Genworth Financial, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Amounts are in U.S. dollars and millions unless noted. Genworth operates U.S., Canadian and Australian mortgage insurance, U.S. life insurance, and runoff businesses.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 or prior balance-sheet date | Change and context |
|---|---|---|---|
| Total revenue | $1,785 | $2,135 | Down 16%; premiums fell $349, chiefly reflecting a new term-life reinsurance arrangement and related ceded premiums. |
| Income before taxes | $150 | $294 | Down 49%; pre-tax margin was approximately 8.4%, versus 13.8%. |
| Continuing-operations income attributable to common shareholders | $72; $0.14 per diluted share | $153; $0.31 per diluted share | Down 53%. |
| Net income attributable to common shareholders | $53; $0.11 per diluted share | $154; $0.31 per diluted share | Down 66%; includes a $19 loss from discontinued operations. |
| Net operating income, a non-GAAP measure | $103; $0.21 per diluted share | $154; $0.31 per diluted share | Down 33%. |
| Net investment income | $789 | $781 | Up 1%; reported yield remained 4.5%. |
| Operating cash flow | $256 | $624 | Lower year over year. Investing cash flow was $(255); financing cash flow was $(1,941), including $1,620 of non-recourse obligation redemptions. |
| Cash and cash equivalents | $4,043 | $5,965 at December 31, 2015 | Down $1,922; continuing-operations cash at quarter-end. |
| Long-term borrowings | $4,232 | $4,570 | Down $338. Non-recourse funding obligations fell to $310 from $1,920. |
| Total assets / total equity | $107,173 / $15,973 | $106,431 / $14,637 | Equity rose largely with $1,276 of other comprehensive income, including investment and hedge gains. |
Benefits and expenses totaled $1,635, down 11%, but acquisition and operating expenses rose 48% to $394, including litigation, debt redemption, consent-solicitation and other costs. The effective tax rate fell to 15.2% from 30.9%, mainly because of a reversal of a deferred tax valuation allowance related to the planned European mortgage insurance sale.
Material changes and segment performance
- U.S. Mortgage Insurance: Net operating income increased to $61 from $52. The loss ratio improved to 24% from 33%, and delinquency rate declined to 4.21% from 5.65% a year earlier. New insurance written rose 17% to $7.4 billion. Estimated PMIERs available assets were 113% of required assets; the segment’s risk-to-capital ratio was approximately 15.5:1.
- Canada Mortgage Insurance: Net operating income decreased to $33 from $40, including foreign-exchange effects. New insurance written fell 31% to $5.7 billion; the loss ratio rose to 24% from 22%. The MCT ratio was approximately 234%, above the 220% company holding target. Management expected modestly lower 2016 net premiums written and moderately higher earned premiums, excluding foreign exchange.
- Australia Mortgage Insurance: Net operating income decreased to $19 from $30. New insurance written fell 24% to $4.4 billion and the loss ratio rose to 26% from 15%; management cited commodity-region delinquencies, lower high-LTV volumes and the prior-year favorable claims adjustment. Management expected lower 2016 gross and earned premiums. The estimated PCA ratio was 168%; a proposed AUD$202 million capital reduction, subject to shareholder approval, would reduce it to about 155% if completed.
- U.S. Life Insurance: Net operating income increased to $91 from $81, led by long-term care (LTC) income of $34 versus $10, reflecting rate actions and reduced benefits. Life insurance income fell to $31 from $40; fixed annuity income fell to $26 from $31. Sales of traditional life and fixed annuity products were suspended effective March 7, 2016.
- Runoff and Corporate and Other: Runoff net operating income declined to $4 from $11, partly due to variable-annuity market effects and mortality. Corporate and Other’s net operating loss widened to $105 from $60, largely reflecting litigation and other expenses.
Outlook, significant events and risks
- Management’s restructuring priorities include separating or isolating LTC, reducing holding-company debt and improving strategic flexibility. Expense actions were expected to reduce annualized pre-tax cash expenses by approximately $135. A universal-life block was recaptured from Bermuda subsidiary BLAIC effective April 1, 2016.
- The January life-block transaction is expected to generate more than $150 in aggregate capital, including approximately $175 of holding-company tax benefits scheduled for settlement in July 2016 and committed to the U.S. life restructuring plan. The filing notes that replacing term-life reinsurance previously ceded to BLAIC with third-party reinsurance may negatively affect results.
- The planned European mortgage insurance sale was expected to close in Q2 2016, subject to customary conditions and regulatory approvals, with approximately $50 of net proceeds. The quarter included a $20 after-tax estimated gain, substantially related to a tax valuation-allowance reversal.
- The company had reached an agreement in principle to settle the securities class action concerning LTC reserve disclosures for $219, including $150 expected from insurers and $69 from Genworth. The company paid its amount into escrow in Q1; final court approval remained pending, with a hearing scheduled for July 20, 2016. Additional Q1 legal costs were approximately $10. The separate Hialeah securities case was class-certified; the company reported no insurance coverage for a settlement or judgment in that case under the 2014 program.
- Genworth Holdings’ cash was $760 at quarter-end. Management said it was approximately $50 below its liquidity target after debt repurchases, litigation settlement funding and consent-solicitation costs. Insurance-subsidiary dividends are regulated; although approximately $140 could be paid without regulatory approval based on year-end estimates, management did not expect distributions at that level if capital was needed in the businesses.
- The $300 revolving credit facility was terminated in April 2016 with no balance outstanding. February 2016 rating downgrades increased financing and derivative-management pressures; the company reported it had maintained its existing derivative arrangements, though new derivative access could be more limited.
- Key risks include LTC claim, lapse, mortality and rate-action assumptions; low interest rates and investment performance; mortgage delinquencies and housing conditions; capital and regulatory requirements; foreign exchange; litigation; and the ability to complete planned sales and restructuring. Management expected to review U.S. life assumptions later in 2016 and said changes could have a negative, potentially material effect.
Most important facts for investors to verify
- Whether the $219 securities settlement receives final court approval, and the company’s remaining uninsured exposure, particularly in the Hialeah litigation.
- Progress and realized cash effects from the European sale, LTC separation plan, reinsurance changes and anticipated $175 holding-company tax benefit.
- Holding-company liquidity after the credit-facility termination, upcoming debt obligations and regulated limits on subsidiary dividends.
- Updated LTC reserve and rate-action assumptions, including regulatory approvals, policyholder responses and any adverse actuarial review findings.
- Mortgage insurer capital compliance and claim trends, especially U.S. PMIERs, Canadian MCT, and Australian PCA following any capital reduction.