Genworth Financial, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2009; filed November 2, 2009. Financial statements are unaudited and amounts are in millions, except per-share data. Genworth operates Retirement and Protection, International, and U.S. Mortgage Insurance businesses.
Key financial results
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Total revenue | $2,391 | $2,168 | $6,608 | $7,319 |
| Net income (loss) attributable to Genworth common stockholders | $19 | $(258) | $(500) | $(251) |
| Net operating income (loss), management-defined | $81 | $220 | $104 | $676 |
| Basic and diluted EPS | $0.04 | $(0.60) | $(1.14) | $(0.58) |
| Net cash from operating activities | Not stated for quarter | Not stated for quarter | $1,854 | $3,193 |
Q3 consolidated net income was $45 million, including $26 million attributable to noncontrolling interests. Q3 revenue rose 10%, while nine-month revenue fell 10%. Net investment losses were $122 million in Q3 and $945 million for the nine months. Net investment income declined to $759 million in Q3 and $2,251 million year to date, from $918 million and $2,873 million, respectively; weighted-average yields fell to 4.4% and 4.3% from 5.1% and 5.3%.
Q3 common-stockholder GAAP income improved primarily because investment impairments were lower than a year earlier and tax benefits were higher. The nine-month common-stockholder loss worsened, mainly reflecting U.S. Mortgage Insurance losses and declines in the International and Retirement and Protection segments. Management’s non-GAAP net operating income excludes after-tax investment gains and losses and certain unusual items; it is not a substitute for GAAP results.
Balance sheet, debt and liquidity
- At September 30, 2009, total assets were $108.8 billion, total liabilities $95.4 billion and total stockholders’ equity $13.4 billion, compared with $107.4 billion, $98.5 billion and $8.9 billion at December 31, 2008.
- Cash and cash equivalents were $7.1 billion, including $1.32 billion at the holding company. Cash, cash equivalents and invested assets totaled $69.1 billion.
- Short-term borrowings were $930 million; long-term borrowings were $3.46 billion; non-recourse funding obligations were $3.44 billion. Long-term borrowings declined from $4.26 billion at year-end 2008. The filing reports $823 million of unused revolving-credit capacity; access to the facilities is $1.9 billion after lender commitment failures.
- Nine-month cash flows were $1.85 billion from operations, $2.39 billion from investing and negative $4.66 billion from financing. Ending cash was $7.14 billion, down $184 million from year-end.
- Capital actions included a September common-stock offering with $622 million net proceeds and the Genworth Canada IPO and related share sales. Genworth retained 57.5% ownership of Genworth Canada. Common dividends remained suspended indefinitely; no common dividends or share repurchases occurred in the first nine months.
Material changes and segment performance
- Retirement and Protection: Q3 net operating income was $120 million, down from $178 million; nine-month operating income was $310 million, down from $490 million. Nine-month results were pressured by lower yields, investment losses, lower annuity sales and higher DAC amortization. Long-term-care premiums benefited from in-force growth and rate increases, while sales remained challenged.
- International: Q3 net operating income was $96 million versus $166 million; nine-month income was $284 million versus $509 million. Mortgage insurance losses rose as books seasoned amid higher unemployment; lifestyle-protection claims and lower consumer lending also weighed on results. Foreign exchange reduced nine-month premiums materially.
- U.S. Mortgage Insurance: Q3 operating loss was $116 million versus $121 million; nine-month operating loss widened to $385 million from $216 million. The Q3 loss ratio was 223% (162% excluding the lender settlement); the nine-month ratio was 228% (209% excluding the settlement). Delinquencies increased sharply: the primary delinquency rate was 12.62% at September 30, 2009, versus 6.92% a year earlier. New insurance written fell 75% for the nine months.
- Corporate and Other: Operating loss was $19 million in Q3 versus $3 million and $105 million for the nine months versus $107 million.
Outlook, risks and unusual items
- No formal earnings or financial guidance is provided in the supplied filing text. Management described improving financial markets and early housing stabilization, but emphasized that recovery remained uncertain. It expected investment impairments to decline and remain manageable, while acknowledging potential future write-downs if collateral or corporate issuers perform worse than expected.
- Management reported signs of slowing delinquency and claims growth in some international markets, but expected U.S. unemployment to rise into 2010 and anticipated continued pressure on U.S. mortgage delinquencies, foreclosures and claims. It tightened underwriting, increased prices in selected markets, pursued loss mitigation and adjusted product offerings and investment strategies.
- Investment impairments were $945 million net for the first nine months, including $413 million of impairment recognized in OCI under newly adopted accounting guidance. The accounting change produced a $355 million net cumulative adjustment to retained earnings, partly offset in OCI.
- A U.S. mortgage-insurance arbitration settlement was reached in September; Genworth recorded an additional $62 million provision, net of tax. The settlement’s benefits and claims activity included a $95 million pre-tax reserve/claims impact.
- Risks include continued U.S. housing weakness, elevated mortgage claims, uncertain benefits from rescissions and loan modifications, investment-credit and valuation risk, rating downgrades, limited commercial-paper access, derivative-counterparty exposure, regulatory changes, foreign-exchange movements and litigation. A California long-term-care rate-increase class action remains pending; the filing says potential losses from pending matters cannot be reasonably estimated. The U.K. payment-protection-insurance remedies were subject to an appeal.
- Genworth said it did not anticipate issuing commercial paper in the current market environment. It was pursuing cost controls, selective product reductions, reinsurance and capital-market options to support liquidity and capital flexibility.
Most important facts for investors to verify
- Whether U.S. mortgage delinquencies, foreclosure progression, paid claims and loss reserves continue to rise, and the durability of loss-mitigation and rescission benefits.
- Capital and liquidity at the holding company and regulated subsidiaries, including credit-facility availability, ratings, debt maturities and constraints on subsidiary dividends.
- Credit quality, valuation assumptions and potential further impairments in structured, mortgage-backed, commercial real-estate and financial-sector investments, including Level 3 assets.
- Trends in segment operating income, especially U.S. Mortgage Insurance losses, international claim experience and annuity/institutional runoff; compare management’s non-GAAP measure with GAAP results.
- Effects of the Genworth Canada share sales, the common-stock offering, the suspended dividend and any future capital-raising or strategic actions.
- Developments in the California long-term-care litigation, U.K. payment-protection regulation, and other legal or regulatory matters.