Genworth Financial, Inc. — 2015 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Dollar amounts are in millions unless noted. The filing is unaudited. Genworth provides mortgage insurance, U.S. life insurance and legacy runoff products; its lifestyle protection insurance business is reported as discontinued operations.
Financial performance and position
- Third quarter: Revenue was $2,100, down 4% from $2,190 a year earlier. Continuing-operations loss was $217; net loss attributable to Genworth common stockholders was $284, or $0.57 per share. Net operating income, a non-GAAP measure, was $64, compared with a $323 loss in Q3 2014.
- First nine months: Revenue was $6,392, down 2%. Continuing-operations income was $161, but a $334 discontinued-operations loss contributed to a $173 consolidated net loss and a $323 loss attributable to common stockholders, or $0.65 per share. Net operating income was $337, versus $17 in 2014.
- Key expense item: Q3 included a $455 pretax DAC impairment ($296 after tax) on term-life policies associated with a planned life-block transaction. The prior-year quarter included $550 of goodwill impairment, explaining much of the year-over-year improvement in reported loss.
- Cash flow: Nine-month operating cash flow was $1,158, versus $1,140 in 2014; investing cash outflow was $2,163 and financing cash outflow was $19. Continuing-operations cash at September 30 was $3,666. Consolidated cash including discontinued operations was $3,808.
- Balance sheet and debt: Total assets were $108,222 and total stockholders’ equity $15,416, compared with $111,358 and $16,797 at year-end 2014. Long-term borrowings were $4,601; non-recourse funding obligations were $1,951, with an additional $188 of securitization-related borrowings. Genworth Holdings held $733 of cash and cash equivalents, including $98 restricted, and $250 of U.S. government securities.
- Investment and reserve indicators: Net investment income was $783 in Q3 and $2,357 for nine months. Net investment losses were $51 and $59, respectively, including derivative losses of $53 and $79. Long-term-care policy-claim liabilities were $6,583 at quarter-end, up from $6,216 at year-end.
Material changes versus comparable periods
- U.S. Mortgage Insurance net operating income improved to $37 in Q3 from a $2 loss and reached $138 for nine months, up from $70. The nine-month loss ratio fell to 36% from 62%; U.S. primary delinquencies declined to 5.10% from 6.59% a year earlier.
- International Mortgage Insurance net operating income fell to $54 in Q3 from $87 and to $179 for nine months from $283. Foreign-exchange effects reduced reported premiums and in-force amounts; Australia’s nine-month segment income also reflected reduced ownership after share sales. Total international primary insurance in-force was $536.5 billion, down 11% year over year.
- U.S. Life Insurance net operating income was $40 in Q3 versus a $322 loss and $178 for nine months versus a $159 loss. The comparison benefited from the absence of 2014 goodwill impairments and prior-year long-term-care reserve strengthening; current results included the term-life DAC impairment outside the company’s non-GAAP operating measure.
- Accumulated other comprehensive income attributable to Genworth declined to $3,478 from $4,446 at year-end, primarily reflecting lower unrealized investment gains and foreign-currency translation effects.
Outlook, management commentary and risks
- Strategic actions: Genworth agreed to sell its lifestyle protection business to AXA for €475 million (about $490 million at September 30 exchange rates); estimated net proceeds were about $400 million, with closing expected by year-end 2015, subject to approvals and other conditions. It also agreed to reinsure certain term-life business with Protective Life, expected to close in Q1 2016. The company said the transaction was expected to provide $100–$150 million of initial capital in aggregate. After quarter-end, it announced an agreement to sell European mortgage insurance for expected net proceeds of about $55 million; closing was expected in Q1 2016, and an after-tax loss of about $140 million was expected.
- Capital and cost plans: Management said U.S. mortgage insurance would meet PMIERs requirements with a reasonable excess, assuming specified reinsurance, asset-transfer and restructuring benefits. A further 2015-book-year reinsurance transaction remained subject to GSE approval. Genworth targeted annualized cost savings exceeding $100 million in 2016 and intended to reduce holding-company debt over time. It continued to pursue long-term-care rate increases, benefit changes and risk-reduction options. No specific consolidated earnings guidance was provided.
- Insurance and market risks: Management warned that long-term-care assumptions and claims experience may require further reserve changes; the annual review of future-policy-benefit and account-balance assumptions was scheduled for Q4 2015. Low interest rates, weaker commodity prices, foreign-exchange movements, mortgage-market conditions, ratings pressure and reinsurance availability could affect earnings, capital and liquidity. Management noted potential pressure on Canadian mortgage-insurance losses from lower oil prices and elevated Australian delinquencies in mining-related areas.
- Liquidity constraints: Insurance-subsidiary dividends are restricted by law and regulation. About $13.1 billion of Genworth Financial subsidiaries’ net assets were restricted at September 30. The board had suspended common-stock dividends and repurchases indefinitely.
- Legal and control matters: Securities litigation related to long-term-care reserves and Australian mortgage insurance, as well as shareholder derivative suits, remained pending; the company said it could not estimate additional reasonably possible losses for certain matters. A material weakness in internal control over financial reporting remained unremediated at quarter-end while enhanced controls were being tested. Management expected to complete testing before or in connection with the 2015 year-end financial statements.
Most important facts for investors to verify
- Whether the AXA, Protective Life and European mortgage-insurance transactions close on the expected terms and timing, and the final proceeds, losses and capital effects.
- Whether the U.S. mortgage-insurance business achieves and sustains PMIERs compliance after GSE approval and actual recognition of reinsurance and other capital benefits.
- Results of the Q4 2015 long-term-care reserve review, future rate approvals and actual claims, persistency and benefit-utilization experience.
- Progress on remediating and validating the material weakness in long-term-care reserve controls.
- Changes in ratings, subsidiary dividend capacity, holding-company liquidity, debt-reduction plans and the outcome or potential cost of pending litigation.