Company Update (NYSE:GNW): Genworth Financial Inc Announces Second Quarter 2016 Results


Genworth Financial Inc (NYSE:GNW) reported results for the period ended June 30, 2016. The company reported net income of $172 million, or $0.34 per diluted share, in the second quarter of 2016, compared with a net loss of $193 million, or $0.39 per diluted share, in the second quarter of 2015. Net operating income for the second quarter of 2016 was$123 million, or $0.25 per diluted share, compared with net operating income of $119 million, or $0.24 per diluted share, in the second quarter of 2015.

Strategic Update

In February 2016, the company announced a restructuring plan for its U.S. life insurance businesses to: (1) suspend sales of its traditional life insurance and fixed annuity products; (2) further reduce expense levels in 2016; (3) repatriate existing business from Brookfield Life and Annuity Insurance Company Limited (BLAIC), its primary Bermuda domiciled reinsurance subsidiary, to its U.S. life insurance companies in 2016; and (4) separate and isolate its LTC business. The company made progress on this plan since the end of the first quarter including:

  • Reducing cash expenses by approximately $150 million pre-tax on an annualized basis, achieving the targeted level of cash expense reduction; and
  • Recapturing two blocks of life insurance business from BLAIC to the U.S. life insurance companies, effective April 1, 2016and July 1, 2016, and filing for the regulatory approvals to merge BLAIC into Genworth Life Insurance Company. The merger will, if approved, complete the repatriation of BLAIC.

During the second quarter of 2016, the company completed the sale of its European MI business to AmTrust Financial Services, Inc., which resulted in net proceeds of approximately $50 million to the U.S. MI business.

“Our results in the second quarter were solid, and we were especially pleased with the strong performance in U.S. MI,” saidTom McInerney, President and CEO. “We also achieved our cash expense reduction target and remain on track to complete the repatriation of our Bermuda subsidiary in the fourth quarter.”

Financial Performance

Net income was impacted by net investment gains, net of taxes and other adjustments, of $25 million in the quarter, including the gains from the sale of certain TIPS in the quarter, compared to $3 million of net investment gains in the prior year. Total impairments, net of tax, were $14 million in the quarter, compared to none in the prior year.

Net investment income decreased to $779 million in the quarter, down from $789 million in the prior quarter primarily from unfavorable prepayment speed adjustments related to residential mortgage-backed securities and down from $793 million in the prior year primarily from lower variable investment income. The reported yield and core yield2 for the current quarter were both 4.48 percent.

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

Net Operating Income (Loss)

(Amounts in millions)

Q2 16 

Q1 16 

Q2 15

U.S. Mortgage Insurance

$

61

$

61

$

49

Canada Mortgage Insurance

38

33

37

Australia Mortgage Insurance

15

19

29

U.S. Life Insurance

55

91

57

Runoff

6

4

9

Corporate and Other

(52)

(105)

(62)

Total Net Operating Income

$

123

$

103

$

119

Net operating income (loss) represents net operating income (loss) from continuing operations excluding net investment gains (losses), 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 income (loss) is included at the end of this press release.

Unless specifically noted in the discussion of results for the MI businesses in Canada and Australia, 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 net operating income in the second quarter of 2016 was a favorable $4 million versus the prior quarter and an unfavorable $3 million versus the prior year in the MI businesses in Canada and Australia, respectively.

U.S. Mortgage Insurance

Operating Metrics

(Dollar amounts in millions)

Q2 16

Q1 16

Q2 15

Net operating income

$

61

$

61

$

49

New insurance written

Primary Flow

$

11,400

$

7,400

$

8,200

Loss ratio

24%

24%

33%

U.S. MI net operating income was $61 million, compared with $61 million in the prior quarter and $49 million in the prior year. The loss ratio in the current quarter was 24 percent, flat sequentially and down nine points from the prior year primarily reflecting the continued decline and improved performance in delinquencies from the 2005 to 2008 book years.

Flow NIW of $11.4 billion increased 54 percent from the prior quarter from a seasonally larger purchase originations market and increased 39 percent versus the prior year primarily from a larger purchase originations market and growth in market share. During the second quarter of 2016, the company’s concentration of single premium flow NIW was slightly lower than the prior quarter, but higher than the prior year as it continues its selective participation in this market.

Canada Mortgage Insurance

Operating Metrics

(Dollar amounts in millions)

Q2 16

Q1 16

Q2 15

Net operating income

$

38

$

33

$

37

New insurance written

Flow

$

4,400

$

2,500

$

5,400

Bulk

$

19,700

$

3,200

$

3,300

Loss ratio

20%

24%

17%

Canada MI reported net operating income of $38 million versus $33 million in the prior quarter and $37 million in the prior year. The loss ratio in the quarter was 20 percent, down four points from the prior quarter primarily driven by a seasonal decrease in new delinquencies, net of cures, but up three points compared to the prior year primarily from unfavorable experience in oil-producing regions. Results versus the prior quarter and prior year included increased premiums from a higher level of NIW in recent years.

Flow NIW was up 64 percent3 sequentially primarily from a seasonally larger originations market and down 15 percent3 from the prior year primarily from targeted underwriting changes in certain regions and a slowing housing market in oil-producing regions. In addition, the company completed several bulk transactions in the quarter of $19.7 billion, consisting of high quality low loan-to-value prime loans primarily driven by demand from large banks in advance of regulatory changes that took effect on July 1, 2016.

Australia Mortgage Insurance

Operating Metrics

(Dollar amounts in millions)

Q2 16

Q1 16

Q2 15

Net operating income

$

15

$

19

$

29

New insurance written

Flow

$

5,000

$

4,400

$

6,500

Bulk

$

800

$

$

1,700

Loss ratio

36%

26%

28%

Australia MI reported net operating income of $15 million versus $19 million in the prior quarter and $29 million in the prior year. The loss ratio in the quarter was 36 percent, up 10 points sequentially and up eight points from the prior year. New delinquencies were up 19 percent versus the prior quarter from seasonal variation and up four percent versus the prior year. Continued unfavorable experience primarily from the commodity dependent regions of Queensland and Western Australiaalso contributed to higher new delinquencies versus the prior quarter and prior year. Results versus the prior quarter reflect$5 million of higher customer contract fees. Results versus the prior year were impacted by several unfavorable items totaling $8 million, including unfavorable foreign exchange, less favorable taxes and the company’s further sell down of approximately 14 percent of its ownership in the Australia MI business in May 2015.

Flow NIW was up nine percent3 sequentially from seasonal variation and down 20 percent3 from the prior year from a smaller high loan-to-value originations market primarily driven by regulatory focus on the market and tightened lender risk appetite as well as the impact from the termination of a customer contract in the second quarter of 2015. In addition, the company completed a bulk transaction in the quarter of approximately $0.8 billion, consisting of high quality low loan-to-value prime loans.

U.S. Life Insurance

Operating Metrics

(Amounts in millions)

Q2 16

Q1 16

Q2 15

Net operating income (loss)

Long Term Care Insurance

$

37

$

34

$

10

Life Insurance

31

31

22

Fixed Annuities

(13)

26

25

Total U.S. Life Insurance

$

55

$

91

$

57

Sales

Long Term Care Insurance

Individual

$

4

$

5

$

8

Group

2

2

1

Life Insurance

Term Life

2

5

9

Universal Life

1

2

4

Linked Benefits

1

2

2

Fixed Annuities

9

168

224

Long Term Care Insurance

LTC had net operating income of $37 million, compared with $34 million in the prior quarter and $10 million in the prior year. Results versus the prior quarter reflected stable claim experience, a more favorable benefit from rate actions and higher net investment income, partially offset by $29 million after-tax of net unfavorable adjustments, including refinements to the calculations of reserves and a correction to reserves and premiums. The current quarter included $26 million after-tax of lower reserves from reserve releases associated with reduced benefits that related to a higher level of policyholders choosing to reduce benefits instead of accepting premium increases from certain premium rate increase implementations. The company expects these premium rate increase implementations to be fully implemented during the third quarter of 2016, and, as a result, expects the favorable impact of these rate actions to decrease significantly in the second half of 2016.

Results versus the prior year reflect a more favorable benefit from rate actions, partially offset by higher severity given the mix of new claims with a higher average reserve. The prior quarter included a $4 million after-tax unfavorable item and the prior year results included $12 million of after-tax favorable items. The loss ratio in the current quarter was approximately 70 percent. Individual LTC sales were $4 million in the quarter.

LTC had net operating income of $71 million in the first half of 2016 reflecting seasonally favorable terminations that are not expected to recur in the second half of 2016. Additionally, earnings in the first half of 2016 were favorably impacted by $47 million after-tax of lower reserves from reduced benefits related to certain premium rate increase implementations described above.

Life Insurance

Life insurance had net operating income of $31 million, compared with $31 million in the prior quarter and $22 million in the prior year. Results versus the prior quarter reflect favorable mortality experience and lower reinsurance expenses that were offset by lower investment income primarily from unfavorable prepayment speed adjustments related to residential mortgage-backed securities. Results versus the prior year reflected lower reinsurance expenses and favorable mortality experience.

Fixed Annuities

Fixed annuities had a net operating loss of $13 million, compared with net operating income of $26 million in the prior quarter and $25 million in the prior year. Given the significant declines in interest rates in the quarter, the company tested its fixed immediate annuity blocks for recoverability as part of loss recognition testing which resulted in a negative margin. As a result, the remaining deferred acquisition costs (DAC) balance was written off and reserves were increased resulting in a $21 million after-tax unfavorable impact to earnings. Future adverse changes in assumptions would be immediately reflected in earnings if the margin for this block is reduced below zero. Additionally, during the quarter, a third-party reinsurer recaptured a block of single premium immediate annuities (SPIA) resulting in a $7 million after-tax unfavorable impact to earnings. Results versus both the prior quarter and prior year also reflect unfavorable impacts from SPIA mortality experience and less favorable variable investment income.

Runoff

Runoff net operating income was $6 million, compared with $4 million in the prior quarter and $9 million in the prior year.

Corporate And Other

Corporate and Other net operating loss was $52 million, compared with $105 million in the prior quarter and $62 million in the prior year. Results in the prior quarter included expenses of $54 million after-tax related to litigation settlement and legal expenses.

Capital & Liquidity

Genworth maintains solid capital positions in its operating subsidiaries. (Original Source)

Shares of Genworth Financial jumped over 17% to $3.23 in after-hours trading. GNW has a 1-year high of $7.05 and a 1-year low of $1.57. The stock’s 50-day moving average is $2.85 and its 200-day moving average is $2.86.

On the ratings front, Genworth has been the subject of a number of recent research reports. In a report issued on July 7, UBS analyst Suneet Kamath reiterated a Sell rating on GNW, with a price target of $1.50, which represents a potential downside of 45.5% from where the stock is currently trading. Separately, on July 5, J.P. Morgan’s Jimmy Bhullar maintained a Hold rating on the stock .

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Suneet Kamath and Jimmy Bhullar have a total average return of 0.8% and 4.2% respectively. Kamath has a success rate of 51.2% and is ranked #2120 out of 4083 analysts, while Bhullar has a success rate of 50.0% and is ranked #1396.

Genworth Financial, Inc. is a financial services company, which provides insurance, wealth management, investment and financial solutions. It operates its business through three divisions: U.S. Life Insurance, Global Mortgage Insurance, and Corporate and Other. The U.S. Life Insurance division offers and manages a variety of insurance and fixed annuity products. The Global Mortgage Insurance division includes the International Mortgage Insurance and U.S. Mortgage Insurance segments. The Corporate and Other division provides life style protection insurance, debt financing, accident and health insurance, variable life insurance, institutional, and corporate-owned life insurance.