Genworth Financial Inc. said Tuesday that it is considering "strategic alternatives" for its U.S. mortgage insurance unit, including a spinoff.
Shares of the Richmond company had lost more than two-thirds of their value in the month before the announcement, and executives said the insurance unit's exposure to the mortgage crisis was dragging down the rest of the company.
"Progress in our international, wealth management, retirement, life and long-term-care insurance businesses has been overshadowed by concerns about the future" of mortgage insurance, Michael Fraizer, Genworth's chief executive, said in a press release Tuesday.
Last month's downgrades of United Guaranty Corp., the Greensboro, N.C., mortgage insurance unit of American International Group Inc., left Genworth's U.S. mortgage insurance business as the only large one in the industry with double-A financial strength ratings from all three major agencies. Such a rating traditionally had been required to do unfettered business with Fannie Mae and Freddie Mac, but the two government-sponsored enterprises loosened their requirements as the industry faltered.
Genworth's second-quarter share of new insurance written increased 10.8 percentage points from a year earlier, to 23.9%, according to National Mortgage News, raising it from No. 4 to No. 1 in the industry.
James Brender, an analyst at Standard & Poor's Corp., said in an interview Tuesday that the there are several potential, and very different, scenarios for the unit. If it is purchased by a company that "has tremendous resources and is looking to really take over the mortgage insurance industry, then that adds capacity."
A private-equity fund, seeking returns through leverage, would be "less likely to provide additional capital," Mr. Brender said. And if it is separated from the rest of Genworth, the mortgage insurance business would "lose something in terms of the risk management and other things."
The unit had benefited from diversification at Genworth, where growth elsewhere reduced the pressure to pursue risky strategies, he said.
"I think one of the reasons that Genworth did not develop as much exposure to subprime and alt-A products on the mortgage insurance side in the U.S. is because they had" mortgage insurance operations abroad that were "generating significant profits," he said. "There wasn't as much earnings and revenue pressure as there was for, say, a monoline mortgage insurer."
It is hard to predict whether a buyer will step forward, he said. "It's one of the stronger-performing entities. You could probably call it best of breed, based on recent operating performances, the risk management capabilities. But nevertheless it has mortgage credit risk," which could scare off potential suitors. "If you think there's going to be a mortgage insurance business," then "the ones losing the least amount of money are best positioned to capitalize when the cycle turns."
Genworth did not return phone calls by press time Tuesday.
It has been damaged most heavily by losses on its holdings of bonds backed by subprime and alternative-A mortgages. Net operating income from its retirement and protection business, which includes life insurance and annuity products, has slid, but the business, Genworth's largest by revenue, remains profitable.
The second-quarter net operating loss at the U.S. mortgage insurance business, Genworth's smallest by revenue, increased by two-thirds from the first quarter, to $59 million. It reported net operating income of $66 million for the second quarter of last year.
Net operating income from Genworth's foreign mortgage insurance unit, increased 14.4% from the first quarter and 28.9% from a year earlier, to $183 million.
During a conference call in July, Mr. Fraizer said that in Canada and Australia — which account for the bulk of his company's foreign mortgage insurance business — "home price appreciation is expected to slow from double-digit levels in 2007 to the 4% to 5% range in 2008, and GDP in these markets is expected to decline somewhat."
He also said Genworth had taken steps to respond to deteriorating conditions, including tightening underwriting standards.
During a conference call last week on the U.S. mortgage insurance business, Kevin Schneider, the president of Genworth's U.S. mortgage insurance business, said factors for which there is "no historical experience" to draw on are making it difficult to forecast losses.
Genworth's capital position will enable it to withstand severe stress, he said, but it is evaluating actions "such as reinsurance, shifting capital from international platforms, and joint venture structures that could provide up to $400 million of capital capacity in a more difficult environment."
In the aftermath of the takeovers of Fannie and Freddie, there has been speculation about whether the government will eliminate mortgage insurance requirements to spur liquidity. During the conference call last week, Mr. Schneider said the GSE requirement for "mortgage insurance, credit enhancement on greater than 80% loan-to-value loans, remains unchanged," but he does expect further reform.
Tuesday's announcement drove Genworth's stock up. By midafternoon it had climbed 66.6% from Monday's close, to $8.33.
