Genworth Financial, Inc. — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; comparisons are with Q1 2009 unless otherwise noted. 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 stated otherwise.
Financial performance and position
| Metric | Q1 2010 | Q1 2009 / prior date |
|---|---|---|
| Total revenue | $2,421 | $1,734 |
| Income (loss) before taxes | $119 | $(833) |
| Net income (loss) attributable to Genworth common stockholders | $178; $0.36 per diluted share | $(469); $(1.08) per diluted share |
| Net operating income attributable to common stockholders | $114 | $14 |
| Net cash from operating activities | $130 | $783 |
| Cash and cash equivalents | $3,466 | $5,002 at December 31, 2009 |
| Total assets / total liabilities | $109,093 / $95,068 | $108,187 / $94,837 at December 31, 2009 |
| Total stockholders’ equity | $14,025 | $13,350 at December 31, 2009 |
- Revenue rose 40%, but the change chiefly reflects substantially lower investment losses: net investment losses were $70 million versus $770 million. Net investment income increased 8% to $765 million; premiums declined 2% to $1.47 billion and fees and other revenue declined 12% to $256 million.
- Benefits and expenses fell 10% to $2.302 billion. Q1 2010 included $80 million of net other-than-temporary investment impairments, compared with $597 million in Q1 2009.
- The reported common-stockholder profit included a $106 million tax benefit from the resolution of uncertain tax benefits related to Genworth’s separation from GE. Excluding investment gains/losses and that tax benefit, net operating income was $114 million, up from $14 million.
- Segment net operating income (loss): Retirement and Protection $122 million, up from $38 million; International $91 million, down from $101 million; U.S. Mortgage Insurance $(36) million, compared with $(135) million; Corporate and Other $(63) million, compared with $10 million.
- Cash flow from investing activities was $(1.174) billion, as investment purchases exceeded proceeds; financing activities used $487 million. Cash declined $1.536 billion during the quarter. Management attributed lower operating cash flow than a year earlier to higher tax settlements, U.S. mortgage insurance claims and changes in other liabilities and policy balances.
- At March 31, borrowings included $930 million short-term and $3.638 billion long-term, plus $3.437 billion of non-recourse funding obligations and $551 million related to consolidated securitization entities. These categories have differing recourse and purposes.
- Genworth reported $14.0 billion in equity and $69.3 billion in cash, cash equivalents and invested assets. About 33% of those assets were in classes described as relatively illiquid, including private fixed maturities, commercial mortgage loans, policy loans, limited partnerships and selected mortgage- and asset-backed securities.
Material changes and business developments
- U.S. Mortgage Insurance remained loss-making. Its loss ratio improved to 138% from 237%, while primary delinquency was 12.74% at March 31, versus 13.73% at year-end and 9.54% a year earlier. New insurance written fell 54% to $1.7 billion, and primary insurance in-force declined 16% year over year to $134.8 billion.
- Management said U.S. mortgage insurance delinquencies declined sequentially, supported by fewer new delinquencies, loan modifications and other loss mitigation. The company reported approximately $233 million of estimated loss-exposure reduction from mitigation actions in Q1, including $107 million from rescissions. Such benefits are uncertain, and modified loans may re-default.
- International mortgage insurance operating income fell 12% to $79 million, partly because Genworth’s ownership of Genworth Canada was reduced to 57.5% after its 2009 IPO. The international mortgage insurance loss ratio improved to 43% from 51%, while delinquency rates edged up year over year to 0.82%.
- Retirement and Protection operating income improved, particularly in retirement income, where lower limited-partnership losses and improved markets helped. Long-term care results were affected by higher claims in older policies and lower policy termination rates. Wealth management assets under management increased to $20.0 billion from $14.2 billion a year earlier, aided by market performance and positive net flows.
- Genworth adopted new VIE consolidation guidance on January 1, 2010, consolidating certain securitization entities and investment structures. The adoption added assets and liabilities and reduced retained earnings by $104 million, with a $91 million partial offset in accumulated other comprehensive income. The entities’ assets are generally restricted; the filing notes $40 million of limited recourse for one consolidated commercial mortgage loan entity.
- Accumulated other comprehensive income improved to $347 million from a loss of $164 million at year-end, primarily reflecting improved unrealized investment marks. The investment portfolio nevertheless had $2.737 billion of gross unrealized losses at quarter-end; management cautioned that weaker collateral or issuer performance could lead to further write-downs.
Outlook, risks and contingencies
- The filing gives no specific consolidated earnings or revenue guidance. Management described improving financial markets and signs of stabilization in some housing markets, but emphasized continued economic, credit-market and housing uncertainty.
- Management expected U.S. home values could decline modestly further in 2010 and unemployment could rise modestly by year-end. U.S. mortgage insurance remained exposed to elevated delinquency, foreclosure and claim activity, especially in older books and stressed states; the pace and effectiveness of loss mitigation, rescissions and reinsurance recoveries are uncertain.
- Other material risks include investment impairments and defaults, commercial mortgage and structured-security performance, interest-rate and foreign-exchange changes, ratings downgrades, access to credit, insurance reserve adequacy, regulatory changes, counterparty exposure, and morbidity, mortality and persistency trends. International results also depend on housing, employment and consumer lending conditions.
- Legal and regulatory proceedings arise in the ordinary course, including insurance and mortgage-insurance practices, claims, commissions and customer matters. The company said it was not feasible to predict outcomes or reasonably estimate potential losses; it reported no material new legal proceedings or developments during the quarter.
- At March 31, revolving facilities had $930 million drawn and $404 million used primarily for letters of credit; reported unused capacity was $526 million. Following an April 29, 2010 termination of $350 million of letters of credit, the company reported unused capacity of $876 million. The filing also describes reduced facility commitments related to Lehman entities and states availability depends on market, regulatory and credit conditions.
- Common-stock dividends had been suspended indefinitely since November 2008. The board’s future dividend decision depends on subsidiary distributions, capital needs, results, legal and regulatory constraints, ratings and other factors.
Most important facts for investors to verify
- How much of reported Q1 profit reflects the $106 million separation-related tax benefit, and whether operating income trends persist without that item.
- U.S. mortgage insurance reserve adequacy, claim development and delinquency trends, including the effect of loss mitigation, rescissions, loan modifications and exhausted or constrained captive reinsurance tiers.
- Whether investment losses and unrealized marks stabilize; review structured-security, commercial mortgage and Level 3 valuation exposures and possible future impairments.
- Actual liquidity available after facility changes, holding-company cash needs, subsidiary dividend capacity, and the terms and recourse of securitization and non-recourse funding.
- Long-term care claims and persistency, international mortgage insurance performance and foreign-exchange effects, and the effect of Genworth Canada’s noncontrolling ownership on reported results.
- Outcomes and potential costs of litigation, regulatory inquiries, and the effects of pending or newly adopted accounting requirements.