Genworth sells mortgage insurance, and is responsible to make good on home loans if borrowers default. The company’s mortgage-insurance business generates about 7% of its revenue, a concern to investors. Company officials have attempted to calm investors’ concerns. In discussing second-quarter results on a conference call, Chief Executive Michael Fraizer said subprime loans made up 9% of the U.S. mortgage-insurance portfolio, and called that exposure "limited."
Each quarter insurers typically have to mark their subprime bonds to market, exposing them to take hits to their shareholders' equity. Yet what looks like an immediate hit could result in longer-term gains if insurers hold these bonds to maturity and there are no significant defaults that undermine them. Then they would eventually realize the gains they originally anticipated. A number of large insurers have noted that most of their bonds are in the highest-rated categories, AAA and AA.
In a research report referring to P/C carriers, Lehman Brothers analyst Jay Gelb wrote: "The P&C insurer stocks could be poised to recover sharply upon reporting third-quarter results that might show no erosion in book value. He has "buy" ratings on Chubb and ACE, which he says have "immaterial exposure" to subprime, and "hold" ratings on Allstate and Hartford, which have subprime and Alt-A exposures as a percentage of book value of 19% and 12%, respectively.
Allstate has reported subprime exposure of $4.8 billion. Dan Hale, Allstate's chief financial officer, has said the insurer is "comfortable" with its subprime holdings. The company currently trades at about 1.5 times book value, below its historical median of 1.6 times, suggesting that investors have priced in their concerns.
Hartford has reported subprime exposure of $3.4 billion, while Chubb has said it has no subprime exposure. ACE has about $280 million in subprime-loan exposure, which is broadly diversified.
As of June 30, Genworth had $2.1 billion invested in bonds backed by subprime loans, out of a total of $72.6 billion in invested assets. Of the subprime-backed bonds, 41% are rated AAA and 25% are rated AA, the company says.