Genworth Plan to Reorganize Struggling US Mortgage Operations Includes a New Holding Company Structure
January 17, 2013 by Fran Matso Lysiak
RICHMOND, Va. – Genworth Financial Inc. said it’s planning to revamp its U.S. mortgage insurance business, which includes a legal entity reorganization that would create a new holding company structure.
The plan for its U.S. mortgage insurance business would reduce Genworth Mortgage Insurance Co.’s risk-to-capital by up to 15 points, reduce the likelihood the U.S. mortgage insurance subsidiaries will require more capital and ensure it can continue to write new business and reduce the risk of a default under the indenture governing Genworth’s senior notes, the company said in a statement. Genworth Mortgage Insurance is its main U.S. mortgage insurance unit.
Since the start of the financial crisis, Genworth’s U.S. mortgage insurance operations have lost $2 billion — a “disaster,” as with everyone else in the industry, said Steven Schwartz, an equity analyst with Raymond James & Associates, Chicago. But these operations are improving, and “we expect to see the US mortgage insurance operations become profitable sometime in 2013.” Currently, GMICO is allowed to write business because of waivers granted by state insurance regulators and from Fannie Mae and Freddie Mac, Schwartz said.
With the plan, the company is forming a new holding company, and the current Genworth Financial would be renamed Genworth Holdings, which would be a direct subsidiary of Genworth Financial, Schwartz said. The company is delinking its U.S. mortgage insurance operations from Genworth Holdings, he said.
Genworth Financial said it expects completing the reorganization in the second quarter. Under the plan, Genworth will contribute $100 million to GMICO.
The U.S. mortgage insurance operations would be moved out from under Genworth Holdings and become a direct subsidiary of Genworth Financial, Schwartz said. This is important because the debt of Genworth Holdings can be accelerated if the U.S. mortgage operations were declared insolvent or taken over by the regulators, he said. By moving U.S. mortgage insurance operations from Genworth Holdings and into Genworth Financial, “that link is broken,” which is good for bondholders, he said. Under the reorganization, an insolvency relating to the U.S. mortgage insurance subsidiaries wouldn’t cause a default under the indenture governing Genworth’s senior notes, the company said.
The plan includes several actions, some of which need regulatory approval, Genworth said. These include transferring ownership of the European mortgage insurance subsidiaries to GMICO, and implementing the legal entity reorganization that creates the new holding company structure.
Ownership of the European mortgage insurance subsidiaries will be moved under GMICO, and these subsidiaries will provide about $200 million in additional statutory capital to GMICO. This transfer has received regulatory approval, and the company expects completing the transfer during the first quarter.
Genworth obtained the approvals to implement a “NewCo” structure that would allow for the continued writing of new business in all 50 states. This option would be used if adverse conditions occurred, such as a higher risk-to-capital level or the regulatory risk-to-capital waivers being revoked.
When formed, “NewCo” would be subject to GSE eligibility guidelines and capital requirements and would allow access to third-party funding sources. As part of this plan, Genworth agreed to contribute $100 million in cash to GMICO and another $100 million if GMICO were to enter into a deferred payment order with the North Carolina insurance department or if projections indicate that GMICO may not have sufficient resources to pay valid claims.
Implementation of this plan will reduce “uncertainties related to our U.S. mortgage insurance subsidiaries,” said Martin P. Klein, Genworth Financial’s chief financial officer, in a statement.
In December, Genworth named Thomas J. McInerney as its new president and chief executive officer, starting Jan. 1, 2013. In May 2012, Michael D. Fraizer, who led Genworth through its initial public offering by General Electric in 2004, abruptly resigned as chairman of the board and CEO (Best’s News Service, May 1, 2012).
Citing higher losses in Australia, Genworth in April 2012 had delayed its planned initial public offering of up to 40% of its mortgage insurance business in that country, which it previously targeted for the second quarter of 2012. At that time, Genworth said it was seeking to complete the IPO in early 2013 (Best’s News Service, April 19, 2012).
Genworth’s Australian mortgage business has nothing to do with this transaction, Schwartz said.
Cash and highly liquid securities at the holding company totaled about $1 billion at Dec. 31, 2012, Genworth said.
Over the summer, an investment firm with about a 5.2% stake in Genworth was in discussions with the company concerning “risk mitigation strategies, possible sale or spin [off] of assets, and similar matters.” Highfields Capital Management, which holds more than 25.36 million shares in Genworth, said in a regulatory filling it has maintained “an ongoing dialogue” with Genworth’s management regarding “performance, allocation of capital and structural issues” (Best’s News Service, June 29, 2012).
“One of Global Mortgage Insurance’s strategic priorities was maintaining the ability to write new profitable business in U.S. Mortgage Insurance while focusing on a return to profitability,” said Kevin D. Schneider, president of Genworth’s Global Mortgage Insurance Division, in a statement. The ability to implement the “NewCo” option, if necessary, along with the company’s continued GMICO waivers and use of Genworth Residential Mortgage Assurance Corp. “will ensure our continued ability to write profitable new business.”
Genworth Life Insurance Co. and Genworth Life and Annuity Insurance Co. each currently has a Best’s Financial Strength Rating of A (Excellent).
On the afternoon of Jan. 16, Genworth Financial’s (NYSE: GNW) stock was trading at $8.90 a share, up 9.47% from the previous close. (By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com) BN-NJ-01-16-2013 1558 ET #
