Genworth Financial, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2014, compared with the same periods in 2013. Genworth operates U.S. life insurance, international and U.S. mortgage insurance, international protection, and runoff businesses. Amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $2,404 | $2,317 | $7,141 | $6,991 |
| Net income (loss) available to common stockholders | $(844) | $108 | $(484) | $352 |
| Net operating income (loss), non-GAAP | $(317) | $139 | $35 | $423 |
| Net cash from operating activities | — | — | $1,140 | $1,093 |
- Q3 benefits and other changes in policy reserves rose to $1,986 from $1,169; total benefits and expenses increased 63% to $3,376. The filing attributes the deterioration principally to long-term care claims and the $550 goodwill impairment charge.
- Nine-month net cash from investing activities was $(2,003), versus $(287) in 2013; financing cash flow was $149, versus $(811). Cash and cash equivalents declined to $3,477 at September 30 from $4,214 at year-end 2013.
- At September 30, total assets were $110,514, total liabilities $93,393, and total stockholders’ equity $17,121. Long-term borrowings were $4,662, down from $5,161 at December 31, 2013. Interest expense was $114 in Q3 and $361 for nine months.
- Net investment income was $805 in Q3 and $2,423 for nine months; annualized weighted-average investment yield was 4.6%, versus 4.7% in the comparable periods. Net investment losses were $27 in Q3 and $10 for nine months.
Material changes and segment performance
- Long-term care insurance was the principal adverse development. A comprehensive claims-reserve review increased LTC claim reserves by $604 before reinsurance. The company reported a $531 net-of-reinsurance reserve increase associated primarily with the review and a separate unfavorable benefit-utilization correction of $61 before reinsurance ($54 net). Q3 LTC loss ratio was 173%, compared with 64% in Q3 2013; the reserve review added 103 percentage points. U.S. Life reported Q3 net operating loss of $322, versus income of $111.
- Goodwill impairment. The company recorded $550 of Q3 impairment charges: $350 in life insurance and $200 in LTC. The remaining goodwill balances were reported as recoverable under management’s impairment analysis.
- Mortgage insurance. International Mortgage Insurance Q3 net operating income was $87, versus $90; U.S. Mortgage Insurance recorded a $2 operating loss, versus a $3 loss. U.S. mortgage delinquencies fell to 6.59% from 8.72% a year earlier, while U.S. MI incurred a $53 reserve increase related principally to the Bank of America arbitration settlement and another servicer dispute.
- Australian mortgage insurance IPO. Genworth sold 33.8% of its Australian mortgage insurance subsidiary in May, retaining 66.2%. Gross proceeds were approximately $541; proceeds were used to repay intercompany funding and were distributed to Genworth Holdings. The offering increased noncontrolling interests and reduced Genworth’s share of subsidiary earnings.
Outlook, commentary, and risks
- Management expected to complete an LTC active life margin review in Q4 2014, including U.S. GAAP loss recognition and statutory asset adequacy testing. It expected the claims-review changes to materially reduce margins, while management actions—including premium increases—might offset much, or possibly most, of the reduction. The filing states the review’s ultimate impact was not yet determinable.
- For U.S. mortgage insurance, the company estimated additional capital needs of $500–$700 by June 30, 2015 under draft PMIERs guidelines, revising its prior estimate upward. It intended to rely primarily on reinsurance or similar transactions and holding-company cash, and targeted compliance by June 30, 2015. Final requirements, interpretation, market availability, cost, and capital needs remained uncertain.
- After the quarter, on November 6, rating agencies took adverse actions: S&P lowered Genworth Holdings’ issuer and senior unsecured ratings to BB+ from BBB− and principal life subsidiaries’ financial strength ratings to BBB+ from A−, with negative outlooks; Moody’s placed holding-company and principal life-subsidiary ratings on review for downgrade. Management said these actions could increase borrowing costs and reduce sales in some products.
- Genworth reported a securities class action alleging inadequate disclosures about LTC reserves. The Bank of America settlement covering remaining arbitration claims was subject to GSE consent, anticipated before the end of the first half of 2015. The company had reserved $53 for that settlement and another servicer dispute; ultimate costs could be higher. Other litigation and regulatory matters could not be reliably quantified.
- Other stated risks include adverse LTC experience or further reserve changes, inability to obtain rate approvals or reinsurance, capital and liquidity needs, ratings pressure, interest-rate and investment-market volatility, mortgage-market and GSE policy changes, and restricted subsidiary dividends. Common-stock dividends and repurchases remained suspended indefinitely. The filing provides no quantified earnings guidance.
Important facts for investors to verify
- Results and assumptions from the planned Q4 active life margin review, including any additional LTC reserves, DAC/PVFP amortization, and statutory capital effects.
- Final PMIERs requirements, actual capital needed, and the availability and terms of reinsurance or other funding.
- GSE consent and implementation of the Bank of America settlement, and whether the $53 reserve is sufficient for the settlement and other servicer dispute.
- Effects of the November 2014 rating actions on funding costs, product sales, collateral requirements, and subsidiary capital.
- Liquidity available at the holding company versus regulated subsidiaries: the filing reports $988 of Genworth Holdings cash and $150 of U.S. government securities, while insurer dividends are subject to regulatory limits.