Business context and reporting period
Genworth Financial, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. It operates U.S. and Australian mortgage insurance, U.S. life insurance, and runoff businesses. The Canada mortgage insurance business was classified as discontinued operations after the company agreed to sell it to Brookfield; prior periods were recast accordingly. Unless noted, financial amounts below are in millions of U.S. dollars.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue from continuing operations | $2,020 | $1,952 | $6,058 | $5,916 |
| Income from continuing operations | $138 | $105 | $464 | $340 |
| Net income available to common stockholders | $18 | $146 | $360 | $448 |
| Adjusted operating income available to common stockholders | $123 | $99 | $396 | $300 |
| Common-stockholder EPS, GAAP | $0.04 | $0.29 | $0.72 | $0.89 |
| Continuing-operations EPS, GAAP | $0.25 | $0.17 | $0.83 | $0.56 |
- Q3 continuing revenue rose 3%; pretax income increased 27% to $172. Nine-month continuing pretax income increased 22% to $633. Adjusted operating income is a non-GAAP measure; it excludes specified items and is not a substitute for GAAP results.
- Q3 common-stockholder net income fell primarily because discontinued operations recorded an after-tax loss on the Canada sale. Canada contributed an $80 loss from discontinued operations in Q3, including the sale loss, versus $105 income in Q3 2018. For nine months, discontinued operations contributed $42 income versus $284 in 2018.
- Cash from operating activities was $1,608 for the first nine months, versus $973 in 2018; investing activities used $548 versus providing $69; financing activities used $1,242 versus $1,350. Continuing-operations cash, cash equivalents and restricted cash were $1,629 at quarter-end.
- At September 30, total assets were $105,653, liabilities $89,508 and total equity $16,145. Long-term borrowings were $3,706 and non-recourse funding obligations were $311. These balances include separately classified assets and liabilities related to discontinued operations.
- At September 30, Genworth Holdings had $297 of cash and restricted cash plus $69 of U.S. government securities. The combined $366 of liquid assets was about $150 below management’s target cash buffer. A $250 U.S. mortgage-insurance dividend received October 18 was not included in quarter-end figures. Insurance-subsidiary dividends are subject to regulatory and capital constraints.
- Net investment income was $816 in Q3 and $2,426 for nine months, up 5% and 4%, respectively. Net investment gains were a $2 loss in Q3 and a $27 gain for nine months. The fixed-maturity portfolio’s fair value was $61,233; total investment portfolio assets were $72,267.
- Selected loss ratios: U.S. mortgage insurance was 11% in Q3 and 6% for nine months, compared with 11% and 4%; Australia mortgage insurance was 36% and 34%, compared with 31% and 30%; long-term care was 76% and 77%, compared with 83% and 81%.
Material changes versus prior periods
- U.S. mortgage insurance adjusted operating income increased to $137 in Q3 from $118 and to $408 for nine months from $366, supported by higher insurance in-force and investment income; operating costs also rose. New insurance written increased 83% in Q3 and 44% for nine months. The U.S. mortgage insurer reported PMIERs available assets of 129% of requirements, with more than $850 of excess assets at quarter-end, before its subsequent $250 dividend.
- Australia mortgage insurance adjusted operating income declined to $12 in Q3 from $17 and to $39 for nine months from $58, primarily due to portfolio seasoning and lower earned premiums; currency movements also affected reported results.
- U.S. Life Insurance adjusted operating income was a $1 loss in Q3 versus a $3 loss, but improved to $60 for nine months from $49. Long-term care improved with rate actions and favorable prior-year claim development; higher new-claim severity and frequency partly offset the benefit. Life insurance and fixed annuities weakened, including higher lapses and loss-recognition charges.
- Net unrealized investment gains attributable to Genworth increased to $1,675 at September 30 from $595 at year-end 2018. Nine-month other comprehensive income was $1,638, compared with a $1,189 loss in 2018, principally reflecting interest-rate-driven investment and hedge valuation changes.
Outlook, commentary, risks and unusual items
- Management’s priorities include improving mortgage-insurance performance, stabilizing U.S. life insurance, reducing debt and improving financial flexibility. No specific consolidated earnings guidance was provided.
- The proposed China Oceanwide acquisition remains pending, at $5.43 per share in cash, with closing dependent on regulatory approvals and other conditions. The parties extended their termination waiver only through December 31, 2019; additional approvals or extensions may be needed. A proposed $1.5 billion post-closing capital contribution is conditional on completion and regulatory approval.
- The Canada sale agreement, signed August 12, 2019, covers Genworth’s 56.9% stake for approximately $1.8 billion before adjustments; estimated net proceeds were approximately $1.7 billion. The sale was targeted to close by year-end and remained subject to customary conditions and regulatory approvals. Genworth recognized a $164 after-tax loss ($189 pretax) in Q3, primarily associated with accumulated foreign-currency translation losses.
- Management expects to complete fourth-quarter 2019 reviews of life-insurance assumptions, long-term-care margins and reserves, and the Australian mortgage-insurance premium-earning pattern. Actual experience or revised assumptions could materially affect reserves, DAC, earnings, capital and liquidity. Low interest rates are a particular pressure on life and annuity products.
- Management cited global trade tensions, slower global growth, low interest rates, housing-market changes, competition, regulatory capital requirements, reinsurance and counterparty exposure, and the risk that alternative strategic plans or asset sales may be needed if the China Oceanwide transaction does not close. The filing warns that sales of businesses may not occur on anticipated terms or timing.
- Legal matters include AXA’s updated £265 million claim relating to payment-protection-insurance remediation, with AXA alleging further losses may be claimed; the company says it will defend the case and cannot estimate the outcome. In a long-term-care disclosure lawsuit, the parties reached an agreement in principle to settle nationwide, but a definitive agreement and court approval remained outstanding. Other litigation and regulatory matters may have material effects; the filing generally provides no reasonable loss estimate.
- Other items: Q3 restructuring expense was zero and nine-month expense was $4. The company’s common-stock dividend and share-repurchase program remain suspended. Long-duration insurance accounting guidance expected to take effect in 2022 is expected to have a significant impact; the forthcoming credit-loss standard is expected to increase allowances, with the amount dependent on conditions at adoption.
Most important facts for investors to verify
- Whether the China Oceanwide transaction received all required approvals and closed by the extended deadline, and the status and terms of the proposed $1.5 billion capital contribution.
- Whether the Brookfield Canada sale closed, final proceeds and adjustments, and use of proceeds, including any debt repayment or litigation-related restrictions.
- Quarter-end holding-company liquidity, the effect of the subsequent $250 mortgage-insurance dividend, upcoming debt maturities, and the ability of regulated subsidiaries to pay dividends.
- Results of fourth-quarter long-term-care reserve, margin and cash-flow reviews; rate-action approvals, implementation and policyholder response; and any resulting reserve or DAC charges.
- Mortgage-insurance capital and PMIERs compliance after dividends and reinsurance, and developments in Australia’s capital position, customer contracts and loss experience.
- Developments in the AXA, policyholder and other legal proceedings, including any settlement, court ruling, or updated estimate of potential losses.