Business Context and Reporting Period
Company: Genworth Financial, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Genworth is a leading financial security company operating in three segments: Retirement and Protection (life insurance, annuities, long-term care), International (mortgage insurance and lifestyle protection), and U.S. Mortgage Insurance. The company operates in a severely deteriorating global economic environment characterized by extreme volatility in credit and equity markets, declining home prices, and increased unemployment.
Key Financial Metrics
| Metric (in millions) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Total Revenues | $2,168 | $7,319 | $2,875 | $8,350 |
| Net Income (Loss) | $(258) | $(251) | $339 | $1,042 |
| Net Investment Gains (Losses) | $(816) | $(1,560) | $(48) | $(118) |
| Net Operating Income (Loss) | $220 | $676 | $368 | $1,059 |
| Total Assets | $109,561 | - | - | $114,315 (Dec 31, 2007) |
| Total Liabilities | $99,063 | - | - | $100,837 (Dec 31, 2007) |
| Stockholders' Equity | $10,498 | - | - | $13,478 (Dec 31, 2007) |
| Cash and Cash Equivalents | $5,102 | - | - | $3,091 (Dec 31, 2007) |
| Long-term Borrowings | $4,530 | - | - | $3,903 (Dec 31, 2007) |
Material Changes vs. Prior Period
- Net Loss: The company reported a net loss of $258 million for the quarter and $251 million for the nine months ended September 30, 2008, a significant reversal from net income of $339 million and $1,042 million in the comparable 2007 periods.
- Investment Impairments: Net investment losses were driven by impairments of $577 million in the third quarter and $1,316 million for the nine months. These were primarily related to sub-prime and Alt-A residential mortgage-backed securities and financial services companies.
- U.S. Mortgage Insurance Segment: This segment reported a net operating loss of $121 million for the quarter and $216 million for the nine months, compared to income of $39 million and $170 million in 2007. This was due to a significant increase in incurred losses and reserves driven by higher delinquencies and foreclosures in the 2005-2007 books of business.
- Goodwill Impairment: The company recorded non-cash charges of $22 million for the U.S. Mortgage Insurance segment and $12 million for the Institutional business (Retirement and Protection segment) to write off goodwill.
- Deferred Acquisition Costs (DAC): A $30 million charge was recorded for the write-down of DAC related to the U.S. Mortgage Insurance business due to deteriorating expected future gross margins.
- Equity Decline: Total stockholders' equity decreased by approximately $3.0 billion from December 31, 2007, primarily due to a $2.4 billion increase in net unrealized investment losses recorded in Accumulated Other Comprehensive Income (Loss).
Guidance, Outlook, and Risks
- Strategic Review: On September 30, 2008, the company announced it is examining strategic alternatives for its U.S. Mortgage Insurance business, including a possible spin-off.
- Liquidity and Capital Plan: In response to market volatility and rating downgrades, the Board of Directors suspended the payment of common stock dividends and the stock repurchase program indefinitely to preserve liquidity. The company contributed $500 million of capital to certain life insurance subsidiaries to maintain regulatory capital levels.
- Rating Actions: Following the announcement of the strategic review and market conditions, rating agencies took negative actions. S&P lowered U.S. and European mortgage insurance ratings to "AA-" and downgraded the holding company's senior debt to "A-". Fitch downgraded life insurance subsidiaries to "A+" and placed them on negative outlook. Moody's placed all ratings on review for possible downgrade.
- Future Impairments: Management expects continued volatility in fixed maturity securities valuations. Additional impairments of up to $135 million are anticipated in the fourth quarter of 2008 based on market activity subsequent to quarter-end.
- Loss Development: The company anticipates increased losses in its international mortgage insurance business over the next three years due to slowing economies. For the U.S. mortgage insurance business, projected losses for the 2005-2007 books could increase by 4% to 7%, potentially impacting operating results by $85 million to $150 million.
- Legal Proceedings: The company faces multiple class action lawsuits regarding antitrust violations in the sale of Guaranteed Investment Contracts (GICs) to municipalities and a Civil Investigative Demand from the Texas Attorney General regarding long-term care insurance.
Key Facts for Investor Verification
- Investment Portfolio Quality: Verify the extent of unrealized losses in the $48.7 billion fixed maturity portfolio, specifically the $5.5 billion in gross unrealized losses and the proportion of securities in a continuous loss position for over 12 months.
- U.S. Mortgage Insurance Reserves: Confirm the adequacy of loss reserves given the 6.92% delinquency rate in the U.S. portfolio and the specific exposure to 2005-2007 vintages in high-risk states (Florida, California, Arizona, Nevada).
- Liquidity Position: Assess the holding company's ability to meet obligations, including $1.1 billion of debt maturing in 2009, given the suspension of dividends and the uncertainty regarding the Lehman Brothers commitment to the company's credit facilities.
- Reinsurance Exposure: Review the status of captive reinsurance arrangements with lenders, as the company noted the potential exhaustion of trust assets for certain book years, which would shift full liability to Genworth.
- Strategic Alternatives Outcome: Monitor the progress of the strategic review of the U.S. Mortgage Insurance segment, as the outcome (spin-off, sale, or retention) will significantly impact the company's future risk profile and capital structure.