Genworth Financial Announces Third Quarter 2017 Results

  • Genworth Financial
  • 03/11/2017
Genworth Financial Announces Third Quarter 2017 Results
Genworth Financial, Inc. (NYSE: GNW) today reported results for the quarter ended September 30, 2017. The company reported net income of $107 million, or $0.21 per diluted share, in the third quarter of 2017, compared with a net loss of $380 million, or $0.76 per diluted share, in the third quarter of 2016. The adjusted operating income3 for the third quarter of 2017 was $76 million, or $0.15 per diluted share, compared with an adjusted operating loss of $405 million, or $0.81 per diluted share, in the third quarter of 2016.

Genworth and China Oceanwide Holdings Group Co., Ltd. (Oceanwide) continue to work towards satisfying the closing conditions of their previously announced proposed transaction as soon as possible.

With respect to the state regulatory review process, the companies made progress and announced during and since the end of the third quarter the following regulatory approvals:

Genworth and Oceanwide recently announced the withdrawal of their joint voluntary notice with the Committee on Foreign Investment in the United States (CFIUS), with the intent to refile with additional mitigation approaches. The parties are actively engaged in developing these approaches, including the potential involvement of a U.S. third-party service provider, and anticipate refiling a new joint notice with CFIUS as soon as the terms of the additional mitigation approaches are determined. Genworth and Oceanwide are fully committed to developing an acceptable solution with CFIUS; however, there can be no assurance that CFIUS will ultimately agree to clear a transaction between Genworth and Oceanwide on terms acceptable to the parties or at all.

In addition to clearance by CFIUS, the closing of the proposed transaction remains subject to the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions and other closing conditions. Genworth and Oceanwide continue to be actively engaged with the relevant regulators regarding the pending applications.

Genworth and Oceanwide are also discussing an additional waiver of each party's right to terminate the merger agreement beyond the November 30, 2017 deadline, and will make a final decision regarding the deadline in the coming weeks. Genworth and Oceanwide remain committed to satisfying the closing conditions under the merger agreement as soon as possible.

Separately, Genworth is currently reviewing potential refinancing options to address upcoming debt maturities in the event the transaction with Oceanwide cannot be completed in a timely manner or at all. Genworth could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with Oceanwide cannot be completed. Genworth is also evaluating options to insulate its U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event the transaction with Oceanwide cannot be completed.

"Genworth remains committed to the transaction with Oceanwide, as it continues to represent the most value for all of our stakeholders," said Tom McInerney, president and CEO of Genworth. "While we are focused on completing this transaction, we do have other alternatives we would turn to in order to address our upcoming maturities and insulate our U.S. mortgage insurance business from ratings pressure if necessary."

LU Zhiqiang, chairman of Oceanwide, added: "Oceanwide continues to work diligently with Genworth towards closing the transaction as soon as possible. This transaction provides Oceanwide with the opportunity to bring best practices from the U.S. long term care and mortgage insurance markets to China, where we will continue to expand our insurance capabilities."

Net income in the third quarter of 2017 benefited from net investment gains, net of taxes and other adjustments, of $40 million in the quarter. The gains were primarily related to offers to exchange fixed income securities and improvement in the value of Canada MI interest rate swaps. The net loss in the third quarter of 2016 benefited from net investment gains, net of taxes and other adjustments, of $12 million.

Net investment income was $797 million in the quarter, down from $801 million in the prior quarter and $805 million in the prior year. Net investment income continues to reflect variability in prepayment speed adjustments related to residential mortgage-backed securities and other variable investment income. The reported yield and the core yield3 for the quarter were 4.52 percent and 4.45 percent, respectively.

Adjusted operating income (loss) results by business line are summarized in the table below:

Adjusted operating income (loss) represents 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 income (loss) to adjusted operating income (loss) of segments and Corporate and Other activities 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.

U.S. MI reported adjusted operating income of $73 million, compared with $91 million in the prior quarter and $67 million in the prior year. The loss ratio in the current quarter was 20 percent, up 18 points sequentially and down one point from the prior year. The company made a favorable reserve adjustment in the prior quarter of $10 million after-tax primarily associated with lower expected claim rates on existing delinquencies, which benefited the loss ratio by eight points. The company also made a favorable reserve adjustment of $6 million after-tax in the third quarter of 2016 associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies. This adjustment benefited the loss ratio by six points in the third quarter of 2016.

Flow new insurance written (NIW) of $11.3 billion increased 15 percent from the prior quarter from a seasonally larger purchase originations market, but decreased 12 percent versus the prior year from a decline in market share and smaller mortgage insurance market. During the third quarter of 2017, the company's concentration of single premium flow NIW was higher than the prior quarter and prior year as it continues its selective participation in this market. U.S. MI's flow insurance in force increased 11 percent in the third quarter of 2017 versus the third quarter of 2016 driven primarily by strong NIW and persistency.

Canada MI reported adjusted operating income of $37 million versus $41 million in the prior quarter and $36 million in the prior year. The loss ratio in the quarter was 14 percent, up 10 points sequentially primarily from the normalization of cure activity in the current quarter. The loss ratio was down 10 points compared to the prior year from a decrease in new delinquencies, net of cures, reflecting the ongoing housing market strength and underlying economic conditions.

Flow NIW was up 14percent5sequentially primarily from a seasonally larger originations market and down 17 percent5 from the prior year primarily from a smaller market size from regulatory changes introduced in late 2016. Effective March 17, 2017, Canada MI increased its flow mortgage insurance premium rates for new insured mortgages by approximately 20 percent to reflect the updated regulatory capital framework that came into effect on January 1, 2017. Bulk NIW decreased versus the prior year as a result of regulatory changes introduced in 2016 and 2017.

Australia MI reported adjusted operating income of $12 million, compared with $12 million in the prior quarter and $14 million in the prior year. The loss ratio in the quarter was 37 percent, up three points sequentially and down five points from the prior year. Results in the second quarter of 2017 reflected non-reinsurance recoveries on paid claims which favorably impacted the loss ratio by eight points. Without the impact of these recoveries, the loss ratio would have been lower sequentially from seasonally lower new delinquencies, net of cures. The company is currently reviewing its premium earning pattern, and anticipates that this review will be completed during the fourth quarter.

Flow NIW was down 12 percent5 sequentially and down 24 percent5 from the prior year primarily from lower market penetration attributable to a change in customer mix.

Long Term Care Insurance

LTC reported an adjusted operating loss of $5 million, compared with adjusted operating income of $33 million in the prior quarter and an adjusted operating loss of $270 million in the prior year. Compared to the prior quarter, results reflected less favorable existing claim terminations, higher benefit payments, and less favorable new claim experience. Results in the prior quarter were also favorably impacted by reserve corrections, net of profits followed by losses reserves, associated with recorded initial claim dates of $13 million after-tax. Results in the prior year reflected updated LTC claim assumptions, which increased reserves by approximately $435 million pre-tax and resulted in an after-tax charge to earnings of $283 million.

Given that experience in aggregate that was analyzed 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. In the fourth quarter of 2017, the company will perform loss recognition and cash flow testing for its LTC products. As part of the annual testing, we will review assumptions for incidence and interest rates, among other assumptions. Results of the LTC annual testing as well as assumption reviews and testing for life insurance and annuities will be part of our fourth quarter earnings disclosures.

Life Insurance

Life insurance reported an adjusted operating loss of $9 million, compared with an adjusted operating loss of $1 million in the prior quarter and adjusted operating income of $48 million in the prior year. Compared to the prior quarter, results reflected unfavorable mortality. Results versus the prior year reflected the impacts of higher reserve and higher amortization of deferred acquisition costs (DAC) as a result of the fourth quarter of 2016 assumption review and unfavorable mortality. Results versus the prior year also reflected higher DAC amortization from higher lapses, compared to original assumptions, primarily associated with large 15-year and 20-year term life insurance blocks entering their post-level premium periods. We anticipate this trend to continue and DAC amortization to increase further as large blocks reach the end of their level premium periods through 2020. Results in the current quarter included an unfavorable impact of $15 million after-tax from model refinements. Results in the prior quarter included a negative impact of $14 million after-tax, which was the net effect of a charge from model corrections related to updating mortality tables for term conversion policies that was partially offset by a net favorable refinement related to reinsurance rates.

Fixed Annuities

Fixed annuities reported adjusted operating income of $13 million, compared with $7 million in the prior quarter and $15 million in the prior year. Results in the quarter included a $6 million after-tax charge from loss recognition testing associated with continued low interest rates on the single premium immediate annuity block compared to a $10 million charge in the prior quarter and a $4 million charge in the prior year. Results varied from the prior year due to lower net investment spread from lower customer account balances and lower variable investment income. Prior year results included an $8 million after-tax unfavorable correction related to state guaranty funds.

Runoff reported adjusted operating income of $13 million compared with $11 million in the prior quarter and $12 million in the prior year reflecting continued strong equity market performance supporting our variable annuity business. Results in the prior quarter reflected unfavorable mortality in the corporate-owned life insurance (COLI) products.

Corporate and Other reported an adjusted operating loss of $58 million, compared with $43 million in the prior quarter and $327 million in the prior year. Results in the current quarter include unfavorable tax charges of $7 million related to changes and corrections to prior period tax returns. Prior year results reflected $265 million of deferred tax charges.

Genworth maintains the following capital positions in its operating subsidiaries:

Genworth Financial, Inc. (NYSE: GNW) is a Fortune 500 insurance holding company committed to helping families achieve the dream of homeownership and address the financial challenges of aging through its leadership positions in mortgage insurance and long term care insurance.Headquartered in Richmond, Virginia, Genworth traces its roots back to 1871 and became a public company in 2004.For more information, visit genworth.com.

From time to time, Genworth releases important information via postings on its corporate website. Accordingly, investors and other interested parties are encouraged to enroll to receive automatic email alerts and Really Simple Syndication (RSS) feeds regarding new postings. Enrollment information is found under the "Investors" section ofgenworth.com. From time to time, Genworth's publicly traded subsidiaries, Genworth MI Canada Inc. and Genworth Mortgage Insurance Australia Limited, separately release financial and other information about their operations. This information can be found athttp://genworth.caand http://www.genworth.com.au.

Financial Supplement Information

This press release, third quarter 2017 financial supplement and earnings presentation are now posted on the company's website. Investors are encouraged to review these materials. Due to the pending sale to China Oceanwide, the company does not plan to host an earnings call.

Use of Non-GAAP Measures

This press release includes the non-GAAP financial measures entitled "adjusted operating income (loss)" and "adjusted operating income (loss) per share." Adjusted operating income (loss) per share is derived from adjusted operating income (loss). The chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss). The company defines adjusted operating income (loss) as income (loss) from continuing operations excluding the after-tax effects of income attributable to noncontrolling interests, 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 infrequent or unusual non-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. The company excludes net investment gains (losses) and infrequent or unusual non-operating items because the company does not consider them to be related to the operating performance of the company's segments and Corporate and Other activities. A component of the company's net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to the company's discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from adjusted operating income (loss) because, in the company's opinion, they are not indicative of overall operating trends. Infrequent or unusual non-operating items are also excluded from adjusted operating income (loss) if, in the company's opinion, they are not indicative of overall operating trends.

While some of these items may be significant components of net income (loss) available to Genworth's common stockholders in accordance with GAAP, the company believes that adjusted operating income (loss) and measures that are derived from or incorporate adjusted operating income (loss), including adjusted operating income (loss) per share on a basic and diluted basis, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses adjusted operating income (loss) as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from adjusted operating income (loss) have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) and adjusted operating income (loss) per share on a basic and diluted basis are not substitutes for net income (loss) available to Genworth's common stockholders or net income (loss) available to Genworth's common stockholders per share on a basic and diluted basis determined in accordance with GAAP. In addition, the company's definition of adjusted operating income (loss) may differ from the definitions used by other companies.

Adjustments to reconcile net income (loss) attributable to Genworth's common stockholders and adjusted operating income (loss) assume a 35 percent tax rate (unless otherwise indicated) and are net of the portion attributable to noncontrolling interests. Net investment gains (losses) are also adjusted for deferred acquisition cost (DAC) and other intangible amortization and certain benefit reserves.

In the third quarters of 2017 and 2016, the company recorded a pre-tax expense of $1 million and $2 million, respectively, related to restructuring costs as part of an expense reduction plan as the company evaluates and appropriately sizes its organizational needs and expenses.

There were no infrequent or unusual items excluded from adjusted operating income (loss) during the periods presented.

The tables at the end of this press release provide a reconciliation of net income (loss) available to Genworth's common stockholders to adjusted operating income (loss) for the three months ended September 30, 2017 and 2016, as well as for the three months ended June 30, 2017, and reflect adjusted operating income (loss) as determined in accordance with accounting guidance related to segment reporting.

This press release includes the non-GAAP financial measure entitled "core yield" as a measure of investment yield. The company defines core yield as the investment yield adjusted for items that do not reflect the underlying performance of the investment portfolio. Management believes that analysis of core yield enhances understanding of the investment yield of the company. However, core yield is not a substitute for investment yield determined in accordance with GAAP. In addition, the company's definition of core yield may differ from the definitions used by other companies. A reconciliation of core yield to reported GAAP yield is included in this appendix.

Definition of Selected Operating Performance Measures

The company reports selected operating performance measures including "sales" and "insurance in force" or "risk in force" which are commonly used in the insurance industry as measures of operating performance.

Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refer to: (1) new insurance written for mortgage insurance; (2) annualized first-year premiums for long term care and term life insurance products; (3) annualized first-year deposits plus five percent of excess deposits for universal and term universal life insurance products; (4) 10 percent of premium deposits for linked-benefits products; and (5) new and additional premiums/deposits for fixed annuities. Sales do not include renewal premiums on policies or contracts written during prior periods. The company considers new insurance written, annualized first-year premiums/deposits, premium equivalents and new premiums/deposits to be a measure of the company's operating performance because they represent a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of the company's revenues or profitability during that period.

Management also regularly monitors and reports a loss ratio for the company's businesses. For the mortgage insurance businesses, the loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. For the long term care insurance business, the loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums. The company considers the loss ratio to be a measure of underwriting performance in these businesses and helps to enhance the understanding of the operating performance of the businesses.

An assumed tax rate of 35 percent is utilized in certain adjustments to adjusted operating income (loss) and in the explanation of specific variances of operating performance and investment results.

These operating performance measures enable the company to compare its operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.

This press release contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "expects," "intends," "anticipates," "plans," "believes," "seeks," "estimates," "will" or words of similar meaning and include, but are not limited to, statements regarding the outlook for the company's future business and financial performance. Examples of forward-looking statements include statements we make relating to the China Oceanwide transaction. Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially from those in the forward-looking statements due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following:

The company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

1 Private Mortgage Insurer Eligibility Requirements

2 Unless otherwise stated, all references in this press release to net income (loss), net income (loss) per share, adjusted operating income (loss), adjusted operating income (loss) per share and book value per share should be read as net income (loss) available to Genworth's common stockholders, net income (loss) available to Genworth's common stockholders per diluted share, adjusted operating income (loss) available to Genworth's common stockholders, adjusted operating income (loss) available to Genworth's common stockholders per diluted share and book value available to Genworth's common stockholders per share, respectively.

3 This is a financial measure that is not calculated based on U.S. Generally Accepted Accounting Principles (Non-GAAP). See the Use of Non-GAAP Measures section of this press release for additional information.

4 Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of the loss from continuing operations, the company was required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million for the three months ended September 30, 2016 would have been antidilutive to the calculation. If the company had not incurred a loss from continuing operations in this period, dilutive potential weighted-average common shares outstanding would have been 500.5 million for the three months ended September 30, 2016.

5 Percent change excludes the impact of foreign exchange.

6 Company estimate for the third quarter of 2017, due to timing of the filing of statutory statements; The MCT Ratio for Canada MI in the third and second quarters of 2017 reflects the new regulatory framework effective January 1, 2017. The Consolidated RBC Ratio for the U.S. life insurance companies in the third quarter of 2016 is restated to reflect the merger of Brookfield Life And Annuity Insurance Company Limited with and into Genworth Life Insurance Company as if the merger occurred January 1, 2015.

7 Calculated as available assets divided by required assets as defined within PMIERs. As of September 30, 2017, June 30, 2017 and September 30, 2016, the PMIERs sufficiency ratios were in excess of approximately $500 million, $500 million and $400 million, respectively, of available assets above the PMIERs requirements. Company estimate for the third quarter of 2017.

8 Holding company cash and liquid assets comprises assets held in Genworth Holdings, Inc. (the issuer of outstanding public debt) which is a wholly-owned subsidiary of Genworth Financial, Inc.

9 Comprises cash and cash equivalents of $754 million, $758 million and $1,065 million, respectively, and U.S. government bonds of $75 million, $100 million and $100 million, respectively, as of September 30, 2017, June 30, 2017 and September 30, 2016.

10 All percentages are comparing the third quarter of 2017 to the third quarter of 2016 unless otherwise stated.

11 The impact of foreign exchange was calculated using the comparable prior period exchange rates.

12 Represents the incremental assets and investment income related to restricted commercial mortgage loans and other invested assets.

13 Includes cost basis adjustments on structured securities and various other immaterial items.
  
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