GENWORTH FINANCIAL INC annual report, FY2013

Vollständiges Dokument

Genworth Financial, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013; this is an annual report, not a standalone fourth-quarter filing. Dollar amounts are in U.S. dollars. Genworth completed a holding-company reorganization on April 1, 2013; prior-period results are presented on a predecessor basis. KPMG issued an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.

Business context and financial performance

Genworth provides life, long-term-care, annuity, mortgage and payment-protection insurance in more than 25 countries. Its principal strategic businesses are U.S. Life Insurance and Global Mortgage Insurance; International Protection and legacy products are managed as non-core or runoff businesses.

  • Consolidated results: Revenue was $9.403 billion, down 2% from $9.640 billion in 2012. Income from continuing operations was $726 million; net income was $714 million; and net income available to common stockholders was $560 million, or $1.13 per diluted share. Net operating income, a non-GAAP measure, was $616 million versus $403 million.
  • Profitability drivers: Lower mortgage-insurance claims and improved U.S. mortgage loss experience were major contributors to stronger earnings. Benefits and expenses fell 8% to $8.353 billion. Net investment losses were $37 million, compared with $27 million of gains in 2012.
  • Segments: Net operating income was $394 million for U.S. Life Insurance, $361 million for International Mortgage Insurance, $37 million for U.S. Mortgage Insurance (versus a $138 million loss), $24 million for International Protection and $66 million for Runoff. Corporate and Other reported a $266 million net operating loss.
  • Insurance loss ratios: U.S. Mortgage Insurance improved to 74% from 132%; International Mortgage Insurance improved to 32% from 51%. Long-term-care insurance was 66% versus 68%, while International Protection worsened to 25% from 22%.
  • Cash flow: Operating cash flow was $1.399 billion, compared with $962 million in 2012. Investing cash outflow was $580 million and financing cash outflow was $149 million. Cash and cash equivalents ended at $4.214 billion.
  • Balance sheet and investments: Total assets were $108.045 billion, down from $113.312 billion; total stockholders’ equity was $15.620 billion, down from $17.781 billion. Cash, cash equivalents and invested assets totaled $72.827 billion. Fixed-maturity securities were $58.629 billion, or 81% of that total.
  • Debt and liquidity: Long-term borrowings were $5.161 billion and non-recourse funding obligations were $2.038 billion; borrowings related to securitization entities were an additional $242 million. Genworth Holdings held $1.219 billion in cash and cash equivalents and $150 million in U.S. government securities. A $300 million revolving facility was undrawn. The $485 million of notes due in June 2014 was expected to be repaid using wealth-management-sale proceeds and cash on hand.

Material changes versus 2012

  • Common-stockholder net income rose from $325 million to $560 million; continuing-operations income available to common stockholders rose from $268 million to $572 million. The filing attributes much of the improvement to lower U.S. mortgage-insurance losses and the absence of 2012’s International Protection goodwill impairment and Australian mortgage-insurance reserve strengthening.
  • U.S. Mortgage Insurance returned to positive net operating income as delinquencies declined and cures and loss-mitigation results improved. Its year-end risk-to-capital ratio fell to approximately 19.3:1 from 36.9:1.
  • U.S. Life Insurance net operating income increased 18% to $394 million, supported in part by long-term-care in-force rate actions. Long-term-care sales fell 38%; life-insurance sales fell 67%, in part following product changes and the discontinuation of term universal life sales.
  • International Mortgage Insurance net operating income increased to $361 million, but revenue declined to $1.361 billion from $1.408 billion. Foreign-currency weakness and seasoning of Canadian business weighed on reported results.
  • Net unrealized investment gains declined sharply as interest rates rose: accumulated other comprehensive income fell to $2.542 billion from $5.202 billion. Total comprehensive income available to common stockholders was a loss of $2.100 billion, despite positive net income.
  • Genworth sold its wealth-management business for approximately $412 million, receiving net proceeds of about $360 million, and sold its reverse-mortgage business for $22 million. Both contributed to portfolio simplification; wealth management was reported as discontinued operations.

Outlook, risks and unusual items

  • Outlook: Management expected U.S. Mortgage Insurance results to improve significantly in 2014, subject to the housing recovery, seasonality and litigation costs. International Protection was expected to produce only slightly positive earnings if European economic and lending conditions remained weak. The planned Australian mortgage-insurance IPO, potentially for up to 40% of the business, was a 2014 priority but remained subject to market, valuation and regulatory conditions.
  • Long-term care: The company is pursuing in-force premium increases and tighter pricing and underwriting. One rate-action round was approved in 41 states, representing an estimated $195–$200 million of targeted annual premiums when fully implemented by 2017; the original target was $250–$300 million. Separate 6%–13% increases were being sought on more than $800 million of annualized premiums, with approvals in four states by year-end. Approval timing and policyholder responses remain uncertain.
  • U.S. mortgage capital: Revised GSE mortgage-insurer eligibility standards were pending. Genworth issued $400 million of 2024 notes and placed $100 million with GEMICO and $300 million in a U.S. mortgage holding company for potential further contribution. The company stated that it did not meet existing GSE rating requirements and could not assure compliance with revised standards.
  • Claims, reserves and assumptions: Mortgage-insurance reserves depend on uncertain claim frequency, severity, cures, housing prices, employment and loss mitigation. The filing estimates that a reasonably possible 9% change in the U.S. mortgage frequency reserve factor could change quarterly gross reserves by about $204 million. Long-term-care profitability is also exposed to morbidity, persistency, mortality, interest rates and regulatory approval of rate increases.
  • Litigation and regulation: A Bank of America/Countrywide rescission settlement addressed approximately $800 million of alleged damages and had no fourth-quarter 2013 income-statement impact within established reserves. It remained subject to GSE approval and a definitive curtailment/denial alternative-dispute agreement; claimants’ remaining demand exceeded $150 million, with the precise amount unclear. Other RESPA, insurance and securities matters remained pending, and the company said outcomes and possible losses could not be estimated.
  • Other notable items: The company recorded a $20 million pre-tax make-whole expense on debt redemption and a $20 million pre-tax restructuring charge associated with a plan eliminating about 400 positions. Common dividends remained suspended. A $245 million estimated present-value obligation to GE under the Tax Matters Agreement remained payable even if projected tax savings are not realized.
  • Market and credit risks: Prolonged low rates may pressure investment spreads, reserves and capital; rising rates can reduce investment values and increase collateral needs. The company reported $14.622 billion of reinsurance recoverables from UFLIC, a significant concentration, secured by trust accounts. U.S. mortgage-insurer financial-strength ratings were below the GSE standards described in the filing.

Most important facts for investors to verify

  • Whether GSE capital and eligibility standards were finalized and whether GEMICO remained eligible without further capital support.
  • Whether the Australian mortgage-insurance IPO was completed, on what terms, and how proceeds affected capital and ratings.
  • State-by-state approvals, realized premiums and policyholder behavior for long-term-care rate increases, alongside updated reserve assumptions.
  • U.S. mortgage delinquency, paid-claim and reserve development, including the final status and financial effect of the Bank of America/Countrywide settlement and other disputes.
  • Genworth Holdings’ liquidity after the 2014 debt maturity, restrictions on subsidiary dividends, and obligations under the GE Tax Matters Agreement.
  • The collectability and collateral adequacy of the UFLIC reinsurance recoverable, and any subsequent change in ratings or common-dividend policy.