Genworth (GNW) Updates

Capital Plan Approved:

GNW Photo LighthouseGenworth announces [Source] the comprehensive U.S. Mortgage Insurance capital plan has all necessary approvals and is fully implemented as of April 1, 2013. The resourceful capital plan was detailed in our blog post “Genworth’s Announces Resourceful Capital Plan” [Source]. The plan transferred the European mortgage insurance subsidiaries into Genworth’s U.S. mortgage insurance unit, Genworth Mortgage Insurance Corporation (GMICO), on January 31 and then implemented a reorganization to create a new public holding company.

The credit rating agencies expressed concern about Genworth’s senior note exposure to the housing industry. This concern continued while the housing market recovered and with the significantly improved pricing and risk profile of the private mortgage insurance industry. As of April 1, 2013 the reorganization separated the U.S. mortgage insurance business from the senior notes. The reorganization accomplishes several important steps:

  • Allows Genworth to maintain its investment grade rating;
  • Enables U.S. mortgage insurance unit to benefit from a strengthening housing market cycle;
  • Reduces the risk to capital ratio of the flagship mortgage insurance writer (GMICO) by 15 points;
  • Preserves the private mortgage insurance business facing likely favorable structural market changes.

Structural Changes in Mortgage Insurance Industry:

On March 22, 2013 Genworth announced [Source] that it elected former Senator Kent Conrad to serve as a new independent director.  At the time of his retirement from the Senate, he was chairman of the Senate Budget Committee.  Genworth and other private mortgage insurers are adding directors and executives with government experience to guide them through the formation of new regulations in housing. In December 2012, Genworth added David Moffett, the former CEO and director of the Federal Home Loan Mortgage Corporation (Freddie Mac) as an independent director [Source].

Congress is considering changes to the U.S. housing policy that could increase the role of private mortgage insurers. Private mortgage insurance industry sales and pricing are improving as its largest competitor, the U.S. Federal Housing Authority (FHA), limits its role and increase prices in the face of mounting losses and congressional scrutiny.

It will take time for this to play out, but the potential for Genworth and other private mortgage insurers is huge and is already taking place. The FHA is raising premiums it charges borrowers to insure their mortgages to help offset its losses. The agency’s market share dropped to 43% in 2012 from a peak of 71% in 2009 [Source].

In our Genworth Investment Thesis [Source] we asked: “Given the choice of 1) locking out 40-60% of credit worthy buyers from an already depressed housing market; 2) requiring the federal government to commit more tax payer money to housing with record deficits already in place, or 3) continuing the decades long role of private mortgage insurers putting their own capital at risk, in the first loss position to insure the mortgages. At the risk of over simplifying; is there really a question here?

Genworth Financial Schedules Earnings Conference Call:

Genworth Financial scheduled the 1Q13 earnings conference call for May 1, 2013 at 9:00 a.m. ET and will issue its earnings release after the market close on April 30, 2013 [Source].

Genworth Mortgage Insurance of Canada Schedules Earnings Conference Call:

Genworth MI Canada also announced [Source] it will issue its earnings release after the market closes on April 30, 2013 and hold a conference call May 1, at 10:30 a.m. ET to discuss 1Q13 results.

Disclosure: Long GNW

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