Genworth Financial, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Genworth operates Retirement and Protection, International, and U.S. Mortgage Insurance segments, plus Corporate and Other activities. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 or prior period |
|---|---|---|
| Total revenue | $2,568 | $2,421; up 6% |
| Income before tax | $146 | $119 |
| Net income | $116 | $212 |
| Net income attributable to common stockholders | $82; $0.17 per diluted share | $178; $0.36 per diluted share |
| Net operating income attributable to common stockholders (non-GAAP) | $98; $0.20 per diluted share | $114; $0.23 per diluted share |
| Net cash from operating activities | $336 | $130 |
| Cash and cash equivalents | $3,742 at March 31 | $3,132 at December 31, 2010 |
| Total assets / total stockholders’ equity | $112,940 / $15,229 | $112,395 / $14,971 at December 31, 2010 |
| Long-term borrowings | $5,347 | $4,952 at December 31, 2010 |
Net investment income rose 8% to $830, while net investment losses narrowed to $28 from $70. Net other-than-temporary impairments were $36, versus $80 a year earlier. Benefits and expenses increased 5% to $2,422. Net income attributable to common stockholders was approximately 3.2% of revenue; this is a simple calculation from reported figures, not a company-reported margin.
Operating cash flow improved year over year. Investing activities provided $496, as maturities and sales of investments exceeded purchases; financing activities used $221, principally reflecting contract withdrawals and other financing activity. Cash flow should be considered in light of the insurance business’s investment and policy-liability cash cycles.
Segments and material period changes
- Retirement and Protection: Revenue increased 9% to $1,738; net operating income rose 4% to $127. Life insurance operating income increased, while retirement income operating income fell to $25 from $34. Long-term care operating income was $40 in both periods.
- International: Revenue declined 3% to $632, but net operating income increased 36% to $124. International mortgage insurance income was $99, up 25%; lifestyle protection income was $25, up from $12.
- U.S. Mortgage Insurance: Net operating loss widened to $81 from $36. Benefits and policy-reserve costs rose to $279 from $196. The loss ratio was 197%, versus 138% (141% in 2010 excluding a prior-year counterparty settlement). Primary delinquency rate improved to 11.66% from 12.74% year over year, but claims and reserve pressure remained high.
- Corporate and Other: Net operating loss widened to $72 from $63, including higher interest expense.
The prior-year comparison included a $106 tax benefit related to Genworth’s separation from GE, which did not recur. This largely explains why reported common-stockholder net income fell 54%, despite higher pretax income. The effective tax rate was 20.5%, compared with a tax benefit and effective rate of negative 78.2% in Q1 2010.
Liquidity, debt, outlook and risks
- In March, Genworth issued $400 million of 7.625% senior notes due September 2021; net proceeds of $397 million were used for general corporate purposes. The company had $1.9 billion of revolving credit capacity, with no borrowings outstanding, but $280 million utilized primarily for letters of credit.
- Holding-company cash and cash equivalents were $1.14 billion at March 31, plus $200 million in highly liquid U.S. government bonds. Common dividends had been suspended indefinitely since November 2008. Genworth said it expected available facilities and operating cash flows to support requirements, while noting funding availability depends on markets, ratings, and other factors.
- Management described improving financial markets and generally stabilizing conditions in Canada and Australia, but continued stress in U.S. housing and slow growth in Europe. It expected U.S. home values to decline further during 2011 and elevated unemployment to persist. No specific consolidated full-year earnings or revenue guidance is provided in the supplied filing text.
- U.S. mortgage insurance remains a central risk: legacy 2006–08 books, aging delinquencies, foreclosure delays, lower loss-mitigation benefits, and possible further home-price declines could pressure losses. Genworth Mortgage Insurance Corporation exceeded the 25:1 risk-to-capital limit and relied on state waivers and alternative subsidiaries to continue writing business in authorized markets.
- Long-term care faces higher claims on older policies. Genworth was seeking an 18% rate increase on two older policy blocks; approvals may take up to two years and benefits may be realized gradually. Variable annuity sales were discontinued in January 2011, with existing policies still serviced.
- Investment risks include potential deterioration in mortgage-backed, asset-backed, and corporate securities; the company reported $1.48 billion of gross unrealized losses on securities in loss positions. Management considered these losses temporary at quarter-end, but acknowledged possible future write-downs if underlying performance worsens.
- Litigation and regulatory matters include a wealth-management class action in which federal claims remained after a March 2011 ruling; the company said it could not reasonably estimate ultimate outcomes or loss ranges. Another mortgage-insurance class action was dismissed without prejudice as to Genworth and its subsidiary.
- Management reported disclosure controls were effective as of March 31, 2011, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether U.S. mortgage insurance loss reserves, claim development, loss-mitigation results, and statutory-capital waivers remain adequate and available.
- How much of the decline in reported earnings reflects the nonrecurring $106 million prior-year tax benefit versus changes in underlying operations; review the company’s non-GAAP reconciliation.
- Long-term care claims experience, the status and eventual approval of in-force rate increases, and the effect on policyholder retention and profitability.
- Credit quality and valuation of structured and corporate investments, including unrealized losses, impairments, and exposure to mortgage-related securities.
- Holding-company liquidity, debt-service needs, credit ratings, and the terms and progress of the planned Series A preferred-stock redemption and Genworth MI Canada share repurchase.