Genworth fortifies collapsing mortgage insurance business
Genworth Financial (GNW) used $375 million worth of shares in its Canadian subsidiary to provide capital support for its collapsing U.S. mortgage insurance business in the second quarter. The move raised concern among investors over why Genworth would continue holding fast to a segment that pushed losses to twice the level seen one year ago. The mortgage insurance segment hemorrhaged $253 million in losses on its own for the quarter. In a conference call with these investors Friday morning, Genworth CEO Michael Fraizer said new business written since the downturn is showing healthy returns, compelling him and other executives to maintain their position. "In U.S. MI, it's important to differentiate between business originated before and after the middle of 2008 when underwriting and pricing changed substantially," Fraizer said. New mortgage insurance written after the crisis generated $230 million in premiums through the second quarter for Genworth and could produce more than $430 million over the life of these loans. The return on equity for the new insurance totaled more than 25%. As the government continues to unravel its support of the industry through the Federal Housing Administration, private mortgage insurance companies pushed market share from 5.3% in the first quarter of 2010 to 8.2% in the second quarter of 2011, Fraizer said. Private insurers wrote $4.8 billion in new business in June, up from less than $4 billion in May, according to an industry trade group. Upcoming standards on the qualified residential mortgage and the future role of Fannie Mae and Freddie Mac could also produce more opportunities for Genworth to grow, and Fraizer said they are hard at work lobbying both state and federal agencies to give them that chance. The result so far has reaped benefits. A total of 46 states granted the company waivers to continue writing new business despite surpassing the risk-to-capital ratio of 25-to-1. But at times, the company has taken the pressure potentially too far, when it funded a research study from George Washington University concluding the FHA should reduce its market share even further. The stakes are very high for Fraizer. Investors expressed interest in Genworth's other segments including life insurance and wealth management. The CEO said he and his team are making progress on separating the company along these lines "if and when it makes sense to do so." Fraizer said Genworth will continue supporting the mortgage insurance segment. For now. "We believe U.S. MI has a strong future potential," Fraizer said. "Trends like we saw in the second quarter could continue so it's important to emphasize the U.S. MI segment will not have an unlimited call on the capital of the enterprise." Write to Jon Prior. Follow him on Twitter @JonAPrior.