Business context and reporting period
Genworth Financial, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2018. Its businesses include U.S., Canadian and Australian mortgage insurance; U.S. life insurance, including long-term care; and runoff operations. Amounts below are in U.S. dollars unless noted.
The proposed China Oceanwide acquisition remained pending. Shareholders had approved the transaction, but regulatory approvals and other closing conditions remained outstanding.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior year-end |
|---|---|---|
| Total revenue | $2.115 billion | $2.171 billion |
| Income before tax | $228 million | $332 million |
| Net income | $165 million | $216 million |
| Net income available to common stockholders | $112 million; $0.22 per diluted share | $155 million; $0.31 per diluted share |
| Adjusted operating income available to common stockholders (non-GAAP) | $125 million; $0.25 per diluted share | $143 million; $0.29 per diluted share |
| Net cash from operating activities | $109 million | $655 million |
| Cash, cash equivalents and restricted cash | $2.843 billion | $2.875 billion at Dec. 31, 2017 |
Net investment income rose to $804 million from $790 million, but net investment results swung to a $31 million loss from a $34 million gain. Benefits and reserve changes increased to $1.311 billion from $1.246 billion. Interest expense rose to $76 million from $62 million. The effective tax rate declined to 27.6% from 34.9%, primarily reflecting the U.S. federal corporate tax rate reduction under the Tax Cuts and Jobs Act (TCJA).
At March 31, total assets were $103.773 billion, total liabilities $88.911 billion and total equity $14.862 billion. Long-term borrowings were $4.654 billion, up from $4.224 billion at year-end. The company held $71.777 billion of investments, including $61.080 billion of available-for-sale fixed maturities. Consolidated cash includes restricted cash and should not be assumed to be freely available to the holding company.
Total comprehensive loss was $415 million, including $580 million of other comprehensive loss, principally reflecting lower unrealized investment gains and losses on qualifying hedges as interest rates rose. This is distinct from the quarter’s net income.
Material changes and business drivers
- Mortgage insurance performance strengthened: adjusted operating income was $111 million in U.S. Mortgage Insurance, $49 million in Canada and $19 million in Australia, versus $73 million, $36 million and $13 million, respectively. U.S. mortgage insurance loss ratio fell to 9% from 17%; Canada’s fell to 13% from 16%; Australia’s was 30% versus 35%.
- U.S. Mortgage Insurance benefited from fewer new delinquencies and improved cures and aging, as well as higher insurance in-force. New insurance written increased 18% year over year. PMIERs available assets were estimated at 124% of required assets, with more than $600 million of excess.
- U.S. Life Insurance adjusted operating results deteriorated to a $5 million loss from $53 million of income. Long-term care insurance recorded a $32 million adjusted operating loss versus $14 million of income; its loss ratio rose to 84% from 72%, reflecting higher claim utilization, severity and frequency, and weaker acquired-block earnings.
- Australia’s reported premiums and loss ratios were affected by a revised premium earnings pattern applied retrospectively under U.S. GAAP. Management said the change shifts the timing of premium recognition over the life of policies, rather than changing total lifetime premiums; it also makes period comparisons less directly comparable.
- Net operating cash flow fell sharply from the prior year, mainly because prior-year trading-security sales did not recur and derivative collateral outflows were higher. Financing cash flow included $441 million of net proceeds from the new term loan.
Outlook, risks and unusual items
- China Oceanwide transaction: the parties extended their termination-right waiver to July 1, 2018. CFIUS review and Delaware insurance regulatory discussions remained unresolved. The parties were pursuing approval without the planned GLAIC unstacking; a revised capital investment plan involving an aggregate $1.5 billion contribution after closing was under development, not finalized. The transaction’s completion and timing were uncertain.
- Debt and liquidity: Genworth Holdings raised a $450 million secured term loan due 2023 at a 6.2% rate as of quarter-end, intended with cash on hand to retire the May 2018 notes. If the acquisition does not close, management said asset sales, including potential sales of the Canadian or Australian mortgage insurance businesses, might be needed to address debt maturities and other challenges.
- Long-term care: management continued to pursue premium increases and benefit modifications to improve the legacy business and support capital. In Q1, 24 state approvals represented a weighted-average 28% increase on approximately $72 million of annualized in-force premiums. Management expected to continue rate actions; approvals, timing and policyholder responses remain uncertain.
- Market and capital risks: management expected interest rates to continue rising during 2018 but noted uncertainty about pace and effects. Equity, interest-rate and credit markets were volatile. Proposed PMIERs 2.0 could materially reduce the U.S. mortgage insurance business’s excess capital buffer, although management estimated it would remain above requirements under the draft reviewed.
- Reserves and other exposures: life and long-term care results are sensitive to actuarial assumptions, claims, persistency and investment returns; management cautioned that adverse experience or reserve revisions could materially affect results and liquidity. The company also cited rating, counterparty, regulatory and litigation risks. An AXA dispute seeks more than £28 million; shareholder suits related to the merger proxy had a proposed settlement preliminarily approved, with final approval hearing set for July 3, 2018. The filing did not estimate potential losses for most pending matters.
- Shareholder returns: common-stock dividends and repurchases remained suspended indefinitely. No formal consolidated earnings guidance was provided in the supplied filing text.
Important facts for investors to verify
- Whether CFIUS and other regulators clear the China Oceanwide transaction by the July 1, 2018 deadline, and whether the proposed $1.5 billion capital plan is finalized.
- How the May 2018 notes were retired, the resulting holding-company liquidity, and the term loan’s covenants, collateral and ongoing interest burden.
- Whether long-term care rate approvals and benefit changes improve claims economics and capital, especially after the higher Q1 loss ratio.
- The final PMIERs 2.0 requirements and effect on U.S. mortgage insurance capital buffers, alongside mortgage delinquency and loss trends.
- Reserve assumptions, investment valuation and market sensitivity, including the effect of rate changes on OCI, DAC and policy liabilities.
- Developments in the AXA litigation and merger-related settlement, and any material change in legal, regulatory or rating-agency exposure.