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Mortgage Losses Weigh Down Genworth's Profits

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Genworth Financial (NYSE: GNW  ) witnessed a decline in its first-quarter net income as its mortgage insurance segment reported an operating loss of $81 million. The financial security company, as I had mentioned in my previous study of it, has been banking too much on its retirement and protection segment. But with credit trends improving in the country, the mortgage business does offer some hope.

On the whole
Genworth's overall net income fell to $82 million in the quarter from $178 million in the first quarter of 2010. Revenues improved slightly to $2.5 billion from $2.4 billion. But, in order to evaluate the company's overall performance in the quarter, we need to question the performance of all its three segments individually. Then, we'll have a much better understanding of what's going on here.

Digging deeper
Genworth's retirement and protection segment's operating revenue grew 6% year-on-year, triggered by life sales and long term care insurance. The segment's earnings increased to $127 million compared with $122 million a year ago.

The company's international segment performed remarkably well as it witnessed an impressive 36% increase in its net operating income. Earnings and margins in lifestyle protection improved in Canada and Australia while flow new insurance written in Canada went up by 5% from the corresponding quarter last year.

Home on the range
Mortgage insurers are still feeling the heat of the U.S. housing crisis. And Genworth is no exception. Its U.S. mortgage insurance segment incurred an operating loss of $81 million in the quarter -- more than a two-fold increase from last year's loss of $36 million.

Several other mortgage insurers such as MGIC Investment (NYSE: MTG  ) and PMI Group (NYSE: PMI  ) have similarly borne the brunt of the crisis. But the loss mitigation activities savings of $122 million in the quarter, the company believes, put it on track to achieve an estimated full-year benefit of $400 million to $500 million. Besides, the total flow delinquencies declined by 7% sequentially, reflecting lower new delinquencies, improved cures, and higher flow paid claims.

The Foolish bottom line
The improving credit scenario paints a good picture for Genworth's mortgage business and I expect greater things from the company. But, at this point in time, I would still reiterate my stance about being vigilant of this stock.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 18, 2011, at 2:06 PM, Cbou101 wrote:

    I would like to know what the gang feels about the future of this sector if our government namely Fannie, Freddie, and most of all the FHA will get out of the mortgage insurance business and turn these back over to the private sector where they belong.

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