Genworth Beats as Profits Shrivel
Mortgage and life insurer Genworth Financial (NYS: GNW) recorded weak earnings in its third quarter on the back of falling mortgage losses. Though the numbers beat analysts' expectations, net income dropped 65% from a year ago as investment losses ate into the company's performance. The Virginia-based company also announced plans to publicly float its Australian mortgage insurance unit, which gave its shares a 7% lift. Let's find out more.
A look at the numbers
The company's staggering earnings decline reflected an investment loss of $60 million, compared to a gain of $54 million in the year-ago period , as market conditions played their part in driving losses.
The American mortgage insurance business has begun to narrow its losses after the turmoil the industry has been through in the last few years. Sandler O'Neill & Partners analyst Edward Shields said results in the segment improved -- in fact beating Street expectations -- because losses in the quarter diminished and loans approached maturity.
In an effort to reorganize its business portfolio, gain a better entrance into capital markets, and help its Australian business grow, Genworth plans to float its Australian mortgage insurance business in a minority initial public offering. It is hoping to sell nearly 40% of the company through the IPO slated to take place in the second quarter of next year.
Genworth and its peers like Radian (NYS: RDN) and PMI Group (NYS: PMI) made the most of the U.S. housing boom by insuring many mortgages at a relatively low premium. But when the housing crisis struck and all the loans went belly up, these companies were left reeling as they incurred huge losses, sending risk ratios sky-high and leaving them with much less capital. Genworth's risk-to-capital ratio, as of last month, stands at 27.5 to 1, which is higher than the 25 to 1 that most states allow. However, 46 states have allowed the insurer to do businesses. Peer MGIC Investment (NYS: MTG) , which recently reported losses, saw its risk-to-capital ratio rise to 24 to 1 as a result of higher defaults.
The Fed recently stated that it is looking to focus more on the housing sector in an effort to boost the sluggish U.S. economy by making a concerted effort to help bolster the real estate market. The suggestion has met with a positive response from economists across the board, as they believe that efforts at bettering the state of the housing market may spur large-scale recovery. If the Fed manages to succeed in spite of the serious housing headwinds, mortgage insurers such as Genworth may just see brighter days ahead.
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