Genworth Financial, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Genworth operates mortgage insurance, U.S. life insurance, international protection and runoff businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial results and position
| Metric | Q1 2015 | Q1 2014 / prior date | Change |
|---|---|---|---|
| Total revenue | $2,335 | $2,322 | Up 1% |
| Income before taxes | $295 | $306 | Down 4% |
| Net income | $204 | $219 | Down 7% |
| Net income attributable to common stockholders | $154; diluted EPS $0.31 | $184; diluted EPS $0.37 | Down 16% |
| Net operating income (non-GAAP) | $156; $0.31 per diluted share | $194; $0.39 per diluted share | Down 20% |
| Net cash from operating activities | $624 | $61 | Up $563 |
| Net cash from investing / financing activities | $(366) / $35 | $(204) / $269 | — |
| Cash and cash equivalents | $5,158 | $4,918 at Dec. 31, 2014 | Up $240 |
| Total assets / total liabilities | $112,331 / $95,250 | $111,358 / $94,561 | Assets up $973; liabilities up $689 |
| Long-term borrowings / non-recourse funding obligations | $4,601 / $1,983 | $4,639 / $1,996 | Both slightly lower |
| Total stockholders’ equity | $17,081 | $16,797 | Up $284 |
Net investment income was $803, compared with $805; annualized weighted-average investment yield declined to 4.5% from 4.6%. Net investment losses were $16, versus $17. Benefits and other changes in policy reserves rose $49 to $1,243, while interest expense fell $11 to $116. The effective tax rate increased to 30.9% from 28.4%.
Operating cash flow was helped by cash collateral received from derivative counterparties and lower tax payments; therefore, the increase should not be read as a comparable increase in recurring earnings. Cash at Genworth Holdings, the parent debt issuer, was $820, including $70 of restricted cash. Insurance subsidiaries’ dividends are regulated; management did not expect them to pay the full approximately $0.5 billion available without regulatory approval in 2015. Subsidiaries had $14.8 billion of restricted net assets. Common dividends and share repurchases remained suspended.
Material changes and segment performance
- U.S. Mortgage Insurance: Net operating income increased to $52 from $33. Revenue was $170, up 10%; new insurance written rose 62% to $6.3 billion, and the primary delinquency rate fell to 5.65% from 7.42% a year earlier. The company estimated $500–$700 million of additional capital would be required to meet final PMIERs by December 31, 2015.
- International Mortgage Insurance: Net operating income fell to $64 from $99, with Australia down to $30 from $62. Currency translation reduced reported results; the Australian business’s partial IPO in 2014 also lowered Genworth’s ownership to 66.2%. Combined primary risk in-force declined 8% year over year to $187.7 billion.
- U.S. Life Insurance: Net operating income declined to $81 from $94. Long-term care (LTC) earnings fell to $10 from $46, while life insurance rose to $40 from $21 and fixed annuities to $31 from $27. LTC sales fell 50% year over year; the LTC loss ratio rose to 72% from 63%.
- International Protection: Net operating income was approximately break-even, versus $7 a year earlier. Management cited higher commissions and claim reserves, partly offset by higher premiums.
- Runoff and Corporate/Other: Runoff net operating income was $11, versus $12. Corporate and Other net operating loss was $52, versus $51.
Foreign currency translation was a significant offset to positive investment-related comprehensive income: other comprehensive income was $132, including a $370 currency translation loss, compared with $910 of other comprehensive income in Q1 2014. Accumulated other comprehensive income attributable to Genworth increased to $4,692 at quarter-end.
Outlook, risks and unusual items
- Management continued a review of strategic options, including simplifying the portfolio, strengthening mortgage insurance and LTC, reducing holding-company debt, and pursuing a sale of the lifestyle protection business. A sale could produce a significant loss relative to book value. A restructuring plan targeted cash savings exceeding $100 million over two years.
- Management expected modest LTC earnings in 2015, with period-to-period variability, and only slightly positive 2015 earnings from International Protection if European conditions remained stable. No consolidated earnings guidance was provided.
- LTC remains a central risk: claims assumptions and methodologies were revised in 2014, increasing reserves; further adverse experience or assumption changes could require additional reserves. Rate increases depend on state approvals and policyholder responses. The company reported approximately $255–$270 million of estimated annual premium increases from approved initial and subsequent rate actions as of April 28, 2015.
- PMIERs compliance is dependent on capital generation and potential reinsurance or holding-company cash, as well as market conditions and approvals. Failure to meet requirements could prevent the U.S. mortgage insurer from writing new GSE-related business.
- Ratings downgrades had already affected distribution and sales, particularly fixed annuities and LTC. Further downgrades could increase borrowing and collateral costs, trigger derivative termination rights, constrain reinsurance and capital access, and impair business relationships.
- Other risks include housing and credit-market deterioration, low investment yields, foreign exchange movements, investment valuation and credit losses, litigation and regulatory action. The filing describes securities class actions concerning LTC reserve disclosures and earlier Australian mortgage insurance disclosures. A U.S. mortgage insurance settlement concerning Bank of America claims remained subject to dismissal steps; the filing states an earlier captive-reinsurance settlement had no financial statement impact.
- Disclosure controls were deemed ineffective because a previously reported material weakness in controls over LTC claim-reserve methodology implementation remained unresolved. Management planned enhanced controls and remediation during 2015.
Important facts for investors to verify
- How the $500–$700 million PMIERs capital estimate will be funded, the timing and cost of any reinsurance, and compliance by the December 2015 deadline.
- Whether LTC claims experience, reserve adequacy, approved rate increases and policyholder behavior support management’s assumptions and 2015 outlook.
- Progress, terms and potential accounting or tax effects of strategic actions, including the lifestyle protection sale and targeted cost savings.
- Parent-level liquidity, subsidiary dividend capacity, debt reduction plans, and any impact of further ratings actions on distributors, collateral or financing.
- Remediation and operating effectiveness of LTC reserve controls, and developments in the disclosed litigation and regulatory matters.