Genworth Financial, Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Genworth is a diversified insurer and financial-services company with life and long-term-care insurance, wealth management, international and U.S. mortgage insurance, and runoff businesses. In the fourth quarter, it reorganized reporting into three divisions and six operating segments; prior periods were recast to the new structure.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $10.344 billion | $10.089 billion |
| Net income attributable to Genworth common stockholders | $122 million | $142 million |
| Net income per diluted share | $0.25 | $0.29 |
| Net operating income attributable to common stockholders, company-defined | $214 million | $126 million |
| Net cash from operating activities | $3.125 billion | $1.336 billion |
| Total assets | $114.302 billion | $112.395 billion |
| Total stockholders’ equity, including noncontrolling interests | $17.665 billion | $14.971 billion |
| Long-term borrowings | $4.726 billion | $4.952 billion |
| Non-recourse funding obligations | $3.256 billion | $3.437 billion |
| Cash, cash equivalents and invested assets | $76.392 billion | $71.569 billion |
Revenue rose 3%, while common-stockholder net income fell 14%, mainly because of lower tax benefits and investment results. Net investment losses were $220 million versus $143 million in 2010; net other-than-temporary impairments declined to $132 million from $208 million. The effective investment yield increased to 4.9% from 4.8%. The filing does not present a single consolidated operating-margin measure.
Operating cash flow increased substantially; investing cash flow was a $59 million outflow and financing cash flow a $1.641 billion outflow. Cash and cash equivalents were $4.488 billion at year-end. The company had no borrowings under its revolving facilities, but $257 million was used primarily for letters of credit, leaving $1.6 billion of unused capacity. The two facilities, with $1.9 billion of total capacity, were due to expire in May and August 2012; refinancing or replacement on acceptable terms was not assured.
Segment results and material changes
- U.S. Life Insurance: Net operating income was $462 million, up from $386 million. Life insurance earnings improved; long-term-care earnings declined to $132 million from $163 million, reflecting higher claims and lower claim terminations on older policies. The long-term-care loss ratio rose to 68% from 67%.
- International Protection: Net operating income rose to $94 million from $71 million. Lower claim registrations and repricing helped profitability, while revenue declined 8% to $1.022 billion as European consumer lending weakened.
- Wealth Management: Net operating income increased to $47 million from $40 million. Year-end assets under management were $25.087 billion, up 1%; 2011 net flows were positive overall, but fourth-quarter flows were negative.
- International Mortgage Insurance: Net operating income declined to $332 million from $363 million. Revenue increased 10% to $1.507 billion, but the loss ratio rose to 43% from 39%, with higher losses in Canada and Australia. Risk in-force was $194.5 billion, up 2%.
- U.S. Mortgage Insurance: Net operating loss improved to $507 million from $580 million, but remained substantial. Revenue fell 5% to $719 million; the loss ratio was 234%. The segment strengthened reserves by $299 million in 2011. U.S. primary insurance in-force declined 7% to $116.5 billion; the delinquency rate was 12.18%, approximately unchanged from 12.21%.
- Runoff and Corporate and Other: Runoff net operating income was $25 million versus $30 million; it reported a $53 million net loss, including investment losses, partly offset by a $20 million after-tax gain on the Medicare supplement sale. Corporate and Other net operating loss widened to $239 million from $184 million, largely reflecting higher interest expense.
Genworth completed the sale of its Medicare supplement business on October 1, 2011 for $276 million. In January 2012, it agreed to sell its tax and accounting financial-advisor unit for approximately $79 million at closing, plus an earnout, subject to closing conditions and regulatory approval.
Outlook, risks and unusual items
- Management expected lower U.S. life sales in 2012 after pricing changes, moderate long-term-care sales, and moderate fixed-annuity growth from new indexed products. Long-term-care results remain exposed to claims and persistency experience on older policies; approvals for requested 18% rate increases covered 39 states and approximately 65% of targeted premiums at year-end.
- Management expected U.S. housing weakness, elevated unemployment and home-price pressure to continue affecting mortgage insurance losses. It anticipated continued reserve and claims pressure, particularly as older delinquent loans progress toward foreclosure. U.S. loss-mitigation actions reduced expected losses by $567 million in 2011, versus $734 million in 2010.
- The primary U.S. mortgage insurer, GEMICO, had a 32.9:1 risk-to-capital ratio, above the 25:1 statutory benchmark. A revocable two-year North Carolina waiver and other state waivers permitted new business in 44 states at year-end; waiver and alternative-subsidiary approvals were subject to renewal and could be changed or withdrawn. Fannie Mae and Freddie Mac approvals for certain arrangements expired in 2012.
- Management planned an Australian mortgage-insurance IPO of up to 40% during 2012, subject to market conditions and regulatory approval. It expected 2012 Australian results to remain sensitive to delinquencies and economic conditions; European mortgage-insurance losses, particularly in Ireland, could remain elevated.
- Key risks include prolonged low interest rates, equity and credit-market volatility, European sovereign-debt stress, mortgage defaults and falling home prices, reserve-estimate uncertainty, ratings downgrades, reinsurance-counterparty exposure, and regulatory changes. U.S. mortgage-insurance subsidiaries had weak financial-strength ratings, including S&P B and Moody’s Ba1 for the principal U.S. entities.
- Legal and regulatory matters include inquiries into lender-affiliated mortgage reinsurance and three putative class actions alleging RESPA violations. The company said it would defend the suits; it could not reasonably estimate outcomes or possible losses. Other matters include investigations relating to municipal guaranteed investment contracts, retained-asset accounts and unclaimed property.
- Common dividends remained suspended, with no assurance as to when or whether they would resume. Genworth is a holding company dependent on subsidiary distributions, which are subject to regulatory limits. Its Tax Matters Agreement requires payments to GE even if the related tax savings are not realized; the recorded obligation was $310 million at year-end, and certain changes in control could accelerate payments.
- Two accounting changes effective in 2012 were expected to reduce retained earnings and equity retrospectively: approximately $1.4 billion for acquisition-cost guidance and approximately $120 million from flooring certain term-life reserves at zero. The filing’s recast figures reflect both changes: 2011 common-stockholder net income would be approximately $49 million and net operating income approximately $129 million, rather than the originally reported $122 million and $214 million.
Management described the 2011 environment as volatile, with low Treasury yields, European-debt concerns and continued U.S. housing stress. KPMG issued an unqualified audit opinion, and management and the auditor concluded internal control over financial reporting was effective as of year-end.
Important facts for investors to verify
- Progress in refinancing or replacing the revolving credit facilities expiring in 2012, and holding-company liquidity after debt service and GE tax-agreement payments.
- GEMICO’s capital ratio, state waiver status, alternative underwriting capacity, and the continuing eligibility requirements imposed by Fannie Mae and Freddie Mac.
- U.S. mortgage delinquency aging, cure and modification rates, reserve development, claim severity, and the durability of reported loss-mitigation benefits.
- Long-term-care claims, persistency and rate-increase approvals, and the impact of 2012 accounting changes on reported earnings, equity and comparability.
- Execution, proceeds and capital effects of the planned Australian IPO and GFIS sale, plus outcomes of the captive-reinsurance litigation and regulatory inquiries.