Genworth Financial (GNW) Reports 2Q13 Results

Genworth Financial (GNW) reported 2Q13 earnings on July 30, 2013 [Source]. The company continues to make progress on its turnaround and our investment thesis remains on track.

The company reported 2Q13 net income increased 86% to $141 million or $0.28/diluted share, compared with net income of $76 million or $0.16/diluted share in the 2Q12. This was also a sequential increase of 33% over the 1Q13 results. Net operating income that excludes investment results was $133 million or $0.27/diluted share for 2Q13 compared with $67 million or $0.14/diluted share in the 2Q12, a 93% increase.

Improved results in the operating performance of the business especially in the two areas of previous concern to investors; Mortgage Insurance and Long Term Care Insurance continue.

Mortgage Insurance Highlights:

  • The U.S. mortgage insurance business posted its second quarterly profit since 2007 with net operating income of $13 million compared $21 million in the 1Q13 and a net operating loss of $25 million in the prior year.
  • New U.S. mortgage insurance written increased 34% over the 1Q13 and 75% over the prior year to $6.3 billion, reflecting increases in both home refinance and home purchases in the improving housing market.
  • Total delinquencies decreased 7% from 1Q13 and 23% from the prior year reflecting further eliminations of delinquencies from the 2005-2008 housing crises years.
  • The Australian mortgage insurance business reported operating earnings of $55 million up from $46 million in the 1Q13 and up from $44 million in the prior year. In Australia new insurance written was up 13 percent from 1Q13 and up 7% year over year.
  • The company continues to work toward the IPO of at least 40% of the Australian business late in 2013 or early 2014 when market conditions improve.
  • Canada mortgage insurance operating earnings were $43 million up from $42 million 1Q13 and up from $41 million in the prior year. New insurance written was up 45% over 1Q13 and down 16% year over year. In addition during 2Q13 the company completed $6.4 billion of bulk transactions consisting of low loan-to-value prime loans in Canada.

Long Term Care Highlights:

  • Long term care insurance net operating income was $26 million compared to $20 million in the 1Q13 and $14 million in the prior year for an increase of 30% and 86% respectively.
  • Long term care results in 1Q13 included $6 million favorable actuarial reserve and other adjustments. The 2Q13 results were improved versus 1Q13 reflect the impact of higher premiums and reduced benefits from the most recent rate action of $8 million versus 1Q13.
  • Individual long term care insurance sales increased from 1Q13 to $38 million reflecting product actions taken in the first half of 2013 and these changes are a temporary benefit as demand increased prior to pricing and product changes going into effect.

Restructuring:

  • The March 2013 agreement to sell the wealth management business results in this business placed in discontinued operations and all prior periods re-presented. During 2Q13 the company earned $6 million of income from discontinued operations and expects to close in the third quarter of 2013. It may record an additional after-tax loss of up to $10 million at that time.
  • In June, 2013, the companies announced plans to eliminate 400 positions and reduce information technology and program expense. Approximately $80 to $90 million in annual pre-tax expense savings primarily related to these actions is anticipated. An after-tax non-operating charge of $13 million was recorded in 2Q13 reflecting costs for these reductions.

GNW’s holding company had approximately $1 billion in cash and liquid securities at the end of 2Q13 showing an increase of approximately $50 million sequentially. The holding company received $270 million in distributions from the operating companies partially offset by the previously discussed $100 million contribution to Genworth Mortgage Insurance Corporation.

GNW Photo

Press Release [Source]

  • Genworth Financial Announces Second Quarter 2013 Results
  • Net Income Improved 86 Percent From Prior Year
  • Second Profitable Quarter In U.S. MI
  • $273 Million In Dividends Paid To Holding Company Including $100 Million Ordinary Dividend From U.S. Life Companies

Richmond, VA (July 30, 2013) – Genworth Financial, Inc. (NYSE: GNW) today reported results for the second quarter of 2013. The company reported net income1 of $141 million, or $0.28 per diluted share, compared with net income of $76 million, or $0.16 per diluted share, in the second quarter of 2012. Net operating income2 for the second quarter of 2013 was $133 million, or $0.27 per diluted share, compared with net operating income of $67 million, or $0.14 per diluted share, in the second quarter of 2012.

“We are beginning to see good results from our efforts to improve the operating performance of the businesses with strong performance in Global Mortgage Insurance, further progress on long term care insurance rate actions and execution of an expense reduction plan,” said Tom McInerney, President and CEO. “We continue to increase financial flexibility with an ordinary dividend from the U.S. life companies and consistent dividends from Global Mortgage Insurance. These are some of the important milestones in our plan to turn the company around.”

GNW 2Q13 Consolidated Income

Net investment gains, net of tax and other adjustments, were $15 million in the quarter compared to net investment losses of $18 million in the prior year. Total investment impairments, net of tax, were $4 million in the current quarter and $27 million in the prior year.

In March 2013, the company entered into an agreement to sell the wealth management business. Beginning in the first quarter of 2013, this business is being separately presented as discontinued operations and all prior periods herein have been re-presented. During the quarter, the company recognized $6 million of income from discontinued operations. The company expects the transaction to close in the third quarter of 2013, subject to customary closing conditions, including requisite regulatory approvals, and may record an additional after-tax loss of up to $10 million at that time. Assets under management as of June 30, 2013 for the wealth management business were $22.6 billion.

On June 6, 2013, the company announced an expense reduction plan as it continues to work on improving the operating performance of its businesses. This plan eliminated approximately 400 positions, including 150 open positions that will not be filled, and will reduce related information technology and program spend. When fully implemented, the company expects to realize approximately $80 to $90 million in annual pre-tax expense savings primarily related to these actions. Overall expense levels may vary for a variety of reasons, including changes in sales volume or other strategic actions the company may take. An after-tax non-operating charge of $13 million was recorded in the second quarter of 2013 reflecting severance, outplacement and other associated costs.

Net operating income (loss) results are summarized in the table below:

GNW 2Q13 NOI

Net operating income excludes net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, and other adjustments, net of taxes. A reconciliation of net operating income of segments and Corporate and Other activities to net income is included at the end of this press release.

Unless specifically noted in the discussion of results for the International Mortgage Insurance and International Protection segments, references to percentage changes exclude the impact of foreign exchange. Percentage changes, which include the impact of foreign exchange, are found in a table at the end of this press release. The impact of foreign exchange on net operating income in the second quarter of 2013 was an unfavorable impact of $2 million versus the prior quarter and prior year.

Bloomberg reported [Source] “Genworth Declines as Profit Misses Analysts’ Estimates”  Then went on to add; “Operating profit, which excludes some investment results, was 27 cents a share, Genworth said yesterday, 2 cents below the average estimate of 10 analyst surveyed by Bloomberg.” Bloomberg is a good business news source but it is interesting even a good source can find something negative from an earnings increase of 86% and a successful turnaround. It used to be that analysts were paid to accurately forecast a company’s earnings not the company paid to meet analyst estimates. Shouldn’t the headlines be; Analysts Salaries Decline as Forecast Misses? 🙂

Genworth trades at about a 40% discount to our $22/share estimate of intrinsic value [Source] and holds significant appreciation potential as it successfully works through the turnaround.

Long: GNW

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