Genworth Financial, Inc. — 2012 Form 10-K
Business context and reporting period. This audited annual report covers the fiscal year ended December 31, 2012; it is not a standalone fourth-quarter filing. Genworth operated through U.S. Life Insurance, Global Mortgage Insurance, and Corporate and Other divisions, with businesses spanning life and long-term care insurance, mortgage insurance, wealth management, and runoff products. It reported more than 15 million customers and operations in over 25 countries. KPMG issued an unqualified opinion on the financial statements and internal controls.
Financial performance and position
| Metric | 2012 | 2011 | Change or context |
|---|---|---|---|
| Total revenue | $10.023 billion | $10.368 billion | Down 3%; premiums fell 12%, partly offset by higher fees and a return to net investment gains. |
| Net income attributable to Genworth common stockholders | $323 million; $0.66 basic EPS | $49 million; $0.10 basic EPS | Improved substantially, largely due to lower U.S. mortgage insurance losses and a Canadian guarantee-fund adjustment. |
| Net operating income attributable to common stockholders | $399 million; $0.81 diluted EPS | $148 million; $0.30 diluted EPS | Non-GAAP measure; excludes specified investment, impairment, sale, and unusual items. |
| Net cash from operating activities | $962 million | $3.125 billion | Down sharply, reflecting lower derivative-related cash flows, higher tax settlements, and higher paid claims. |
| Cash and cash equivalents | $3.653 billion | $4.488 billion | Separate from invested assets. |
| Total cash, cash equivalents and invested assets | $78.042 billion | $76.392 billion | Included $62.161 billion of fixed-maturity securities. |
| Total assets / total liabilities | $113.312 billion / $95.487 billion | $112.187 billion / $96.009 billion | Year-end balances. |
| Genworth parent stockholders’ equity | $16.537 billion | $15.068 billion | Increase included higher accumulated other comprehensive income from unrealized investment gains. |
| Long-term borrowings / non-recourse funding obligations | $4.776 billion / $2.066 billion | $4.726 billion / $3.256 billion | Interest expense was $476 million, down from $506 million. |
Segment results and notable movements
- U.S. Life Insurance: revenue was $6.250 billion, up 2%; net income was $274 million, down from $356 million. Net operating income fell to $290 million from $388 million, including $47 million of after-tax losses from life-block transactions and higher life DAC amortization.
- International Mortgage Insurance: revenue was $1.408 billion, down 7%; net income was $349 million versus $353 million. Canada benefited from a $78 million after-tax improvement tied to reversal of accrued Canadian guarantee exit fees. Australia’s results were pressured by an $82 million reserve strengthening.
- U.S. Mortgage Insurance: revenue was $673 million, down 6%; net loss narrowed to $116 million from $483 million. The loss ratio improved to 133% from 234%, but remained above 100%.
- International Protection: revenue declined 20% to $822 million; the segment reported a $59 million net loss, including an $86 million after-tax goodwill impairment. Net operating income was $24 million, down from $91 million.
- Wealth Management: revenue fell 14% to $390 million. Net income was $55 million, including a $13 million after-tax sale gain; net operating income was $42 million. Assets under management fell 11% to $22.349 billion, with net outflows of $1.231 billion.
- Runoff: revenue fell 27% to $381 million, while net income improved to $58 million from a $37 million loss. Variable annuity sales had been discontinued in 2011; the Medicare supplement business was sold in 2011.
Outlook, strategy, risks and unusual items
- Strategy: Management designated U.S. Life Insurance and Global Mortgage Insurance as core businesses and identified International Protection, Wealth Management, and Runoff businesses as non-core. It aims to improve in-force profitability, generate capital from non-core businesses, and strengthen holding-company financial flexibility.
- U.S. mortgage insurance capital plan: Announced January 2013, it includes the completed transfer of European mortgage insurance subsidiaries to GEMICO, a planned $100 million contribution to GEMICO in the second quarter of 2013, a possible additional $100 million contribution if specified adverse events occur, and a proposed legal-entity reorganization. The plan is subject to approvals and execution risks. Genworth also guaranteed receipt by GEMICO of $150 million in intercompany payments by June 30, 2017.
- U.S. mortgage insurance outlook: Management said results could reach breakeven or modest profitability in one or two quarterly periods in 2013, assuming no significant deterioration in U.S. housing or material global downturn. This is an expectation, not a guarantee; GEMICO’s risk-to-capital ratio was 36.9:1 at year-end against a 25:1 statutory benchmark, and it relied on revocable regulatory waivers to continue writing business in many states.
- Long-term care: Rate increases on older policies were filed in 49 states; approvals represented approximately 20% of the expected $200–$300 million in additional annual premiums when fully implemented. Approval timing and amounts depend on regulators, and policyholder responses may affect results. The segment’s 2012 loss ratio was 71%, up from 68%.
- International mortgage outlook and portfolio actions: Management expected Canadian flow new business to remain similar to or decrease modestly in 2013, Australian flow new business to be lower, and Australian losses to decline. A sale of up to 40% of the Australian mortgage insurance business was planned, with an IPO not expected before the fourth quarter of 2013 or later and subject to market, valuation, and regulatory conditions.
- Liquidity and shareholder returns: Management said it expected to maintain holding-company cash and highly liquid securities of at least two times debt service plus a $350 million buffer through the end of 2013. The company had no long-term debt maturities until $500 million due in June 2014. Common dividends have been suspended since November 2008; resumption is uncertain.
- Risks and contingencies: Principal risks include U.S. mortgage delinquencies and reserve-estimate uncertainty, low interest rates, long-term care claims and rate approvals, ratings downgrades, capital and dividend restrictions, investment and derivative counterparty risk, regulatory change, foreign exchange exposure, and litigation. A Bank of America/Countrywide arbitration seeks more than $834 million plus interest and punitive damages over mortgage-insurance claims handling; the company disputes the claims and says outcomes and possible losses cannot be estimated. RESPA-related litigation and regulatory inquiries, including a CFPB demand, also remain.
- Other unusual items: The Canadian guarantee-fund change produced a $78 million after-tax benefit to common-stockholder income in fourth-quarter 2012. Genworth recorded $106 million of net other-than-temporary investment impairments for the year and an $89 million pre-tax goodwill impairment in International Protection. Accounting changes adopted retrospectively reduced 2012 net income by $13 million compared with the previous reserve method and reduced opening 2010 retained earnings through the DAC accounting change.
Important facts for investors to verify
- Whether GEMICO’s capital plan receives all required approvals, reduces its risk-to-capital ratio as expected, and preserves authority to write new U.S. business.
- U.S. mortgage insurance reserve adequacy, delinquency aging, claim payments, loss mitigation benefits, and the effect of the still-elevated loss ratio.
- Actual approvals, timing, and policyholder effects of long-term care premium increases, alongside claims and persistency trends.
- Holding-company liquidity, subsidiary dividend capacity, the $500 million 2014 maturity, and the ability to maintain the stated liquidity buffer.
- Progress and proceeds, if any, from the proposed Australian mortgage insurance sale and other non-core asset actions.
- Developments in the Bank of America/Countrywide arbitration, RESPA cases, and CFPB inquiry; the filing provides no reliable estimate of potential losses.
- How much of 2012 earnings depends on the Canadian guarantee-fund benefit and other investment, reserve, and accounting items rather than recurring operating performance.