Genworth Financial, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2012. Amounts are in millions of dollars except per-share data. Genworth’s businesses include U.S. life and mortgage insurance, international protection and mortgage insurance, wealth management, and runoff operations.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total revenues | $2,536 | $2,521 | $7,485 | $7,744 |
| Income before tax | $99 | $13 | $367 | $21 |
| Net income | $70 | $20 | $259 | $13 |
| Net income (loss) available to common stockholders | $34 | $(16) | $157 | $(93) |
| Diluted GAAP earnings (loss) per share | $0.07 | $(0.03) | $0.32 | $(0.19) |
| Net operating income available to common stockholders | $121 | $62 | $232 | $24 |
| Operating cash flow | Not separately presented | Not separately presented | $427 | $2,032 |
- Revenue and earnings: Q3 revenue rose 1% year over year; nine-month revenue fell 3%. Premiums declined 10% in Q3 and 15% year to date, while insurance and investment product fees and other increased. The improvement in GAAP earnings reflects, among other factors, much smaller investment losses than in 2011.
- Operating results: Nine-month operating income improved to $232 million from $24 million. The measure excludes investment gains and losses, goodwill impairments, business-sale gains or losses, and certain unusual items; it is not a GAAP substitute.
- Cash flow: Nine-month operating cash flow fell to $427 million from $2.032 billion. Management cited lower derivative-related cash flows, higher claims in several insurance businesses, payment timing and higher tax settlements. Investing cash flow was $(530) million; financing cash flow was $(663) million.
- Margins: The filing does not provide a single consolidated operating-margin measure. Income before tax was $99 million on Q3 revenue of $2.536 billion and $367 million on nine-month revenue of $7.485 billion.
- Balance sheet and liquidity: At September 30, total assets were $114.4 billion, liabilities $96.7 billion, and total stockholders’ equity $17.6 billion. Cash and equivalents were $3.741 billion, down from $4.488 billion at year-end 2011. Holding-company cash and equivalents were $1.2 billion, plus $150 million in highly liquid securities.
- Debt and financing: Long-term borrowings were $4.880 billion; non-recourse funding obligations were $2.325 billion and securitization-related borrowings were $353 million. The company issued $350 million of 7.625% senior notes due 2021 and repaid $222 million of senior notes. It did not renew two $930 million revolving facilities that matured in 2012; neither had borrowings at maturity. The next stated debt maturity was $600 million in June 2014.
- Investment portfolio: Available-for-sale fixed-maturity securities were $62.214 billion, up from $58.295 billion at year-end. Net unrealized investment gains attributable to Genworth were $2.553 billion, up from $1.485 billion, contributing to higher equity. Net investment income declined 2% in both the quarter and nine-month period; reported weighted-average yields were 4.7% and 4.8%, respectively.
Material changes and segment performance
- U.S. Life Insurance: Nine-month operating income declined to $214 million from $294 million. Life insurance results were pressured by mortality, interest-assumption unlocking and life-block reinsurance transactions; long-term care operating income rose to $94 million from $71 million, partly reflecting favorable reserve adjustments.
- International Protection: Nine-month operating income fell to $16 million from $72 million as premiums and sales weakened amid reduced European consumer lending and client exits. The segment recorded an $89 million goodwill impairment charge ($86 million after tax) after its reporting-unit value fell below book value.
- International Mortgage Insurance: Nine-month operating income fell to $177 million from $245 million. Australia’s results included an $82 million first-quarter reserve strengthening for higher claim frequency and severity, particularly in Queensland and older policy vintages. Canada’s nine-month operating income was broadly stable at $120 million.
- U.S. Mortgage Insurance: The nine-month operating loss narrowed to $106 million from $417 million, primarily because the $299 million 2011 reserve strengthening did not recur and new delinquencies declined. The business remained loss-making; its reported loss ratio was 133% for the nine months.
- Wealth Management and runoff: Wealth Management had $858 million of net outflows year to date and sold its tax and accounting financial-advisor unit for approximately $79 million, recognizing a $15 million gain. Runoff operating income was $38 million versus $12 million, reflecting favorable equity-market effects on variable-annuity guarantees and the prior-year sale of Medicare supplement insurance.
Outlook, risks and unusual items
- Strategy and outlook: In October 2012, management identified U.S. Life Insurance and Global Mortgage Insurance as core businesses, with priorities including risk rebalancing, profitable new business, improving in-force returns and supporting holding-company liquidity. International Protection, Wealth Management and runoff operations were identified as non-core; management said it may seek to realize value from non-core businesses over time. No consolidated earnings guidance was provided.
- Mortgage insurance capital: The U.S. mortgage insurance subsidiary GEMICO’s risk-to-capital ratio was approximately 35.1:1, above the 25:1 statutory threshold. It continued operating under state waivers or equivalent approvals, which are revocable; Fannie Mae and Freddie Mac approvals were extended through December 31, 2013. Management said the U.S. mortgage insurance business could return to profitability in 2013, subject to economic and housing-market assumptions.
- Australia IPO: The planned sale of up to 40% of the Australian mortgage insurance business was delayed; management did not expect an IPO before late 2013. Further delay or cancellation could affect ratings and capital plans.
- Ratings and liquidity: Moody’s had the holding-company senior debt at its lowest investment-grade rating and continued a review; S&P lowered the holding-company rating to BBB- with a negative outlook in October. Management stated it was pursuing ways to reduce the U.S. mortgage business’s links to the holding company. The two revolving facilities were not renewed, and management targeted holding-company liquidity of at least two times annual debt interest plus an additional $350 million through year-end 2012.
- Long-term care: Product changes implemented in 2012 included tighter underwriting and pricing adjustments. Management began another round of in-force rate filings, targeting $200 million to $300 million in additional annual premiums when fully implemented, subject to regulatory approval and timing. Low interest rates, claims experience and approval uncertainty remain important risks.
- Litigation and regulatory matters: A CFPB demand concerns mortgage-insurance captive reinsurance arrangements. Related putative RESPA class actions were pending. Bank of America and Countrywide claimants sought more than $834 million, plus interest and punitive damages, in arbitrations over mortgage-insurance claims handling. Genworth said it could not predict outcomes or estimate possible losses and had accrued no amounts for the specifically identified matters.
- Other notable items: The company retrospectively adopted accounting changes for acquisition costs and level-premium term life reserves; the former reduced retained earnings and equity by $1.3 billion as of January 1, 2011. The reserve change floors certain term-life reserves at zero. Life-block transactions and associated reinsurance, DAC amortization and debt repurchases produced a combined $47 million after-tax loss in the first nine months of 2012. The company also announced an agreement to sell its reverse mortgage business for $22 million, subject to closing conditions and regulatory approvals.
Important facts for investors to verify
- Whether operating cash flow improves and how much of the earnings improvement is recurring versus driven by investment-market movements, reserve changes and transactions.
- U.S. mortgage insurer capital adequacy, waiver renewals, GSE approvals, claim trends and any capital support required from the holding company.
- Progress, timing and proceeds of the Australian mortgage insurance IPO, and the effect of any further delay on ratings.
- Long-term care claims, reserve assumptions and regulatory approvals for in-force premium increases.
- Developments in the CFPB inquiry, RESPA cases and the Bank of America/Countrywide arbitrations, including any change to the unaccrued exposure.
- Holding-company liquidity, subsidiary dividend capacity, debt maturities and credit-rating actions.