Genworth Financial, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; the filing also reports fourth-quarter results. Genworth is an insurer operating in more than 25 countries, with U.S. life insurance, U.S. and international mortgage insurance, international protection, and runoff businesses.
Financial results and condition
| Metric | 2014 | 2013 | Change / context |
|---|---|---|---|
| Total revenue | $9.565 billion | $9.403 billion | Up 2% |
| Net income (loss) available to common stockholders | $(1.244) billion | $560 million | Turned to a substantial loss |
| Net operating income (loss), company-defined | $(381) million | $616 million | Excludes specified non-operating items; not GAAP net income |
| Income (loss) from continuing operations before taxes | $(1.276) billion | $1.050 billion | Benefits and expenses rose 30%, to $10.841 billion |
| Net cash from operating activities | $2.438 billion | $1.399 billion | Investing cash flow was $(1.836) billion; financing cash flow was $205 million |
| Cash and cash equivalents | $4.918 billion | $4.214 billion | Consolidated balance-sheet amount |
| Total assets / total stockholders’ equity | $111.358 billion / $16.797 billion | $108.045 billion / $15.620 billion | 2014 equity includes $1.874 billion of noncontrolling interests; Genworth Financial common equity was $14.923 billion |
| Long-term borrowings / non-recourse funding obligations | $4.639 billion / $1.996 billion | $5.161 billion / $2.038 billion | Long-term borrowings declined, principally following repayment of $485 million of notes |
Fourth-quarter 2014 revenue was $2.424 billion; the company reported a continuing-operations loss of $708 million and a loss available to common stockholders of $760 million.
Net investment income was $3.242 billion, down from $3.271 billion; the weighted-average investment yield fell to 4.6% from 4.7%. Cash from operations is not equivalent to free cash flow for this insurance group.
Segment performance
- U.S. Life Insurance: Revenue was $6.587 billion. Net operating loss was $641 million, versus income of $394 million in 2013; net loss available to common stockholders was $1.405 billion. Long-term care insurance drove the deterioration, with a net operating loss of $815 million versus income of $129 million.
- International Mortgage Insurance: Revenue was $1.240 billion, down 9%; net operating income was $345 million versus $361 million. Income available to Genworth common stockholders was $169 million, including a $174 million tax charge tied to the Australian business.
- U.S. Mortgage Insurance: Revenue was $639 million, up 4%; net operating income rose to $91 million from $37 million. Delinquency rates declined, and new insurance written increased 9% to $24.4 billion.
- International Protection: Revenue was $837 million, up 6%; net operating income fell to $8 million from $24 million. Net income available to common stockholders was $116 million, reflecting a $108 million tax benefit related primarily to an internal restructuring for a planned sale.
- Runoff: Revenue was $275 million, down 9%; net operating income was $48 million versus $66 million.
Material changes and unusual items
- Long-term care claim experience worsened: claims were terminating more slowly and policyholders used more benefits than previously assumed. The third-quarter comprehensive review increased claim reserves by $604 million before reinsurance ($531 million net, as described in MD&A). Fourth-quarter testing resulted in further reserve increases; the filing presents figures on differing gross and net bases, including $731 million before reinsurance for the acquired block and approximately $729 million net in one discussion.
- Long-term care’s 2014 loss ratio rose to 129% from 66%. The acquired block had no remaining loss-recognition margin after the fourth-quarter reserve increase; the other long-term care block had a reported $2.3 billion margin dependent in part on future premium increases or benefit reductions.
- Genworth recorded $849 million of goodwill impairment: $354 million in long-term care and $495 million in life insurance, reducing those goodwill balances to zero. The filing also identifies a $44 million after-tax calculation error from implementation of reserve methodology changes; it was corrected before issuance of the financial statements.
- Accumulated other comprehensive income increased to $4.446 billion from $2.542 billion, mainly from unrealized investment and hedge gains. This is distinct from the GAAP net loss.
- Genworth Australia completed an IPO in May 2014; Genworth retained 66.2%. The transaction generated approximately $500 million of net proceeds to Genworth Holdings, principally through dividends, and increased noncontrolling interests.
Outlook, management commentary and risks
- In the fourth quarter, management began reviewing strategic options to maximize long-term stockholder value. It was pursuing a sale of the lifestyle protection business and anticipated a significant loss on sale relative to book value; no completed sale was reported in this filing.
- Management targeted cash savings exceeding $100 million over two years through restructuring and portfolio rationalization. It planned to strengthen U.S. life capital through additional long-term care rate actions, risk reduction, reinsurance, block transactions and expense reductions, and said life subsidiaries would not pay dividends to the holding company at least in the near term.
- Draft GSE mortgage-insurer capital standards (PMIERs) were estimated to require an additional $500 million to $700 million for the U.S. mortgage insurance business. Management intended to rely primarily on reinsurance or similar transactions and holding-company cash; final requirements, timing, and capital treatment remained uncertain.
- Management expected holding-company cash and highly liquid securities to remain at least 1.5 times debt service plus a $350 million buffer in the near term, with deleveraging over time. Genworth Holdings reported $953 million of cash and cash equivalents plus $150 million of U.S. government securities at year-end; the $300 million revolving facility had no borrowings outstanding and matured in September 2016.
- Premium rate increases on older long-term care policies had been approved in whole or part in 47 states; management estimated $200 million to $210 million of additional annual premiums when implemented by 2017. Approvals, timing, policyholder responses and realized benefits remain uncertain.
- Rating downgrades after 2014 year-end were significant: Moody’s and S&P downgraded principal U.S. life subsidiary financial-strength ratings in February 2015, and A.M. Best also downgraded them. The filing says distributor suspensions affected portions of 2014 linked-benefit, annuity and long-term care sales; adverse ratings may also constrain capital access, reinsurance, mortgage-insurance eligibility and liquidity.
- Key risks include reserve-estimation uncertainty, low interest rates, mortgage losses and housing conditions, dependence on regulators and GSEs for rate and capital approvals, distributor and customer concentration, reinsurance counterparty exposure, foreign exchange, legal proceedings, and the planned business changes. The company’s common-stock dividend remained suspended.
- KPMG issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting because of a material weakness in controls over implementation of long-term care reserve assumption and methodology changes. Management targeted remediation during 2015.
Most important facts for investors to verify
- Whether subsequent long-term care claims experience supports reserve assumptions, and whether further reserve increases or statutory capital needs emerge.
- Whether planned long-term care rate increases and benefit adjustments receive approvals and produce the projected premium and capital benefits.
- Final PMIERs requirements, the actual U.S. mortgage insurer capital shortfall, and whether reinsurance or other funding is secured on acceptable terms.
- Progress and economics of the lifestyle protection sale, including any realized loss, required approvals and use of proceeds.
- Effects of rating actions on distribution, policyholder behavior, collateral requirements, reinsurance availability and holding-company liquidity.
- Remediation and independent testing of the reserve-control material weakness, and whether any further calculation errors are identified.
- Cash and dividend flows from subsidiaries, debt repayment capacity, legal matter outcomes, and the distinction between GAAP earnings, company-defined operating income and OCI movements.