Business context and reporting period
Genworth Financial, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2019; comparisons are with the first quarter of 2018 unless noted. Its businesses include U.S., Canada and Australia mortgage insurance, U.S. life insurance (including long-term care), and runoff operations. The company’s strategy emphasizes mortgage insurance and stabilizing U.S. life insurance, while addressing leverage and liquidity.
Financial results and key metrics
Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise stated.
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Total revenue | $2,204 | $2,115; up 4% |
| Net income | $230 | $165 |
| Net income attributable to common stockholders | $174; diluted EPS $0.34 | $112; diluted EPS $0.22 |
| Adjusted operating income attributable to common stockholders | $121; $0.24 per diluted share | $125; $0.25 per diluted share |
| Net investment gains (losses) | $74 | $(31) |
| Cash from operating activities | $134 | $109 |
| Cash from (used by) investing activities | $277 | $(167) |
| Cash from (used by) financing activities | $(375) | $47 |
- Revenue increased despite lower premiums ($1,114 versus $1,140) and policy fees and other income ($187 versus $202), supported by higher net investment income ($829 versus $804) and investment gains. Benefits and expenses fell to $1,862 from $1,887. The effective tax rate rose to 32.7% from 27.6%, largely reflecting GILTI-related tax expense.
- Adjusted operating income declined slightly year over year, even as reported common-stockholder net income increased. The $74 million investment gain was excluded from adjusted operating income; the filing attributes gains mainly to realized securities gains and favorable equity and limited-partnership performance.
- At March 31, total assets were $102.2 billion, total liabilities $87.3 billion, and total equity $14.9 billion. Long-term borrowings were $4.0 billion and non-recourse funding obligations $311 million. Consolidated cash, cash equivalents and restricted cash were $2.2 billion.
- Genworth Holdings, the holding company, had $361 million of cash and restricted cash and $44 million of U.S. government securities. Its combined $405 million of cash and liquid assets was about $100 million below the company’s target buffer of twice expected annual external debt interest payments. An intercompany note of $200 million is due March 31, 2020.
- Fixed-maturity securities were $61.4 billion at fair value; the portfolio was 97% investment grade. Net unrealized investment gains attributable to Genworth increased to $943 million from $595 million at year-end 2018, largely reflecting lower interest rates.
Material changes versus the prior comparable period
- U.S. Mortgage Insurance adjusted operating income rose to $124 million from $111 million. New insurance written increased 7%; primary insurance in-force rose 10% to $170.4 billion, and the loss ratio improved to 8% from 9%.
- Canada Mortgage Insurance adjusted operating income fell to $41 million from $49 million, reflecting foreign exchange, lower earned premiums and higher expenses. New insurance written fell 15%; the loss ratio was 15% versus 13%. Its MICAT ratio was approximately 172%, above the 150% supervisory target.
- Australia Mortgage Insurance adjusted operating income fell to $14 million from $19 million, mainly due to foreign exchange and seasoning of newer books. New insurance written increased 15%, but in-force business declined 11%; the quarterly loss ratio rose to 34% from 30%. Management expected the full-year 2019 loss ratio to be similar to 2018’s 30%.
- U.S. Life Insurance reported an adjusted operating loss of $5 million in both periods. Long-term care’s adjusted loss narrowed to $20 million from $32 million, while fixed annuities income fell to $17 million from $28 million, including $13 million of unfavorable loss-recognition charges.
- Runoff adjusted operating income increased to $20 million from $10 million, mainly due to favorable equity-market performance. Corporate and Other adjusted losses widened to $73 million from $59 million, primarily due to higher taxes, including GILTI-related expense.
- Comprehensive income available to common stockholders was $622 million, compared with a loss of $419 million in Q1 2018, reflecting a $503 million increase in other comprehensive income versus a $580 million loss a year earlier.
Outlook, management commentary, risks and unusual items
- China Oceanwide transaction: The proposed acquisition remains subject to closing conditions, including Canadian regulatory approval and Chinese currency-conversion and funds-transfer clearance. The parties extended the termination-waiver deadline to June 30, 2019. The stated offer is $5.43 per share, approximately $2.7 billion in total; a proposed $1.5 billion post-close capital contribution is conditional on closing and approvals. Genworth also agreed to a post-close $175 million contribution to its long-term-care insurer over time; the scheduled March 2019 contribution was not made due to closing delays.
- If the transaction does not close, management said it may pursue strategic alternatives, including asset sales and potential sales of its Canada or Australia mortgage insurance businesses, to address debt maturities and ratings pressure. The company said it cannot predict completion or further deadline extensions.
- Management considers long-term-care in-force rate increases and associated benefit reductions important to stabilizing that business. In Q1, 24 filings in nine states were approved, representing a weighted-average increase of 62% on approximately $241 million of annualized premiums. New individual long-term-care sales through intermediaries were suspended effective March 7, 2019.
- Management expected GILTI-related pressure on the effective tax rate to continue through the remainder of 2019 and into 2020. It also cited low interest rates, mortgage and housing conditions, foreign exchange movements, market volatility, and insurance reserve assumptions as important uncertainties.
- Long-term-care claim reserve assumptions are sensitive to experience; the 2018 annual review increased claim reserves by $308 million and reinsurance recoverables by $17 million. Q1 2019 favorable prior-year claims development was $81 million, primarily in long-term care. The filing warns future reserve revisions could be significant.
- Other notable items include $4 million of restructuring expense and a $10 million unfavorable universal-life model correction. Investment and insurance results also include fair-value effects from derivatives and embedded policyholder guarantees.
- Contingencies include the AXA litigation, whose demand was amended to £265 million; the company disputes liability and says it cannot estimate reasonably possible losses for the identified matters. Other litigation includes long-term-care rate-action and disclosure claims. The filing states outcomes cannot be predicted and adverse outcomes could materially affect results.
- Common-stock dividends and share repurchases remain suspended indefinitely. The filing reports no material change in risk factors from the 2018 Form 10-K and says disclosure controls were effective as of quarter-end.
Important facts for investors to verify
- Whether the China Oceanwide merger received all remaining approvals and closed by the extended June 30, 2019 deadline, and whether the proposed capital contributions were made.
- Holding-company liquidity relative to the target buffer, debt maturities (including the $200 million intercompany note due in 2020), and capacity to obtain subsidiary dividends or pursue asset sales.
- U.S. mortgage insurer capital and PMIERs compliance after revised requirements took effect; the reported March 31 cushion was over $600 million, or approximately 123% of required assets.
- Long-term-care reserve development, claim experience, rate-action approvals and realized premium increases versus the company’s assumptions.
- Developments in the AXA and other litigation, including any updated loss estimates or material rulings.
- How much reported earnings growth depended on investment gains and market-driven other comprehensive income, versus recurring adjusted operating performance.