.2% after Bank of America (BAC) said it would consider forgiving the principal on some of its mortgages.

"The less foreclosures there are out there, the more it helps U.S. mortgage insurers," S&P's Howlett says. For the mortgage-insurance business, he adds, "people think the worst might be over."

On Mar. 25, Genworth shares tumbled 2%, reflecting worries that problems for U.S. mortgage insurers could deepen yet. Morningstar's Ryan notes that Bank of America's program affects just 45,000 borrowers—out of millions of potential mortgage foreclosures in the U.S. The hope is that other lenders copy and expand on the BofA program. "It's something good," Ryan says, "but it's miniscule."

Risk Warnings

Analysts warn Genworth remains a risky company. "Genworth's earnings picture is still very uncertain," Citigroup (C) analyst Colin Devine wrote Mar. 22. He predicts the company's mortgage-insurance business won't be profitable until 2013, two years later than the CEO's prediction. Growth in delinquencies may have slowed, but loan defaults continue to set new records, Devine noted.

Though Genworth survived, it didn't escape 2009 unscathed. For example, worries about the company's creditworthiness have hurt the appeal of its annuities and other insurance products. "When consumers shop for insurance, they want someone who is financially sound," Howlett says. A.M. Best, which rates the financial strength of insurance providers, gives an "A," or excellent, rating to Genworth Life & Annuity Insurance, but rates the company's outlook as negative. Howlett adds: "It's definitely a high-risk company."

"It remains to be seen how much permanent damage has been to its franchise value," Devine wrote.

Genworth's executives sound more optimistic, noting the ways they're revamping various businesses. "We will emerge from this difficult economic cycle a stronger and smarter franchise than the one that entered it," Schneider said on Mar. 2.

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