Genworth Financial, Inc. (filed by Genworth Holdings, Inc.) — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial amounts are in U.S. dollars unless stated otherwise. The filing entity was then Genworth Holdings, Inc., formerly Genworth Financial, Inc. On April 1, 2013, a holding-company reorganization created the new public parent, also named Genworth Financial, Inc. (New Genworth). Unless noted, amounts below are for the pre-reorganization company and its consolidated subsidiaries.
Business context and reporting period
Genworth operated in U.S. life insurance, international and U.S. mortgage insurance, international protection, and runoff businesses. The results are unaudited and are not necessarily indicative of full-year performance. The wealth management business was classified as discontinued operations following an announced sale agreement.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $2,303 million | $2,315 million |
| Income from continuing operations before taxes | $237 million | $82 million |
| Income from continuing operations | $161 million | $67 million |
| Net income | $141 million | $79 million |
| Net income available to common stockholders | $103 million; $0.21 per diluted share | $46 million; $0.09 per diluted share |
| Net operating income, a non-GAAP measure | $151 million; $0.30 per diluted share | $17 million; $0.03 per diluted share |
| Net cash from operating activities | $60 million | $(252) million |
| Net cash from investing activities | $453 million | $124 million |
| Net cash from financing activities | $(299) million | $(189) million |
- Revenue was nearly flat: premiums rose 14% to $1,261 million, while net investment income fell 2% to $814 million and fees and other revenue fell 15% to $289 million. Net investment results swung to a $61 million loss from a $37 million gain.
- Total benefits and expenses declined 7% to $2,066 million. DAC and intangible amortization fell to $122 million from $271 million, largely because the prior-year period included a $142 million write-off associated with a life reinsurance transaction. Interest expense increased 33% to $126 million.
- The effective tax rate on continuing operations was 32.1%, versus 18.3%. Net loss from discontinued operations was $20 million, compared with $12 million of income a year earlier.
- Other comprehensive loss was $405 million; total comprehensive loss was $264 million. The decline largely reflected unrealized investment and hedge losses and foreign-currency effects.
- At March 31, total assets were $112.1 billion, total liabilities $94.6 billion, and total stockholders’ equity $17.5 billion. Cash and cash equivalents were $3.8 billion; investments totaled $72.7 billion.
- Long-term borrowings were $4.8 billion; non-recourse funding obligations were $2.1 billion; securitization-related borrowings were $329 million. The filing states there were no long-term debt maturities until June 2014, when $500 million of notes were due.
Segment performance
| Segment or activity | Q1 2013 net operating income (loss) | Q1 2012 |
|---|---|---|
| U.S. Life Insurance | $85 million | $64 million |
| International Mortgage Insurance | $81 million | $7 million |
| U.S. Mortgage Insurance | $21 million | $(44) million |
| International Protection | $6 million | $5 million |
| Runoff | $16 million | $35 million |
| Corporate and Other | $(58) million | $(50) million |
- International Mortgage Insurance improved mainly because Australia did not repeat the prior-year $82 million reserve strengthening. U.S. Mortgage Insurance improved with fewer delinquencies, lower reserves on new delinquencies, and loss mitigation.
- U.S. Mortgage Insurance’s loss ratio was 62%, down from 146%; primary delinquency rate was 9.67%, down from 10.51% at year-end 2012. New insurance written rose 57% to $4.7 billion, while primary insurance in-force fell 4% year over year.
- International Mortgage Insurance’s total loss ratio was 39%, compared with 84%; Australia’s loss ratio was 47%, versus 154%. Canada’s loss ratio was 31%, versus 38%.
- Long-term care insurance’s loss ratio rose to 69% from 66%. Life and fixed annuity sales were weak: life insurance sales fell 68% and fixed annuity sales fell 68% year over year, reflecting product changes, pricing and low interest rates.
Material changes versus the prior comparable period
- Common-stockholder net income more than doubled, and net operating income increased to $151 million from $17 million. Improvement reflected lower mortgage-insurance losses and the absence of prior-year Australian reserve strengthening and life-block transaction effects.
- Investment performance weakened: net investment gains of $37 million became losses of $61 million, including $42 million of derivative losses and $26 million of realized losses on available-for-sale securities. Net investment income declined $18 million.
- Cash from operations improved to a $60 million inflow from a $252 million outflow, primarily because of higher tax settlements in the prior-year period. Investing cash inflow increased, while financing cash outflow widened as contract withdrawals exceeded deposits.
- Genworth restated prior-period financial statements for a U.S. mortgage insurance liability related to post-delinquent premiums expected to be refunded upon claim. The correction reduced retained earnings by $46 million as of January 1, 2012 and increased December 31, 2012 other liabilities by $68 million; the 2012 first-quarter premium and revenue adjustment was $1 million.
Outlook, management commentary, risks, contingencies and unusual items
- U.S. mortgage insurance: Management expected possible breakeven or modest profitability in one or two quarters of 2013, assuming no significant deterioration in housing or the global economy. GEMICO’s risk-to-capital ratio was about 26.4:1 at March 31, above the 25:1 statutory limit; it operated under regulatory waivers or equivalent approvals, which are revocable. The April 1 $100 million capital contribution was expected to improve the ratio by about three points pro forma. The company cautioned that future losses, business volume, mitigation outcomes and capital needs remain uncertain.
- Capital plan and reorganization: On April 1, Genworth Holdings contributed $100 million to U.S. mortgage insurance subsidiaries and distributed the mortgage insurance entities to New Genworth. New Genworth guaranteed the old holding company’s senior and subordinated notes. The reorganization was intended to support the U.S. mortgage insurance capital plan.
- Wealth management sale: The company agreed to sell the business for approximately $412 million, with closing expected in the second half of 2013 subject to customary conditions and regulatory approvals. Q1 included a $13 million goodwill impairment, an approximately $5 million contingent-consideration loss and an approximately $9 million held-for-sale valuation loss. Management expected an additional after-tax loss of up to $10 million at closing.
- Other dispositions: The reverse mortgage business was sold effective April 1, 2013 for $22 million, with no significant gain or loss. Genworth also planned to pursue a sale of up to 40% of its Australian mortgage insurance business; an IPO was not expected before Q4 2013 or later.
- Long-term care: Management described ongoing pressure from claims severity and duration, low investment yields, and volatile morbidity and loss ratios. In-force premium increases were targeted to generate $200 million–$300 million of additional annual premiums when fully implemented, subject to approvals; approvals at March 31 represented approximately $60 million–$65 million of the target. The company also announced cessation of new AARP-branded long-term care sales effective June 1, 2013.
- Regulatory and legal matters: In April 2013, U.S. mortgage insurance subsidiaries agreed to a CFPB settlement ending its captive-reinsurance review, including approximately $4 million in payments and a 10-year restriction on certain reinsurance arrangements. RESPA class actions remained pending; one case was dismissed with prejudice as to the subsidiary, while another proceeded with limited discovery. The company recorded no accrual and could not estimate possible losses.
- Investment and market risks: Low interest rates were expected to pressure investment returns. Management identified credit, interest-rate, equity, currency, housing, unemployment, mortgage-default, reserve, counterparty, regulatory and litigation risks. It noted possible future write-downs if corporate or structured-security cash flows perform worse than expected.
- Liquidity and capital: Parent-company cash and cash equivalents were $805 million, plus $150 million of highly liquid securities, at quarter-end. The company managed holding-company liquidity to a target based on twice expected annual debt interest plus an additional $350 million, subject to timing. Common dividends had been suspended indefinitely since November 2008.
- No formal consolidated earnings guidance was provided. The filing describes management expectations and assumptions but emphasizes that actual results may differ materially.
Most important facts for investors to verify
- Whether the U.S. mortgage insurance risk-to-capital ratio remained within required limits after the April 1 capital contribution, and whether state and GSE waivers or approvals continued.
- Progress, approvals, proceeds and final loss on the wealth management sale, and execution of the Australian mortgage insurance minority sale plan.
- Long-term care claims experience, reserve assumptions, rate-increase approvals and the realized premium benefit versus management’s $200 million–$300 million target.
- Whether lower mortgage-insurance delinquencies and favorable reserve development persist, particularly in older U.S. loan books and Australian and European portfolios.
- Investment portfolio credit quality, unrealized losses, derivative results and exposure to less observable fair-value inputs.
- Impact of the premium-refund restatement, CFPB settlement, remaining litigation and any additional capital support on liquidity, earnings and subsidiary statutory capital.
- Reconcile the filing’s reported consolidated cash balance with parent-company liquidity and assess debt service capacity, including the $500 million June 2014 maturity and suspended common dividends.