Income From Continuing Operations of $0.27 Per Diluted Share
RICHMOND, Va., April 24 /PRNewswire-FirstCall/ -- Genworth Financial, Inc.
(NYSE: GNW) today reported income from continuing operations for the first
quarter of 2008 of $116 million, or $0.27 per diluted share, compared with
$314 million, or $0.69 per diluted share, in the first quarter of 2007. Net
operating income for the first quarter of 2008 was $244 million, or $0.56 per
diluted share, compared to net operating income of $340 million, or $0.75 per
diluted share, in the first quarter of 2007.
First quarter net investment losses of $128 million, net of tax and
amortization of deferred acquisition costs (DAC), included $121 million of
impairments, net of tax, $75 million of which related to sub-prime and Alt-A
residential mortgage and asset-backed securities, and $13 million of hedging
ineffectiveness on income distribution series products.
Three months ended March 31 (Unaudited)
2008 2007
Total Per diluted Total Per diluted
share share
(Amounts in millions, except per
share)
Income from continuing operations $116 $0.27 $314 $0.69
Net income $116 $0.27 $324 $0.71
Net operating income(1) $244 $0.56 $340 $0.75
Weighted average diluted shares 436.8 455.0
"Genworth had a challenging quarter with weakness in U.S. housing and
financial markets, which impacted results in our U.S. Mortgage Insurance and
other domestic product lines, partly offset by solid performance in our
international platforms," said Michael D. Fraizer, chairman and chief
executive officer. "Recent market and business trends have reinforced the
cautious outlook we conveyed to investors in February, and as a result, we are
lowering our outlook for full year 2008 operating earnings per diluted share
to a range of $2.25 to $2.65. We remain focused on executing key strategic
initiatives to position Genworth for improved future performance."
Highlights
- International segment earnings increased 10 percent, excluding the
benefit from foreign exchange, from strong growth in the company's
established mortgage insurance and payment protection platforms.
- Wealth management(2) earnings were up 20 percent and assets under
management (AUM) grew nine percent despite the highly volatile equity
markets.
- Fee-based retirement income annuities sales grew 43 percent, and total
AUM increased 46 percent.
- Total long term care (LTC) sales increased 19 percent from growing
individual long term care sales through the career sales channel, along
with increased sales of Medicare supplement and linked benefits
products.
- U.S. Mortgage Insurance flow new insurance written (NIW) more than
doubled from strong growth in the mortgage insurance market.
Underwriting and guideline changes for risk management effectively
limited sales of alternative products such as Alt-A and A minus loans,
which represented less than five percent of NIW during the quarter.
- On April 24th, an approximately 20 percent increase in U.S. Mortgage
Insurance flow product pricing was announced.
Segment Results
Net operating income presented in the tables below excludes net investment
gains (losses) and other adjustments, net of taxes, as well as the results
from discontinued operations. In the discussion of International results, all
references to percentage changes exclude the impact of foreign exchange. The
impact of foreign exchange on net operating income in the first quarter of
2008 was a favorable $25 million.
A reconciliation of net operating income (loss) of segments and Corporate
and Other activities to net income is included at the end of this press
release.
Retirement and Protection
Retirement and Protection
Net Operating Income
(in millions) Q1 08 Q1 07
Wealth Management $12 $10
Retirement Income
Fee-Based 10 15
Spread-Based 26 31
Life Insurance 65 78
Long Term Care 38 37
Institutional 11 14
Total Retirement and Protection $162 $185
Sales
(in millions) Q1 08 Q1 07
Wealth Management
Gross Flows $1,280 $1,712
Net Flows 200 1,281
Retirement Income
Fee-Based 700 544
Spread-Based 651 414
Life Insurance 79 88
Long Term Care 62 52
Institutional 151 622
Assets Under Management(3)
(in millions) Q1 08 Q1 07
Fee-Based(4) $27,950 $23,920
Spread-Based(5) 30,682 31,565
Total Assets Under Management $58,632 $55,485
Retirement and Protection earnings decreased 12 percent reflecting a
decline in life insurance earnings, the impact of equity market volatility and
lower fixed annuity AUM. Wealth management earnings grew 20 percent from a 16
percent increase in average AUM. Net flows remained positive, although down
significantly from a year ago, as a result of lower sales and increased
redemptions associated with equity market conditions.
Retirement income fee-based earnings declined $5 million reflecting equity
market declines that resulted in higher death benefit reserves and accelerated
amortization of DAC. In addition, third party service fees were $3 million
lower than in the prior year quarter. Income distribution series product sales
and AUM both increased over 40 percent.
Retirement income spread-based earnings declined $5 million primarily from
10 percent lower fixed annuity AUM. Sales more than doubled from focused
distribution strategies supported by increased wholesaling and improved
competitiveness of fixed annuities as compared with bank certificates of
deposit.
Life insurance earnings were $65 million. Favorable term life mortality
was more than offset by lower persistency on policies coming out of the
level-premium period, $4 million higher funding costs associated with the
securitization of life reserves and a $4 million unfavorable policy reserve
system coding correction. Universal life sales decreased five percent, as 18
percent growth in annual first-year deposits was more than offset by a decline
in excess deposits. Term life sales declined 21 percent in a highly
competitive market environment.
Long term care earnings were $38 million reflecting strong new business
performance, continued expense productivity, favorable terminations, and $6
million related to an update in factors associated with mortality
notifications, partially offset by old block claims performance. Individual
LTC sales grew seven percent to $44 million, with strong growth in the career
channel, which benefited from the AARP distribution relationship, partially
offset by a six percent decrease in independent channel sales.
Institutional earnings were $11 million reflecting stable account values
and a product mix shift between guaranteed investment contracts and floating
rate funding agreements. In the prior year, results included $3 million of
bond call, prepayment and limited partnership distributions.
International
International
Net Operating Income
(in millions) Q1 08 Q1 07
Mortgage Insurance
Canada $75 $55
Australia 47 36
Other International - 3
Payment Protection 38 29
Total International $160 $123
International
Sales
(in billions) Q1 08 Q1 07
Mortgage Insurance (MI)
Flow
Canada $4.9 $6.0
Australia 10.4 10.8
Other International 2.3 4.9
Bulk
Canada 1.5 0.4
Australia 1.0 2.3
Other International 0.7 3.8
Total International MI $20.8 $28.2
Payment Protection $0.7 $0.6
International earnings increased 10 percent to $160 million reflecting
solid performance from established platforms. The mortgage insurance unearned
premium reserve increased 21 percent to $3.4 billion. Flow NIW was lower in
each platform reflecting a combination of factors including global liquidity
constraints, cautious lender origination stances towards high loan-to-value
(LTV) lending, slowing of some economies and proactive actions taken by
Genworth to limit targeted exposures and underwriting risks. Given these
factors, flow NIW is expected to be below 2007 levels for the remainder of the
year.
In Canada, earnings grew 15 percent driven by strong revenue growth,
partially offset by increased losses from seasoning of larger blocks in a
slowing home price appreciation environment. Flow NIW declined 30 percent as a
result of lower levels of high LTV mortgage originations during the quarter.
Strong historical levels of home price appreciation have created affordability
challenges particularly among first time homebuyers. In addition, product and
underwriting guideline changes were made during the quarter in view of the
economic outlook, which also reduced sales.
In Australia, earnings increased 11 percent from strong revenue growth and
lower losses, partially offset by a higher tax rate. The loss ratio declined
both sequentially and year over year to 41 percent reflecting actions taken to
improve experience with select distribution relationships. Flow NIW declined
17 percent, from a modest decline in mortgage originations and reduced levels
of mortgage securitizations. The prior year quarter also included a NIW
catch-up benefit of about $1 billion from a delay in client sales reporting.
Other international mortgage insurance earnings were break-even, a
reduction of $3 million from the prior year, reflecting slower expansion in
newer markets and increased loss reserves in Spain. Several risk management
actions have been taken in Spain, which represents about two percent of
international risk in force, reflecting market and economic conditions as well
as tightening liquidity. Flow NIW decreased 59 percent reflecting declining
new business in Europe where the company has taken a conservative stance. In
addition, regulatory delays or limitations have slowed some new country new
business efforts.
Payment protection earnings increased 14 percent to $38 million from
strong revenue growth partially offset by higher taxes. Total payment
protection sales remained relatively flat. Sales in established regions,
outside of the U.K. and Ireland, grew 10 percent. In the U.K. and Ireland,
sales declined, reflecting flat levels of consumer lending and lower
single-premium sales pending anticipated clarifications of related new
business regulations. Structured transaction sales grew 47 percent, primarily
with lenders in Canada.
U.S. Mortgage Insurance
U.S. Mortgage Insurance
(in millions) Q1 08 Q1 07
Net Operating Income (Loss) $(36) $65
Primary Insurance In Force $166.7 $120.5
(in billions)
Primary Risk In Force $33.9 $24.0
(in billions)
Primary Sales
(in billions)
Flow $15.0 $6.9
Bulk 0.1 6.1
Total Primary Sales $15.1 $13.0
U.S. Mortgage Insurance had a $36 million net operating loss in the
quarter. Strong 27 percent revenue growth was more than offset by higher
incurred losses. Sequentially, reserves increased $175 million primarily from
higher average flow reserve per delinquency and a 14 percent increase in
delinquencies from the fourth quarter. Underlying factors impacting the
reserve build included increases centered around loss development associated
with the 2007 book year mortgages, alternative products such as Alt-A and A
minus, high loan balance states concentrated in Florida, and prime bulk
products.
Paid claims were $84 million before taxes in the first quarter. This
reflects a $46 million increase from the first quarter of 2007 and $19 million
sequentially. The average paid claim was $42,400, up from $32,200 a year ago,
reflecting higher loan balances in recent book years and a shift of claims to
higher loan balance states.
Lender captive reinsurance provided $19 million of benefit before taxes
during the quarter, primarily related to the 2006 book year. Movement toward
attachment of both the 2006 and 2007 book years accelerated during the quarter
and, as a result, lender captive reinsurance benefits are expected to increase
in the latter half of 2008 and 2009. Significant resources and initiatives are
dedicated to active management of in force business given the challenging
housing market. These efforts include increased customer outreach and loss
mitigation efforts to help keep borrowers in their homes.
Flow NIW more than doubled to $15.0 billion from strong mortgage insurance
market penetration. Flow persistency increased to 83 percent from 78 percent a
year ago. Strong persistency and NIW resulted in a 41 percent increase in flow
risk in force. Prime bulk NIW was minimal during the quarter, as the market
has contracted. During the quarter, Genworth announced exits from Alt-A, and A
minus loans, and in April, has announced further restrictions on interest only
loans as well as loans with LTV greater than 90 percent in declining markets.
On April 24th, Genworth announced an approximately 20 percent rate increase on
its flow business.
Corporate and Other
Corporate and Other
(in millions) Q1 08 Q1 07
Net Operating Loss $(42) $(33)
The Corporate and Other net operating loss was driven by $16 million of
additional tax expense, partially offset by lower expenses and higher
investment income. Additional tax benefits in future quarters are expected to
bring Genworth's total effective tax rate based upon operating income to
between 28 percent and 29 percent for the full year.
Investments & Hedging
First quarter net investment losses of $128 million, net of tax and other
offsets, included $121 million of impairments, $75 million of which related to
sub-prime and Alt-A residential mortgage and asset-backed securities, net of
tax. The impairments of the sub-prime and Alt-A securities were nearly all
related to securities rated A and below, and were the result of adverse
changes in the present value of estimated cash flows of the underlying
collateral. These changes are required to be reported as impairment losses
valued at estimated fair market values as of March 31, 2008, and reflect a
highly illiquid market for such securities.
Retirement income fee-based net income included a $13 million decline from
hedge ineffectiveness related to volatility in the equity markets. Hedging is
used to manage the risk associated with living benefit guarantees for the
income distribution series products.
Stockholders' Equity
Stockholders' equity as of March 31, 2008 was $12.7 billion, or $29.41 per
share, compared with $13.3 billion, or $30.43 per share, as of March 31, 2007.
Stockholders' equity, excluding accumulated other comprehensive income (loss),
as of March 31, 2008 was $12.8 billion, or $29.49 per share, compared with
$12.2 billion, or $27.89 per share, as of March 31, 2007.
Share Repurchases
The company repurchased $76 million, or approximately 3 million shares,
during the first quarter under its current program.
About Genworth Financial
Genworth Financial, Inc. (NYSE: GNW) is a leading public Fortune 500
global financial security company. Genworth has $114 billion in assets and
employs approximately 7,000 people in 25 countries. Its products and services
help meet the investment, protection, retirement and lifestyle needs of over
15 million customers. Genworth operates through three segments: Retirement and
Protection, International and U.S. Mortgage Insurance. Its products and
services are offered through financial intermediaries, advisors, independent
distributors and sales specialists. Genworth Financial, which traces its roots
back to 1871, became a public company in 2004 and is headquartered in
Richmond, Virginia. For more information, visit genworth.com.
Conference Calls and Financial Supplement Information
This press release and the first quarter 2008 financial supplement are now
posted on the company's website. Investors are encouraged to review all of
these materials.
Genworth will conduct a conference call on April 25 from 9 a.m. to 10 a.m.
(ET) to discuss the quarter's results and outlook. The conference call will be
accessible via telephone and the Internet. The dial-in number for Genworth's
April 25 conference call is 1-877-548-7907 or 1-719-325-4853 (outside the
U.S.), passcode 6628614. To participate in the call by webcast, register at
http://investor.genworth.com at least 15 minutes prior to the webcast to
download and install any necessary software.
The webcast will be archived on the company's website and a replay of the
call will be available at 1-888-203-1112 or 1-719-457-0820 (outside the U.S.)
passcode 6628614. The replay will be available through May 9, 2008.
Use of Non-GAAP Measures
This press release includes the non-GAAP financial measure entitled "net
operating income." The chief operating decision maker evaluates segment
performance and allocates resources on the basis of net operating income. The
company defines net operating income (loss) as income (loss) from continuing
operations excluding after-tax net investment gains (losses) and other
adjustments and infrequent or unusual non-operating items. This metric
excludes these items because the company does not consider them to be related
to the operating performance of its segments and Corporate and Other
activities. A significant component of the net investment gains (losses) is
the result of impairments and credit-related gains and losses, the timing of
which can vary significantly depending on market credit cycles. In addition,
the size and timing of other investment gains (losses) are often subject to
Genworth's discretion and are influenced by market opportunities, as well as
asset-liability matching considerations. Infrequent or unusual non-operating
items are also excluded from net operating income 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 in accordance with
GAAP, the company believes that net operating income, and measures that are
derived from or incorporate net operating income, are appropriate measures
that are useful to investors because they identify the income attributable to
the ongoing operations of the business. However, net operating income should
not be viewed as a substitute for GAAP net income. In addition, the company's
definition of net operating income may differ from the definitions used by
other companies. There were no infrequent or unusual non-operating items
excluded from net operating income for the periods presented in this press
release other than a $14 million after-tax expense recorded in the first
quarter of 2007 related to reorganization costs. The table at the end of this
press release reflects net operating income (loss) as determined in accordance
with Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise and Related Information, and a reconciliation of net
operating income (loss) of the company's segments and Corporate and Other
activities to net income for the three months ended March 31, 2008 and 2007.
Due to the unpredictable nature of the items excluded from the company's
definition of net operating income, the company is unable to reconcile its
outlook for net operating income to net income presented in accordance with
GAAP.
Definition of Selected Operating Performance Measures
Management regularly monitors and reports a production volume metric
referred to as "sales," which is a measure commonly used in the insurance
industry as a measure of volume of new and renewal business generated in a
period. "Sales" refers to (1) annualized first-year premiums for term life
insurance, long term care insurance and Medicare supplement insurance; (2) new
and additional premiums/deposits for universal life insurance, linked-
benefits, spread-based and variable annuity products; (3) gross and net flows
for the wealth management business which represent gross flows net of
redemptions; (4) written premiums and deposits, gross of ceded reinsurance and
cancellations, and premium equivalents, where we can earn a fee for
administrative services only business, for payment protection insurance; (5)
new insurance written for mortgage insurance, which in each case reflects the
amount of business the company generated during each period presented; and (6)
written premiums, net of cancellations, for the Mexican insurance operations.
Sales do not include renewal premiums on policies or contracts written during
prior periods. The company considers annualized first-year premiums, new
premiums/deposits, gross and net flows, written premiums, premium equivalents
and new insurance written to be measures of the company's operating
performance because they represent measures of new sales of insurance policies
or contracts during a specified period, rather than measures of the company's
revenues or profitability during that period.
Management regularly monitors and reports assets under management for the
wealth management business. Assets under management for the wealth management
business represent third-party assets under management that are not
consolidated in the financial statements. Insurance in-force for the life
insurance, international mortgage insurance and U.S. mortgage insurance
businesses is a measure of the aggregate face value of outstanding insurance
policies as of the respective reporting date. Risk in-force for the
international and U.S. mortgage insurance businesses is a measure that
recognizes that the loss on any particular mortgage loan will be reduced by
the net proceeds received upon sale of the underlying property. The company
considers assets under management for its wealth management business to be
measures of the company's operating performance because they represent
measures of the size of the business at a specific date, rather than measures
of the company's revenues or profitability during that period.
These operating 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 the following:
- Risks relating to the company's businesses, including interest rate
fluctuations, downturns and volatility in equity and credit markets,
downgrades in the company's financial strength or credit ratings,
insufficiency of reserves, legal constraints on dividend distributions
by subsidiaries, intense competition, availability and adequacy of
reinsurance, defaults by counterparties, legal or regulatory
investigations or actions, political or economic instability,
regulatory restrictions on the company's operations and changes in
applicable laws and regulations, the failure or any compromise of the
security of the company's computer systems, and the occurrence of
natural or man-made disasters or a disease pandemic;
- Risks relating to the company's Retirement and Protection segment,
including changes in morbidity and mortality, accelerated amortization
of deferred acquisition costs and present value of future profits,
goodwill impairments, reputational risks as a result of an announced
rate increase on certain in-force long term care insurance products,
medical advances such as genetic mapping research, unexpected changes
in persistency rates, increases in statutory reserve requirements, and
the failure of demand for long term care insurance to increase as the
company expects;
- Risks relating to the company's International segment, including
political and economic instability, foreign exchange rate fluctuations,
unexpected changes in unemployment rates, deterioration in economic
conditions or decline in home price appreciation, unexpected increases
in mortgage insurance default rates or severity of defaults, decreases
in the volume of high loan-to-value international mortgage
originations, increased competition with government-owned and
government-sponsored entities offering mortgage insurance, changes in
regulations, and growth in the global mortgage insurance market that is
lower than the company expects;
- Risks relating to the company's U.S. Mortgage Insurance segment,
including increases in mortgage insurance default rates or severity of
defaults, deterioration in economic conditions or a decline in home
price appreciation, the influence of Fannie Mae, Freddie Mac and a
small number of large mortgage lenders and investors, 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 (such as simultaneous second mortgages)
and reductions by lenders in the level of coverage they select,
increases in the use of reinsurance with reinsurance companies
affiliated with the company's mortgage lending customers, increased
competition with government-owned and government-sponsored entities
offering mortgage insurance, changes in regulations, legal actions
under Real Estate Settlement Practices Act, and potential liabilities
in connection with the company's U.S. contract underwriting services;
and
- Other risks, including the possibility that in certain circumstances
the company will be obligated to make payments to General Electric
Company (GE) under the company's tax matters agreement with GE even if
the company's corresponding tax savings are never realized and the
company's 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 company's tax matters agreement with
GE may discourage takeover attempts and business combinations that
stockholders might consider in their best interests.
The company undertakes no obligation to publicly update any forward-
looking statement, whether as a result of new information, future developments
or otherwise.
Consolidated Statements of Income
(Amounts in millions, except per share amounts)
Three months ended
March 31,
2008 2007
Revenues:
Premiums $1,717 $1,511
Net investment income 1,002 984
Net investment gains (losses) (226) (19)
Insurance and investment product fees and other 260 234
Total revenues 2,753 2,710
Benefits and expenses:
Benefits and other changes in policy reserves 1,401 1,067
Interest credited 345 385
Acquisition and operating expenses, net of
deferrals 528 489
Amortization of deferred acquisition costs and
intangibles 203 213
Interest expense 112 107
Total benefits and expenses 2,589 2,261
Income from continuing operations before income
taxes 164 449
Provision for income taxes 48 135
Income from continuing operations 116 314
Income from discontinued operations, net of taxes - 10
Net income $116 $324
Earnings from continuing operations per common
share:
Basic $0.27 $0.71
Diluted $0.27 $0.69
Earnings per common share:
Basic $0.27 $0.74
Diluted $0.27 $0.71
Weighted-average common shares outstanding:
Basic 433.6 441.0
Diluted 436.8 455.0
Reconciliation of Net Operating Income to Net Income
(Amounts in millions, except per share amounts)
Three months ended
March 31,
2008 2007
Net operating income:
Retirement and Protection segment $162 $185
International segment 160 123
U.S. Mortgage Insurance segment (36) 65
Corporate and Other (42) (33)
Net operating income 244 340
Net investment gains (losses), net of taxes and
other adjustments (128) (12)
Expenses related to reorganization, net of taxes - (14)
Income from continuing operations 116 314
Income from discontinued operations, net of taxes - 10
Net income $116 $324
Earnings per common share:
Basic $0.27 $0.74
Diluted $0.27 $0.71
Net operating earnings per common share:
Basic $0.56 $0.77
Diluted $0.56 $0.75
Weighted-average common shares outstanding:
Basic 433.6 441.0
Diluted 436.8 455.0
(1) This is a financial measure 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) Wealth management was formerly referred to as managed money.
(3) Assets under management represent account values, net of reinsurance,
and managed third party assets.
(4) Fee-based includes wealth management and retirement income fee-based
businesses.
(5) Spread-based includes retirement income spread-based and institutional
businesses.
SOURCE Genworth Financial, Inc.
CONTACT: Investors, Alicia Charity, +1-804-662-2248
alicia.charity@genworth.com, Kelly Groh, +1-804-281-6321
kelly.groh@genworth.com, or Media, Al Orendorff, +1-804-662-2534
alfred.orendorff@genworth.com, all of Genworth Financial, Inc.
Web site: http://www.genworth.com
(GNW)
