Genworth Financial, Inc. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Genworth operates Retirement and Protection, International, and U.S. Mortgage Insurance businesses. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $2,667 | $2,391 | $7,498 | $6,608 |
| Income (loss) before taxes | $140 | $(7) | $331 | $(894) |
| Net income (loss) attributable to Genworth common stockholders | $83 | $19 | $303 | $(500) |
| Basic / diluted EPS | $0.17 / $0.17 | $0.04 / $0.04 | $0.62 / $0.61 | $(1.14) / $(1.14) |
| Net cash from operating activities | Not separately stated | Not separately stated | $976 | $1,854 |
| Net cash from investing activities | Not separately stated | Not separately stated | $(1,688) | $2,386 |
| Net cash from financing activities | Not separately stated | Not separately stated | $(765) | $(4,659) |
- Q3 pretax margin was approximately 5.2% of revenue; nine-month pretax margin was approximately 4.4%. These are calculated from reported figures.
- At September 30, 2010, total assets were $114.7 billion, total liabilities $98.6 billion, and total stockholders’ equity $16.1 billion. Cash and cash equivalents were $3.6 billion, down from $5.0 billion at year-end 2009.
- Debt and funding included $730 million short-term borrowings, $4.373 billion long-term borrowings, $3.437 billion non-recourse funding obligations, and $502 million borrowings related to securitization entities. The securitization borrowings are associated with consolidated entities.
- Available-for-sale fixed maturity securities were $56.4 billion at fair value. Accumulated other comprehensive income was $2.5 billion, compared with a $164 million accumulated other comprehensive loss at year-end 2009.
- Net investment income rose 7% in both the quarter and nine-month period; net other-than-temporary impairments fell to $37 million for Q3 and $168 million for nine months, from $196 million and $945 million, respectively, in 2009.
Material changes and segment results
- Revenue increased 12% in Q3 and 13% year to date. Common-stockholder net income was $83 million for Q3 and $303 million year to date, versus $19 million and a $500 million loss in the comparable 2009 periods.
- Reported results benefited from lower investment impairments and improved investment performance. The nine-month comparison also includes a $106 million tax benefit related to Genworth’s former parent, GE; management excludes this item from its non-GAAP net operating income measure.
- Net operating income attributable to common stockholders was $29 million in Q3, down from $81 million; year to date it was $261 million, up from $104 million. This non-GAAP measure excludes investment gains or losses and specified unusual items.
- Q3 segment net operating income: Retirement and Protection $111 million, down from $134 million; International $121 million, up from $96 million; U.S. Mortgage Insurance loss $152 million, compared with a $116 million loss; Corporate and Other loss $51 million, compared with a $33 million loss.
- U.S. Mortgage Insurance remained the principal operating pressure. Its Q3 loss ratio was 263%; primary delinquency rate was 12.29% at September 30, down from 13.73% at December 31, 2009. The company cited aging delinquencies, foreclosures, lower premiums, and reduced rescission activity; Florida reserve pressure was a notable concern.
- International mortgage insurance benefited from lower claims and delinquencies, while lifestyle protection earnings improved amid fewer unemployment-related claims and prior repricing. Lifestyle protection premiums nevertheless declined with weaker European consumer lending.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing gives no consolidated earnings or revenue guidance. Management expected U.S. home prices to weaken further in Q4 2010 and early 2011, with unemployment remaining elevated; it anticipated favorable international mortgage insurance loss levels relative to 2009. Management also expected lower Canadian mortgage originations in Q4 after activity was accelerated earlier in 2010.
- Management announced plans to seek an 18% premium rate increase on two older long-term care policy blocks, representing about 25% of individual long-term care premiums. Filings were expected to begin in November 2010, with increases anticipated to take effect from 2011 and be implemented over two to three years.
- U.S. Mortgage Insurance risk-to-capital ratios increased during Q3. The company was pursuing possible regulatory waivers and approvals for a subsidiary to write new business; under stress scenarios, capital constraints could affect business-writing capacity.
- Mortgage insurance results remain exposed to U.S. housing weakness, claim severity, aged delinquencies, foreclosure delays, rescission disputes, and the availability or exhaustion of captive reinsurance recoveries. The company reported $156 million of U.S. mortgage insurance reinsurance recoveries for the first nine months of 2010, primarily from captive arrangements.
- Investment risks include further deterioration in mortgage-backed, asset-backed, and corporate securities. The filing says adverse collateral or issuer performance could lead to additional write-downs; $1.634 billion of securities had unrealized losses at September 30, with $1.586 billion of gross losses on securities in loss positions for 12 months or more.
- Genworth consolidated certain securitization entities under new VIE accounting rules, adding restricted assets and related borrowings. Adoption of accounting guidance for embedded credit derivatives also produced a cumulative accounting adjustment and fair-value elections. These changes affect comparability and presentation.
- Legal and regulatory matters include a New York Attorney General subpoena concerning retained asset accounts and U.K. payment protection insurance remedies expected in the second half of 2011 and early 2012. Management said potential losses from all pending matters could not be reasonably estimated.
- The Dodd-Frank Act may add regulation, collateral costs, or affect mortgage insurance volumes and product distribution. The filing also identifies credit-market, interest-rate, foreign-exchange, reinsurance, ratings, and subsidiary dividend restrictions as material risks.
- After quarter-end, Genworth agreed to acquire Altegris Capital’s operating assets for about $35 million at closing, with up to $85 million in performance-based payments over five years, subject to approvals and closing conditions.
Important facts for investors to verify
- Whether U.S. Mortgage Insurance capital ratios, regulatory waivers, and subsidiary approvals permit the company to continue writing business.
- Subsequent U.S. mortgage delinquencies, foreclosures, paid claims, reserve development, and the effectiveness and collectability of reinsurance and loss-mitigation benefits.
- Performance of long-term care reserves and claims, and the status, timing, and policyholder impact of proposed rate increases.
- Investment portfolio credit quality, unrealized-loss trends, valuation assumptions, and potential additional impairments, particularly in structured securities.
- Liquidity and holding-company funding, including cash levels, available revolver capacity, debt maturities, and constraints on dividends from regulated subsidiaries.
- The sustainability of reported earnings after separating recurring operating results from investment marks, accounting changes, noncontrolling interests, and the $106 million GE-related tax benefit.
- Outcomes of the retained asset account inquiry, U.K. payment protection insurance remedies, mortgage insurance litigation, and implementation of Dodd-Frank requirements.