Genworth Financial, Inc. — 2013 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Genworth provides life and long-term care insurance, mortgage insurance, lifestyle protection insurance and legacy runoff products. On April 1, 2013, it completed a holding-company reorganization and transferred its U.S. mortgage insurance businesses to the new public parent. On August 30, 2013, it completed the sale of its wealth management business for net proceeds of approximately $360 million; that business is presented as discontinued operations. These changes affect comparisons and presentation.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $2,317 | $2,456 | $6,991 | $7,173 |
| Income from continuing operations | $146 | $59 | $481 | $208 |
| Net income available to common stockholders | $108 | $35 | $352 | $157 |
| Diluted continuing-operations EPS | $0.21 | $0.05 | $0.73 | $0.22 |
| Diluted net income EPS | $0.22 | $0.07 | $0.71 | $0.32 |
| Net operating income, a non-GAAP measure | $119 | $111 | $403 | $195 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $1,093 | $427 |
Revenue declined 6% for the quarter and 3% year to date. Common-stockholder net income and continuing-operations income increased, reflecting lower benefits and expenses, the absence of the prior-year $89 million goodwill impairment, and improved U.S. mortgage insurance results. Offsetting items included lower net investment income and investment losses in 2013. Net operating income excludes specified items and is not a substitute for GAAP net income.
Net investment income was $801 million in Q3 and $2,436 million year to date, down from $825 million and $2,503 million, respectively. Net investment losses were $23 million in Q3 and $63 million year to date, versus gains of $9 million and $13 million in the comparable 2012 periods. The nine-month effective tax rate rose to 34.6% from 23.8%; Q3’s rate was 41.8% versus 28.0%.
Balance sheet, cash flow and debt
- At September 30, total assets were $108.1 billion, total liabilities $92.3 billion and total stockholders’ equity $15.8 billion. Equity was down from $17.8 billion at year-end 2012, principally reflecting a $2.3 billion decline in accumulated other comprehensive income, largely from interest-rate-related investment and hedge valuation changes.
- Cash and cash equivalents were $3.554 billion, compared with $3.632 billion at December 31, 2012. Nine-month cash flow was $1.093 billion from operations, $287 million used in investing and $811 million used in financing; cash declined $99 million before the reported foreign-exchange effect.
- Long-term borrowings were $4.780 billion and non-recourse funding obligations were $2.046 billion. A new $300 million revolving credit facility was undrawn at quarter-end. Genworth Holdings issued $400 million of 4.90% notes due 2023 and used proceeds plus cash to redeem the remaining $346 million of 2015 notes; the transaction incurred an approximately $30 million pre-tax make-whole expense.
- The company reported $1.164 billion of cash at Genworth Holdings. Approximately $360 million of wealth-management-sale proceeds was held there and, with cash on hand, was intended for the 2014 debt maturity. Common dividends had been suspended indefinitely since 2008.
Material changes by business
- U.S. Life Insurance: Q3 net operating income rose to $111 million from $86 million; nine-month income rose to $275 million from $214 million. Life insurance improved, while long-term care income declined year to date amid reserve adjustments and claims; in-force rate actions provided some benefit.
- International Mortgage Insurance: Q3 net operating income was $90 million versus $94 million; nine-month income increased to $260 million from $177 million, substantially reflecting the absence of an $82 million Australian reserve strengthening recorded in Q1 2012 and lower losses. Australia and Canada delinquency rates improved, while Other Countries remained loss-making.
- U.S. Mortgage Insurance: Q3 net operating loss narrowed to $3 million from $37 million; nine-month results improved to $31 million income from a $106 million loss. Lower new delinquencies, improved cures and loss mitigation reduced claims and reserves. Nine-month new insurance written rose 54% to $17.4 billion.
- International Protection: Net operating income fell to $4 million from $8 million in Q3 and to $11 million from $16 million year to date, as lower premiums and investment income outweighed expense reductions.
- Runoff and Corporate and Other: Runoff income increased to $25 million from $9 million in Q3 and to $47 million from $38 million year to date. Corporate and Other losses widened to $108 million from $49 million in Q3 and $221 million from $144 million year to date.
Outlook, risks and unusual items
- Management expected U.S. mortgage insurance to be modestly profitable in 2013 and results to improve in 2014, while noting a possible modest Q4 loss due to seasonality. These expectations depend on housing recovery, claim trends and litigation costs.
- The planned sale of up to 40% of the Australian mortgage insurance business through an IPO was deferred; management said 2014 offered more likely execution opportunities. S&P indicated it might lower the Australian insurer’s rating by one notch if the IPO was not completed by June 2014, assuming other rating factors were unchanged.
- U.S. mortgage insurer GEMICO’s risk-to-capital ratio was approximately 23.2:1 at September 30, below the 25:1 maximum cited in the filing. State waivers and affiliated-insurer approvals are material to continued new business; Florida licensing and an approval expiring December 31, 2013 were unresolved. Additional capital needs could arise from regulatory or GSE requirements.
- Long-term care insurance remains exposed to morbidity, persistency, low investment yields and the timing and approval of premium increases. A rate-increase program was approved in 31 states, representing an estimated $155 million to $160 million of targeted annual premium increases; management said approvals and implementation take time.
- New York regulators required an alternative interpretation of statutory reserving guidance for certain universal-life policies. The additional reserve impact was uncertain; management expected an increase at year-end but did not expect the subsidiary to fall below minimum capital requirements.
- A June expense-reduction plan eliminated approximately 400 positions, including 150 open roles. It generated a $20 million pre-tax charge, or $13 million after tax, in Q2. The company also reported $22 million of net other-than-temporary investment impairments for the first nine months, down from $85 million.
- The CFPB settlement concerning certain captive mortgage reinsurance arrangements included an approximately $4 million payment and a 10-year injunction on specified arrangements and RESPA violations. Mortgage-insurance arbitrations involving Bank of America and Countrywide included previously reported claimed damages of $834 million; the company said it believed a resolution could be significantly lower. No accrual or loss range was recorded or provided for the identified matters.
- Management described risks from interest-rate and credit-market changes, investment valuation and impairments, long-term care claims and rate approvals, mortgage defaults and capital rules, rating actions, litigation, reinsurance counterparties and foreign exchange. The filing states that actual results may differ materially from forward-looking statements.
Important facts for investors to verify
- Whether U.S. mortgage insurance maintains regulatory capital headroom and Florida and other state/GSE approvals needed to continue writing business.
- Progress, timing, valuation and rating implications of the proposed Australian mortgage insurance IPO.
- Long-term care claim experience, reserve assumptions and actual approvals and collections from in-force premium increases.
- Developments and potential financial exposure in the Bank of America/Countrywide arbitrations and remaining RESPA-related litigation.
- How interest rates, credit spreads and investment valuations affect accumulated other comprehensive income, earnings and capital.
- Availability of cash at the holding company, planned repayment of the 2014 notes and any future capital support required by insurance subsidiaries.