Genworth Financial, Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. The filing also reports unaudited fourth-quarter results. Genworth provides life, long-term care, retirement and wealth-management products, international insurance, and U.S. mortgage insurance.
Financial performance and condition
| Metric | 2009 | 2008 |
|---|---|---|
| Total revenue | $9.069 billion | $9.948 billion |
| Net loss attributable to common stockholders | $460 million | $572 million |
| Net loss from continuing operations before tax | $792 million | $942 million |
| Net investment losses | $1.041 billion | $1.709 billion |
| Net cash from operating activities | $1.931 billion | $5.443 billion |
| Total assets at year-end | $108.187 billion | $107.389 billion |
- Revenue fell 9%, mainly reflecting lower premiums, investment income and fees. Weighted-average investment yield declined to 4.4% from 5.2%.
- Net investment impairments were $1.058 billion, down from $2.131 billion. The 2009 total included $323 million of impairments on financial hybrid securities and a $36 million write-down of a retained securitization interest.
- Operating cash flow declined substantially year over year, which management attributed principally to timing-related changes in liabilities and policy balances and derivative terminations that had boosted 2008 cash flow.
- Cash and cash equivalents were $5.002 billion; cash, cash equivalents and invested assets totaled $68.517 billion. Genworth reported $12.276 billion of parent stockholders’ equity and $13.350 billion of total equity, including $1.074 billion of noncontrolling interests.
- Year-end debt included $930 million of short-term borrowings, $3.641 billion of long-term borrowings and $3.443 billion of non-recourse funding obligations. Unused revolving-credit capacity was $523 million.
- Fourth-quarter revenue was $2.461 billion and net income attributable to common stockholders was $40 million, compared with a $469 million loss in the first quarter.
Changes versus prior periods
- GAAP net loss narrowed from $572 million in 2008, largely because investment and goodwill impairments were lower; 2009 still included substantial investment losses.
- Net operating income, a non-GAAP measure defined by Genworth, fell to $198 million from $469 million. Retirement and Protection improved to $424 million from $227 million, while International declined to $385 million from $633 million and U.S. Mortgage Insurance’s operating loss widened to $459 million from $330 million.
- U.S. mortgage insurance remained the main operating pressure: its loss ratio increased to 219% from 165%, and its delinquency rate rose to 13.73% from 8.42%. New U.S. insurance written declined 72% to $11.3 billion.
- The July 2009 Canadian mortgage-insurance IPO reduced Genworth’s ownership to 57.5% and created noncontrolling interests. Genworth raised $622 million net in a common-stock offering and received approximately $770 million net from the Canadian subsidiary share offering.
- Common dividends remained suspended. The board had suspended them in November 2008 to preserve liquidity and capital.
Outlook, risks and unusual items
- Management described improving financial markets and signs of stabilization in some housing markets, but anticipated a slow, uncertain recovery. It expected U.S. unemployment to increase modestly in 2010 and further modest home-price declines; U.S. mortgage claims and reserves could remain pressured, with losses expected to affect results for at least two more years.
- Management cited improving conditions in Canada and Australia but continuing risks from unemployment, mortgage defaults, housing values, foreign exchange and government policy. It expected higher Australian interest rates and reduced first-time-buyer support could dampen new business in 2010.
- Genworth recorded $847 million of estimated U.S. mortgage loss-exposure reductions from mitigation activities in 2009, including approximately $583 million from rescissions and $264 million from workouts, modifications and presales. The company cautioned that future benefits were uncertain and that lenders disputed some rescissions.
- A January 2010 agreement cancelled 11 bulk mortgage-insurance policies with about $237 million of risk in-force in exchange for a termination fee of approximately $182 million, already provided for at year-end.
- Key risks include mortgage-loss reserve estimation, long-term-care claims and persistency, investment-credit and valuation risk, ratings and capital constraints, access to funding, regulatory changes, and legal or regulatory proceedings. Reinsurance recoverables included $14.827 billion associated with UFLIC; Genworth remains liable to policyholders if reinsurers fail to pay.
- Management said it expected operating cash flows and revolving facilities to support requirements, but noted that funding availability depends on markets, ratings and business performance. No formal earnings guidance was provided.
- KPMG issued an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting as of year-end.
Important facts for investors to verify
- Updated U.S. mortgage delinquency, claim, reserve and rescission trends, especially for the 2005–2007 books and high-risk regions and products.
- Whether captive reinsurance trusts can fund recoveries as loss layers are exhausted, and the collectability of significant UFLIC recoverables.
- Insurance-subsidiary statutory capital, regulatory dividend capacity, credit ratings and the availability of the remaining credit-facility capacity.
- Investment portfolio credit quality, Level 3 valuations, future impairment exposure and the effect of market conditions on investment income.
- Progress on International segment claims and pricing actions, and the impact of Canadian guarantee terms and other regulatory changes.
- Any developments in lender disputes, regulatory investigations and the wealth-management mutual-fund lawsuit; the filing does not provide a clear estimate of potential losses for all proceedings.