Genworth Financial, Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Genworth operates Retirement and Protection, International, and U.S. Mortgage Insurance businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
- Second quarter: Revenue was $2,483, up 4% from $2,398 a year earlier. Net loss was $50, or $0.11 per share, versus a $109 loss, or $0.25 per share. Net operating income, a non-GAAP measure, was $9 versus $212.
- First half: Revenue was $4,217, down 18% from $5,151. Net loss was $519, or $1.20 per share, compared with net income of $7, or $0.02 per share. Net operating income was $23 versus $456.
- Revenue and investment trends: First-half premiums fell 12% to $3,004 and net investment income fell 24% to $1,492. Average investment yield declined to 4.3% from 5.4%. Net investment losses were $823, including $749 of net other-than-temporary impairment charges.
- Cash flow: First-half operating cash flow was $1,369, down from $2,120; investing cash flow was $635; financing cash outflow was $4,041. Cash and cash equivalents declined $1,954 to $5,374.
- Balance sheet at June 30: Total assets were $104,826, liabilities $94,856, and stockholders’ equity $9,970. Cash and invested assets totaled $65,212. Short- and long-term borrowings were $930 and $3,484, respectively; non-recourse funding obligations were $3,443.
- Liquidity and debt: Holding-company cash was $145. The company reported $825 of unused revolving-credit capacity and $930 drawn under its facilities. It repaid or repurchased $739 of senior-note principal in the first half; no further long-term senior notes were due until 2011. The common-stock dividend remained suspended.
Material changes and segment results
- U.S. Mortgage Insurance: Second-quarter operating loss widened to $134 from $59; first-half operating loss was $269 versus $95. The second-quarter loss ratio rose to 225% from 155%. U.S. delinquency rate reached 10.85%, compared with 5.59% a year earlier; new insurance written fell 77% in the quarter.
- International: Second-quarter operating income fell to $87 from $183; first-half operating income fell to $188 from $343. Higher mortgage-insurance delinquencies and unemployment-related lifestyle-protection claims, lower consumer lending, and adverse foreign-exchange translation weighed on results. International mortgage-insurance loss ratio increased to 56% from 33% in Q2.
- Retirement and Protection: Second-quarter operating income was $127 versus $150; first-half operating income was $190 versus $312. Long-term-care results improved, but life insurance, wealth management, and retirement income were pressured by lower investment yields, market effects, and weaker sales. Wealth-management assets under management ended Q2 at $15,909, versus $20,285 a year earlier.
- Investment marks and accounting: Q2 net loss improved year over year partly because net investment impairments were lower: $152 versus $552. First-half net impairments were $749 versus $739. Adoption of new impairment guidance on April 1 shifted some impairment losses to other comprehensive income and produced a $355 million cumulative adjustment to retained earnings, offset by a $349 million adjustment to accumulated other comprehensive loss.
Outlook, risks, contingencies, and unusual items
- Management gave no specific earnings or revenue guidance. It described continued economic, housing, and credit-market weakness, while noting some improvement in markets during Q2. It expected U.S. housing conditions to remain pressured and anticipated continued elevated mortgage and unemployment-related claims.
- Management said it had tightened underwriting, raised prices in selected mortgage and protection markets, adjusted asset-liability management, reduced costs, and refined product and distribution strategies. It did not anticipate writing new institutional business in the then-current market environment.
- Mortgage-insurance exposure remained especially sensitive to delinquencies, foreclosures, falling home prices, slow loan cures, and losses in 2005–2007 books and higher-risk products and regions. Captive reinsurance recoveries face constraints as some tiers and trust assets are exhausted.
- Investment risks include credit deterioration and further write-downs in structured, mortgage-backed, asset-backed, and corporate securities. About 19% of fair-value investment holdings used significant unobservable inputs (Level 3). In July, Genworth changed its intent and began reducing exposure to a financial-services company’s securities; it expected to recognize losses in Q3, but the filing does not provide a clear amount of those future losses.
- In July 2009, Genworth Canada’s IPO and subsequent over-allotment generated approximately $705 million of net proceeds; Genworth’s ownership fell to 57.5%. This occurred after quarter-end and is not reflected in the June 30 balance sheet.
- Legal matters include municipal GIC-related suits, a mortgage-insurance arbitration involving approximately $531 million of risk in-force, and a California long-term-care rate-increase class action. The company said outcomes and potential losses could not be reasonably estimated; it also noted ongoing regulatory and litigation risks.
Most important facts for investors to verify
- Whether U.S. mortgage-insurance delinquency, claim, reserve, and reinsurance trends continue to worsen, and how much captive reinsurance capacity remains.
- Investment-portfolio credit performance, Level 3 valuations, impairment assumptions, and the Q3 loss from the securities exposure identified in July.
- Holding-company liquidity, access to revolving facilities and subsidiary dividends, upcoming $861 million of funding-agreement and FABN maturities, and effects of ratings actions.
- Whether the Canadian IPO proceeds improve parent-company liquidity and capital flexibility as expected, while Genworth retains control of the subsidiary.
- Developments and potential financial consequences in the disclosed lawsuits, arbitration, and regulatory matters.