The collapse of the US residential mortgage market has
taken a heavy toll on a multitude of insurers, not least Genworth
Financial which found itself hit as an investor and mortgage
insurer. Now, busy with a radical restructuring, Genworth faces at
least another year of extremely testing market
conditions.
Genworth Financial is on a path of intense restructuring, the
inevitable result of a stream of bad financial news delivered in
2008 by the US’ eighth largest life insurer ranked in terms of 2007
revenue and assets.
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Hit particularly hard by the US residential property market
meltdown, Genworth reported increasingly deteriorating performance
during 2008, reporting net losses of $109 million and $258 million
in the second and third quarters, respectively. Total net loss for
the first three quarters came in at $251 million, down from a net
profit of $1.04 billion in the first three quarters of 2007.
Poor results combined with concerns relating to Genworth’s
exposure to the US residential mortgage insurance market has evoked
negative investor reaction, leaving Genworth’s share price trading
more than 90 percent below peak levels recorded in mid-2007.
This is certainly not conducive to raising new capital,
something the insurer mooted in its third quarter 2008 results
announcement. Not surprisingly, Genworth was among the first
insurers in line to take advantage of the US Treasury’s Troubled
Assets Relief Program (TARP) announced in October 2008.
Genworth could receive up to $1 billion in funds under the TARP
but to be eligible it must become a savings and loan (thrift)
holding company. To this end Genworth has reached a definitive
agreement to acquire InterBank, a Minnesota-based thrift company.
Completion of the acquisition is subject to the approval of the
Office of Thrift Supervision as is Genworth’s application to
convert to thrift holding company status.
Slashing staff numbers
In another radical restructuring move Genworth has announced
that it is to slash its workforce by almost 14 percent, leaving
some 1,000 employees in the US and elsewhere facing redundancy.
This will bring staff numbers back to 2004 levels and combined with
other initiatives reduce annual costs by between $100 million and
$150 million, said Genworth chairman and CEO Michael Fraizer.
Fraizer has also been at great pains to address investor
concerns relating to Genworth’s US mortgage insurance business
which has, unsurprisingly, come under considerable pressure in the
wake of collapsing house prices and soaring foreclosures.
In the third quarter of 2008 alone, Genworth reported a $121
million net operating loss on mortgage insurance while paid claims
of $132 million were up from $92 million in the previous quarter
and $49 million in the third quarter of 2007. Genworth ended the
third quarter of 2008 with total primary mortgage insurance risk in
force of $36.5 billion.
Responding to concerns directed at Genworth’s US mortgage
insurance operations Fraizer conceded factors such as increasing
unemployment, declining home prices and the lack of credit were
impacting on homeowners’ abilities to maintain mortgage
obligations.
“The US mortgage insurance team has been responding to these
realities, while simultaneously shifting to a business model that
delivers higher returns, with a lower risk profile,” said Fraizer.
“We will maintain our focus on insuring high-quality single
mortgages supported by the tightened underwriting standards and
increased pricing we introduced in late 2007 and continued
throughout 2008.”
Notably, Genworth reported that new US mortgage insurance
written in the third quarter of 2008 decreased by 53 percent
compared with the third quarter of 2007 to $6.2 billion
Fraizer also highlighted what he termed a “refining” of
Genworth’s strategic focus in the US where emphasis will be placed
on expanding Genworth’s already strong position in the long-term
care insurance sector.
“We compete well in wealth management through independent
advisers, in middle market life insurance, group annuities, and
Medicare supplement coverage,” said Fraizer.
Emphasis is also being placed on reducing risk exposure in other
business areas. For example, while Genworth will continue to sell
variable annuities it will do so on a more selective basis, said
Fraizer.
Risk management is evident in the mandate of chief investment
officer Ron Joelson who took control of Genworth’s $70 billion
investment portfolio in November 2008.
“Currently, we are focused on repositioning the investment
portfolio for yield and liquidity,” explained Joelson. “We have
reduced exposures to non-agency residential mortgage backed
securities and have increased our holdings in cash and cash
equivalent investments.”
Genworth has also indicated that sale of operating units
regarded as non-core is also under consideration. In the first move
in this direction Genworth has agreed to sell Genworth Seguros
Mexico (GSM) to HDI-Gerling International Holding, a unit of Talanx
Group, Germany’s third-biggest German insurance group, for an
undisclosed sum.
A small composite insurer, GSM offers vehicle, property, life
and personal accident insurance products.
In Mexico, Genworth will now focus on what it markets as
lifestyle protection insurance (payment protection insurance) and
mortgage insurance. These products are also Genworth’s core
offerings in Canada, Australia and Europe, its other three major
foreign markets.
In these major markets, Fraizer commented that Genworth was
positioning to grow in a “disciplined and careful fashion” in
response to reduced mortgage origination levels and its own tighter
risk management. In addition, because of uncertain global market
conditions was curtailing investment in growing mortgage insurance
business in emerging markets.
Clearly much of Genworth’s recovery potential rests on a
recovery in residential property markets in its major markets where
the outlook remains grim.
In the US, rating agency Moody’s predicts house prices will fall
by a further 12 percent between the third quarter of 2008 and the
end of 2009. In the UK, where house prices slumped by an average of
16.2 percent in 2008, building society Nationwide predicts further
weakness in 2009.
In Australia, where the economy is already under pressure from
lower commodity prices, Prime Minister Kevin Rudd warned in
late-January that China’s economic slowdown has very negative
implications for Australia and the Asia-Pacific region.
Against this background Genworth’s radical restructuring
measures and decimated share price are more than
understandable.
