Genworth Financial Inc (GNW) Announces Third Quarter 2015 Results


Genworth Financial Inc (NYSE:GNW) reported results for the period ended September 30, 2015. The company reported a net loss1 of $284 million, or $0.57 per diluted share, compared with a net loss of $844 million, or $1.70 per diluted share, in the third quarter of 2014. The net loss in the quarter includes an after-tax loss of $296 million, or $0.59 per diluted share, related to a write-off of deferred acquisition costs (DAC) from the previously announced life block sale. Net operating income2 for the third quarter of 2015 was $64 million, or $0.13 per diluted share, compared with a net operating loss of $323 million, or $0.65 per diluted share, in the third quarter of 2014.

Strategic Update
As of September 30, 2015, the U.S. mortgage insurance (MI) business would be compliant with the private mortgage insurer eligibility requirements (PMIERs) capital requirements, with a prudent buffer, when including:

  • An excess of loss reinsurance transaction on its 2015 book of business which has been executed with a panel of reinsurers, and would be effective as of October 1, 2015, that is expected to provide approximately $225 millionof PMIERs capital credit as of December 31, 2015. This transaction, which is pending approval from the government sponsored enterprises (GSEs), has similar terms and conditions as the two recent transactions approved by the GSEs.
  • An internal legal entity restructuring completed on October 1, 2015.

The company has generated or expects to generate a total of approximately $525 million in PMIERs capital credit year-to-date from three reinsurance transactions covering the 2009 through 2015 books of business in addition to the intercompany sale of its ownership of affiliated preferred securities of approximately $200 million. The company will work to maintain a prudent level of capital in excess of the PMIERs capital requirements.

The company continues to make progress on the completion of the planned sale of its lifestyle protection insurance business. The transaction is expected to generate approximately $400 million in net proceeds and close by the end of 2015, subject to customary conditions, including requisite regulatory approvals.

In September 2015, the company announced it had agreed to sell certain blocks of its term life insurance to Protective Life Insurance Company which is expected to generate initial capital of approximately $100 to $150 million in aggregate to Genworth. The transaction is expected to utilize all of the net operating losses in the U.S. life insurance companies resulting in expected intercompany tax payments over time to the holding company and other entities for the use of tax benefits. The transaction is expected to close in the first quarter of 2016, subject to customary conditions, including requisite regulatory approvals.

In October 2015, the company announced it had entered into an agreement to sell its European mortgage insurance business to AmTrust Financial Services, Inc. that is expected to result in net proceeds of approximately $55 million. These proceeds will provide additional capital credit to Genworth Mortgage Insurance Corporation under PMIERs. Additionally, the company expects to record an after-tax GAAP loss of approximately $140 million related to the sale in the fourth quarter of 2015. The transaction is expected to close in the first quarter of 2016 and is subject to customary conditions, including requisite regulatory approvals.

The company has taken and will continue to take steps to bring cash expenses in line with near-term sales levels. The company now expects to achieve its annualized cash savings target of $100 million pre-tax or more in the first half of 2016.

“Our Global Mortgage Insurance Division is performing well with strong loss ratios and U.S. MI made substantial progress towards PMIERs compliance. Long term care insurance remains challenged, but we continue to receive significant premium rate increases and claims experience remained in line with our expectations,” said Tom McInerney, President and CEO. “We are making progress on our strategic priorities and will continue to explore strategic options to accelerate our turnaround.”

 Consolidated Net Loss & 

Net Operating Income (Loss) 

Three months ended September 30

(Unaudited)

2015

2014

Per

Per

diluted

diluted

Total 

(Amounts in millions, except per share) 

Total

share

Total

share

% change 

Net loss available to Genworth’s common stockholders 

$

(284)

$

(0.57)

$

(844)

$

(1.70)

66  %

Net operating income (loss) 

$

64

$

0.13

$

(323)

$

(0.65)

120  %

Weighted average diluted shares

497.4

496.6

Three months ended September 30

(Unaudited)

2015

2014

Book value per share 

$

27.29

$

30.54

Book value per share, excluding accumulated other comprehensive income (loss) 

$

20.30

$

22.62

Net investment losses, net of taxes and other adjustments, were $22 million in the quarter, compared to net investment gains of $4 million in the prior quarter and net investment losses of $10 million in the prior year. Total impairments, net of tax, were $6 million in the quarter, compared to none in the prior quarter and $4 million in the prior year.

Net investment income decreased to $783 million, compared to $793 million in the prior quarter primarily from lower limited partnership income. The reported yield for the current quarter was 4.46 percent. The core yield2 was 4.39 percent, down from the prior quarter.

Net operating income (loss) results are summarized in the table below:

Net Operating Income (Loss)

(Amounts in millions)

Q3 15 

Q2 15 

Q3 14

Global Mortgage Insurance Division

$

91

$

110

$

85

U.S. Life Insurance Division

40

57

(322)

Corporate and Other Division

(67)

(48)

(86)

Total Net Operating Income (Loss)

$

64

$

119

$

(323)

Net operating income (loss) represents net operating income (loss) from continuing operations excluding net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and other adjustments, net of taxes. A reconciliation of net operating income (loss) of segments and Corporate and Other activities to net loss is included at the end of this press release.

Unless specifically noted in the discussion of results for the International Mortgage Insurance segment, references to percentage changes exclude the impact of translating foreign denominated activity into U.S. dollars (foreign exchange). Percentage changes, which include the impact of foreign exchange, are found in a table at the end of this press release. The impact of foreign exchange on results in the third quarter of 2015 was an unfavorable $13 million versus the prior year.

Global Mortgage Insurance Division
Global Mortgage Insurance Division had net operating income of $91 million, compared with $110 million in the prior quarter and $85 million a year ago.

Global Mortgage Insurance Division

Net Operating Income (Loss)

(Amounts in millions)

Q3 15 

Q2 15 

Q3 14

International Mortgage Insurance

Canada

$

38

$

37

$

46

Australia

21

29

48

Other Countries

(5)

(5)

(7)

Total International Mortgage Insurance

54

61

87

U.S. Mortgage Insurance

37

49

(2)

Total Global Mortgage Insurance

$

91

$

110

$

85

Sales

(Amounts in billions)

Q3 15

Q2 15

Q3 14

International Mortgage Insurance

Flow

Canada

$

6.6

$

5.4

$

6.8

Australia

6.3

6.5

8.1

Other Countries

0.6

0.5

0.4

Bulk

Canada

4.8

3.3

5.6

Australia

1.7

1.0

U.S. Mortgage Insurance

Primary Flow

9.3

8.2

7.5

Canada Mortgage Insurance
Canada reported net operating income of $38 million versus $37 million in the prior quarter and $46 million in the prior year. The loss ratio in the quarter was 21 percent, up four points from the prior quarter driven by a seasonal increase in new delinquencies, net of cures, and flat compared to the prior year. Results included lower expenses versus the prior quarter and unfavorable foreign exchange versus the prior year of $7 million. Flow new insurance written (NIW) was up 26 percent4 sequentially from a seasonally larger originations market and up 15 percent4 year over year primarily from an increase in market penetration. In addition, the company completed several bulk transactions in the quarter of approximately $4.8 billion in total, consisting of low loan-to-value prime loans.

Australia Mortgage Insurance
Australia reported net operating income of $21 million versus $29 million in the prior quarter and $48 million in the prior year. The loss ratio in the quarter was 29 percent, up one point sequentially and eight points from the prior year. Results in the quarter include actuarial updates to earned premiums and loss reserves which combined had a negligible impact on earnings, but did unfavorably impact the loss ratio by approximately seven points. New delinquencies were down 10 percent sequentially and cures were up 11 percent sequentially from normal seasonal variation, including improved performance in Queensland and Western Australia. Results versus the prior quarter were lower by $6 million from the company’s further sell down of approximately 14 percent of its ownership in the Australia business in May 2015, less favorable tax benefits and unfavorable foreign exchange. Results versus the prior year were also impacted by less favorable tax benefits of $15 million, an unfavorable $8 million related to the further sell down in May 2015 and unfavorable foreign exchange of $6 million. Flow NIW was up two percent4 sequentially and down two percent4 year over year.

Other Countries Mortgage Insurance
Other Countries had a net operating loss of $5 million, flat to the prior quarter and down from a net operating loss of $7 million in the prior year.

U.S. Mortgage Insurance
U.S. MI net operating income was $37 million, compared with net operating income of $49 million in the prior quarter and a net operating loss of $2 million in the prior year. The prior year included an unfavorable impact of $34 million related to loss mitigation settlements. The loss ratio in the current quarter was 43 percent, up 10 points sequentially reflecting normal seasonal variation in new flow delinquencies which increased approximately 13 percent from the prior quarter and decreased approximately 11 percent from the prior year, reflecting the continued burn through of delinquencies from the 2005 to 2008 book years. Results versus the prior year also reflected lower net investment income, primarily related to an approximately $8 million reduction from the affiliated preferred securities that were transferred to the holding company in July 2015.

Flow NIW of $9.3 billion increased 13 percent from the prior quarter from a larger purchase originations market and increased 24 percent versus the prior year primarily from a larger purchase originations market and higher refinance activity. During the third quarter, the company increased its single premium lender paid new insurance written and continues its selective participation in this market. Future volumes of this product will vary in part depending on the company’s evaluation of the risk return profile of these transactions.

U.S. Life Insurance Division
U.S. Life Insurance Division net operating income was $40 million, compared with net operating income of $57 million in the prior quarter and a net operating loss of $322 million a year ago.

U.S. Life Insurance Division

Net Operating Income (Loss)

(Amounts in millions)

Q3 15

Q2 15

Q3 14

U.S. Life Insurance

Long Term Care Insurance

$

(10)

$

10

$

(361)

Life Insurance

31

22

13

Fixed Annuities

19

25

26

Total U.S. Life Insurance

40

57

(322)

Total U.S. Life Insurance

$

40

$

57

$

(322)

Sales

(Amounts in millions)

Q3 15

Q2 15

Q3 14

U.S. Life Insurance

Long Term Care Insurance

Individual

$

7

$

8

$

28

Group

1

1

1

Life Insurance

Term Life

7

9

13

Universal Life

2

4

11

Linked Benefits

3

2

4

Fixed Annuities

260

224

371

Long Term Care Insurance
Long term care insurance (LTC) had a net operating loss of $10 million, compared with net operating income of $10 million in the prior quarter and a net operating loss of $361 million in the prior year. Results in the quarter reflected $21 million of after-tax unfavorable items, due largely to corrections to reinsurance, premium taxes and group LTC reserves. The current quarter included favorable mortality on existing claims versus the prior year, unfavorable severity given the mix of new claims with a higher average reserve versus the prior year and less favorable benefits from reinsurance versus both the prior quarter and prior year. Results in the prior quarter included net favorable items of $12 million after-tax while results in the prior year included $380 million after-tax of unfavorable items. The loss ratio in the current quarter was 76 percent. Given that experience in aggregate included in this year’s claim reserves review was in line with expectations, the company made no significant adjustments in the current quarter to its assumptions and methodologies related to its LTC claim reserves.

Results for the quarter included a favorable impact from higher premiums and reduced benefit options of $19 millionafter-tax versus the prior quarter and $16 million after-tax versus the prior year related to premium increases from in force rate actions approved and implemented to date.

Individual LTC sales of $7 million were lower than the prior quarter and the prior year. Sales are expected to continue at low levels in the near term due to the 2014 introduction of a higher priced LTC product and lower ratings, but build over time as new products and distribution strategies are introduced.

Life Insurance
Life insurance net operating income was $31 million, compared with $22 million in the prior quarter and $13 million in the prior year. Results in the quarter included favorable mortality versus both the prior quarter and prior year in addition to higher reinsurance expenses versus the prior year. Results in the prior year reflected $10 million of net unfavorable items. Sales of $12 million decreased compared to the prior quarter and the prior year.

Fixed Annuities
Fixed annuities net operating income was $19 million, compared with $25 million in the prior quarter and $26 million in the prior year. Results in the quarter reflected unfavorable impacts from mortality and lower limited partnership income versus both the prior quarter and prior year. Sales in the quarter totaled $260 million, up sequentially and down versus the prior year.

Corporate and Other Division
Corporate and Other Division net operating loss was $67 million, compared with $48 million in the prior quarter and $86 million in the prior year.

Corporate and Other Division

Net Operating Income (Loss)

(Amounts in millions)

Q3 15

Q2 15

Q3 14

Runoff

$

(4)

$

9

$

5

Corporate and Other

(63)

(57)

(91)

Total Corporate and Other

$

(67)

$

(48)

$

(86)

Runoff net operating loss was $4 million, compared with net operating income of $9 million in the prior quarter and net operating income of $5 million in the prior year reflecting unfavorable equity market performance versus the prior quarter and prior year and lower limited partnership income versus the prior quarter. Results in the prior year also included a favorable impact from refinement of DAC assumptions related to the company’s annual review of assumptions in variable annuity products.

Corporate and Other net operating loss was $63 million, compared with $57 million in the prior quarter and $91 million in the prior year. Results in the current quarter included higher legal accruals and expenses of $17 million after-tax. Results versus the prior year reflected less favorable taxes.

Capital & Liquidity
Genworth maintains solid capital positions in its operating subsidiaries.

Key Capital & Liquidity Metrics 

(Dollar amounts in millions) 

Q3 15

Q2 15

Q3 14

Canada MI 

Minimum Capital Test (MCT) Ratio5 

227

%

231

%

224

%

Australia MI 

Prescribed Capital Amount (PCA) Ratio5 

167

%

164

%

156

%

U.S. MI 

Consolidated Risk-To-Capital Ratio5 

14.3:1

13.7:1

15.4:1

GMICO Risk-To-Capital Ratio5 

14.3:1

13.5:1

14.8:1

U.S. Life Companies 

Consolidated Risk-Based Capital (RBC) Ratio5 

445

%

455

%

448

%

Unassigned Surplus5 

$

75

$

97

$

291

Holding Company Cash6 and Liquid Assets

$

983

$

1,154

$

1,138

Key Points

  • $102 million of dividends from the operating subsidiaries were paid to the holding company during the third quarter in addition to the remaining $50 million in net proceeds related to the sale of 92.3 million shares of the Australia MI business in May 2015;
  • In July 2015, approximately $200 million of cash from Genworth Holdings, Inc. was paid to U.S. MI in exchange for the business’ ownership interest in affiliated preferred securities;
  • Unassigned surplus and RBC ratio declined versus the prior quarter primarily from unfavorable equity market impacts in runoff and lower LTC earnings, partially offset by favorable taxes;
  • The holding company ended the third quarter with a buffer of approximately $490 million in excess of one and a half times annual debt service and restricted cash;
  • The holding company targets maintaining cash balances of at least one and a half times its annual debt service expense plus a risk buffer of $350 million; and
  • A $90 million reduction in surplus occurred in U.S. MI related to the anticipated sale of the European MI business, increasing the consolidated risk-to-capital ratio by less than one point.
  • Shares of Genworth Financial Inc opened today at $5.22 . GNW has a 1-year high of $14.10 and a 1-year low of $4.23. The stock’s 50-day moving average is $5.00 and its 200-day moving average is $6.62. (Original Source)

On the ratings front, Genworth Financial has been the subject of a number of recent research reports. In a report issued on October 27, Compass Point analyst Kenneth Billingsley maintained a Buy rating on GNW, with a price target of $7.50, which implies an upside of 43.7% from current levels. Separately, on October 22, BTIG’s Mark Palmer reiterated a Buy rating on the stock and has a price target of $13.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Kenneth Billingsley and Mark Palmer have a total average return of -1.7% and -5.5% respectively. Billingsley has a success rate of 61.0% and is ranked #2925 out of 3808 analysts, while Palmer has a success rate of 40.0% and is ranked #3669.

The street is mostly Neutral on GNW stock. Out of 6 analysts who cover the stock, 4 suggest a Hold rating and 2 recommend to Buy the stock. The 12-month average price target assigned to the stock is $7.00, which implies an upside of 34.1% from current levels.

Genworth Financial Inc is a financial security company. It provides insurance, wealth management, investment and financial solutions.