Genworth Financial, Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet figures are as of March 31, 2012, compared with December 31, 2011. Genworth operates life and long-term care insurance, wealth management, international and U.S. mortgage insurance, and runoff businesses.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior date |
|---|---|---|
| Total revenue | $2.426 billion | $2.568 billion; down 6% |
| Net income | $80 million | $93 million |
| Net income attributable to common stockholders; diluted EPS | $47 million; $0.09 | $59 million; $0.12 |
| Net operating income attributable to common stockholders (non-GAAP) | $31 million; $0.06 per diluted share | $75 million; $0.15 per diluted share |
| Net investment income / weighted-average yield | $832 million / 4.8% | $830 million / 4.8% |
| Operating cash flow | $(252) million | $336 million |
| Cash and cash equivalents | $4.187 billion | $4.488 billion at Dec. 31, 2011 |
| Total assets / total stockholders’ equity | $110.983 billion / $15.883 billion | $112.187 billion / $16.178 billion at Dec. 31, 2011 |
| Long-term borrowings / non-recourse funding obligations | $5.095 billion / $2.602 billion | $4.726 billion / $3.256 billion at Dec. 31, 2011 |
Investing cash flow was $124 million and financing cash flow was $(189) million; cash declined $301 million during the quarter. The company reported a $344 million comprehensive loss available to common stockholders, chiefly reflecting $377 million of other comprehensive loss, including adverse changes in hedge derivatives and unrealized investment values.
Material changes and operating results
- Premiums fell 23% to $1.107 billion, primarily reflecting ceded term-life reinsurance, the Medicare supplement business sale, and seasoning of mortgage-insurance blocks. Insurance and investment product fees rose 37% to $452 million; net investment gains were $35 million versus a $28 million loss in Q1 2011.
- Net operating income decreased to $31 million from $75 million. U.S. Life net operating income was $64 million (down from $92 million); International Protection was $5 million (down from $25 million); Wealth Management was $12 million (up from $10 million); International Mortgage Insurance was $7 million (down from $99 million); U.S. Mortgage Insurance recorded a $43 million operating loss (versus an $83 million loss); and Runoff earned $35 million (versus $1 million).
- Australian mortgage insurance recorded an $82 million reserve strengthening for higher claim frequency and severity, contributing to a $21 million segment operating loss versus $52 million income. International Mortgage Insurance loss ratio rose to 84% from 42%; Australia’s was 154% versus 45%.
- U.S. Mortgage Insurance loss ratio improved to 144% from 197%, with fewer new delinquencies and improved cures, but the business remained loss-making. Its insured-loan delinquency rate was 11.45% at quarter-end versus 12.18% at year-end.
- Net other-than-temporary investment impairments were $17 million, down from $36 million. Available-for-sale unrealized investment losses remained material, and management warned that weaker-than-expected issuer or collateral performance could lead to future write-downs.
Outlook, risks, contingencies and unusual items
- Management described continued economic uncertainty, including European debt concerns and U.S. housing-market stress. It expected U.S. unemployment to remain elevated and home values to decline through mid-2012 before gradual improvement. Outlook statements are forward-looking and subject to material uncertainty.
- Management expected Australian mortgage-insurance claims pressure to remain elevated into at least Q2 2012 and moderate in the second half. The planned minority IPO of up to 40% of the Australian mortgage-insurance business was shifted from 2012 to early 2013, subject to market conditions, valuation and regulatory approvals. Moody’s placed the Australian business on review for possible downgrade.
- U.S. mortgage insurer GEMICO’s risk-to-capital ratio was approximately 33.4:1, above the 25:1 statutory threshold; a revocable North Carolina waiver and other state arrangements allowed business to continue in many states. Management said the ratio could rise further and that future capital needs could be substantial; no assurance was given that additional capital would be provided.
- Two revolving credit facilities provided access to $1.9 billion and matured in May and August 2012. The company did not intend to renew the May facility and was assessing options for the August facility; refinancing on acceptable terms was not assured. There were no facility borrowings at quarter-end, but $254 million was utilized mainly for letters of credit.
- In March, Genworth issued $350 million of additional 7.625% senior notes due 2021, receiving $358 million net proceeds for general corporate purposes, including holding-company liquidity. The company had $1.272 billion of holding-company cash at quarter-end. Common-stock dividends had been suspended indefinitely since 2008.
- The life-block transaction generated an approximately $41 million after-tax loss: a $52 million gain on repurchased non-recourse obligations was more than offset by a $93 million after-tax reinsurance-related loss. The transaction also drove a $142 million write-off of deferred acquisition costs and contributed to higher amortization expense.
- Two mortgage-insurance arbitrations filed in April 2012 seek damages exceeding $834 million, plus interest and punitive damages, concerning claims handling. The filing says outcomes and reasonable loss ranges cannot be predicted. Additional putative class actions allege RESPA violations related to captive reinsurance arrangements; the company intends to defend them.
- On April 2, 2012, the company sold its tax and accounting financial advisor unit for approximately $79 million plus a possible earnout and expected a realized gain of about $15 million. This post-quarter sale was not reflected in Q1 results.
- Effective January 1, 2012, Genworth retrospectively adopted accounting changes, including flooring certain term-life reserves at zero. The DAC change reduced retained earnings and equity by $1.3 billion as of January 1, 2011; the reserve-policy change reduced them by $110 million. These changes reduced restated 2011 Q1 common-stockholder net income from $82 million to $59 million. The filing presents adjusted comparative figures.
Most important facts for investors to verify
- Whether Australian mortgage-insurance claim frequency and severity, reserve adequacy and Moody’s review develop as management anticipated.
- GEMICO’s capital ratio, waiver conditions, ability to write new business and potential parent-company capital support.
- Progress and terms of the August 2012 credit-facility refinancing, holding-company liquidity, and subsidiary dividend capacity.
- Development and potential financial impact of the Bank of America/Countrywide arbitrations, RESPA litigation and CFPB inquiry.
- Underlying drivers of the Q1 operating-income decline, especially the life-block transaction, mortgage-insurance losses and the distinction between GAAP net income and non-GAAP net operating income.
- Assumptions supporting investment valuations and reserves, including structured securities, derivative exposures and the effects of the retrospective accounting changes.