The stock was also pressured as the company, a major mortgage insurer, sounded cautious about the housing market.
Genworth reported second-quarter results late Thursday that just missed analyst estimates. See details on the numbers here.
Lapse
Genworth's life insurance business generated net operating income of $32 million in the quarter, down 45% from the same period a year earlier.
The drop was partly caused by more customers allowing level-term life insurance policies to lapse. These types of policies usually charge a level premium each year for a decade. In the 11th year, the premium increases a lot. Genworth assumes a certain number of policyholders will stop paying at this point, allowing their policies to lapse.
However, lapses are coming in higher than expected. When Genworth sells policies like this it has to amortize the cost of the sales over the life of the policies. When polices lapse, these costs have to be recognized earlier. When that happens, it dents profits.
Genworth sold a lot of 10-year level-premium life insurance policies in 1999 and 2000, so this issue is showing up in results now.
There may also be a knock-on impact on mortality rates, which measure the number of policyholders who die, triggering payouts. When premiums increase in the 11th year, healthier customers may be able to drop their policies and get a new one that's cheaper. Unhealthier policyholders may stick around. That could leave Genworth insuring a higher proportion of people who are more likely to die.
Still, Genworth's Chief Financial Officer Pat Kelleher said that he wasn't seeing such adverse selection.
"As I look at the mortality that is emerging quarter over quarter, we haven't seen that anti-selection," he said during a conference call with analysts on Friday. "In fact, I described the mortality as being within the normal range, but high."
'Giddy'
Genworth was also cautious about the housing market. This is an important sector for the company because it's one of the largest mortgage insurers in the U.S.
Mortgage insurance helps home buyers who don't have enough money for a down-payment, which traditionally was 20% of the purchase price. As house prices slumped, rising defaults sparked a surge in claims that hit companies like Genworth, MGIC, Radian and PMI hard.
Still, an economic recovery in 2009 and signs of stabilization in house prices have sparked optimism that the worst may be behind the mortgage insurance sector.
Genworth's mortgage insurance business generated a net operating loss of $40 million in the second quarter. But that was down from a $134 million loss a year earlier.
Delinquencies declined 4% in the latest quarter. Genworth also got a $217 million boost from loss-mitigation efforts. These include mortgage modifications and so-called recissions, in which mortgage insurers challenge claims on home loans that may have been underwritten improperly.
Still, Genworth Chief Executive Michael Fraizer was cautious about the housing market during an interview with MarketWatch on Friday.
"Some people get absolutely giddy about housing market but you have to be practical about it," he said. "We're more conservative and cautious when you look at where unemployment is. We're more optimistic about 2011."
The peak-to-trough decline in house prices could end up being larger than expected, he added.
Based on an index of home prices compiled by the Federal Housing Finance Agency, Genworth was expecting the peak-to-trough decline to be roughly 15%. It's already dropped about 13%, Fraizer noted.
"Now we see a wider range," he said. "It's still down 13% so far, but could be down between 14% or 20% worst case on that index, depending on the pace of the recovery in jobs."
Genworth shares dropped 15.8% to $13.30 in afternoon trading on Friday. That still leaves the stock up 17% so far this year.
"The market reacts and sometimes over-reacts," Fraizer said. "We're pleased with the progress we made."