GENWORTH FINANCIAL, INC. RICHMOND, Va., Aug. 1, 2017 /PRNewswire/ --
-- Merger Agreement Deadline With China Oceanwide Holdings Group Co., Ltd.
(Oceanwide) Extended To November 30, 2017
-- Additional Progress Made On U.S. Life Restructuring Plan With The
Remaining Internal Reinsurance Transactions Completed Effective July 1,
2017
-- U.S. Mortgage Insurance (MI) Second Quarter 2017 Adjusted Operating
Earnings(1) Increased 49% Compared To The Second Quarter Of 2016, Which
Includes A Favorable $10 Million Reserve Adjustment In The Current
Quarter
-- Strong Loss Ratio And Capital Levels In The Second Quarter For U.S. MI
And Canada MI
-- Net Income(2) Included $51 Million Of Investment Gains, Net Of Taxes And
Other Adjustments, Related To Fixed Income Tenders And Derivative Gains
-- Holding Company Cash And Liquid Assets Of Approximately $860 Million
Genworth Financial, Inc. (NYSE: GNW) today reported results for the quarter ended June 30, 2017. The company reported net income of $202 million, or $0.40 per diluted share, in the second quarter of 2017, up 17 percent as compared with net income of $172 million, or $0.34 per diluted share, in the second quarter of 2016. The adjusted operating income for the second quarter of 2017 was $151 million, or $0.30 per diluted share, up 23 percent as compared with adjusted operating income of $123 million, or $0.25 per diluted share, in the second quarter of 2016.
Strategic Update
Genworth and Oceanwide continue to work diligently to satisfy the closing conditions under their previously announced proposed transaction and are committed to closing the transaction as soon as possible.
Since the end of the first quarter, the two companies reported the following progress toward completing the transaction:
-- On July 13, 2017, Genworth and Oceanwide withdrew and refiled their
joint voluntary notice to the Committee on Foreign Investment in the
United States (CFIUS) for a second time to provide CFIUS more time to
review and discuss the proposed transaction. CFIUS' acceptance of the
refiled joint voluntary notice commenced a new 30-day review period,
which may be followed by an additional 45-day investigation period.
-- Effective July 1, 2017, Genworth completed the remaining internal
reinsurance and recapture transactions required under the Oceanwide
merger agreement. We expect these transactions to create a 15 to 20
point decline in consolidated risk-based capital (RBC) ratio from a
reduction in covariance benefit.
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.
Because the timing of the regulatory reviews will delay the completion of the transaction beyond the originally targeted time frame of the middle of 2017, Genworth and Oceanwide have agreed in principle to extend the August 31, 2017 deadline set forth in the merger agreement to November 30, 2017, with the associated documentation expected to be finalized in the near term. Genworth and Oceanwide remain committed to satisfying the closing conditions under the merger agreement as soon as possible and now anticipate that the transaction will be completed during the fourth quarter of 2017, subject to receipt of the required regulatory approvals.
"Genworth strongly believes the pending transaction with Oceanwide is the best option for our shareholders, policyholders and other stakeholders," said Tom McInerney, president and CEO of Genworth. "The transaction will strengthen Genworth's financial position in the mortgage insurance and long term care insurance markets. Because of our leadership role in the long term care insurance industry, the merger also has implications for our nation's ability to finance burgeoning long term care costs. As a result of the merger, Genworth will be in a better position to support the market and help the government and taxpayers shoulder the burden of long term care financing."
Added LU Zhiqiang, chairman of Oceanwide: "I remain committed to satisfying the closing conditions under the merger agreement as soon as possible. I believe the merger will strengthen Genworth and its leadership role in mortgage insurance and the U.S. long term care insurance market, and allow us to bring best practices from the recognized leader in long term care insurance to China as we expand our long term care insurance capabilities and work together to address a common challenge for our aging populations."
Meanwhile, Genworth continues to make substantial progress on its stated strategic goals, including maximizing opportunities in its mortgage insurance businesses, achieving significant long term care insurance premium rate increases consistent with its multi-year plan and restructuring its U.S. life insurance businesses.
Financial Performance
Consolidated Net Income &
Adjusted Operating Income
-------------------------
Three months ended June 30
(Unaudited)
----------
2017 2016
---- ----
Per Per
diluted diluted Total
(Amounts in millions, except per share) Total share Total share % change
-------------------------------------- ----- ----- ----- ----- --------
Net Income available to Genworth's common
stockholders $202 $0.40 $172 $0.34 17 %
Adjusted operating income $151 $0.30 $123 $0.25 23 %
Weighted-average diluted shares 501.2 500.4
Three months ended June 30
(Unaudited)
----------
2017 2016
---- ----
Book value per share $26.08 $30.37
Book value per share, excluding
accumulated other comprehensive
income $19.88 $20.16
Net income in the second quarter of 2017 benefited from net investment gains, net of taxes and other adjustments, of $51 million in the quarter. Net income in the second quarter of 2016 benefited from net investment gains, net of taxes and other adjustments, of $25 million.
Net investment income was $801 million in the quarter, up from $790 million in the prior quarter and $779 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 yield(1) for the quarter were 4.57 percent and 4.47 percent, respectively.
Adjusted operating income (loss) results by business line are summarized in the table below:
Adjusted Operating Income
(Loss)
(Amounts in millions) Q2 17 Q1 17 Q2 16
-------------------- ----- ----- -----
U.S. Mortgage Insurance $91 $73 $61
Canada Mortgage Insurance 41 36 38
Australia Mortgage Insurance 12 13 15
U.S. Life Insurance 39 53 55
Runoff 11 14 6
Corporate and Other (43) (46) (52)
--- --- ---
Total Adjusted Operating
Income $151 $143 $123
------------------------ ---- ---- ----
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. Mortgage Insurance
Operating Metrics
(Dollar amounts in millions) Q2 17 Q1 17 Q2 16
--------------------------- ----- ----- -----
Adjusted operating income $91 $73 $61
New insurance written
Primary Flow $9,800 $7,600 $11,400
Loss ratio 2% 17% 24%
---------- --- --- ---
U.S. MI reported adjusted operating income of $91 million, compared with $73 million in the prior quarter and $61 million in the prior year. The loss ratio in the current quarter was two percent, down 15 points sequentially and down 22 points from the prior year. During the quarter, the company made a favorable reserve adjustment of $10 million after-tax primarily associated with lower expected claim rates on existing delinquencies, which benefited the loss ratio by eight points.
Flow New Insurance Written (NIW) of $9.8 billion increased 29 percent from the prior quarter from a seasonally larger purchase originations market, but decreased 14 percent versus the prior year primarily from lower originations and a decline in market share. U.S. MI's flow insurance in force increased 12 percent in the second quarter of 2017 versus the second quarter of 2016 driven primarily by strong NIW and continued elevated persistency.
Canada Mortgage Insurance
Operating Metrics
(Dollar amounts in millions) Q2 17 Q1 17 Q2 16
--------------------------- ----- ----- -----
Adjusted operating income $41 $36 $38
New insurance written
Flow $3,700 $2,300 $4,400
Bulk $800 $8,000 $19,700
Loss ratio 4% 16% 20%
---------- --- --- ---
Canada MI reported adjusted operating income of $41 million versus $36 million in the prior quarter and $38 million in the prior year. The loss ratio in the quarter was four percent, down 12 points from the prior quarter and down 16 points compared to the prior year from a decrease in new delinquencies and strong cure activity reflecting the ongoing housing market strength and underlying economic conditions. New delinquencies, net of cures, were down in all regions sequentially and versus the prior year.
Flow NIW was up 65 percent(3) sequentially primarily from a seasonally larger originations market and down 14 percent(3) 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 quarter and prior year as a result of regulatory changes introduced in 2016.
Australia Mortgage Insurance
Operating Metrics
(Dollar amounts in millions) Q2 17 Q1 17 Q2 16
--------------------------- ----- ----- -----
Adjusted operating income $12 $13 $15
New insurance written
Flow $4,100 $4,100 $5,000
Bulk $600 $1,000 $800
Loss ratio 34% 35% 36%
---------- --- --- ---
Australia MI reported adjusted operating income of $12 million versus $13 million in the prior quarter and $15 million in the prior year. The loss ratio in the quarter was 34%, down one point sequentially and down two points from the prior year primarily from non-reinsurance recoveries on paid claims in the current quarter which favorably impacted the loss ratio by eight points. Without the impact of these recoveries, the loss ratio would have been higher sequentially from an increase in new delinquencies, net of cures, in the commodity dependent regions of Queensland and Western Australia as well as higher than the prior year from less favorable delinquency aging.
Flow NIW was flat sequentially and down 18 percent(3) from the prior year primarily from lower market penetration attributable to a change in customer mix.
U.S. Life Insurance
Operating Metrics
(Amounts in millions) Q2 17 Q1 17 Q2 16
-------------------- ----- ----- -----
Adjusted operating income (loss)
Long Term
Care
Insurance $33 $14 $37
Life
Insurance (1) 16 31
Fixed
Annuities 7 23 (13)
Total U.S.
Life
Insurance $39 $53 $55
Sales
Long Term
Care
Insurance
Individual $2 $2 $4
Group 1 1 2
Life
Insurance
Term Life - - 2
Universal Life - 1 1
Linked Benefits - - 1
Fixed
Annuities 1 2 9
---------- --- --- ---
Long Term Care Insurance
Long Term Care Insurance (LTC) reported adjusted operating income of $33 million, compared with $14 million in the prior quarter and $37 million in the prior year. Compared to the prior quarter, results reflected higher premiums and higher reserve releases from reduced benefit elections by in-force policyholders, partially offset by less favorable existing claims experience. Results in the quarter were favorably impacted by reserve corrections, net of profits followed by losses reserves, associated with recorded initial claim dates of $13 million after-tax. Prior quarter results included an unfavorable accrual for state guaranty fund assessments of $14 million after-tax relating to the Penn Treaty plan of liquidation. Results versus the prior year reflected continued growth of new claims, partially offset by improved existing claims experience. Prior year results also included $29 million of after-tax unfavorable items.
Life Insurance
Life insurance reported an adjusted operating loss of $1 million, compared with adjusted operating income of $16 million in the prior quarter and $31 million in the prior year. Compared to the prior quarter, results reflected higher lapses and accelerated amortization of deferred acquisition costs (DAC) primarily associated with large 15-year and 20-year term life insurance blocks entering their post-level premium periods and modestly improved mortality. Results versus the prior year reflect higher reserve and DAC impacts associated with the fourth quarter of 2016 assumption review, unfavorable mortality and higher DAC amortization from lapses partially offset by higher variable investment income. Results in the 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 $7 million, compared with $23 million in the prior quarter and an adjusted operating loss of $13 million in the prior year. Results in the quarter included a $10 million after-tax charge from loss recognition testing on the single premium immediate annuity block related to lower interest rates. Results in the quarter also reflected unfavorable mortality versus the prior quarter. Prior year results included $28 million of after-tax unfavorable items.
Runoff
Runoff reported adjusted operating income of $11 million compared with $14 million in the prior quarter and $6 million in the prior year. Results varied from the prior quarter due to unfavorable mortality in the corporate-owned life insurance (COLI) products while benefitting from favorable equity market performance versus the prior year.
Corporate And Other
Corporate and Other reported an adjusted operating loss of $43 million, compared with $46 million in the prior quarter and $52 million in the prior year. Results in the current quarter include favorable tax benefits of $7 million, the majority of which is expected to reverse in the second half of 2017 due to the timing of when tax items are recorded. Prior quarter results reflected a correction to our GE Tax Matters Agreement liability.
Capital & Liquidity
Genworth maintains the following capital positions in its operating subsidiaries:
Key Capital & Liquidity Metrics
(Dollar amounts in millions) Q2 17 Q1 17 Q2 16
--------------------------- ----- ----- -----
U.S. MI
Consolidated Risk-To-Capital Ratio4 13.0:1 13.6:1 15.0:1
Genworth Mortgage Insurance Corporation Risk-To-Capital Ratio4 13.1:1 13.7:1 15.1:1
Private Mortgage Insurer Eligibility Requirements (PMIERs) Sufficiency Ratio5 122% 118% 115%
Canada MI
Minimum Capital Test (MCT) Ratio4 167% 162% 233%
Australia MI
Prescribed Capital Amount (PCA) Ratio4 181% 171% 156%
U.S. Life Insurance Companies
Consolidated Risk-Based Capital (RBC) Ratio4 330% 326% 379%
Holding Company Cash6 and Liquid Assets7 $858 $999 $934
---------------------------------------- ---- ---- ----
Key Points
-- U.S. MI's PMIERs sufficiency ratio increased in the quarter to 122
percent primarily from an increase in operating cash flows;
-- Canada MI's MCT ratio as of June 30, 2017 is estimated to be 167
percent, above both the regulatory minimum requirement of 150 percent
and a target range of 160 to 165 percent;
-- Australia MI's capital levels improved sequentially to 181 percent
driven primarily by continued portfolio seasoning;
-- The holding company ended the quarter with $858 million of cash and
liquid assets, representing a buffer of approximately $460 million in
excess of restricted cash and liquid assets and one and a half times
annual debt service; and
-- $175 million of holding company cash is committed to facilitate the
separation and isolation of the LTC business.
About Genworth Financial
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 of genworth.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 at http://genworth.ca and http://www.genworth.com.au.
Financial Supplement Information
This press release, second 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 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 DAC and other intangible amortization and certain benefit reserves.
In June 2016, the company completed the sale of its term life insurance new business platform and recorded a pre-tax gain of $12 million. In May 2016, the company completed the sale of its mortgage insurance business in Europe and recorded an additional pre-tax loss of $2 million. These transactions were excluded from adjusted operating income (loss) for the periods presented as they related to a gain (loss) on the sale of businesses.
In June 2016, the company settled restricted borrowings of $70 million related to a securitization entity and recorded a $64 million pre-tax gain related to the early extinguishment of debt. This transaction was excluded from adjusted operating income (loss) for the periods presented as it related to a gain (loss) on the early extinguishment of debt.
In the first quarter of 2017, the company recorded a pre-tax expense of $1 million related to restructuring costs as part of an expense reduction plan as the company evaluates and appropriately sizes its organizational needs and expenses. In the second quarter of 2016, the company also recorded a pre-tax expense of $5 million related to restructuring costs.
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 available to Genworth's common stockholders to adjusted operating income for the three months ended June 30, 2017 and 2016, as well as for the three months ended March 31, 2017, and reflect adjusted operating income 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 a table at the end of this press release.
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.
Cautionary Note Regarding Forward-Looking Statements
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. 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 due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following:
-- risks related to the proposed transaction with China Oceanwide Holdings
Group Co., Ltd. (Oceanwide) including: the company's inability to
complete the transaction in a timely manner or at all; the parties'
inability to obtain regulatory approvals, or the possibility that the
parties may delay the transaction or that materially burdensome or
adverse regulatory conditions may be imposed in connection with any such
regulatory approvals; existing and potential legal proceedings may be
instituted against the company in connection with the announcement of
the transaction that may delay the transaction, make it more costly or
ultimately preclude it; the risk that the proposed transaction disrupts
the company's current plans and operations as a result of the
announcement and consummation of the transaction; certain restrictions
during the pendency of the transaction that may impact the company's
ability to pursue certain business opportunities or strategic
transactions; continued availability of capital and financing to the
company before, or in the absence of, the consummation of the
transaction; further rating agency actions and downgrades in debt or the
company's financial strength ratings; changes in applicable laws or
regulations; the company's ability to recognize the anticipated benefits
of the transaction; the amount of the costs, fees, expenses and other
charges related to the transaction; the risks related to diverting
management's attention from the company's ongoing business operations;
the merger agreement may be terminated in circumstances that would
require the company to pay Oceanwide a fee? the company's ability to
attract, recruit, retain and motivate current and prospective employees
may be adversely affected? and disruptions and uncertainty relating to
the transaction, whether or not it is completed, may harm the company's
relationships with its employees, customers, distributors, vendors or
other business partners, and may result in a negative impact on the
company's business;
-- strategic risks in the event the proposed transaction with Oceanwide is
not consummated including: the company's inability to successfully
execute alternative strategic plans to effectively address its current
business challenges (including with respect to the restructuring of its
U.S. life insurance businesses, debt obligations, cost savings, ratings
and capital); the company's ability to continue to sell long term care
insurance policies, the company's inability to attract buyers for any
businesses or other assets it may seek to sell, or securities it may
seek to issue, in each case, in a timely manner and on anticipated
terms; failure to obtain any required regulatory, stockholder and/or
noteholder approvals or consents for such alternative strategic plans,
or the company's challenges changing or being more costly or difficult
to successfully address than currently anticipated or the benefits
achieved being less than anticipated; inability to achieve anticipated
cost-savings in a timely manner; or adverse tax or accounting charges;
and inability to increase the capital needed in the company's businesses
in a timely manner and on anticipated terms, including through improved
business performance, reinsurance or similar transactions, asset sales,
securities offerings or otherwise, in each case as and when required;
-- risks relating to estimates, assumptions and valuations including:
inadequate reserves and the need to increase reserves (including as a
result of any changes the company may make to its assumptions,
methodologies or otherwise in connection with periodic or other
reviews); inaccurate models; deviations from the company's estimates and
actuarial assumptions or other reasons in its long term care insurance,
life insurance and/or annuity businesses; accelerated amortization of
deferred acquisition costs (DAC) and present value of future profits
(PVFP) (including as a result of any changes it may make to its
assumptions, methodologies or otherwise in connection with periodic or
other reviews); adverse impact on the company's financial results as a
result of projected profits followed by projected losses (as is
currently the case with its long term care insurance business); and
changes in valuation of fixed maturity, equity and trading securities;
-- risks relating to economic, market and political conditions including:
downturns and volatility in global economies and equity and credit
markets; interest rates and changes in rates (particularly given the
historically low interest rate environment) have adversely impacted, and
may continue to materially adversely impact, the company's business and
profitability; deterioration in economic conditions or a decline in home
prices that adversely affect the company's loss experience in mortgage
insurance; political and economic instability or changes in government
policies; and fluctuations in foreign currency exchange rates and
international securities markets;
-- regulatory and legal risks including: extensive regulation of the
company's businesses and changes in applicable laws and regulations;
litigation and regulatory investigations or other actions; dependence on
dividends and other distributions from the company's subsidiaries
(particularly its international subsidiaries) and the inability of any
subsidiaries to pay dividends or make other distributions to the
company, including as a result of the performance of its subsidiaries
and insurance, regulatory or corporate law restrictions; adverse change
in regulatory requirements, including risk-based capital; changes in
regulations adversely affecting the company's international operations;
inability to maintain the private mortgage insurer eligibility
requirements (PMIERs); inability of the company's U.S. mortgage
insurance subsidiaries to meet minimum statutory capital requirements
and hazardous financial condition standards; the influence of Federal
National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage
Corporation (Freddie Mac) and a small number of large mortgage lenders
on the U.S. mortgage insurance market and adverse changes to the role or
structure of Fannie Mae and Freddie Mac; adverse changes in regulations
affecting the company's mortgage insurance businesses; inability to
continue to implement actions to mitigate the impact of statutory
reserve requirements; impact of additional regulations pursuant to the
Dodd-Frank Wall Street Reform and Consumer Protection Act; and changes
in accounting and reporting standards;
-- liquidity, financial strength ratings, credit and counterparty risks
including: insufficient internal sources to meet liquidity needs and
limited or no access to capital (including the company's ability to
obtain financing under a credit facility); future adverse rating agency
actions, including with respect to rating downgrades or potential
downgrades or being put on review for potential downgrade, all of which
could have adverse implications for the company, including with respect
to key business relationships, product offerings, business results of
operations, financial condition and capital needs, strategic plans,
collateral obligations and availability and terms of hedging,
reinsurance and borrowings; defaults by counterparties to reinsurance
arrangements or derivative instruments; defaults or other events
impacting the value of the company's fixed maturity securities
portfolio; and defaults on the company's commercial mortgage loans or
the mortgage loans underlying its investments in commercial
mortgage-backed securities and volatility in performance;
-- operational risks including: inability to retain, attract and motivate
qualified employees or senior management; ineffective or inadequate risk
management in identifying, controlling or mitigating risks; reliance on,
and loss of, key customer or distribution relationships; availability,
affordability and adequacy of reinsurance to protect the company against
losses; competition; competition in the company's mortgage insurance
businesses from government and government-owned and government-sponsored
enterprises (GSEs) offering mortgage insurance; the design and
effectiveness of our disclosure controls and procedures and internal
control over financial reporting may not prevent all errors,
misstatements or misrepresentations; and failure or any compromise of
the security of the company's computer systems, disaster recovery
systems and business continuity plans and failures to safeguard, or
breaches of, its confidential information;
-- insurance and product-related risks including: the company's inability
to increase sufficiently, and in a timely manner, premiums on in force
long term care insurance policies and/or reduce in force benefits, and
charge higher premiums on new policies, in each case, as currently
anticipated and as may be required from time to time in the future
(including as a result of the company's failure to obtain any necessary
regulatory approvals or unwillingness or inability of policyholders to
pay increased premiums); the company's inability to reflect future
premium increases and other management actions in its margin calculation
as anticipated; failure to sufficiently increase new sales for the
company's long term care insurance products; inability to realize
anticipated benefits of the company's rescissions, curtailments, loan
modifications or other similar programs in its mortgage insurance
businesses; premiums for the significant portion of the company's
mortgage insurance risk in force with high loan-to-value ratios may not
be sufficient to compensate the company for the greater risks associated
with those policies; decreases in the volume of high loan-to-value
mortgage originations or increases in mortgage insurance cancellations;
increases in the use of alternatives to private mortgage insurance and
reductions in the level of coverage selected; potential liabilities in
connection with the company's U.S. contract underwriting services; and
medical advances, such as genetic research and diagnostic imaging, and
related legislation that impact policyholder behavior in ways adverse to
the company;
-- other risks including: occurrence of natural or man-made disasters or a
pandemic; impairments of or valuation allowances against the company's
deferred tax assets; the possibility that in certain circumstances the
company will be obligated to make payments to General Electric Company
(GE) under the tax matters agreement with GE even if its corresponding
tax savings are never realized and payments could be accelerated in the
event of certain changes in control; and provisions of the company's
certificate of incorporation and bylaws and the tax matters agreement
with GE may discourage takeover attempts and business combinations that
stockholders might consider in their best interests; and
-- risks relating to the company's common stock including: the continued
suspension of payment of dividends; and stock price fluctuations.
The company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.
Condensed Consolidated Statements of Income
(Amounts in millions, except per share amounts)
Three months ended
June 30,
--------
2017 2016
---- ----
Revenues:
Premiums $1,111 $1,127
Net investment income 801 779
Net investment gains
(losses) 101 30
Policy fees and other
income 210 300
--- ---
Total
revenues 2,223 2,236
Benefits and expenses:
Benefits and other changes
in policy reserves 1,206 1,193
Interest credited 163 173
Acquisition and operating
expenses, net of deferrals 240 327
Amortization of deferred
acquisition costs and
intangibles 139 112
Interest expense 74 80
--- ---
Total
benefits and
expenses 1,822 1,885
Income from continuing
operations before income
taxes 401 351
Provision for income taxes 130 110
--- ---
Income from continuing
operations 271 241
Loss from discontinued
operations, net of taxes - (21)
--- ---
Net income 271 220
Less: net income
attributable to
noncontrolling interests 69 48
--- ---
Net income available to
Genworth Financial, Inc.'s
common stockholders $202 $172
==== ====
Income from continuing
operations available to
Genworth Financial, Inc.'s
common
stockholders
per share:
Basic $0.40 $0.39
===== =====
Diluted $0.40 $0.39
===== =====
Net income available to
Genworth Financial, Inc.'s
common stockholders
per share:
Basic $0.40 $0.35
===== =====
Diluted $0.40 $0.34
===== =====
Weighted-average shares
outstanding:
Basic 499.0 498.5
===== =====
Diluted 501.2 500.4
===== =====
Reconciliation of Net Income to Adjusted Operating Income
(Amounts in millions, except per share amounts)
Three Three
months ended months ended
June 30, March 31,
--------
2017 2016 2017
---- ---- ----
Net income available to Genworth Financial, Inc.'s common stockholders $202 $172 $155
Add: net income attributable to noncontrolling interests 69 48 61
--- --- ---
Net income 271 220 216
Loss from discontinued operations, net of taxes - (21) -
--- --- ---
Income from continuing operations 271 241 216
Less: income from continuing operations attributable to
noncontrolling interests 69 48 61
Income from continuing operations available to Genworth Financial, Inc.'s
common stockholders 202 193 155
Adjustments to income from continuing operations available to Genworth
Financial, Inc.'s common stockholders:
Net investment (gains) losses, net8 (79) (39) (20)
Gains on sale of businesses - (10) -
Gains on early extinguishment of debt, net - (64) -
Expenses related to restructuring - 5 1
Taxes on adjustments 28 38 7
--- --- ---
Adjusted operating income $151 $123 $143
==== ==== ====
Adjusted operating income (loss):
U.S. Mortgage Insurance segment $91 $61 $73
--- --- ---
Canada Mortgage Insurance segment 41 38 36
--- --- ---
Australia Mortgage Insurance segment 12 15 13
--- --- ---
U.S. Life Insurance segment:
Long Term Care Insurance 33 37 14
Life Insurance (1) 31 16
Fixed Annuities 7 (13) 23
Total U.S. Life Insurance segment 39 55 53
Runoff segment 11 6 14
--- --- ---
Corporate and Other (43) (52) (46)
--- --- ---
Adjusted operating income $151 $123 $143
==== ==== ====
Net income available to Genworth Financial, Inc.'s common stockholders
per share:
Basic $0.40 $0.35 $0.31
===== ===== =====
Diluted $0.40 $0.34 $0.31
===== ===== =====
Adjusted operating income per share:
Basic $0.30 $0.25 $0.29
===== ===== =====
Diluted $0.30 $0.25 $0.29
===== ===== =====
Weighted-average common shares outstanding:
Basic 499.0 498.5 498.6
===== ===== =====
Diluted 501.2 500.4 501.0
===== ===== =====
Condensed Consolidated Balance Sheets
(Amounts in millions)
June 30, December 31,
2017 2016
---- ----
Assets
Cash, cash equivalents and invested assets $76,688 $75,012
Deferred acquisition costs 2,378 3,571
Intangible assets and goodwill 334 348
Reinsurance recoverable 17,609 17,755
Deferred tax and other assets 738 673
Separate account assets 7,269 7,299
Total assets $105,016 $104,658
======== ========
Liabilities and equity
Liabilities:
Future policy benefits $37,772 $37,063
Policyholder account balances 24,971 25,662
Liability for policy and contract claims 9,239 9,256
Unearned premiums 3,400 3,378
Deferred tax and other liabilities 2,791 2,969
Borrowings related to securitization entities 63 74
Non-recourse funding obligations 310 310
Long-term borrowings 4,205 4,180
Separate account liabilities 7,269 7,299
Total liabilities 90,020 90,191
------ ------
Equity:
Common stock 1 1
Additional paid-in capital 11,969 11,962
------ ------
Accumulated other comprehensive income (loss):
Net unrealized investment gains (losses):
Net unrealized gains (losses) on securities not other-than-temporarily impaired 1,170 1,253
Net unrealized gains (losses) on other-than-temporarily impaired securities 10 9
--- ---
Net unrealized investment gains (losses) 1,180 1,262
----- -----
Derivatives qualifying as hedges 2,064 2,085
Foreign currency translation and other adjustments (149) (253)
---- ----
Total accumulated other comprehensive income (loss) 3,095 3,094
Retained earnings 653 287
Treasury stock, at cost (2,700) (2,700)
------ ------
Total Genworth Financial, Inc.'s stockholders' equity 13,018 12,644
Noncontrolling interests 1,978 1,823
----- -----
Total equity 14,996 14,467
------ ------
Total liabilities and equity $105,016 $104,658
======== ========
Impact of Foreign Exchange on Flow New Insurance Written9
Three months ended June 30, 2017
Percentages Percentages
Including Foreign Excluding Foreign
Exchange Exchange10
-------- ----------
Canada
Mortgage
Insurance
(MI):
Flow new
insurance
written (16)% (14)%
Flow new
insurance
written (2Q17
vs. 1Q17) 61% 65%
Australia MI:
Flow new
insurance
written (18)% (18)%
Flow new
insurance
written (2Q17
vs. 1Q17) ? % ? %
Reconciliation of Core Yield to Reported Yield
Three
months ended
June 30,
(Assets - amounts in billions) 2017
----------------------------- ----
Reported Total Invested Assets and Cash $76.1
Subtract:
Securities lending 0.2
Unrealized gains (losses) 5.6
Adjusted end of period invested assets $70.3
=====
Average Invested Assets Used in Reported Yield Calculation $70.1
Subtract:
Restricted commercial mortgage loans and other invested assets related
to
securitization entities11 0.1
---
Average Invested Assets Used in Core Yield Calculation $70.0
=====
(Income - amounts in millions)
-----------------------------
Reported Net Investment Income $801
Subtract:
Bond calls and commercial mortgage loan prepayments 8
Other non-core items12 8
Restricted commercial mortgage loans and other invested assets related
to
securitization entities11 2
---
Core Net Investment Income $783
====
Reported Yield 4.57%
====
Core Yield 4.47%
====
(1) 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.
(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) Percent change excludes the impact of foreign exchange.
(4) Company estimate for the second quarter of 2017, due to timing of the filing of statutory statements; The MCT Ratio for Canada MI in the second and first 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 second quarter of 2016 is restated to reflect the merger of Brookfield Life Annuity Insurance Company with and into Genworth Life Insurance Company as if the merger occurred January 1, 2015.
(5) Calculated as available assets divided by required assets as defined within PMIERs. As of June 30, 2017, March 31, 2017, and June 30, 2016, the PMIERs sufficiency ratios were in excess of approximately $500 million, $400 million and $350 million, respectively, of available assets above the PMIERs requirements. Company estimate for the second quarter of 2017.
(6) 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.
(7) Comprises cash and cash equivalents of $758 million, $849 million and $834 million, respectively, and U.S. government bonds of $100 million, $150 million and $100 million, respectively, as of June 30, 2017, March 31, 2017 and June 30, 2016.
(8) For the three months ended June 30, 2017 and 2016 and the three months ended March 31, 2017, net investment gains (losses) were adjusted for DAC and other intangible amortization and certain benefit reserves of zero, $(6) million and zero respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $22 million, $(3) million, and $14 million, respectively.
(9) All percentages are comparing the second quarter of 2017 to the second quarter of 2016 unless otherwise stated.
(10) The impact of foreign exchange was calculated using the comparable prior period exchange rates.
(11) Represents the incremental assets and investment income related to restricted commercial mortgage loans and other invested assets.
(12) Includes cost basis adjustments on structured securities and various other immaterial items.
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SOURCE Genworth Financial, Inc.
