Genworth Financial, Inc. (NYSE: GNW) today reported results for the first quarter of 2010. Net income, before provision for noncontrolling interests, was $212 million, or $0.43 per diluted share, compared with a net loss of $469 million, or $1.08 per diluted share, in the first quarter of 2009. Net operating income, before provision for noncontrolling interests, for the first quarter of 2010 was $147 million, or $0.30 per diluted share, compared to net operating income of $14 million, or $0.03 per diluted share, in the first quarter of 2009.
Reflecting the company's reduction in ownership of Genworth MI Canada (MIC) in the third quarter of 2009 from 100 percent to 57.5 percent in connection with an initial public offering (IPO) transaction, Genworth's net income available to Genworth's common stockholders was $178 million, or $0.36 per diluted share, in the first quarter of 2010. On this same basis, net operating income available to Genworth's common stockholders for the first quarter of 2010 was $114 million, or $0.23 per diluted share.
Genworth's results in the quarter included net operating income of $122 million from the Retirement and Protection segment and $91 million from the International segment. This was partially offset by lower net operating losses of $36 million in the U.S. Mortgage Insurance (U.S. MI) segment and a loss of $63 million in Corporate and Other. The impact of foreign exchange on net operating income in the first quarter of 2010 was a favorable $19 million.
Net investment losses, net of tax and other adjustments, decreased to $42 million from $483 million in the first quarter of 2009, and decreased on a sequential basis from $54 million in the fourth quarter of 2009. Net unrealized investment losses, net of tax and other adjustments, declined to $0.9 billion from $4.1 billion in the prior year quarter.
Net income in the quarter included a $106 million tax benefit related to separation from the company's former parent recorded in the first quarter of 2010.
"Genworth's improved results demonstrate clear progress in our served markets around the world," said Michael D. Fraizer, chairman and chief executive officer. "Our decisive actions on loss mitigation, select product re-pricing and re-investing cash all contributed to earnings growth in the quarter. As we look ahead, we are positioned for strong growth and enhanced returns from new product introductions, distribution expansion and efficient capital management."
First Quarter Highlights
New Business Growth
- Combined sales of term life insurance and the new Colony(SM) TermUL product grew 26 percent versus the prior year and nine percent sequentially.
- Individual long term care (LTC) insurance sales increased 29 percent versus the prior year, marking the fourth sequential quarter of growth.
- Wealth management net flows were $504 million, the fourth consecutive quarter of positive net flows, bringing assets under management (AUM) to $20.0 billion.
- Sound growth returned in Genworth MI Canada (MIC) with flow new insurance written (NIW) increasing 42 percent from the prior year from growth in the mortgage origination market as consumer confidence improved.
- Australia mortgage insurance maintained stable market share in an anticipated smaller mortgage origination market that reflected reduced government first-time homebuyer program benefits and higher interest rates.
- U.S. MI announced prudent expansion of underwriting guidelines that are expected to drive new business growth in line with future increases in the private mortgage insurance market. Estimated market share in the quarter increased to 17 percent from 15 percent in the fourth quarter of 2009.
Earnings Power & Risk Positions
- A total of $2.6 billion of excess cash has been redeployed since the beginning of the fourth quarter 2009 through the first quarter as part of the company's strategy to reinvest $2.5 billion to $3.5 billion of excess cash by mid-2010, with $1.1 billion reinvested in the current quarter. Cash reinvestment strategies contributed $18 million in incremental investment earnings overall.
- Mortgage insurance loss ratios improved sequentially in both Canada and Australia from ongoing loss mitigation benefits and economic conditions either stabilizing or improving. In Canada, the 2006 book has passed its peak loss seasoning period, while the large 2007 book is showing signs of peaking.
- U.S. MI flow delinquencies declined five percent sequentially to the lowest level of new flow delinquencies seen since the first quarter of 2008. Based on recent trends, the company estimates that delinquencies in its 2005, 2006 and 2007 book years peaked in the first quarter of 2010.
- U.S. MI loss mitigation activities resulted in a net $233 million of savings in the quarter and included $113 million in savings from various loan modification programs including the Home Affordable Modification Program (HAMP).
- Investment performance improved in the quarter with significant year over year declines in realized and unrealized losses.
Capital Management & Flexibility
- Consolidated U.S. life companies ended the quarter with an estimated risk based capital (RBC) ratio of approximately 385 percent, exceeding the company's year end 2010 target of at or above 350 percent.
- The risk to capital ratio in the U.S. mortgage insurance companies was 14.9:1, up slightly from 14.6:1 in the fourth quarter of 2009.
- Regulatory capital ratios in Canada, Australia and lifestyle protection remained strong and well in excess of regulatory required levels.
- Genworth MI Canada announced a new capital management plan that includes a combination of debt issuance and a return of capital to shareholders of up to CAD$350 million.
Segment Results
Net operating income (loss) presented in the tables below excludes net investment gains (losses) and other adjustments, net of taxes. In the discussion of International results, all references to percentage changes exclude the impact of foreign exchange. The percentage changes including the impact of foreign exchange are included in a table at the end of this press release.
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.
Retirement and Protection
Retirement and Protection earned $122 million compared to $38 million a year ago. Consolidated U.S. life insurance companies ended the quarter with an estimated RBC ratio of approximately 385 percent.
Life insurance earnings decreased to $37 million from $38 million a year ago as improved investment income and lower taxes were more than offset by less favorable mortality, lower persistency on policies coming out of the post level term period and a $5 million unfavorable correction related to the calculation of ceded reinsurance premiums. Total life sales reflected a mix shift to the new more capital efficient product suite as well as lower universal life (UL) excess deposits associated with the low interest rate environment. Sales from the combination of term life insurance and the new Colony (SM) TermUL product grew 26 percent versus the prior year and nine percent sequentially. The more capital efficient Colony(SM) TermUL product, which was launched in late 2009, demonstrated strong producer adoption.
LTC earnings declined $1 million to $40 million, as higher net investment income was more than offset by higher claims on old generation policies and a return to lower levels of policy terminations experienced historically. Individual LTC sales increased $7 million year over year, primarily reflecting growth in overall industry sales. Group LTC sales increased to $8 million in the quarter, up from $1 million a year ago, while linked benefit sales grew to $11 million, up from $5 million a year ago.
Wealth management earnings increased from $6 million to $11 million primarily from increased revenue associated with a 41 percent increase in AUM and also included a $2 million favorable tax item. Net flows were $504 million, representing the fourth consecutive quarter of positive net flows. This, combined with favorable market performance, resulted in a $1.2 billion sequential increase in AUM to $20.0 billion.
Retirement income fee-based earnings increased to $17 million from a $27 million loss in the prior year. Results in the prior year were significantly impacted by declines in the equity markets, which accelerated deferred acquisition cost (DAC) amortization and reduced variable annuity income. Earnings in the current quarter reflected equity market growth, lower death related claims, as well as an $8 million favorable DAC amortization adjustment. Total variable annuity sales increased to $205 million compared to $143 million in the prior year from improved equity market conditions.
The retirement income spread-based business had net operating income of $17 million compared to a loss of $20 million in the prior year from improved investment income. Earnings in the prior year included a $39 million loss from lower valuation of limited partnership (LP) investments. Total spread-based AUM remained flat sequentially ending at $18.9 billion reflecting the company's targeted annuity strategy and favorable persistency.
International
International earnings, before provision for noncontrolling interests, were $124 million, up from $101 million a year ago, primarily reflecting benefits from foreign exchange.
In Canada, home prices improved as a result of government stimulus programs that began in late 2008 to lower interest rates which enhanced housing affordability and increased home sales. Sequentially, the unemployment rate in Canada improved from 8.4 percent at year end to 8.2 percent at the end of the first quarter.
Total Canadian operating earnings decreased six percent from the prior year primarily from a decline in premiums from lower policy cancellations and lower investment income, partially offset by improved losses. On both a year over year and a sequential basis, the loss ratio declined from 39 percent to 38 percent in the first quarter. Based on current loss experience, the 2006 book has passed its peak loss seasoning period, while the large 2007 book is showing signs of peaking.
Flow NIW in Canada increased 42 percent from the prior year from growth in the mortgage origination market as consumer confidence improved. Bulk NIW increased from $0.4 billion in the prior year to $1.8 billion primarily from one transaction that was executed in the quarter.
The regulatory capital ratio in Canada increased sequentially to 150 percent from 149 percent, in excess of regulatory requirements. Genworth MI Canada (MIC) announced a new capital plan to optimize its capital structure, with two components. First, adding debt to its capital structure, taking advantage of current favorable market conditions and bringing it more in line with other publicly traded Canadian insurance companies. The debt to capital ratio is initially targeted at approximately 10 percent . Second, MIC plans to return up to CAD$350 million of its capital to shareholders in 2010. These actions are all subject to market conditions and final MIC Board approval. GAAP book value for the Canada MI business was $2.6 billion at quarter end, of which $1.5 billion represented Genworth's 57.5 percent ownership interest.
In Australia, national home prices improved as a result of government stimulus programs that began in late 2008 to lower interest rates which enhanced housing affordability and increased home sales. Sequentially, the unemployment rate in Australia improved from 5.5 percent at year end to 5.3 percent at the end of the first quarter.
Australia earnings increased seven percent year over year as improved loss experience more than offset lower premiums. As part of on going capital and risk management initiatives to diversify its reinsurance programs, the company added AUD$250 million of external reinsurance coverage. In total, additional external reinsurance coverage reduced earned premiums in the quarter by $6 million.
On a sequential basis, the loss ratio improved one point to 44 percent. Excluding the reduction in premiums associated with higher reinsurance levels, the loss ratio would have improved four points to 41 percent sequentially. Higher interest rates and reduced government first-time homebuyer program benefits have slowed mortgage originations as expected. Flow NIW in Australia was down 26 percent from the prior year and 22 percent sequentially as stable market share was more than offset by a smaller mortgage origination market. Bulk new insurance written increased to $0.7 billion, an early sign of a return of liquidity to the securitization market.
The regulatory capital ratio in Australia increased sequentially to 140 percent, in excess of the regulatory requirement and reflected increased use of reinsurance and in force profitability. Australia mortgage insurance had approximately $225 million of capital in excess of regulatory requirements. GAAP book value for Australia mortgage insurance at the end of the quarter was $1.6 billion.
Other international mortgage insurance had a $5 million net operating loss. In Europe, loss mitigation actions continued to lower risk in force (RIF), which declined by approximately $0.9 billion to $4.5 billion from the prior year. The company's RIF in Spain continued to decline and ended the first quarter at $0.4 billion, down approximately $0.9 billion from the prior year.
Lifestyle protection earnings increased to $12 million versus the prior year earnings of $11 million. Four factors contributed to earnings results. First, loss experience improved in Southern and Western European countries where new claim registrations declined. Second, price or distribution contract changes to date that were concentrated in the Southern and Western regions have taken hold and added $5 million to earnings in the quarter versus the prior year. Third, loss experience was pressured in Nordic countries as unemployment rose, with loss experience concentrated in a specific coverage type subject to multiple loss mitigation actions. Additional price or distribution contract changes are being taken in this region to reflect current unemployment experience. Finally, results reflected continued slow new business growth resulting from low levels of consumer lending. Specifically, lifestyle protection sales decreased two percent as a result of the stressed economic environment in Europe and continued lower consumer lending along with selective risk management actions. In lifestyle protection, the regulatory capital ratio ended the quarter at 236 percent, more than twice the regulatory requirement.
U.S. Mortgage Insurance
U.S. MI had a $36 million net operating loss, an improvement from a $135 million loss during the prior year quarter and from a $74 million loss in the fourth quarter of 2009, primarily from improved losses and continued loss mitigation benefits.
Total losses decreased to $196 million from $272 million in the fourth quarter of 2009 from a normal seasonal decline in new flow delinquencies, an increase in cures from loan modifications, lower bulk losses and continued loss mitigation benefits.
Gross flow losses decreased to $226 million from $274 million sequentially as first quarter loss experience reflected a decline in new flow delinquencies and an increase in loan modifications and cures. This marked the fifth consecutive quarter of decline in flow losses.
Flow delinquencies decreased primarily from normal seasonal patterns in new delinquencies and increased cures from loan modification programs including HAMP. Flow delinquencies declined to approximately 102,400 from 107,500 in the fourth quarter of 2009, with new flow delinquencies down about 4,500. Lower delinquencies resulted in $67 million lower reserves in the quarter. The flow average reserve per delinquency increased sequentially to $19,200 from $18,900 as a result of a change in the mix of the delinquency inventory from two factors. First, the decrease in new flow delinquencies coupled with increased cures reduced the proportion of early stage delinquencies. As a result, the delinquency inventory was more heavily weighted to late stage delinquencies. Second, the later stage delinquencies are primarily from higher loan balance states and specialty products and therefore carry higher reserves per delinquency.
Gross bulk losses decreased to $4 million from $36 million in the fourth quarter driven by $22 million lower government sponsored enterprise (GSE) Alt-A losses resulting from policy cancellations. Effective January 1, 2010, the company executed an agreement that resulted in the cancellation of approximately 80 percent of the GSE Alt-A RIF. This reduced total bulk RIF to $523 million in the first quarter, resulting in the remaining RIF being primarily from high quality Federal Home Loan Bank programs.
Loss mitigation activities, including workouts, presales and policy rescissions, net of reinstatements, resulted in $233 million of savings in the quarter. This included approximately $113 million in savings from various loan modification programs which included a $63 million benefit from loans modified through HAMP. Based upon reporting from the GSEs and certain servicers, Genworth estimates that at the end of the first quarter there were approximately 28,200 loans that have been approved to participate in HAMP, representing 28 percent of flow delinquencies. Benefits from loss mitigation activities in 2010 in total are expected to be consistent with 2009 savings, with the benefit mix continuing to shift from rescissions to loan modifications.
Flow NIW decreased sequentially by $300 million as the mortgage insurance market size declined and offset growth in market share. Estimated market share grew sequentially to 17 percent from 15 percent. In addition, the Home Affordable Refinance Program accounted for $700 million of insurance that is treated as a modification of the coverage on existing insurance in force rather than new insurance written.
U.S. MI made a number of changes to underwriting guidelines in the first quarter that are expected to support future NIW growth. In particular, retail channel originations in metropolitan statistical areas (MSAs) where Genworth continued to restrict coverages to 90 percent loan to value (LTV) based on housing market conditions, were reopened to mortgages with 95 percent and lower LTVs with strong FICO scores. Remaining declining market policies were maintained for non-retail channel originations as well as for select property types in Florida.
The risk to capital ratio was up moderately to 14.9:1 from 14.6:1 in the fourth quarter.
Corporate and Other
Corporate and other net operating loss was $63 million compared to income of $10 million in the prior year quarter. Results in the prior year included $46 million of income associated with repurchases of funding agreements backing notes and $25 million of higher tax benefits. Results in the current year quarter included $7 million of higher losses from limited partnerships offset by improved investment income from holding lower cash balances.
Holding company cash and cash equivalents totaled $0.8 billion and highly liquid treasury securities totaled $0.2 billion at the end of the first quarter.
Investments
Net income in the quarter included net investment losses of $42 million, net of tax and other adjustments, including $52 million of net other-than-temporary impairments, $10 million of net realized losses from asset sales, $5 million of losses on derivatives used for risk management purposes, $11 million from the recovery of a counterparty receivable, $7 million of mark to market valuation gains on trading securities and bank loans and $7 million of gains related to consolidated securitization entities.
Credit related impairments totaled $52 million and were primarily comprised of
- $24 million from sub-prime and Alt-A residential mortgage-backed securities (RMBS),
- $17 million from other structured securities, with $6 million related to prime RMBS,
- $7 million from other corporate securities, including hybrids, and
- $4 million from LPs.
Net unrealized investment losses were $0.9 billion, net of tax and other items, as of March 31, 2010, declining from $1.4 billion as of December 31, 2009. The fixed maturity securities portfolio had gross unrealized investment losses of $2.7 billion compared to $3.5 billion as of December 31, 2009 and gross unrealized investment gains of $1.5 billion compared to $1.3 billion as of December 31, 2009.
Stockholders' Equity
Stockholders' equity as of March 31, 2010 increased to $12.9 billion, or $26.36 per share, compared with $12.3 billion, or $25.12 per share, as of December 31, 2009. Stockholders' equity, excluding accumulated other comprehensive income (loss), as of March 31, 2010 increased to $12.5 billion, or $25.65 per share, compared with $12.4 billion, or $25.46 per share, as of December 31, 2009.