GENWORTH FINANCIAL INC quarterly report, Q2 FY2019

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Genworth Financial, Inc. — Q2 2019 Form 10-Q

Business context and reporting period

Quarter ended June 30, 2019; financial statements are unaudited and amounts below are in millions of U.S. dollars unless stated otherwise. Genworth operates U.S., Canadian and Australian mortgage insurance businesses, U.S. life insurance businesses, a Runoff segment and Corporate and Other activities.

Financial performance and position

  • Q2 revenue: $2,156, essentially flat versus $2,159 a year earlier. Premiums were $1,126, down 1%; net investment income rose 3% to $852; net investment losses were $45 versus losses of $14.
  • Q2 earnings: Net income was $218 versus $249; $168 was available to common stockholders versus $190. Diluted EPS was $0.33 versus $0.38. Adjusted operating income, a non-GAAP measure, was $204 versus $200.
  • First-half results: Revenue was $4,360 versus $4,274. Net income was $448 versus $414; common-stockholder income was $342 versus $302, or diluted EPS of $0.67 versus $0.60. Adjusted operating income was $325 in both periods. Net investment gains were $29 versus losses of $45.
  • Cash flow, first half: Operating cash flow was $795 versus $561; investing cash outflow was $351 versus $198; financing cash outflow was $695 versus $943. Cash, cash equivalents and restricted cash ended at $1,938 versus $2,243 at year-end 2018.
  • Balance sheet, June 30: Assets were $104,306, liabilities $88,714 and total equity $15,592. Long-term borrowings were $4,044, compared with $4,025 at year-end. Total investments were $75,048; fixed-maturity securities were $63,774.
  • Liquidity: Genworth Holdings, the holding company, had $358 of cash, cash equivalents and restricted cash plus $45 of U.S. government securities. The combined $403 was about $100 below management’s targeted cash buffer of twice expected annual external debt-interest payments. Insurance-subsidiary cash and assets are not necessarily freely available to the parent.
  • Comprehensive income: First-half other comprehensive income was $1,055, compared with a loss of $929 a year earlier, largely reflecting investment and hedge valuation changes. Accumulated other comprehensive income was $3,013 at June 30.

Changes versus comparable periods

  • Q2 common-stockholder earnings declined 12%, while adjusted operating income increased 2%. The difference reflects, in part, a larger investment loss and other excluded items; adjusted operating income is not a GAAP substitute.
  • First-half common-stockholder earnings increased 13%, while adjusted operating income was unchanged. Higher U.S. Mortgage Insurance results and improved long-term care results were offset by declines in Canada and Australia Mortgage Insurance and lower fixed-annuity results.
  • U.S. Mortgage Insurance adjusted operating income rose to $147 in Q2 from $137; Canada Mortgage Insurance fell to $41 from $46; Australia Mortgage Insurance fell to $13 from $22. U.S. Life Insurance rose to $66 from $57, and Runoff declined to $9 from $13.
  • Long-term care insurance improved to $17 of adjusted operating income in the first half from a $10 loss, helped by rate actions and favorable prior-year claim development. Fixed annuities declined to $36 from $59, including unfavorable loss-recognition charges.

Outlook, management commentary and key risks

  • China Oceanwide transaction: The proposed $2.7 billion acquisition, or $5.43 per share in cash, remained pending. The parties extended the termination date to November 30, 2019; Canadian regulatory approval and Chinese currency-conversion/funds-transfer clearance remained outstanding. The parties were exploring a possible sale of Genworth Canada; China Oceanwide may reject proposed terms. A sale or transaction completion was not assured.
  • If completed, China Oceanwide and/or affiliates agreed to contribute an aggregate $1.5 billion over time after closing, subject to required approvals. The filing says China Oceanwide has no current intention or future obligation to contribute additional capital for the legacy long-term care business. Genworth also described a post-closing $175 million contribution to GLIC, with timing to be revised due to transaction delays.
  • If the transaction does not close, Genworth said it may pursue asset sales, including Genworth Canada or Australia Mortgage Insurance, and evaluate options involving U.S. Mortgage Insurance. Management cited debt maturities, ratings pressure and the need for capital and financial flexibility.
  • Insurance and market risks: Long-term care results depend on rate approvals, claims, persistency and assumptions; the company expected its annual claim-reserve assumption review in Q3 2019 and loss-recognition and cash-flow testing in Q4. It recorded $39 of incremental long-term-care reserves in the first half related to projected profits followed by losses. Lower interest rates may pressure investment returns and fixed-annuity testing. Mortgage-insurance results are exposed to housing, unemployment, competition, delinquencies, regulation and foreign exchange.
  • Management expected Canada’s full-year 2019 loss ratio to be similar to or modestly above 2018’s 15%, and Australia’s to be similar to 2018’s 30%; these are outlook statements, not guarantees. Management reported U.S. Mortgage Insurance PMIERs available assets at approximately 123% of requirements, with more than $650 above requirements at June 30.
  • Ratings and litigation: Moody’s upgraded the principal U.S. mortgage insurer GMICO to Baa3 but downgraded GLAIC to B1 in June. S&P downgraded the principal Australian mortgage insurer to A from A+ on July 25, citing competitive position and diversification concerns; one customer contract provides a potential termination right subject to a 30-day response period. AXA’s UK claim relating to payment-protection-insurance remediation was stated at £265 million, with AXA alleging further amounts may be sought. Genworth said it could not predict outcomes or estimate reasonably possible losses for the identified litigation generally.
  • The board’s suspension of common-stock dividends and stock repurchases remained in effect. Insurance-subsidiary dividends are subject to regulatory limits; approximately $500 could be paid to the company in 2019 without regulatory approval based on year-end 2018 statutory results, but subsidiaries may retain capital instead.

Most important facts for investors to verify

  • Whether the China Oceanwide transaction, required approvals and any Genworth Canada sale proceed before the November 30, 2019 deadline, and what happens if they do not.
  • Holding-company liquidity, debt maturities and the ability to obtain dividends from regulated subsidiaries; distinguish parent cash from consolidated cash.
  • Long-term-care claims, reserve assumptions, rate approvals and the effect of the Q3/Q4 2019 reviews, including the $39 incremental reserve.
  • Mortgage-insurance capital compliance, delinquency trends, customer concentration and the effect of the Australian rating downgrade and related contract provision.
  • Developments in the £265 million AXA claim and other litigation, for which the filing provides no clear estimate of total potential exposure.