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.
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.