Business context and reporting period
Genworth Financial, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2017. Its businesses include U.S., Canadian and Australian mortgage insurance; U.S. life insurance, including long-term care; and runoff operations.
The company’s proposed acquisition by China Oceanwide for $5.43 per share in cash (approximately $2.7 billion) had been approved by stockholders but remained subject to regulatory approvals and other closing conditions. The parties continued to target a mid-2017 closing; they re-filed their joint CFIUS notice on April 28 to allow more time for review.
Key financial results
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q1 2017 | Q1 2016 or prior balance |
|---|---|---|
| Total revenue | $2,171 | $1,785 |
| Income from continuing operations before tax | $332 | $150 |
| Net income | $216 | $108 |
| Net income available to common stockholders | $155; $0.31 per diluted share | $53; $0.11 per diluted share |
| Adjusted operating income available to common stockholders, non-GAAP | $143; $0.29 per diluted share | $103; $0.21 per diluted share |
| Net investment income | $790 | $789 |
| Net investment gains (losses) | $34 | $(19) |
| Operating cash flow | $655 | $256 |
| Cash and cash equivalents, March 31 | $3,018 | $2,784 at December 31, 2016 |
| Total assets / total liabilities | $104,686 / $89,970 | $104,658 / $90,191 at December 31, 2016 |
| Long-term borrowings | $4,194 | $4,180 at December 31, 2016 |
The effective tax rate was 34.9%, versus 15.2% a year earlier; the prior-year rate benefited from a valuation-allowance reversal. The filing does not present a consolidated operating-margin measure as a primary performance metric. Mortgage-insurance loss ratios were 17% in the U.S. (24% prior year), 16% in Canada (24%), and 35% in Australia (26%). Long-term-care insurance loss ratio was 72% (68%).
Material changes and operating performance
- Common-stockholder net income rose $102 million year over year. Adjusted operating income rose $40 million. The filing attributes the improvement principally to stronger U.S. mortgage-insurance results and lower corporate expenses; prior-year results included substantial litigation, debt-redemption, bond-consent and restructuring costs.
- Revenue increased 22%, primarily reflecting the comparison with a first-quarter 2016 life-insurance reinsurance transaction that ceded $326 million of term-life premiums. Benefits and policy-reserve changes also increased, including from life-reserve comparisons, long-term-care claims and mortgage-insurance experience.
- U.S. mortgage insurance adjusted operating income increased to $73 million from $61 million, supported by higher premiums and lower losses. U.S. primary insurance in-force was $139.3 billion, up 12%; new insurance written rose 3%.
- Canada mortgage insurance adjusted operating income increased to $36 million from $33 million. New insurance written rose 81%, largely on bulk activity, while the company warned regulatory changes would likely reduce future flow and bulk demand.
- Australia mortgage insurance adjusted operating income decreased to $13 million from $19 million. Delinquency and loss ratios worsened, especially in commodity-dependent regions. A major customer terminated its contract effective April 8, 2017; another renewed for three years.
- U.S. Life Insurance adjusted operating income declined to $53 million from $91 million. Long-term-care income fell to $14 million from $34 million, life income to $16 million from $31 million, and fixed-annuity income to $23 million from $26 million. Traditional life and fixed-annuity sales had been suspended in March 2016.
Liquidity, debt and capital
Operating cash flow increased to $655 million, partly reflecting investment-security and derivative-related movements and comparison with prior-year cash outflows. Investing activities used $142 million; financing activities used $304 million. Cash rose $234 million during the quarter, including foreign-exchange effects.
Consolidated cash should not be equated with holding-company liquidity: Genworth Holdings held $849 million of cash and cash equivalents, including approximately $74 million of restricted assets, plus $150 million of U.S. government securities. Insurance subsidiaries’ dividends are restricted; approximately $220 million could be paid to the company in 2017 without regulatory approval, but Genworth did not expect subsidiaries to pay that amount if capital was needed for growth or requirements. The company targeted holding-company liquidity of 1.5 times expected annual debt interest plus $350 million and said it was above target at quarter-end.
China Oceanwide committed, upon transaction completion, to provide $600 million for debt maturing in 2018 and $525 million for U.S. life-insurance businesses, in addition to $175 million previously committed by Genworth Holdings. The board had indefinitely suspended common-stock dividends and share repurchases. Without the transaction or alternative external capital, management cited potential asset sales—including Canadian or Australian mortgage insurance businesses or part of the U.S. business—as possible responses to debt, capital and rating pressures.
Outlook, risks and unusual items
- Canada management expected the full-year 2017 loss ratio to be consistent with or moderately above 2016’s 22%. Australia management expected its full-year loss ratio to exceed 2016’s 34%, reflecting regional loss pressure and lower expected earned premiums. These are segment outlook statements, not consolidated earnings guidance.
- Long-term-care results remain exposed to claims, policyholder behavior, reserve assumptions and the timing and approval of rate increases. The 2016 reserve review increased claim reserves by $460 million and reinsurance recoverables by $25 million; management said margins were materially reduced. Future reserve or assumption changes could materially affect results and capital.
- Long-term-care rate actions remain central to the recovery plan. In Q1 2017, 11 approvals across eight states represented a weighted-average increase of 22% on approximately $98 million of annualized in-force premiums; 18 new filings covered approximately $24 million.
- Moody’s downgraded Genworth Life Insurance Company and its New York affiliate from Ba2 to Ba3 in March, citing weaker long-term-care margins and reliance on future rate actions. The company discussed counterparty termination rights, collateral demands, limited access to new derivatives, and potential effects of further rating downgrades.
- On March 21, 2017, Genworth reached an agreement in principle to settle the In re Genworth securities class action for $20 million, subject to final documentation and court approval; the company said applicable insurance coverage had been exhausted. Other litigation includes shareholder derivative suits, merger-related stockholder suits, and a policyholder class action concerning long-term-care disclosures. Outcomes and possible losses in most matters could not be determined.
- Penn Treaty’s liquidation resulted in guaranty-fund assessments; the filing discusses a $21 million accrual and a $14 million net impact on long-term-care results. The quarter also included $1 million of restructuring expense and $34 million of net investment gains, including $29 million of realized gains on available-for-sale securities.
- Management cited low interest rates, market and currency volatility, mortgage-market and housing conditions, changing regulation, reinsurance and counterparty exposure, and possible failure or delay of the China Oceanwide transaction as material risks. If the transaction does not close, management warned that ratings, capital, debt refinancing and the life-insurance restructuring could face greater pressure.
Most important facts for investors to verify
- Progress and conditions for China Oceanwide regulatory approvals, the CFIUS review, expected closing timing, and the committed capital and debt-support funding.
- Genworth Holdings’ accessible liquidity, debt maturities and refinancing options, and the extent to which insurance-subsidiary capital can be distributed to the holding company.
- Long-term-care reserve adequacy, claims and utilization trends, rate-action approvals and implementation, guaranty-fund costs, and the planned separation of the long-term-care business.
- Mortgage-insurance capital compliance, delinquency and loss trends—particularly Australia’s deterioration—and effects of regulatory and customer changes in Canada and Australia.
- Developments in the $20 million securities-litigation settlement and other legal matters, including any material financial effect.