Genworth Financial, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Amounts are in millions of U.S. dollars, except per-share data and ratios. The unaudited statements are prepared under U.S. GAAP. Genworth operates U.S. life insurance, international and U.S. mortgage insurance, international protection, runoff, and corporate activities.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / prior date | Change or context |
|---|---|---|---|
| Total revenue | $2,322 | $2,303 | Up 1% |
| Income before tax from continuing operations | $306 | $237 | Up 29% |
| Net income | $219 | $141 | Up 55%; Q1 2013 included a $20 discontinued-operations loss |
| Net income available to common stockholders | $184 | $103 | Up 79%; diluted EPS $0.37 vs. $0.21 |
| Net operating income (non-GAAP) | $194 | $151 | Diluted operating EPS $0.39 vs. $0.30 |
| Benefits and expenses / revenue | 86.8% | 89.7% | Calculated from reported totals; lower ratio reflects reduced expenses |
| Net investment income | $805 | $814 | Down 1%; annualized weighted-average yield 4.6% vs. 4.7% |
| Net investment gains (losses) | $(17) | $(61) | Losses narrowed; derivative losses were $21 vs. $42 |
| Operating cash flow | $61 | $60 | Investing cash flow $(204); financing cash flow $269 |
| Cash and cash equivalents | $4,360 | $4,214 at Dec. 31, 2013 | Quarter-end balance |
| Total assets / total equity | $109,765 / $16,734 | $108,045 / $15,620 at Dec. 31, 2013 | Equity increase included $910 of other comprehensive income |
| Long-term borrowings | $5,150 | $5,161 at Dec. 31, 2013 | Also had $2,030 non-recourse funding obligations and $239 securitization-related borrowings |
Other comprehensive income was $910, versus a $405 loss in Q1 2013, driven largely by higher unrealized investment gains and hedge gains. Accumulated other comprehensive income was $3,483 at quarter-end. Deferred tax liability rose to $714 from $206 at year-end, primarily due to unrealized investment gains.
Material changes and segment performance
- U.S. Life Insurance: Net operating income was $94, up 11%. Long-term care income rose to $46 from $20, supported by in-force rate actions; life insurance income fell to $21 from $36, principally from higher mortality. Long-term care first-year premiums and deposits fell 45% to $22; its reported loss ratio improved to 63% from 66%.
- International Mortgage Insurance: Net operating income increased 22% to $99. Australia income rose to $62 from $46 as losses declined; Canada was $41, approximately flat. Segment revenue fell 11% to $308, affected by foreign exchange and the seasoning of Canadian books. The loss ratio improved to 20% from 39%.
- U.S. Mortgage Insurance: Net operating income increased 57% to $33. The loss ratio improved to 46% from 62%, and delinquency rate declined to 7.42% from 9.67% year over year. New insurance written declined 17% to $3.9 billion. Reserves included $17 of net strengthening for anticipated higher severity in late-stage delinquencies.
- International Protection: Net operating income was $7, compared with $6; the loss ratio increased to 26% from 24%. Management expected only slightly positive 2014 earnings if European economic and lending conditions remained stable and did not improve materially.
- Runoff and Corporate and Other: Runoff net operating income fell to $12 from $16, reflecting variable-annuity market effects. Corporate and Other net operating loss narrowed to $51 from $58; the prior-year comparison included the reverse-mortgage business sold April 1, 2013.
Outlook, risks, contingencies and unusual items
- No consolidated earnings guidance was stated in the supplied filing text. Management described economic, housing, interest-rate and credit-market conditions as uncertain; low reinvestment yields continue to pressure returns.
- Genworth planned an Australian mortgage-insurance IPO of up to 40%, targeting completion in the first half of 2014, subject to market conditions and valuation. The filing reports investor education began April 8 and a prospectus was filed April 23.
- Management expected long-term-care rate actions to generate approximately $250–$300 of additional annual premiums when fully implemented over several years, with the cited program expected to be fully implemented in 2017, subject to regulatory approval. It also planned to repatriate its long-term-care business into a U.S.-domiciled insurer in the second half of 2014.
- U.S. mortgage insurer GEMICO had an approximately 18.4:1 risk-to-capital ratio at March 31, below the 25:1 maximum cited under North Carolina law. Revised GSE eligibility and regulatory capital standards remained under review; Genworth was considering capital alternatives, including a potential contribution of $300 held at its U.S. mortgage holding company.
- Legal matters include mortgage-insurance rescission, curtailment and captive-reinsurance disputes, and a new securities class action concerning disclosures about the Australian mortgage-insurance business. The company said outcomes and possible losses could not be estimated and no amounts were accrued. The Bank of America/Countrywide settlement remained subject to GSE approval; a curtailment ADR agreement was executed in March.
- Commercial mortgage loans totaled $5,894, with $41 past due; 1% of recorded investment was past due, and no loans over 90 days past due were still accruing interest. Management cautioned that structured-security collateral could perform worse than current expectations and lead to future write-downs.
- At the holding-company level, Genworth Holdings had $1,118 cash and $150 of U.S. government securities. A $485 debt maturity was due in June 2014; management expected to use cash on hand and approximately $360 of wealth-management sale proceeds toward repayment. Common dividends and share repurchases remained suspended indefinitely.
- Insurance-subsidiary distributions are regulated. Based on year-end statutory results, subsidiaries could pay approximately $1.0 billion in 2014 without regulatory approval, but management did not expect them to distribute that full amount. Restricted net assets were $14.5 billion at Genworth Financial’s subsidiaries.
- After quarter-end, Genworth Canada issued CAD$160 of 4.24% senior notes due 2024 to refinance CAD$150 of notes due 2015; an approximately CAD$7 early redemption payment was expected in Q2.
Most important facts for investors to verify
- Whether the Australian mortgage-insurance IPO closed, its proceeds and impact on ownership, capital and risk exposure.
- Progress and realized premium benefit from long-term-care rate approvals, and developments in statutory reserves and reinsurance arrangements.
- U.S. mortgage-insurance reserve adequacy, delinquency severity, GEMICO capital ratio, and final GSE eligibility requirements.
- Cash and capital accessible at the holding company versus regulated insurance subsidiaries, including repayment of the June 2014 maturity and any subsequent financing actions.
- Developments in the securities, mortgage-insurance and captive-reinsurance litigation, including settlement approvals and any later loss estimates or accruals.
- How much of the reported earnings improvement reflects ongoing operating performance versus lower investment losses, tax benefits, prior-year discontinued operations, and market-driven OCI changes; net operating income is a non-GAAP measure.