First quarter net loss $66 million and adjusted operating income $33 million

Genworth Lynchburg, VA

Genworth's building in Lynchburg, Virginia. (Credit: Genworth Financial, Inc. )

Genworth Financial reported results for the quarter ended March 31, 2020. The company reported a net loss of $66 million, or $0.13 per diluted share, in the first quarter of 2020, compared with net income of $174 million, or $0.34 per diluted share, in the first quarter of 2019. The company reported adjusted operating income of $33 million, or $0.07 per diluted share, in the first quarter of 2020, compared with adjusted operating income of $95 million, or $0.19 per diluted share, in the first quarter of 2019.

COVID-19 Update

The COVID-19 pandemic has had a profound effect on the global economy, and Genworth has been proactive to support its employees, customers and communities around the world. The company has implemented business continuity procedures including a global work from home policy initiated on March 11th and has continued to serve its customers and policyholders effectively with minimal disruption. Genworth is providing additional financial, health and wellness resources to employees including additional paid leave to assist employees in caring for themselves and their family members. Genworth is also following regulatory guidelines to support loss mitigation efforts for mortgage borrowers and extend grace periods for life insurance, LTC and annuity policyholders. Genworth has extended these and other relief options to customers to ensure continuation of insurance coverage and mitigate financial hardship for customers and policyholders.

The COVID-19 pandemic and ensuing global economic slowdown impacted the company’s first quarter of 2020 financial results primarily as a result of the significant decline in equity markets and interest rates during the quarter, which led to unfavorable impacts in Genworth’s fixed and variable annuity products. The global MI businesses experienced limited impacts from the pandemic in the first quarter, as mortgage origination levels remained strong and delinquencies remained stable.

The company is closely monitoring the evolving macroeconomic environment and is focused on managing and mitigating its risks and effects. The extent of the economic impact remains uncertain and will depend on the severity of the pandemic and the shape of the economic recovery. In the U.S. and Australia MI businesses, the company is anticipating both a decline in purchase originations in the second half of 2020 due to lower economic activity and an increase in delinquencies as a result of higher unemployment. Higher delinquencies may be mitigated by higher cure rates as economic activity resumes. Given the expected increase in delinquency activity and resulting increase in capital requirements, the company may not receive further dividends from its MI businesses in 2020 in order to preserve capital in its insurance subsidiaries during this period of uncertainty. The amount and timing of dividends will be reevaluated later in the year and depend on the economic recovery from COVID-19.

In the U.S. Life Insurance segment, interest rate and equity market movements will continue to impact GAAP and statutory results. The company continues to manage the U.S. life insurance businesses on a standalone basis with no plans to infuse or extract capital other than as committed in connection with the completion of the Oceanwide transaction.

“I am very proud of our team’s response to these unprecedented challenges and the dedication of our employees as we continue to serve all of our customers and policyholders during this volatile period,” said Tom McInerney, President and CEO of Genworth. “Genworth had a strong start to the year, but headwinds from the COVID-19 pandemic have caused significant volatility and decline in our market environments. We expect those challenges to persist into the second quarter and potentially longer. As we navigate through this time of uncertainty, we are doing everything in our power to ensure the safety and wellbeing of our employees while continuing to deliver outstanding service to our customers and policyholders.”

Transaction Update

Genworth and Oceanwide made significant progress towards closing their transaction during the first quarter. Both parties remain fully committed to closing the transaction.

On March 24, Genworth announced that the NYDFS reapproved the proposed acquisition of control by Oceanwide of Genworth’s New York-domiciled insurance company, Genworth Life Insurance Company of New York (GLICNY). In connection with the NYDFS’ reapproval, Genworth committed, among other things, to contribute $100 million to GLICNY at the closing of the transaction.

On March 31, Genworth announced that the Virginia State Corporation Commission, Bureau of Insurance also reapproved the proposed acquisition of control by Oceanwide of Genworth’s insurance companies domiciled in Virginia.

Oceanwide is currently finalizing its funding plan for the transaction purchase price of $5.43 per share. As previously disclosed, Oceanwide has a financing commitment for debt funding of up to $1.8 billion through Hony Capital to partially finance the acquisition of Genworth, which was extended to June 30, 2020. After the funding plan is finalized, Oceanwide will then discuss the currency conversion and transfer of funds with China’s State Administration of Foreign Exchange (SAFE) in order to complete the transaction. Oceanwide will also seek confirmation from the Delaware Department of Insurance that the acquisition of Genworth’s Delaware domiciled insurer may proceed under the existing approval.

Given the unprecedented market disruptions due to the coronavirus pandemic, Oceanwide and Genworth extended the merger agreement deadline to not later than June 30, 2020 to provide the parties with additional time if needed to close the transaction. Genworth and Oceanwide are working to close the transaction as soon as possible. While the parties announced in March that they were targeting a closing by the end of May, they currently expect that the challenges caused by the pandemic will likely delay the closing until the end of June.

Oceanwide also remains committed to the capital investment plan under which Oceanwide and/or its affiliates will contribute an aggregate of $1.5 billion to Genworth over time following the consummation of the merger, subject to the receipt of the required regulatory approvals and clearances.

“The unprecedented market volatility and decline due to the coronavirus has presented challenges across the economy. Despite those challenges, Genworth was able to make significant progress towards closing the transaction with Oceanwide,” said Tom McInerney, President and CEO of Genworth. “Like Oceanwide, we remain fully committed to closing the transaction as soon as possible, which we believe is the best value for shareholders.” 

“Oceanwide remains fully committed to the Genworth transaction,” said Lu Zhiqiang, chairman of Oceanwide. “I continue to believe the long-term value of Genworth to Oceanwide is very compelling. We are finalizing the transaction’s financing and look forward to welcoming Genworth to Oceanwide’s family of companies as soon as possible.”

Financial Performance

Consolidated Net Income (Loss) & Adjusted Operating Income  

Three months ended March 31

2020

2019

Per

Per

diluted

diluted

Total  

(Amounts in millions, except per share) 

Total

share

Total

share

% change  

Net income (loss) available to Genworth’s common stockholders 

$

(66)

$

(0.13)

$

174

$

0.34

(138)%

Adjusted operating income 

$

33

$

0.07

$

95

$

0.19

(65)%

Weighted-average diluted shares4

504.3

508.6

As of March 31

2020

2019

Book value per share 

$

28.61

$

25.98

Book value per share, excluding accumulated other comprehensive 

   income (loss) 

$

21.05

$

21.03

The net loss in the quarter included investment losses of $89 million, net of taxes and other adjustments. The investment losses were driven by net losses on derivatives, including losses due to guaranteed minimum withdrawal benefits on variable annuities and foreign exchange hedges in Australia MI due to the decline in the Australian dollar, and mark-to-market losses on limited partnerships and equity securities. Net income in the first quarter of 2019 included $56 million from investment gains, net of taxes and other adjustments.

Net investment income was $793 million in the quarter, compared to $794 million in both the prior quarter and the prior year. Net investment income remained in line with the prior year with higher income from bond calls and prepays offset by lower income from limited partnerships. Net investment income remained in line with the prior quarter as lower income from bond calls and prepays and limited partnerships offset favorable prepayment speed adjustments on mortgage backed securities. The reported yield and the core yield for the quarter were 4.71 percent and 4.57 percent, respectively, compared to 4.74 percent and 4.62 percent, respectively, in the prior quarter.

Genworth’s effective tax rate was approximately 12 percent on its net loss for the quarter. The effective tax rate was reduced by the tax effect of forward starting swap gains settled prior to the change in the corporate tax rate under the 2017 Tax Cuts and Jobs Act, which continue to be tax effected at 35 percent as they are amortized into net investment income.

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

Adjusted Operating Income (Loss)

(Amounts in millions)

Q1 20 

Q4 19 

Q1 19

U.S. Mortgage Insurance

$

148

$

160

$

124

Australia Mortgage Insurance

9

12

14

U.S. Life Insurance

(70)

(115)

(5)

Runoff

(13)

17

20

Corporate and Other

(41)

(50)

(58)

Total Adjusted Operating Income

$

33

$

24

$

95

Adjusted operating income (loss) represents income (loss) from continuing operations excluding the after-tax effects of income (loss) from continuing operations 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 other adjustments, net of taxes. A reconciliation of net income (loss) to adjusted operating income is included at the end of this press release.

Unless specifically noted in the discussion of results for the Australia MI business, references to percentage changes exclude the impact of translating foreign denominated activity into U.S. dollars (foreign exchange). Percentage changes that 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)

Q1 20 

Q4 19 

Q1 19 

Adjusted operating income

$

148

$

160

$

124

New insurance written

Primary Flow

$

17,900

$

18,100

$

9,600

Loss ratio

8%

4%

8%

U.S. MI reported adjusted operating income of $148 million, compared with $160 million in the prior quarter and $124 million in the prior year. Prior quarter results included $21 million of favorable after-tax impacts from assumption updates. U.S. MI’s flow insurance in force increased 17 percent versus the prior year from strong new insurance written (NIW), driving continued growth in earned premiums. U.S. MI achieved $17.9 billion in flow NIW in the quarter, up 86 percent versus the prior year primarily driven by higher refinance originations and strong estimated market share. Flow NIW decreased one percent from the prior quarter due to market seasonality. The growth in earned premiums versus the prior year was also driven by increased single premium policy cancellations from higher mortgage refinancing activity partially offset by lower average premium rates.

The company is not aware of any new delinquencies in the first quarter related to the COVID-19 pandemic and did not identify any deterioration in the performance of existing delinquencies that would warrant reserve strengthening, as delinquencies remained low with strong cure rates. The U.S. MI loss ratio was eight percent, flat to the prior year and up four points sequentially. The favorable assumption updates in the prior quarter reduced that period’s loss ratio by six points.

Australia Mortgage Insurance

Operating Metrics

(Dollar amounts in millions)

Q1 20 

Q4 19 

Q1 19 

Adjusted operating income

$

9

$

12

$

14

New insurance written

Flow

$

4,100

$

4,900

$

3,400

Bulk

$

200

$

400

$

500

Loss ratio

34%

30%

34%

Australia MI reported adjusted operating income of $9 million, down from $12 million in the prior quarter and $14 million in the prior year. Australia MI flow NIW decreased 16 percent sequentially from normal seasonal patterns and increased 26 percent versus the prior year primarily due to higher mortgage origination volume from a key customer. The loss ratio in the quarter was 34 percent, up four points sequentially primarily due to seasonal increases in losses and lower premiums due to portfolio seasoning and flat to the prior year with lower premiums from portfolio seasoning and lower policy cancellations offset by lower losses primarily from favorable aging of existing delinquencies.

U.S. Life Insurance

Adjusted Operating Income (Loss)

(Amounts in millions)

Q1 20

Q4 19

Q1 19

Long Term Care Insurance

$

1

$

19

$

(20)

Life Insurance

(77)

(164)

(2)

Fixed Annuities

6

30

17

Total U.S. Life Insurance

$

(70)

$

(115)

$

(5)

Long Term Care Insurance

LTC reported adjusted operating income of $1 million, compared with adjusted operating income of $19 million in the prior quarter and an adjusted operating loss of $20 million in the prior year. Earnings from in force rate actions were higher than the prior year but lower than the prior quarter. Losses on new claims increased compared to the prior quarter and prior year, partially offset by continued favorable development on prior period incurred but not reported claims. Existing claims performance improved, driven by seasonally higher terminations compared to the prior quarter and a slightly favorable impact from the quarterly benefit utilization rate update compared to an unfavorable update in the prior year.

Life Insurance

Life insurance reported an adjusted operating loss of $77 million, compared with $164 million in the prior quarter and $2 million in the prior year. During the prior quarter, the company completed its annual review of life insurance assumptions and recorded after-tax charges of $139 million primarily driven by the lower interest rate environment. Results reflected higher amortization of deferred acquisition costs (DAC) compared to the prior year and prior quarter, primarily associated with higher lapses from a large 20-year level-premium term life insurance block entering its post-level premium periods. Compared to the prior quarter and prior year, results also reflected reserve increases during the premium grace period in the 10-year term universal life insurance product associated with policies entering the post-level premium period, as well as higher mortality in universal and term life insurance products.

Fixed Annuities

Fixed annuities reported adjusted operating income of $6 million, compared with $30 million in the prior quarter and $17 million in the prior year. Results versus the prior quarter and prior year reflected unfavorable fixed indexed annuities reserve changes and DAC amortization due to the decline in equity markets and interest rates in the quarter, lower mortality in the single premium immediate annuity product and a decrease in net spreads due to block runoff. Results in the prior year included unfavorable after-tax charges of $13 million from loss recognition testing on the single premium immediate annuity block.

Runoff

Runoff reported an adjusted operating loss of $13 million, compared with adjusted operating income of $17 million in the prior quarter and adjusted operating income of $20 million in the prior year. Compared to the prior quarter and prior year, results reflected unfavorable impacts in the company’s variable annuity business from the decline in equity markets and interest rates during the quarter.

Corporate And Other

Corporate and Other reported an adjusted operating loss of $41 million, compared with $50 million in the prior quarter and $58 million in the prior year. Results in the current quarter reflected lower interest expense following the early redemption of the June 2020 senior notes and higher investment income.

Capital & Liquidity

Genworth maintains the following capital positions in its operating subsidiaries:

Key Capital & Liquidity Metrics 

(Dollar amounts in millions) 

Q1 20

Q4 19

Q1 19

U.S. MI 

Consolidated Risk-To-Capital Ratio

12.2:1

12.2:1

11.9:1

Genworth Mortgage Insurance Corporation Risk-To-Capital Ratio6 

12.4:1

12.5:1

12.1:1

Private Mortgage Insurer Eligibility Requirements (PMIERs) Sufficiency Ratio6, 7

 142

%

138

%

123

%

Australia MI 

Prescribed Capital Amount (PCA) Ratio6 

178

%

191

%

201

%

U.S. Life Insurance Companies 

Consolidated Risk-Based Capital (RBC) Ratio6 

195

%

213

%

195

%

Holding Company Cash and Liquid Assets8, 9

$

575

$

1,531

$

405

Key Points

  • U.S. MI’s PMIERs sufficiency ratio is estimated to be 142 percent, in excess of $1.1 billion above requirements. The PMIERs sufficiency ratio benefited three points from a 30 percent multiplier applied to the risk based required asset factor for each non-performing loan backed by a property located in a FEMA Declared Major Disaster Area. PMIERs sufficiency is expected to decline in upcoming periods as a result of higher delinquencies related to the macroeconomic environment, taking into account the reduced PMIERs required asset factors;
  • Australia MI’s PCA ratio is estimated to be 178 percent, above the company’s target operating range of 132 to 144 percent. The PCA ratio declined in the quarter following a write-off of DAC in local results due to higher expected future claims;
  • U.S. life insurance companies’ consolidated statutory risk-based capital is estimated to be 195%, down from the previous quarter primarily due to statutory losses on variable annuities due to the decline in equity markets and interest rates during the quarter; and
  • The holding company ended the quarter with $575 million of cash and restricted liquid assets. During the first quarter, the holding company redeemed its $397 million debt due in June 2020 and repurchased an additional $14 million of principal on its 2021 maturities. In addition, cash outflows in the quarter included $200 million to retire its intercompany note with Genworth Life Insurance Company, a previously disclosed £100 million interim payment (USD$134 million) to AXA related to an adverse court ruling on pending litigation, additional cash collateral posted on interest rate swaps related to the company’s hybrid debt and other expenses including interest payments on outstanding debt and employee benefit payments.

Source: Company Press Release