Why Genworth Earnings Are Set to Soar

Genworth Financial (GNW -1.08%) will release its quarterly report tomorrow, but investors have already gotten a head-start in celebrating. With the recovery in housing greatly bolstering the creditworthiness of mortgage-backed securities compared to their financial-crisis lows, companies that insure those bonds against loss have bounced back sharply, and Genworth earnings look poised to reap the benefits.

Genworth Financial does more than just insure mortgages, with a full line of other insurance products as well. But lately, institutional investors have paid a lot of attention to Genworth's rivals in mortgage insurance, and the segment has been a big part of the company's overall success recently. Let's take an early look at what's been happening with Genworth Financial over the past quarter and what we're likely to see in its quarterly report.

Stats on Genworth Financial

Source: Yahoo! Finance.

How far can Genworth earnings soar?
Analysts have largely held their views on Genworth earnings steady in recent months, with just a single penny increase in earnings-per-share estimates for the full 2013 year. The stock, though, has gone through the roof, climbing 34% since late April.

Genworth's positive momentum continued when it announced its first-quarter results at the end of April. With its profit more than doubling, Genworth's gains centered on its mortgage-insurance business, which reversed a year-ago operating loss with a profit of $21 million. The company also saw substantial gains globally from its mortgage business.

Genworth's results are consistent with the gains that its mortgage-insurance peers have experienced. Both Radian Group (RDN -1.47%) and MGIC Investment (MTG -1.18%) have posted impressive gains that have attracted the attention of hedge-fund investors seeking to capitalize on the strengthening housing market. Yet in the long run, the question that faces the entire industry is whether lenders will even want to make mortgage loans with inadequate down payments that require mortgage insurance in the first place. Some would argue that tighter lending standards would make mortgage insurance unnecessary, while others note that lenders might choose to demand insurance beyond the current standards of roughly 20% to 25% home equity that have historically triggered the contractual need for purchase-money insurance in mortgage contracts.

Beyond mortgage insurance, not everything has gone well at Genworth. Its long-term care insurance business continues to struggle, with operating profits having fallen by more than 40% as Genworth struggles to get regulators to allow it to increase rates enough to make the business economically viable. Major competitors MetLife (MET -2.24%) and Prudential (PRU -1.68%) have already pulled back from long-term care, and Genworth might have to follow suit if it can't find other ways to make money from the segment. In addition, Genworth joined other insurers in settling claims that it and others failed to pay policy benefits to life-insurance customers, serving as a reminder that litigation risks continue to exist throughout the financial industry.

In the Genworth earnings report, watch to see whether the company comments on any impact from higher interest rates on mortgage activity. If banks start making fewer mortgage loans, it could dry up Genworth's policy-underwriting growth, potentially putting an end to the huge growth the company has seen recently. 

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