Strategic Progress Continues On Multiple Fronts
Oct. 29, 2009 (PR Newswire) -- RICHMOND, Va., Oct. 29 /PRNewswire-FirstCall/ -- Genworth Financial, Inc. (NYSE: GNW) today reported results for the third quarter of 2009. Net income(1), before provision for noncontrolling interests, was $45 million, or $0.10 per diluted share, compared with a net loss of $258 million, or $0.60 per diluted share, in the third quarter of 2008. Net operating income(2), before provision for noncontrolling interests, for the third quarter of 2009 was $106 million, or $0.24 per diluted share, compared with $220 million, or $0.51 per diluted share, in the third quarter of 2008.
Reflecting the company's recent reduction in ownership of Genworth MI Canada in the quarter 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 $19 million, or $0.04 per diluted share. On this same basis, net operating income available to Genworth's common stockholders for the third quarter of 2009 was $81 million, or $0.18 per diluted share.
Three months ended September 30 (Unaudited)
2009 2008
Total Per Total Per
diluted diluted
share share
(Amounts in millions,
except per share)
Net income (loss) $45 $0.10 $(258) $(0.60)
Less: net income attributable to
noncontrolling interests 26 0.06 N/A(3) N/A
Net income (loss) available
to Genworth's common stockholders $19 $0.04 $(258) $(0.60)
Net operating income $106 $0.24 $220 $0.51
Less: net operating income
attributable to noncontrolling
interests 25 0.06 N/A N/A
Net operating income available to
Genworth's common stockholders $81 $0.18 $220 $0.51
Weighted average diluted shares 451.6 433.1
Genworth's results in the quarter included net operating income of $120 million from the Retirement and Protection segment and $96 million from the International segment. This was partially offset by net operating losses of $116 million in the U.S. Mortgage Insurance (U.S. MI) segment and $19 million in Corporate and Other. The impact of foreign exchange on net operating income in the third quarter of 2009 was an unfavorable $6 million.
Net investment losses, net of tax and other adjustments, decreased to $62 million from $478 million in the third quarter 2008, and increased on a sequential basis from $59 million in the second quarter. Net unrealized investment losses, net of tax, deferred acquisition costs (DAC) and other adjustments, declined to $1.4 billion from $3.0 billion in the prior year quarter. On September 21, 2009, Genworth completed an equity offering of 55.2 million shares for net proceeds of $622 million, bringing total outstanding shares at the end of the quarter to 488.5 million. Book value per share grew 10 percent sequentially to $25.42 per share from $23.01 per share as of June 30, 2009, reflecting improvement in the investment environment and the additional equity capital partially offset by an increased number of shares. Book value per share, excluding accumulated other comprehensive income (loss), decreased sequentially to $25.37 per share from $27.33 per share as of June 30, 2009.
"Genworth continued to make substantial progress across our business lines with improved sequential sales, emerging benefits from sound price increases in several lines, lower losses and strong financial flexibility," said Michael D. Fraizer, chairman and chief executive officer. "We are encouraged by the multiple signs of stabilization and improvement in our served markets which combined with our focused growth strategies, engaged distribution relationships and risk reduction efforts position us well for improved results as we move ahead."
Third Quarter Highlights
New Business Growth
-- Retirement and Protection had sequential sales growth across its life,
long term care (LTC) and variable annuity (VA) lines. In addition wealth
management net flows increased for a second consecutive quarter bringing
assets under management (AUM) to $18.0 billion with positive net flows
continuing into October. These favorable trends resulted from a
combination of new product introductions, distribution expansion, strong
service execution and improved market conditions.
-- In International mortgage insurance, Australia flow new insurance
written (NIW) grew nine percent(4) versus prior year to $8.9 billion,
and Canada flow NIW increased 14 percent(4) sequentially.
-- U.S. MI made a number of changes to underwriting guidelines in the third
quarter that are expected to improve future NIW growth. In particular,
199 metropolitan statistical areas (MSAs) where Genworth had been
restricting coverages to 90 percent loan to value (LTV) based on housing
market conditions, were reopened to mortgages with 95 percent and lower
LTVs. Underwriting guidelines remained more stringent in five states
including California, Florida, Arizona, Nevada and Michigan.
Earnings Power & Risk Positions
-- Loss ratios improved sequentially in Canada and Australia mortgage
insurance as well as in lifestyle protection.
-- U.S. MI achieved three consecutive quarters of increased loss mitigation
savings and decreased losses. U.S. MI had net loss mitigation savings of
$224 million in the quarter, bringing the year to date total to $557
million. The company expects total year savings to be between $775
million and $825 million.
-- U.S. MI new business effective pricing increased approximately 35
percent reflecting both the 2008 approximate 20 percent price increase
as well as the benefit from new business not being subject to ceded
premiums for lender captive reinsurance arrangements.
-- Lifestyle protection earnings improved significantly over the second
quarter as a result of lower claims volume as well as the impact of
ongoing portfolio repricing and distributor agreement restructuring
efforts.
-- Mortgage insurance risk in force (RIF) in Spain continued to be reduced,
dropping to $1.3 billion from $2.7 billion a year ago. In addition, as a
result of actions completed after the close of the quarter, Spain RIF
will be further reduced by at least an additional $340 million by year
end. In total, European mortgage insurance RIF represented less than
four percent of the total international mortgage insurance RIF at the
end of the quarter.
-- Genworth initiated a number of strategies to begin reinvesting operating
company cash balances. This included redeploying cash at the operating
companies, where cash totaled $5.8 billion at the end of the quarter, at
yields accretive on average to the current portfolio rate. Given strong
holding company liquidity and improved credit market conditions,
approximately $2.5 billion to $3.5 billion of additional cash
reinvestment is targeted over the next few quarters across the operating
companies.
-- Investment performance improved significantly in the quarter with year
over year declines in realized and unrealized losses. Portfolio
repositioning to decrease targeted risks continued, with over $1.5
billion of positions sold year to date which, coupled with improved
credit market conditions, contributed to better performance. Net
unrealized investment losses, net of tax, DAC and other adjustments,
decreased to $1.4 billion from $3.0 billion in the prior year.
Capital Management & Flexibility
-- On September 21, 2009, Genworth completed an equity offering with net
proceeds of $622 million and 55.2 million shares issued, including the
underwriters' full exercise of their option to purchase additional
shares, bringing total outstanding shares to 488.5 million.
-- Holding company cash totaled $1.3 billion and included net proceeds
associated with the Genworth MI Canada IPO and the equity offering. In
addition, Genworth repurchased $73 million of long term debt during the
quarter.
-- Consolidated U.S. life companies ended the third quarter of 2009 with an
estimated risk based capital (RBC) ratio of approximately 370
percent(5). Genworth expects to end the year with an RBC ratio at or
above 350 percent.
-- The risk to capital ratio in the U.S. mortgage insurance companies was
15.1:1(5) at the end of the quarter which provides flexibility to
increase the level of attractive return new business.
-- The International segment ended the quarter with sound capital ratios in
excess of regulatory required levels.
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
Net Operating Income (Loss)
(in millions) Q3 09 Q3 08
Life Insurance $79 $63
Long Term Care 35 39
Wealth Management 8 12
Retirement Income
Fee-Based 16 (1)
Spread-Based (8) 16
Institutional (10) 49
Total Retirement and Protection $120 $178
Sales
(in millions) Q3 09 Q3 08
Life Insurance $50 $76
Long Term Care 53 64
Wealth Management
Gross Flows 1,372 1,230
Net Flows 468 183
Retirement Income
Fee-Based 217 596
Spread-Based 127 727
Institutional - 458
Assets Under Management(6)
(in millions) Q3 09 Q3 08
Wealth Management $17,992 $18,671
Retirement Income Fee-Based 8,067 7,710
Total Fee-Based 26,059 26,381
Retirement Income Spread-Based 19,457 20,236
Institutional 5,053 9,253
Total Spread-Based 24,510 29,489
Total Assets Under Management $50,569 $55,870
Retirement and Protection earned $120 million compared with $178 million a year ago. Consolidated U.S. life companies ended the quarter with an estimated RBC ratio of approximately 370 percent(5), and are expected to end the year at or above 350 percent.
Life insurance earnings increased to $79 million from $63 million. Earnings in the current quarter included an annual review of actuarial assumptions that resulted in a $16 million favorable unlocking related to a refinement of assumptions for better mortality experience and lower reinsurance costs. Results in the quarter also reflected favorable mortality, offset partially by lower investment income. Total life sales decreased 34 percent from prior year primarily reflecting a decline in overall universal life industry sales. Genworth continued its transition to the "main street" life insurance market characterized by policy face sizes of $1 million and below resulting in lower comparable premium levels while achieving a 15 percent sequential increase in new term policies sold. Genworth recently introduced a new suite of life insurance products with more capital efficient designs which provide higher returns.
LTC earnings declined $4 million to $35 million, as profit emergence from favorable new block business growth was more than offset by higher claims primarily associated with lower death related terminations. Individual LTC sales decreased $15 million year over year, primarily from an overall decline in LTC sales across the industry, but sequentially increased $3 million from higher sales across all channels.
Wealth management earnings decreased from the prior year, driven by a 13 percent decline in average AUM to $17.0 billion from $19.5 billion. On a sequential basis, earnings increased $1 million reflecting growth in AUM. Net flows were positive for the second consecutive quarter improving to $468 million compared with $160 million in the second quarter. Net flows, combined with favorable market performance, resulted in a $2.1 billion sequential increase in AUM.
Retirement income fee-based earnings increased to $16 million from lower DAC amortization attributable to positive equity market performance during the quarter. This was partially offset by lower fees from a decline in average AUM for the VA product and higher taxes. On a sequential basis, earnings increased $5 million from $11 million as a result of improved equity market performance and lower taxes. Total VA sales grew 41 percent sequentially to $217 million. Recently, Genworth launched RetireReady(SM) One, a more streamlined retirement income VA product with improved risk characteristics and flexible features that enable a more customized guaranteed income strategy.
The retirement income spread-based business had a net operating loss of $8 million compared to income of $16 million in the prior year. In the prior year, earnings included a $15 million tax benefit that did not recur. Earnings in the current period reflected lower investment income associated with holding higher cash balances and $5 million of unfavorable DAC unlocking related to a refinement of assumptions for spreads. A significant portion of these higher cash balances is targeted for reinvestment as noted previously. Total spread-based AUM remained relatively flat sequentially ending at $19.5 billion. Genworth's fixed annuity production in the quarter was down significantly and reflected a less attractive spread environment and a cautious stance regarding interest rates and related investment strategies. Going forward, fixed annuity production will remain targeted with a disciplined focus on risk adjusted returns.
Institutional had a net operating loss of $10 million from lower net investment spread associated with a decline in AUM and holding higher cash balances. The prior year quarter included $52 million of opportunistic repurchases of funding agreements backing notes (FABNs) at prices discounted to contract value as compared with only $2 million of similar transactions in the current quarter. AUM declined $0.5 billion sequentially to $5.1 billion, primarily reflecting scheduled maturities and the company's decision not to offer new institutional contracts given the current market environment.
International
International
Net Operating Income (Loss)
(in millions) Q3 09 Q3 08
Mortgage Insurance
Canada:
Net operating income $70 $80
Less: net operating income attributable
to noncontrolling interests 25 N/A
Net operating income available to
Genworth's common stockholders 45 80
Australia 42 48
Other International (9) (2)
Lifestyle Protection 18 40
Total International $96 $166
International Q3 09 Q3 08
Sales
(in billions)
Mortgage Insurance (MI)
Flow
Canada $4.4 $8.0
Australia 8.9 8.7
Other International 0.9 2.0
Bulk
Canada 0.2 0.9
Australia - 0.6
Other International - 1.1
Total International MI $14.4 $21.3
Lifestyle Protection $0.5 $0.6
International earnings reflected sound mortgage insurance performance in Canada and Australia as housing markets improved and economies stabilized, a $25 million decrease in earnings as a result of the IPO of 42.5 percent of Genworth MI Canada and lower earnings in the lifestyle protection business associated primarily with higher unemployment related claims in Europe and lower consumer lending levels which reduced new business.
In Canada and Australia, a sequential lift in aggregate home prices were reported during the quarter, which continues the favorable trends the company observed since the beginning of the year. Government stimulus programs including lower interest rates, combined with enhanced housing affordability and increased home sales activity, contributed to home price improvement. After several consecutive quarters of job losses in both Canada and Australia, there were modest job gains in September.
