RICHMOND, Va., Jan. 27 /PRNewswire-FirstCall/ -- Genworth Financial, Inc.
(NYSE:
GNW -
News) today reported net earnings from continuing operations for the
fourth quarter of 2004 of $346 million, or $0.70 per diluted share. Net
earnings from continuing operations for the fourth quarter of 2003 were $220
million, or $0.45 per diluted share.
In connection with the company's initial public offering (IPO) completed
on May 28, 2004, the company effected a corporate reorganization that included
a series of significant reinsurance, recapitalization and separation
transactions. As more fully explained at the end of this release, the company
is presenting pro forma financial information that reflects those transactions
to enable a more meaningful comparison of its period-to-period results.
Pro forma net earnings from continuing operations in the fourth quarter of
2004 were $346 million, or $0.70 per diluted share, compared to $211 million
or $0.43 per diluted share in the fourth quarter of 2003. Pro forma net
operating earnings for the fourth quarter of 2004 were $254 million, or $0.52
per diluted share, compared to $179 million or $0.37 per diluted share in the
fourth quarter of 2003.
Pro forma net operating earnings in the fourth quarter of 2004 consist of
pro forma net earnings from continuing operations, excluding after-tax net
realized investment losses of $1 million, a $68 million IPO-related net tax
benefit recorded during the quarter and a $25 million after-tax gain related
to our waiver of contractual rights under an outsourcing services agreement
with General Electric's (GE) global business processing operation, 60% of
which was sold in the fourth quarter. Pro forma net operating earnings in the
fourth quarter of 2004 included a one-time charge of $32 million after-tax on
a small run-off block of equity-indexed annuities resulting from an adjustment
of reserving processes.
Pro forma net operating earnings in the fourth quarter of 2003 consist of
pro forma net earnings from continuing operations, excluding after-tax net
realized investment gains of $32 million.
"2004 was a year of tremendous progress in growing our business, building
distribution relationships and maintaining our focus on expense and risk
disciplines," said Michael D. Fraizer, chairman and chief executive officer.
"We finished the full year with pro forma net operating earnings per share
growth of 20 percent, good sequential sales progress and operating ROE of 9.8
percent. We continue to make steady improvements toward our long term goal of
12 percent operating ROE by 2008, and expect to achieve 2005 net operating
earnings of $2.30-to-$2.40 per share."
Management believes that the presentation of net operating earnings and
operating ROE enhances understanding and comparability of performance by
highlighting underlying business activity and profitability drivers. However,
net operating earnings and operating ROE should not be viewed as a substitute
for net earnings or return on equity prepared under accounting principles
generally accepted in the U.S. (GAAP). (Please refer to the disclosure at the
end of this release for a discussion of the basis on which financial
information is presented in this release.)
The company operates in three primary business segments: Protection,
Retirement Income & Investments, and Mortgage Insurance, in addition to a
Corporate and Other Segment.
Consolidated fourth quarter pro forma net operating earnings growth of 42
percent was driven by increases in all three primary business segments over
the prior year quarter, and included $6 million of favorable FX.
Protection Segment pro forma net operating earnings increased 46 percent
to $140 million compared to $96 million in the prior year quarter primarily
from non-recurring items in the prior year quarter and from growth in life and
payment protection.
- (1) In the third quarter of 2003, the company evaluated its contractual
relationships with PPI distributors against targeted return thresholds and
made decisions to terminate or non-renew certain contracts which the company
refers to as "non-core" or "runoff." Existing business under these contracts
will runoff over several years in the normal course of business.
- (2) Income distribution series products are comprised of the company's
retirement income annuity product and two variable annuity riders that provide
similar income features. The term does not include immediate annuities or
fixed annuities, which also serve income distribution needs but are reported
separately in the company's fourth quarter financial supplement.
RI&I Segment pro forma net operating earnings grew to $35 million in the
fourth quarter of 2004 from $12 million in the fourth quarter of 2003. Growth
was due to higher assets under management, improved spreads and increased fee
income from new contracts in 2004 to manage GE's municipal guaranteed
investment contracts (GIC) business. Growth was partially offset by a one-
time charge of $32 million after-tax on a small run-off block of equity-
indexed annuities resulting from an adjustment of reserving processes.
Mortgage Insurance Segment pro forma net operating earnings increased to
$107 million from $77 million in the fourth quarter of 2003 due to continued
strong international growth, $13 million of higher taxes in the prior year
quarter and $4 million of favorable FX.
Corporate and Other Segment pro forma net operating loss increased to $28
million in the fourth quarter of 2004 from $6 million in the fourth quarter of
2003 primarily due to non-recurring tax benefits of $32 million in the prior
year quarter.
All segment information below is presented on a pro forma basis. Segment
pro forma net operating earnings presented are equivalent to pro forma net
earnings for all segments except Corporate and Other. For a reconciliation of
the Corporate and Other Segment pro forma net operating earnings to GAAP net
earnings, see the disclosure at the end of this release.
Pro Forma Segment Net Operating Earnings
Protection
Pro forma net operating earnings (unaudited)
(Dollar amounts in millions) Q4 04 Q4 03
Life $67 $50
Long term care 46 47
Payment protection 22 (5)
Group 5 4
Total Protection $140 $96
Sales
(Dollar amounts in millions) Q4 04 Q4 03
Life $39 $31
Long term care 41 54
Payment protection 351 498
Group 66 57
Total Protection $497 $640
Protection Segment pro forma net operating earnings increased $44 million
due to overall business growth and non-recurring items in the prior year
quarter. Life pro forma net operating earnings were up $17 million to $67
million due to in-force growth and lower expenses offset by less favorable
mortality of $4 million when compared to the prior year quarter. The prior
year quarter also included an increase in policyholder reserves of $10 million
that did not recur. Long term care (LTC) pro forma net operating earnings
were down $1 million to $46 million. Payment Protection (PPI) pro forma net
operating earnings grew to $22 million compared to a loss of $5 million in the
prior year quarter. The current quarter included new business growth of $4
million and $2 million related to favorable FX. The prior year quarter
included $21 million of one-time expenses related to employee benefit costs,
increased DAC amortization and higher travel insurance claim reserves.
Sales of term life were $27 million in the fourth quarter of 2004,
compared with $19 million in the comparable prior year period. This growth
reflects competitive pricing and technology-enhanced customer service. LTC
sales decreased to $41 million in the fourth quarter of 2004 from $54 million
in the prior year quarter reflecting shifts in market demand and pricing
conditions. As planned, overall PPI sales declined from $498 million in the
fourth quarter of 2003 to $351 million in the fourth quarter of 2004
reflecting the strategic decision to exit lower return distribution
relationships. PPI sales, excluding runoff business, grew 16 percent from $296
million in the fourth quarter of 2003 to $343 million in the fourth quarter of
2004 from continued growth across European markets. Group sales increased 16
percent in the current year quarter compared to the prior year quarter from
growth in all products.
Retirement Income & Investments
Pro forma net operating earnings (unaudited)
(Dollar amounts in millions) Q4 04 Q4 03
Spread based retail $9 $8
Fee based retail 16 -
Spread based institutional 10 4
Total RI&I $35 $12
Sales
(Dollar amounts in millions) Q4 04 Q4 03
Spread based retail $599 $675
Fee based retail 561 678
Spread based institutional 796 526
Total RI&I $1,956 $1,879
RI&I pro forma net operating earnings were $35 million for the fourth
quarter of 2004 compared to $12 million in the prior year period. Spread
retail pro forma net operating earnings were up modestly to $9 million
compared to $8 million in the prior year quarter. This included a one-time
charge of $32 million after-tax on a small run-off block of equity-indexed
annuities resulting from an adjustment of reserving processes. This charge was
offset by growth in assets under management, improved investment spreads, and
lower guarantee fund assessments in the current quarter. The prior year
quarter included $15 million of accelerated DAC amortization. Fee retail pro
forma net operating earnings increased to $16 million compared to break-even
in the prior year quarter primarily due to new contracts in 2004 to manage
GE's municipal GIC business as well as growth due to higher assets under
management. Spread institutional pro forma net operating earnings increased to
$10 million in the current quarter compared to $4 million in the prior year
quarter primarily due to bond prepayments in the current quarter and improved
spreads.
Fourth quarter 2004 sales of spread retail products declined 11 percent
compared to the prior year quarter, driven primarily by pricing actions taken
in fixed annuities and uneven flows in both immediate annuity and structured
settlement sales. Sales of fee retail products declined 17 percent from the
prior year quarter due to the continued market focus on products with a
variety of guarantees, many of which the company elected not to offer, as well
as restrictions we placed on fixed account variable annuity sales. Sales of
Genworth's income distribution series products were up 87 percent to $84
million in the current period quarter compared to the prior year quarter. The
increase in sales of spread institutional products from $526 million to $796
million reflects uneven timing of new contracts.
Mortgage Insurance Segment
Pro forma net operating earnings
(unaudited) Q4 04 Q4 03
(Dollar amounts in millions)
International $57 $38
United States 50 39
Total Mortgage Insurance $107 $77
Sales
(Dollar amounts in millions) Q4 04 Q4 03
International $15,225 $12,210
United States 7,074 18,087
Total Mortgage Insurance $22,299 $30,297
Mortgage insurance pro forma net operating earnings were $107 million in
the fourth quarter of 2004 compared to $77 million in the prior year quarter,
an increase of $30 million. International pro forma net operating earnings
were up $19 million to $57 million compared to $38 million in the prior year
quarter. This growth was primarily due to strong revenue growth, continued
low loss ratios, higher taxes in the prior year quarter and favorable FX of $4
million. U.S. pro forma net operating earnings were up $11 million to $50
million due to higher taxes in the prior year quarter and solid in-force
performance.
International new insurance written was $15 billion, up 25 percent
including $1 billion related to FX. Growth was primarily due to deeper
account penetration in Canada and Australia and growth in new insurance
written in Europe. U.S. new insurance written was $7 billion in the current
year quarter, down from $18 billion in the prior year quarter. This decrease
was driven by a $7 billion decline in prime credit bulk sales due to a smaller
market and a $4 billion decline in flow sales from a smaller mortgage
origination market and actions taken to restructure certain excess of loss
risk sharing arrangements.
Corporate and Other Segment (unaudited) Q4 04 Q4 03
Pro forma net operating loss
(Dollar amounts in millions) ($28) ($6)
The Corporate and Other Segment had a pro forma net operating loss of $28
million in the fourth quarter of 2004 compared to a loss of $6 million in the
fourth quarter of 2003. The current quarter included higher litigation
expenses. The prior year quarter included $32 million of tax benefits
principally associated with the company's international operations, $8 million
of higher reserves at our captive reinsurance subsidiary and other expenses
that did not recur.
Shareholders' equity at December 31, 2004 was $12.9 billion, or $26.28 per
share. Shareholders' equity, excluding accumulated other comprehensive
income, at December 31, 2004 was $11.3 billion. Book value per share,
excluding accumulated other comprehensive income, increased to $22.99 at
December 31, 2004, compared to $22.35 at September 30, 2004.
Earnings Conference Call Information
The company will hold a conference call on January 28 from 10 a.m. to 11
a.m. (EST) to discuss fourth quarter results and business outlook.
Genworth's conference call will be accessible via telephone and the
Internet. This earnings release and the fourth-quarter financial supplement
are now available on the company's website. The conference call materials
will be available on the company's website January 28 prior to the conference
call. Investors are encouraged to review all of these materials. To access the
web cast, go to http://www.genworth.com at least 15 minutes prior to the event
to register and download and install any necessary software. To access the
call by telephone, please dial 1-800-599-9795 (U.S.) or 1-617-786-2905
(outside the U.S.) and enter the access code "Genworth" to register. A replay
of the call will be available from 1 p.m. EST on January 28 through February
4, 2005 by dialing 1-888-286-8010 in the U.S. or 1-617-801-6888 (outside the
U.S.) and entering the access code 62549597. The call will also be replayed
at the company's website during this same time period.
Basis of Historical and Pro Forma Financial Information
As part of a corporate reorganization effected in connection with the
company's IPO, the company acquired substantially all of the assets and
liabilities of GE Financial Assurance Holdings, Inc. (GEFAHI), an indirect
subsidiary of GE. The company also acquired certain other insurance businesses
that were owned by other GE subsidiaries but managed by members of the
company's management team. In consideration for the assets that the company
acquired and the liabilities that the company assumed, the company issued
various equity and debt securities to GEFAHI.
The company has prepared its historical financial information as if the
company had been in existence throughout all relevant periods. The historical
financial information through the date of the corporate reorganization (May
24, 2004) includes all businesses that were owned by GEFAHI, including those
that were not transferred to the company, as well as the other insurance
businesses that the company acquired from other GE subsidiaries in connection
with the corporate reorganization. As a result, the company's historical
financial information for periods prior to the corporate reorganization is not
comparable to historical financial information for periods ending after that
date.
Prior to the completion of the IPO, the company entered into several
significant reinsurance transactions with Union Fidelity Life Insurance
Company (UFLIC), an indirect subsidiary of GE. As part of these transactions,
the company ceded to UFLIC, effective as of January 1, 2004, policy
obligations under all of its in-force structured settlement contracts, which
had reserves of $12.0 billion, and substantially all of its in-force variable
annuity contracts, which had general account reserves of $2.8 billion and
separate account reserves of $7.9 billion, each as of December 31, 2003. In
addition, effective as of January 1, 2004, the company ceded to UFLIC policy
obligations under a block of long-term care insurance policies, which had
reserves of $1.5 billion as of December 31, 2003. As part of the reinsurance
transactions, UFLIC ceded to the company in-force blocks of Medicare
supplement insurance, which had reserves of $19 million.
The unaudited pro forma financial information for 2003 contained in this
press release was previously published in the prospectuses for the company's
initial public offering and related offerings and reflects the company's
historical combined financial information as adjusted to give effect to the
transactions described below and certain other transactions as if each had
occurred as of January 1, 2003. The unaudited pro forma financial information
for 2004 contained in this press release reflects the company's historical
combined financial information as adjusted to give effect to these
transactions as if each had occurred as of January 1, 2004. The following
transactions are reflected in the unaudited pro forma financial information:
- the removal of certain businesses of GEFAHI that were not transferred to
the company in connection with the corporate reorganization;
- the reinsurance transactions with UFLIC;
- the issuance of equity and debt securities to GEFAHI in exchange for the
assets that the company acquired and the liabilities that the company
assumed in connection with the corporate reorganization; and
- the issuance and sale of $1.9 billion of senior notes and $500 million
of commercial paper and the application of the proceeds therefrom.
If the unaudited pro forma financial information for 2004 had been
adjusted to give effect to these transactions as if each had occurred as of
January 1, 2003, rather than January 1, 2004, then full year pro forma
revenues would have been approximately $90 million higher, pro forma benefits
and expenses would have been approximately $77 million higher and pro forma
net earnings from continuing operations would have been approximately $8
million higher.
The unaudited pro forma financial information is based upon available
information and assumptions that the company believes are reasonable. The
unaudited pro forma financial information is for illustrative and
informational purposes only and is not intended to represent or be indicative
of what the company's financial condition or results of operations would have
been had the transactions described above occurred on the dates indicated, nor
what they may be in the future.
Use of Non-GAAP Measures
This press release includes the non-GAAP financial measure entitled "net
operating earnings." The company defines net operating earnings as pro forma
net earnings from continuing operations, excluding pro forma after-tax net
realized investment gains and losses (which can fluctuate significantly from
period to period), changes in accounting principles and non-recurring,
infrequent or unusual items. There were no non-recurring, infrequent or
unusual items excluded from pro forma net operating earnings for the periods
presented in this press release other than a $68 million IPO-related net tax
benefit recorded during the fourth quarter of 2004 and a $25 million after-tax
gain related to our waiver of contractual rights under an outsourcing services
agreement with GE's global business processing operation, 60% of which was
sold in the fourth quarter of 2004.
Management believes that analysis of net operating earnings enhances
understanding and comparability of performance by highlighting underlying
business activity and profitability drivers. However, net operating earnings
should not be viewed as a substitute for GAAP net earnings. In addition, the
company's definition of net operating earnings may differ from the definitions
used by other companies. The table at the end of this press release provides a
reconciliation of pro forma net operating earnings (as defined above) to
historical and pro forma net earnings.
Due to the unpredictable nature of the items excluded from the company's
definition of net operating earnings, the company is unable to reconcile its
outlook for net operating earnings to net earnings from continuing operations
presented in accordance with GAAP.
This press release also includes the non-GAAP financial measure entitled
"operating ROE." The company defines operating ROE as pro forma net operating
earnings divided by average pro forma stockholders' interest, excluding
accumulated non-owner changes in average stockholders' interest (commonly
referred to as accumulated other comprehensive income (AOCI)). Management
believes that analysis of operating ROE enhances understanding of the
efficiency with which the company deploys its capital. However, operating ROE
as defined by the company should not be viewed as a substitute for GAAP net
earnings divided by average stockholders' interest. The company's operating
ROE for 2004 is presented on a basis consistent with the other pro forma
financial information presented elsewhere in this press release. The table at
the end of this press release provides a reconciliation of the 2004 operating
ROE (as defined above) to 2004 GAAP net earnings divided by average
stockholders' interest. Due to the unpredictable nature of net operating
earnings and average stockholders' interest excluding AOCI, the company is
unable to reconcile its outlook for operating ROE to GAAP net earnings divided
by average stockholders' interest.
All net realized investment gains (losses) are reflected in the Corporate
and Other Segment and are not reflected in the results of any of the company's
other segments. As a result, the segment results contained in this press
release are presented on a net operating earnings basis, which is the same as
net earnings under GAAP for all segments, except Corporate and Other Segment.
For a reconciliation of net operating earnings for Corporate and Other Segment
to net earnings presented in accordance with GAAP, see the table at the end of
this press release. The term "net operating loss" as used in this press
release is also a non-GAAP financial measure and has an analogous meaning to
"net operating earnings."
Definition of Sales
The term "sales" as used in this press release means (1) annualized first-
year premiums for term life insurance, long-term care insurance, and group
life and health insurance; (2) new premiums/deposits for universal life
insurance, spread-based and variable products; (3) new deposits for managed
assets; (4) written premiums gross of reinsurance and cancellations for PPI;
and (5) new insurance written for mortgage insurance, which in each case
reflect the amount of business the company generated during each period
presented. Sales do not include renewal premiums on policies or contracts
written during prior periods. The company considers annualized first-year
premiums, deposits, written premiums and new insurance written 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.
This operating measure enables 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, including the following:
- Risks relating to the company's businesses, including interest rate
fluctuations, downturns and volatility in equity markets, defaults in
portfolio securities, downgrades in the company's financial strength and
credit ratings, unexpected changes in mortality and morbidity rates,
accelerated amortization of deferred acquisition costs and present value
of future profits, impairment of the value of goodwill, decreases in the
volume of mortgage originations, increases in mortgage insurance
cancellations, increases in the use of captive reinsurance in the
mortgage insurance market, the influence of large mortgage lenders and
investors, foreign exchange rate fluctuations, insufficiency of
reserves, legal constraints on dividend distributions by subsidiaries,
illiquid investments, competition, inability to attract or retain
independent sales intermediaries and dedicated sales specialists,
defaults by counterparties, regulatory restrictions on the company's
operations, changes in applicable laws and regulations, legal or
regulatory actions or investigations, political or economic instability
and the threat of terrorism; and
- Risks relating to the company's separation from GE, including the loss
of benefits associated with GE's brand and reputation, the company's
need to establish the new Genworth brand identity quickly and
effectively, the company's inability to present financial information in
SEC filings that accurately represents the results the company would
have achieved as a stand-alone company, the possibility that the company
will not be able to replace services previously provided by GE on
comparable terms, uncertainty of amounts and timing of payments that the
company has agreed to make to GE under the company's tax matters
agreement and other matters relating to that agreement, potential
conflicts of interest with GE and GE's engaging in the same type of
business as the company does in the future.
The company undertakes no obligation to publicly update any forward-
looking statement, whether as a result of new information, future developments
or otherwise.
About Genworth Financial
Genworth is a leading insurance holding company, serving the lifestyle
protection, retirement income, investment and mortgage insurance needs of more
than 15 million customers, and has operations in 20 countries, including the
U.S., Canada, Australia, the U.K. and more than a dozen other European
countries. For more information, visit http://www.genworth.com.
COMBINED STATEMENT OF EARNINGS INFORMATION
Three months ended December 31,
(Amounts in millions, except per Historical Pro forma
share data) 2004 2003 2004 2003
(Unaudited)
Revenues:
Premiums $1,606 $1,766 $1,606 $1,651
Net investment income 825 1,031 825 757
Net realized investment gains
(losses) (1) 39 (1) 49
Policy fees and other income 212 230 212 134
Total revenues 2,642 3,066 2,642 2,591
Benefits and expenses:
Benefits and other changes in
policy reserves 1,129 1,464 1,129 1,184
Interest credited 344 402 344 335
Underwriting, acquisition and
insurance expenses, net of
deferrals 429 427 429 352
Amortization of deferred
acquisition costs and
intangibles 262 416 262 359
Interest expense 63 46 63 61
Total benefits and expenses 2,227 2,755 2,227 2,291
Earnings from continuing operations
before income taxes and
accounting changes 415 311 415 300
Provision for income taxes 69 91 69 89
Net earnings from continuing
operations 346 220 $346 $211
Loss on sale of discontinued
operations, net of taxes - (7)
Net earnings $346 $213
Net earnings per share:
Basic $0.71 $0.44
Diluted $0.70 $0.44
Shares outstanding
Basic 489.6 489.5
Diluted 492.4 489.5
COMBINED STATEMENT OF EARNINGS INFORMATION
Twelve months ended December 31,
(Amounts in millions, except per Historical Pro forma
share data) 2004 2003 2004 2003
(Unaudited)
Revenues:
Premiums $6,559 $6,707 $6,388 $6,256
Net investment income 3,648 4,051 3,160 2,964
Net realized investment gains 26 10 23 38
Policy fees and other income 824 915 664 529
Total revenues 11,057 11,683 10,235 9,787
Benefits and expenses:
Benefits and other changes in
policy reserves 4,804 5,270 4,340 4,229
Interest credited 1,432 1,624 1,319 1,358
Underwriting, acquisition and
insurance expenses, net of
deferrals 1,812 1,916 1,657 1,583
Amortization of deferred
acquisition costs and
intangibles 1,154 1,351 1,052 1,149
Interest expense 217 140 243 205
Total benefits and expenses 9,419 10,301 8,611 8,524
Earnings from continuing operations
before income taxes and
accounting changes 1,638 1,382 1,624 1,263
Provision for income taxes 493 413 494 371
Net earnings from continuing
operations before accounting
changes 1,145 969 $1,130 $892
Net earnings from discontinued
operations, net of taxes - 186
Gain (loss) on sale of discontinued
operations, net of taxes 7 (74)
Net earnings before accounting change 1,152 1,081
Cumulative effect of accounting
changes, net of taxes 5 -
Net earnings $1,157 $1,081
Net earnings per share:
Basic $2.36 $2.21
Diluted $2.36 $2.21
Shares outstanding
Basic 489.5 489.5
Diluted 490.5 489.5
PRO FORMA FINANCIAL INFORMATION
Three months ended December 31, 2004
Pro
forma Pro
adjust Pro forma
ments forma adjust
- adjust ments
exclud ments -
ed - capital
assets reinsu struct
and rance ure
liabil transa and
ities ctions other Pro
(Dollar amounts in millions) Historical (a) (b) (c) forma
(Unaudited)
Revenues:
Premiums $1,606 $- $- $- $1,606
Net investment income 825 - - - 825
Net realized investment (losses) (1) - - - (1)
Policy fees and other income 212 - - - 212
Total revenues 2,642 - - - 2,642
Benefits and expenses:
Benefits and other changes in
policy reserves 1,129 - - - 1,129
Interest credited 344 - - - 344
Underwriting, acquisition and
insurance expenses, net of
deferrals 429 - - - 429
Amortization of deferred
acquisition costs and
intangibles 262 - - - 262
Interest expense 63 - - - 63
Total benefits and expenses 2,227 - - - 2,227
Earnings from continuing operations
before income taxes 415 - - - 415
Provision for income taxes 69 - - - 69
Net earnings from continuing
operations $346 $- $- $- $346
Three months ended December 31, 2003
Pro
forma Pro
adjust Pro forma
ments forma adjust
- adjust ments
exclud ments -
ed - capital
assets reinsu struct
and rance ure
liabil transa and
ities ctions other Pro
(Dollar amounts in millions) Historical (a) (b) (c) forma
(Unaudited)
Revenues:
Premiums $1,766 $(57) $(58) $- $1,651
Net investment income 1,031 (15) (259) - 757
Net realized investment gains
(losses) 39 (1) 11 - 49
Policy fees and other income 230 (65) (31) - 134
Total revenues 3,066 (138) (337) - 2,591
Benefits and expenses:
Benefits and other changes in
policy reserves 1,464 (60) (220) - 1,184
Interest credited 402 - (67) - 335
Underwriting, acquisition and
insurance expenses, net
of deferrals 427 (48) (27) - 352
Amortization of deferred
acquisition costs and
intangibles 416 (29) (28) - 359
Interest expense 46 - - 15 61
Total benefits and expenses 2,755 (137) (342) 15 2,291
Earnings from continuing operations
before income taxes 311 (1) 5 (15) 300
Provision for income taxes 91 2 1 (5) 89
Net earnings from continuing
operations $220 $(3) $4 $(10) $211
Note: For a discussion of notes (a), (b), and (c) to these tables see
Notes to Pro Forma Financial Information and Reconciliation Tables.
PRO FORMA FINANCIAL INFORMATION
Twelve months ended December 31, 2004
Pro
forma Pro
adjust Pro forma
ments forma adjust
- adjust ments
exclud ments -
ed - capital
assets reinsu struct
and rance ure
liabil transa and
ities ctions other Pro
(Dollar amounts in millions) Historical (a) (b) (c) forma
(Unaudited)
Revenues:
Premiums $6,559 $(80) $(91) $- $6,388
Net investment income 3,648 (28) (460) - 3,160
Net realized investment gains
(losses) 26 (3) - - 23
Policy fees and other income 824 (103) (57) - 664
Total revenues 11,057 (214) (608) - 10,235
Benefits and expenses:
Benefits and other changes in
policy reserves 4,804 (71) (393) - 4,340
Interest credited 1,432 - (113) - 1,319
Underwriting, acquisition and
insurance expenses, net
of deferrals 1,812 (117) (38) - 1,657
Amortization of deferred
acquisition costs and
intangibles 1,154 (46) (56) - 1,052
Interest expense 217 - - 26 243
Total benefits and expenses 9,419 (234) (600) 26 8,611
Earnings from continuing operations
before income taxes 1,638 20 (8) (26) 1,624
Provision for income taxes 493 13 (4) (8) 494
Net earnings from continuing
operations $1,145 $7 $(4) $(18) $1,130
Twelve months ended December 31, 2003
Pro
forma Pro
adjust Pro forma
ments forma adjust
- adjust ments
exclud ments -
ed - capital
assets reinsu struct
and rance ure
liabil transa and
ities ctions other Pro
(Dollar amounts in millions) Historical (a) (b) (c) forma
(Unaudited)
Revenues:
Premiums $6,707 $(244) $(207) $- $6,256
Net investment income 4,051 (70) (1,017) - 2,964
Net realized investment gains 10 6 22 - 38
Policy fees and other income 915 (260) (126) - 529
Total revenues 11,683 (568) (1,328) - 9,787
Benefits and expenses:
Benefits and other changes in
policy reserves 5,270 (196) (845) - 4,229
Interest credited 1,624 - (266) - 1,358
Underwriting, acquisition and
insurance expenses, net
of deferrals 1,916 (248) (85) - 1,583
Amortization of deferred
acquisition costs and
intangibles 1,351 (105) (97) - 1,149
Interest expense 140 - - 65 205
Total benefits and expenses 10,301 (549) (1,293) 65 8,524
Earnings from continuing operations
before income taxes 1,382 (19) (35) (65) 1,263
Provision for income taxes 413 (4) (15) (23) 371
Net earnings from continuing
operations $969 $(15) $(20) $(42) $892
Note: For a discussion of notes (a), (b), and (c) to these tables see
Notes to Pro Forma Financial Information and Reconciliation Tables.
RECONCILIATION OF COMPANY NET EARNINGS TO PRO FORMA
NET OPERATING EARNINGS
Three months ended Twelve months ended
December 31, December 31,
(Amounts in millions, except per 2004 2003 2004 2003
share data) (Unaudited)
Net earnings $346 $213 $1,157 $1,081
Net earnings from discontinued
operations, net of taxes - - - (186)
(Gain) loss on sale of discontinued
operations, net of taxes - 7 (7) 74
Cumulative effect of accounting
change, net of taxes - - (5) -
Net earnings from continuing
operations 346 220 1,145 969
Excluded assets and liabilities (a) - (3) 7 (15)
Reinsurance transactions (b) - 4 (4) (20)
Capital structure and other (c) - (10) (18) (42)
Pro forma net earnings from
continuing operations 346 211 1,130 892
Pro forma net realized (gains) losses
on investments, net of taxes 1 (32) (15) (25)
Net tax benefit related to initial
public offering (68) - (46) -
Gain on outsourcing services
agreement, net of taxes (25) - (25) -
Pro forma net operating earnings $254 $179 $1,044 $867
Net earnings per share
Basic $0.71 $0.44 $2.36 $2.21
Diluted $0.70 $0.44 $2.36 $2.21
Net earnings from continuing
operations per share
Basic $0.71 $0.45 $2.34 $1.98
Diluted $0.70 $0.45 $2.33 $1.98
Pro forma net earnings from
continuing operations per share
Basic $0.71 $0.43 $2.31 $1.82
Diluted $0.70 $0.43 $2.30 $1.82
Pro forma net operating earnings per
share
Basic $0.52 $0.37 $2.13 $1.77
Diluted $0.52 $0.37 $2.13 $1.77
Shares outstanding
Basic 489.6 489.5 489.5 489.5
Diluted 492.4 489.5 490.5 489.5
RECONCILIATION OF CORPORATE AND OTHER SEGMENT NET EARNINGS (LOSS)
TO PRO FORMA NET OPERATING LOSS
Three months ended Twelve months ended
December 31, December 31,
(Dollar amounts in millions) 2004 2003 2004 2003
(Unaudited)
Segment net earnings (loss) $64 $24 $52 $(54)
Excluded assets and liabilities (a) - (3) (5) (2)
Reinsurance transactions (b) - 15 - 47
Capital structure and other (c) - (10) (18) (42)
Pro forma segment net earnings (loss) 64 26 29 (51)
Pro forma net realized (gains) losses
on investments, net of taxes 1 (32) (15) (25)
Net tax benefit related to initial
public offering (68) - (46) -
Gain on outsourcing services
agreement, net of taxes (25) - (25) -
Pro forma net operating loss $(28) $(6) $(57) $(76)
RECONCILIATION OF OPERATING ROE
(Amounts in millions, except ROE)
GAAP Basis
Total stockholders' equity as of December 31, 2004 $12,866
Less accumulated nonowner changes in stockholders'
equity (AOCI) as of December 31, 2004 1,609
Total stockholders' equity, excluding AOCI as of
December 31, 2004 (I) 11,257
Total stockholders' equity as of December 31, 2003 15,800
AOCI as of December 31, 2003 1,672
Total stockholders' equity, excluding AOCI as
of December 31, 2003 (II) 14,128
Total (I+II) 25,385
w 2
Average stockholders' equity, excluding AOCI $12,693
2004 net earnings $1,157
ROE (net earnings divided by average stockholders'
equity, excluding AOCI) 9.1%
GAAP Basis, As Adjusted - Operating ROE
Total stockholders' equity, excluding AOCI as
of December 31, 2004 $11,257
Adjusted stockholders' equity, excluding AOCI
as of December 31,2003 (see table below for
reconciliation) 9,956
Total 21,213
w 2
Average adjusted stockholders' equity, excluding AOCI $10,607
2004 pro forma net operating earnings
(see page 14 for reconciliation) $1,044
Operating ROE (pro forma net operating earnings
divided by average adjusted stockholders'
equity, excluding AOCI) 9.8%
RECONCILIATION OF COMPANY TOTAL STOCKHOLDERS' EQUITY, EXCLUDING AOCI
(Amounts in millions)
As of
December 31,
2003
Total stockholders' equity $15,800
AOCI 1,672
Total stockholders' equity, excluding AOCI 14,128
Excluded assets and liabilities (a) 673
Reinsurance transactions (b) (1,434)
Capital structure and other (c) (3,411)
Adjusted stockholders' equity, excluding AOCI $9,956
Note: For a discussion of notes (a), (b), and (c) to these tables see
Notes to Pro Forma Financial Information and Reconciliation Tables.
Notes to Pro Forma Financial Information and Reconciliation Tables
(a) Reflects adjustments to exclude amounts included in the company's
historical combined earnings relating to (1) certain businesses (formerly
reported in the company's Affinity Segment) and certain investment
partnerships, which in each case were not transferred to the company, and (2)
net realized investment (gains) losses and related tax benefit arising from
sales of Affinity segment assets that were reflected in the company's
Corporate and Other Segment.In addition, related to the statement of financial position as of December
31, 2003, reflects adjustments to exclude $1,691 million of commercial paper
and all related impacts of derivative contracts hedging the commercial paper
cash flows, $548 million of short-term borrowings from GE Capital and
intercompany balances that were not transferred to the company.
(b) Reflects adjustments to record the effects of the reinsurance
transactions the company entered into with, and the related contribution the
company made to, UFLIC, an indirect subsidiary of GE. As part of these
transactions, the company ceded to UFLIC all of its in-force structured
settlement contracts, substantially all of its in-force variable annuity
contracts, and a block of long-term care insurance policies that it reinsured
from Travelers in 2000, and it assumed from UFLIC a block of Medicare
supplement insurance, all effective as of January 1, 2004. The unaudited pro
forma earnings information for 2003 gives effect to the reinsurance
transactions as if each occurred as of January 1, 2003 and excludes the
effects of all ceded reinsured contracts that were issued before January 1,
2003. The unaudited pro forma earnings information for 2004 gives effect to
the reinsurance transactions as if each had occurred as of January 1, 2004 and
excludes the effects of all ceded reinsured contracts that were issued before
January 1, 2004. The adjusted stockholders' equity information gives effect
to the reinsurance transactions as if each had occurred as of December 31,
2003. The company has continued to sell variable annuities and structured
settlements after completion of the reinsurance transactions and is retaining
that business for its own account, subject to third party reinsurance in the
ordinary course of business.As a result, the company's unaudited pro forma combined statement of
earnings reflects premiums and fees from these products issued after January
1, 2003 (in the case of pro forma information for 2003), even though variable
annuities and structured settlements issued during such year are included in
the blocks of policies reinsured to UFLIC. The company's pro forma combined
statements of earnings for the years ended December 31, 2003 and 2004 exclude
the impact of the entire block of long-term care insurance policies that the
company ceded to UFLIC as the company did not issue any new policies for this
block in 2003 or 2004, and the company will not issue any in the future.
Under the reinsurance transactions, the company receives an expense
allowance to reimburse it for costs it incurs to service the reinsured blocks.
Actual costs and expense allowance amounts will be determined by expense
studies to be conducted periodically. The pro forma adjustments have been
prepared assuming that actual costs incurred during the pro forma periods, as
determined under the company's historical cost structure and allocation
methods, were reimbursed by an expense allowance.
In addition to investment assets transferred to UFLIC in exchange for a
reinsurance recoverable asset from UFLIC, concurrently, the company
contributed $1.836 billion of capital to UFLIC, which primarily represented
the excess statutory capital in the company's insurance subsidiaries after
giving effect to the reinsurance transactions. As a significant portion of
the assets transferred and contributed were not owned for the entire period,
the pro forma earnings adjustments to reduce net investment income and net
realized investment gains were based upon a proportional allocation of
investment income from the investment assets historically identified (1) as
supporting the blocks of business reinsured for the reinsurance, and (2) as
representing surplus of subsidiaries providing assets to be contributed to
UFLIC for the contribution.
(c) Reflects adjustments for changes in the company's capitalization to
exclude the impact of commercial paper, short-term borrowings from GE Capital
and derivatives that were not transferred to the company in connection with
the corporate reorganization and to include the impact of the issuance of $600
million of the company's 6.00% Equity Units and $100 million of the company's
5.25% mandatory redeemable Series A Cumulative Preferred Stock, both of which
were completed on May 28, 2004, the issuance of 3, 5, 10 and 30 year notes
totaling $1.9 billion which was completed June 15, 2004, and the issuance of
$500 million of commercial paper which was completed June 14, 2004, as well as
interest expense related to the accretion of the company's obligation to GE
under the Tax Matters Agreement and the tax impacts resulting from these
changes in the company's capitalization.In addition, adjusted stockholders' equity as of December 31, 2003
reflects adjustments to include $550 million Contingent Note issued to GEFAHI,
the company's first-year cost of stock option and stock appreciation rights to
management and employees and cost relating to conversion of certain existing
stock-based compensation awards, and the company's obligation to GE and other
effects under the Tax Matters Agreement, as well as to reflect capital
contributions received from GE and dividends paid to GE in 2004.
Source:
Genworth Financial, Inc.
