Genworth Financial, Inc. — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. This is an annual report, not a standalone fourth-quarter filing. Unless otherwise stated, dollar amounts are in millions. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Business context and reporting period
Genworth is a financial security and insurance company serving more than 15 million customers in over 25 countries. Its operating segments are Retirement and Protection, International, and U.S. Mortgage Insurance; Corporate and Other includes holding-company financing and non-core activities.
Financial performance and condition
| Metric | FY 2010 / Dec. 31, 2010 | Prior comparable period |
|---|---|---|
| Total revenue | $10.089 billion | $9.069 billion in 2009 |
| Net income (loss) available to common stockholders | $142 million; $0.29 per diluted share | $(460) million; $(1.02) per diluted share in 2009 |
| Net operating income available to common stockholders (non-GAAP) | $126 million | $198 million in 2009 |
| Net cash from operating activities | $1.336 billion | $1.931 billion in 2009 |
| Total assets | $112.395 billion | $108.187 billion at year-end 2009 |
| Total stockholders’ equity | $14.971 billion, including $13.861 billion attributable to Genworth | $13.350 billion total at year-end 2009 |
| Cash, cash equivalents and invested assets | $71.569 billion, including $3.132 billion in cash and cash equivalents | $68.517 billion, including $5.002 billion in cash and cash equivalents |
| Borrowings | $4.952 billion long-term; $3.437 billion non-recourse funding obligations; no short-term borrowings | $3.641 billion long-term and $930 million short-term, plus $3.443 billion non-recourse obligations |
Genworth also reported $494 million of borrowings related to consolidated securitization entities. It had $1.8 billion of unused revolving credit capacity at year-end, subject to facility terms. Common-stock dividends remained suspended; the remaining Series A preferred stock was mandatorily redeemable in June 2011.
Segment results
- Retirement and Protection: Revenue was $6.765 billion versus $5.667 billion in 2009. Net operating income was $485 million versus $424 million. Life insurance operating income declined to $144 million from $217 million; retirement income improved to $127 million from $8 million.
- International: Revenue was $2.484 billion versus $2.560 billion. Net operating income increased to $434 million from $385 million. International mortgage insurance operating income was $363 million; lifestyle protection income was $71 million.
- U.S. Mortgage Insurance: Revenue was $754 million versus $826 million. Net operating loss widened to $580 million from $459 million. The loss ratio rose to 251% from 219%; year-end delinquency rate was 12.21%, down from 13.73% in 2009.
- Corporate and Other: Net operating loss was $213 million versus $152 million in 2009.
Material changes versus 2009
- Revenue increased 11%, helped by higher investment income and Retirement and Protection revenue. Net investment losses narrowed substantially to $143 million from $1.041 billion, while net other-than-temporary impairments declined to $208 million from $1.058 billion.
- Common-stockholder earnings returned to a profit, but net operating income fell to $126 million from $198 million. The 2010 result included a $106 million tax benefit related to separation from former parent GE; net investment results and this tax item make reported profit distinct from operating performance.
- U.S. Mortgage Insurance losses worsened amid elevated claims and reserve adjustments. The company strengthened U.S. mortgage insurance reserves by $85 million in Q3 and $350 million in Q4 2010. Fourth-quarter net loss available to common stockholders was $161 million.
- Operating cash flow decreased by $595 million, primarily reflecting higher U.S. mortgage insurance claims and settlements and higher tax settlements. Investing cash flow shifted to a $1.815 billion outflow as investment purchases exceeded maturities and sales.
- Long-term borrowings increased, reflecting new U.S. and Canadian note issuances; the company repaid its revolving-credit borrowings during 2010. Investment portfolio fair values and accumulated other comprehensive income improved with market conditions.
Outlook, management commentary, risks and unusual items
- Outlook: The filing provides no quantified company-wide earnings or revenue guidance. Management expected U.S. mortgage insurance claims and losses to remain pressured, with foreclosure starts and aged delinquencies a concern. It expected modest improvement in international mortgage insurance losses and described selective growth plans for other businesses.
- Portfolio and product actions: Genworth emphasized tighter underwriting, pricing discipline, loss mitigation, investment diversification and capital management. In January 2011, it announced it would stop new sales of retail and group variable annuities while servicing existing business. It acquired Altegris’s operating assets on December 31, 2010; the acquisition added a platform with approximately $2.2 billion in client assets.
- Mortgage insurance capital: At December 31, 2010, U.S. mortgage insurance subsidiaries were within the 25:1 risk-to-capital limit. In January 2011, GEMICO slightly exceeded the limit and received a revocable two-year North Carolina waiver; additional state and GSE approvals and alternative underwriting arrangements remained important.
- Long-term care: Genworth began filing for an 18% premium increase on two older policy blocks, representing about $550 million, or 29%, of annual long-term care premium in-force. State approvals and implementation may take years; rate actions may affect sales, retention and reputation.
- Key risks: U.S. housing weakness, unemployment, mortgage delinquencies and foreclosure delays; reserve estimation uncertainty; investment credit, valuation and interest-rate risk; ratings downgrades and regulatory capital constraints; reinsurer and derivative counterparty performance; foreign exchange exposure; and evolving U.S. and international regulation, including Dodd-Frank.
- Contingencies: The company disclosed regulatory inquiries and lawsuits involving, among other matters, mortgage insurance captive reinsurance and RESPA, municipal guaranteed investment contracts, retained asset accounts, and wealth-management mutual fund selection. Ultimate outcomes and reasonably estimable loss ranges were not clear in the filing.
- Other notable items: The effective tax rate was an unusual negative 275% in 2010, reflecting the low pre-tax income and tax benefits, including the $106 million separation-related benefit. New accounting guidance adopted in 2010 led to consolidation of certain securitization entities and related cumulative-effect adjustments.
Important facts for investors to verify
- Whether U.S. mortgage insurance reserve strengthening, delinquency aging, foreclosure trends and loss-mitigation results develop as management assumed.
- GEMICO’s and affiliated insurers’ risk-to-capital ratios, the duration and conditions of waivers, and continued state and GSE eligibility to write business.
- The quality and recoverability of reinsurance assets, particularly the $14.866 billion UFLIC recoverable and captive mortgage reinsurance recoveries subject to trust limits or exhausted tiers.
- Long-term care claims, persistency and rate-increase approvals, and whether those actions improve block profitability without harming retention or new sales.
- Holding-company liquidity and debt-service capacity, the June 2011 preferred-stock redemption, subsidiary dividend availability, and the status of the GE Tax Matters Agreement obligation.
- Material developments in the disclosed legal and regulatory matters, and changes in ratings, capital requirements or applicable regulations.