Genworth Financial Announces Third Quarter 2019 Results

• Reached Agreement To Sell Genworth’s Majority Interest In Genworth MI Canada Inc. To Brookfield Business Partners L.P. With Approximately $1.8 Billion Expected Net Proceeds
• Merger Agreement With China Oceanwide Holdings Group Co., Ltd (Oceanwide) Extended To Not Later Than December 31, 2019
• U.S. Mortgage Insurance (MI) Adjusted Operating Income Of $137 Million With $18.9 Billion In New Insurance Written (NIW) And Continued Strong Loss Performance
• U.S. MI’s PMIERs¹ Sufficiency Ratio At 129 Percent, In Excess Of $850 Million Above Requirements
• $62 Million Capital Returned To The Holding Company In The Quarter From Canada And Australia MI
• Continued Progress With Long Term Care Insurance (LTC) In Force Rate Actions In Line With Plan
• Annual Review Of LTC Claim Reserves Completed With No Significant Adjustments.  Loss Recognition Testing And Cash Flow Testing Will Be Completed In The Fourth Quarter
• $250 Million Dividend From U.S. MI To The Holding Company Completed In October 2019

Genworth Financial, Inc. (NYSE: GNW) today reported results for the quarter ended September 30, 2019. The company reported net income² of $18 million, or $0.04 per diluted share, in the third quarter of 2019, compared with net income of $146 million, or $0.29 per diluted share, in the third quarter of 2018. The company reported adjusted operating income³ of $123 million, or $0.24 per diluted share, in the third quarter of 2019, compared with adjusted operating income of $99 million, or $0.20 per diluted share, in the third quarter of 2018.

With the pending sale of Genworth MI Canada Inc. (Genworth Canada), Canada MI segment results are reported as discontinued operations, and all prior periods have been re-presented accordingly. While the expected net proceeds amount exceeds the balance sheet carrying value of Genworth Canada, the company recorded an estimated after-tax loss of $164 million on the sale due to historical foreign currency translation adjustments in accumulated other comprehensive income that must be recognized upon sale. Including the estimated loss on sale, the company recognized a net loss from discontinued operations of $110 million⁴ in the quarter. 

Strategic Update

During and following the third quarter, Genworth and Oceanwide made progress towards closing their previously announced transaction.

On August 13, 2019, Genworth and Brookfield Business Partners L.P. (NYSE: BBU) (TSX: BBU.UN) (Brookfield Business Partners) announced an agreement for Brookfield Business Partners to purchase Genworth’s majority interest in Genworth Canada for CAD$48.86 per share, reflecting a total transaction value of approximately CAD$2.4 billion (the Canada Transaction). Genworth is selling its stake in Genworth Canada to facilitate the completion of the acquisition of Genworth by Oceanwide (the Oceanwide Transaction). Genworth also believes that the sale of its stake in Genworth Canada would allow it to increase its financial flexibility, whether or not the Oceanwide Transaction is consummated. Oceanwide consented to the Canada Transaction, and in connection with the announcement, Genworth and Oceanwide entered into the 12th Waiver and Agreement extending the merger agreement deadline to not later than December 31, 2019.

On October 22, 2019, Genworth announced it received feedback from Canadian regulators with respect to the Canada Transaction. The Canadian regulators remain focused on national security matters, including data protection and, in particular, the continued protection of Canadian customer data during the period after the closing of the Canada Transaction when Genworth will be providing certain transition services to Genworth Canada before it transitions away from Genworth’s information technology platforms. Genworth and Brookfield Business Partners are working to assure the regulators that Canadian customers’ information has appropriate protections.

Genworth and Brookfield Business Partners have received all other required approvals to complete the sale of Genworth Canada and are targeting a closing of the Canada Transaction by the end of 2019.

The Canada Transaction value of CAD$2.4 billion is expected to result in approximately USD$1.8 billion of net proceeds. Proceeds received at closing will be reduced by special dividends received from Genworth Canada during the period between signing and closing. Of the net proceeds, approximately USD$500 million will be paid to Genworth’s primary U.S. MI insurance subsidiary based on its ownership share of Genworth Canada. In addition, approximately USD$445 million of proceeds will be used to repay Genworth’s term loan issued March 7, 2018 as required under the terms of the loan agreement.

Previously, Oceanwide and Genworth had received approvals from all necessary U.S. regulators with respect to the Oceanwide Transaction. The parties recently provided supplemental information to certain regulators to reflect the Genworth Canada disposition and the passage of time since their prior approval of the Oceanwide Transaction. The approval of the New York Department of Financial Services (NYDFS) expired earlier in the year and the parties are in discussion with the NYDFS to secure an appropriate reapproval. In addition, Fannie Mae and Freddie Mac will need to reapprove the Oceanwide Transaction. Other regulators are still reviewing the supplemental information to determine whether it has any impact on their existing approvals. Following the receipt of all required U.S. regulatory approvals, Oceanwide will also need to receive clearance in China for the currency conversion and transfer of funds.

Genworth and Oceanwide remain 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.

“Genworth has significant expertise in implementing security protocols that satisfy data security concerns as a result of the successful implementation of our Enhanced Data Security Program,” said Tom McInerney, president and CEO of Genworth Financial. “We are confident in our ability to satisfy the Canadian government’s requirements in order to move forward with the sale of Genworth Canada, which is the best path forward to ultimately close the transaction with Oceanwide. The Oceanwide Transaction continues to represent the best value for Genworth’s shareholders.”

LU Zhiqiang, chairman of Oceanwide, added: “Oceanwide remains committed to the transaction with Genworth, as well as the $1.5 billion contribution to Genworth over time following the consummation of the transaction, subject to the receipt of the required regulatory approvals and clearances. We look forward to closing the transaction as soon as possible.”

Net investment gains, net of taxes and other adjustments, increased net income by $5 million in the quarter, with net trading gains and gains on limited partnerships offset by derivative losses. Net income in the third quarter of 2018 was reduced by net investment losses, net of taxes and other adjustments, of $11 million.

Net investment income was $816 million in the quarter, flat to the prior quarter and up from $780 million in the prior year. Net investment income increased versus the prior year primarily due to higher limited partnership income, favorable prepayment speed adjustments on mortgage-backed securities, and continued growth in invested assets. The reported yield and the core yield³ for the quarter were 4.93 percent and 4.80 percent, respectively, compared to 4.95 percent and 4.86 percent, respectively, in the prior quarter.

Genworth’s effective tax rate on income from continuing operations was approximately 20 percent, bringing the year-to-date effective tax rate to approximately 27 percent. The effective tax rate for the quarter was impacted by tax timing adjustments and lower taxes on foreign operations. 

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

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 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. MI reported adjusted operating income of $137 million, compared with $147 million in the prior quarter and $118 million in the prior year. U.S. MI’s flow insurance in force increased 14 percent versus the prior year from strong NIW, driving continued growth in earned premiums, which exceeded $215 million. The loss ratio in the current quarter was 11 percent, up 11 points sequentially and flat to the prior year. Prior quarter results included a favorable $10 million pre-tax reserve adjustment which reduced that period’s loss ratio by five points. 

U.S. MI achieved $18.9 billion in flow NIW in the quarter, up 20 percent from the prior quarter and 83 percent versus the prior year driven primarily by a larger estimated mortgage insurance market from higher refinance originations as rates declined further during the quarter. The increase in flow NIW versus the prior year was also driven by an estimated increase in market share with the market adoption of the company’s proprietary risk-based pricing engine, GenRATE, and selective participation in forward commitment transactions.

Australia MI reported adjusted operating income of $12 million versus $13 million in the prior quarter and $17 million in the prior year. Australia MI flow NIW increased 27 percent sequentially and 32 percent versus the prior year, primarily due to higher mortgage origination volume from certain key customers. The loss ratio in the quarter was 36 percent, up two points sequentially and up five points from the prior year primarily due to lower levels of earned premium from portfolio seasoning.

Long Term Care Insurance

Long term care insurance reported adjusted operating income of $21 million, compared with adjusted operating income of $37 million in the prior quarter and an adjusted operating loss of $24 million in the prior year. Compared to the prior quarter and prior year, results reflected higher earnings from in force rate actions, partially offset by growth in new claims. Compared to the prior quarter, results also reflected seasonally lower claim terminations.

The company completed its annual review of LTC claim reserves in the third quarter. The review concluded with no significant adjustments to its assumptions and methodologies related to LTC claim reserves, as experience in aggregate was in line with expectations. In the fourth quarter of 2019, the company will perform loss recognition and cash flow testing for all of its U.S. life insurance products. Fourth quarter annual testing will include review of assumptions, including incidence, benefit utilization, mortality, interest rates and in force rate actions, among other assumptions, and incorporate emerging claim experience in newer LTC blocks. Results of the annual testing as well as assumption reviews will be part of fourth quarter earnings disclosures.

Life Insurance

Life insurance reported an adjusted operating loss of $25 million, compared with adjusted operating income of $10 million in the prior quarter and an adjusted operating loss of $2 million in the prior year. Results versus the prior quarter and prior year reflected higher amortization of deferred acquisition costs (DAC) primarily associated with higher lapses from large 20-year level-premium term life insurance blocks entering their post-level premium periods, partially offset by lower mortality. Current quarter results included an unfavorable after-tax adjustment of $10 million for higher ceded reinsurance rates. Results in the prior quarter included a reinsurance correction and an adjustment for higher ceded reinsurance rates resulting in a net favorable after-tax impact of $17 million.

Fixed Annuities

Fixed annuities reported adjusted operating income of $3 million, compared with $19 million in the prior quarter and $23 million in the prior year. Results included unfavorable charges of $13 million after-tax from loss recognition testing on the single premium immediate annuity block due to lower interest rates versus $4 million in the prior quarter. Results versus the prior quarter and prior year reflected lower net spreads.  Results versus the prior quarter and prior year also reflected higher reserves in fixed indexed annuities due to the decline in interest rates.

Runoff

Runoff reported adjusted operating income of $10 million, compared with $9 million in the prior quarter and $14 million in the prior year. Results in the current quarter reflected unfavorable impacts in the company’s variable annuity business from less favorable equity market performance and lower interest rates compared to the prior quarter and prior year, with lower mortality relative to the prior quarter.

Corporate And Other

Corporate and Other reported an adjusted operating loss of $35 million, compared with $57 million in the prior quarter and $47 million in the prior year. Results in the current quarter reflected favorable tax timing adjustments and lower expenses relative to the prior quarter and prior year.

Capital & Liquidity

Genworth maintains the following capital positions in its operating subsidiaries:

Key Points

• U.S. MI’s PMIERs sufficiency ratio is estimated to be 129 percent, in excess of $850 million above requirements. Capital sufficiency increased in the quarter from continued earnings as well as from the execution of an excess of loss reinsurance transaction during the quarter;
• Australia MI’s PCA ratio is estimated to be 198 percent, above the company’s target operating range of 132 to 144 percent. The ratio decreased in the quarter driven primarily by lower available capital from dividends paid in the quarter;
• The U.S. Life insurance companies’ consolidated RBC ratio is estimated to be approximately 200 percent, up from 191 percent in the prior quarter, as in force statutory earnings more than offset increases in required capital primarily in variable annuities from lower interest rates and growth of new claims in LTC;
• The holding company ended the quarter with $366 million of cash and liquid assets, which is below the company’s target of two times expected annual debt interest payments excluding restricted cash and assets. In fourth quarter results, holding company cash will reflect a $250 million ordinary dividend from U.S. MI and a $36 million special dividend from Canada MI, both of which were paid in October 2019.

About Genworth Financial 

Genworth Financial, Inc. (NYSE: GNW) is a Fortune 500 insurance holding company committed to helping families achieve the dream of homeownership and address the financial challenges of aging through its leadership positions in mortgage insurance and long term care insurance. Headquartered in Richmond, Virginia, Genworth traces its roots back to 1871 and became a public company in 2004. For more information, visit genworth.com.

From time to time, Genworth releases important information via postings on its corporate website. Accordingly, investors and other interested parties are encouraged to enroll to receive automatic email alerts and Really Simple Syndication (RSS) feeds regarding new postings. Enrollment information is found under the “Investors” section of genworth.com. From time to time, Genworth’s publicly traded subsidiaries, Genworth MI Canada Inc. and Genworth Mortgage Insurance Australia Limited, separately release financial and other information about their operations. This information can be found at http://genworth.ca and http://www.genworth.com.au.

Conference Call And Financial Supplement Information

This press release and the third quarter 2019 financial supplement are now posted on the company’s website. Additional information regarding business results will be posted on the company’s website, http://investor.genworth.com, by 7:00 a.m. on October 30, 2019. Investors are encouraged to review these materials.

Genworth will conduct a conference call on October 30, 2019 at 8:00 a.m. (ET) to discuss business results and provide an update on strategic objectives, including the pending sale of Genworth Canada and pending transaction with Oceanwide.  Genworth’s October 30^th conference call will be accessible via telephone and the Internet. The dial-in number for the conference call is 888 208.1820 or 323 794.2110 (outside the U.S.); conference ID # 8212170. 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. 

A replay of the call will be available at 888 203.1112 or 719 457.0820 (outside the U.S.); conference ID # 8212170 through November 14, 2019. The webcast will also be archived on the company’s website for one year.

Use of Non-GAAP Measures

This press release includes the non-GAAP financial measures entitled “adjusted operating income (loss)” and “adjusted operating income (loss) per share.” Adjusted operating income (loss) per share is derived from adjusted operating income (loss). The chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss). The company defines adjusted operating income (loss) as 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 infrequent or unusual non-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. The company excludes net investment gains (losses) and infrequent or unusual non-operating items because the company does not consider them to be related to the operating performance of the company’s segments and Corporate and Other activities. A component of the company’s net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to the company’s discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from adjusted operating income (loss) because, in the company’s opinion, they are not indicative of overall operating trends. Infrequent or unusual non-operating items are also excluded from adjusted operating income (loss) 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 (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, the company believes that adjusted operating income (loss) and measures that are derived from or incorporate adjusted operating income (loss), including adjusted operating income (loss) per share on a basic and diluted basis, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses adjusted operating income (loss) as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from adjus

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