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Genworth Financial Announces Third Quarter 2015 Results

The following excerpt is from the company's SEC filing.

Net Operating Income Of $0.13 Per Share; Net Loss Per Share Of $0.57 Driven By Planned Life Block Sale

U.S. MI Enhanced PMIERs Compliance With Execution Of Third Reinsurance Transaction

On Track To Close Sale Of Lifestyle Protection Insurance Business By The End Of 2015

Life Block Sale Expected To Close In The First Quarter Of 2016

Aggregate LTC Claim Reserve Experience In Line With Expectations

Sequential Results Reflect Seasonally Higher Losses In Canada And U.S. Mortgage Insurance; Adverse Equity Markets And Higher Legal Accruals And Expenses In Corporate And Other Divisi on; And Net Favorable Mortality In U.S. Life Insurance Division

Richmond, VA (October 29, 2015) Genworth Financial, Inc. (NYSE: GNW) today reported results for the period ended September 30, 2015. The company reported a net loss

of $284 million, or $0.57 per diluted share, compared with a net loss of $844 million, or $1.70 per diluted share, in the third quarter of 2014. The net loss in the quarter includes an after-tax loss of $296 million, or $0.59 per diluted share, related to a write-off of deferred acquisition costs (DAC) from the previously announced life block sale. Net operating income

for the third quarter of 2015 was $64 million, or $0.13 per diluted share, compared with a net operating loss of $323 million, or $0.65 per diluted share, in the third quarter of 2014.

Strategic Update

As of September 30, 2015, the U.S. mortgage insurance (MI) business would be compliant with the private mortgage insurer eligibility requirements (PMIERs) capital requirements, with a prudent buffer, when including:

An excess of loss reinsurance transaction on its 2015 book of business which has been executed with a panel of reinsurers, and would be effective as of October 1, 2015, that is expected to provide approximately $225 million of PMIERs capital credit as of December 31, 2015. This transaction, which is pending approval from the government sponsored enterprises (GSEs), has similar terms and conditions as the two recent transactions approved by the GSEs.

An internal legal entity restructuring completed on October 1, 2015.

Unless otherwise stated, all references in this press release to net loss, net loss per share, book value, book value per share and stockholders equity should be read as net loss available to Genworths common stockholders, net loss available to Genworths common stockholders per share, book value available to Genworths common stockholders, book value available to Genworths common stockholders per share and stockholders equity available to Genworths common stockholders, respectively.

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.

The company has generated or expects to generate a total of approximately $525 million in PMIERs capital credit year-to-date from three reinsurance transactions covering the 2009 through 2015 books of business in addition to the intercompany sale of its ownership of affiliated preferred securities of approximately $200 million. The company will work to maintain a prudent level of capital in excess of the PMIERs capital requirements.

The company continues to make progress on the completion of the planned sale of its lifestyle protection insurance business. The transaction is expected to generate approximately $400 million in net proceeds and close by the end of 2015, subject to customary conditions, including requisite regulatory approvals.

In September 2015, the company announced it had agreed to sell certain blocks of its term life insurance to Protective Life Insurance Company which is expected to generate initial capital of approximately $100 to $150 million in aggregate to Genworth. The transaction is expected to utilize all of the net operating losses in the U.S. life insurance companies resulting in expected intercompany tax payments over time to the holding company and other entities for the use of tax benefits. The transaction is expected to close in the first quarter of 2016, subject to customary conditions, including requisite regulatory approvals.

In October 2015, the company announced it had entered into an agreement to sell its European mortgage insurance business to AmTrust Financial Services, Inc. that is expected to result in net proceeds of approximately $55 million. These proceeds will provide additional capital credit to Genworth Mortgage Insurance Corporation under PMIERs. Additionally, the company expects to record an after-tax GAAP loss of approximately $140 million related to the sale in the fourth quarter of 2015. The transaction is expected to close in the first quarter of 2016 and is subject to customary conditions, including requisite regulatory approvals.

The company has taken and will continue to take steps to bring cash expenses in line with near-term sales levels. The company now expects to achieve its annualized cash savings target of $100 million pre-tax or more in the first half of 2016.

Our Global Mortgage Insurance Division is performing well with strong loss ratios and U.S. MI made substantial progress towards PMIERs compliance. Long term care insurance remains challenged, but we continue to receive significant premium rate increases and claims experience remained in line with our expectations, said Tom McInerney, President and CEO. We are making progress on our strategic priorities and will continue to explore strategic options to accelerate our turnaround.

Consolidated Net Loss & Net Operating Income (Loss)

Three months ended September 30

(Unaudited)

(Amounts in millions, except per share)

% change

Net loss available to Genworths common stockholders

Net operating income (loss)

Weighted average diluted shares

Three months ended September 30

Book value per share

Book value per share, excluding accumulated other comprehensive income (loss)

Net investment losses, net of taxes and other adjustments, were $22 million in the quarter, compared to net investment gains of $4 million in the prior quarter and net investment losses of $10 million in the prior year. Total impairments, net of tax, were $6 million in the quarter, compared to none in the prior quarter and $4 million in the prior year.

Net investment income decreased to $783 million, compared to $793 million in the prior quarter primarily from lower limited partnership income. The reported yield for the current quarter was 4.46 percent. The core yield

was 4.39 percent, down from the prior quarter.

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

(Amounts in millions)

Corporate and Other Division

Total Net Operating Income (Loss)

Net operating income (loss) represents net operating income (loss) from continuing operations excluding 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 operating income (loss) of segments and Corporate and Other activities to net loss is included at the end of this press release.

Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of the loss from continuing operations for the three months ended September 30, 2015 and 2014, the company was required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the three months ended September 30, 2015 and 2014, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.3 million and 5.4 million, respectively, would have been antidilutive to the calculation. If the company had not incurred a loss from continuing operations for the three months ended September 30, 2015 and 2014, dilutive potential weighted-average common shares outstanding would have been 498.7 million and 502.0 million, respectively. Since it had net operating income for the three months ended September 30, 2015, the company used 498.7 million diluted weighted-average common shares outstanding in the calculation of diluted net operating income per common share.

Unless specifically noted in the discussion of results for the International Mortgage Insurance segment, references to percentage changes exclude the impact of translating foreign denominated activity into U.S. dollars (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 results in the third quarter of 2015 was an unfavorable $13 million versus the prior year.

Global Mortgage Insurance Division

Global Mortgage Insurance Division had net operating income of $91 million, compared with $110 million in the prior quarter and $85 million a year ago.

(Amounts in millions)

Australia

Other Countries

Total International Mortgage Insurance

Total Global Mortgage Insurance

(Amounts in billions)

Primary Flow

Canada Mortgage Insurance

Canada reported net operating income of $38 million versus $37 million in the prior quarter and $46 million in the prior year. The loss ratio in the quarter was 21 percent, up four points from the prior quarter driven by a seasonal increase in new delinquencies, net of cures, and flat compared to the prior year. Results included lower expenses versus the prior quarter and unfavorable foreign exchange versus the prior year of $7 million. Flow new insurance written (NIW) was up 26 percent

sequentially from a seasonally larger originations market and up 15 percent

year over year primarily from an increase in market penetration. In addition, the company completed several bulk transactions in the quarter of approximately $4.8 billion in total, consisting of low loan-to-value prime loans.

Percent change excludes the impact of foreign exchange.

Australia Mortgage Insurance

Australia reported net operating income of $21 million versus $29 million in the prior quarter and $48 million in the prior year. The loss ratio in the quarter was 29 percent, up one point sequentially and eight points from the prior year. Results in the quarter include actuarial updates to earned premiums and loss reserves which combined had a negligible impact on earnings, but did unfavorably impact the loss ratio by approximately seven points. New delinquencies were down 10 percent sequentially and cures were up 11 percent sequentially from normal seasonal variation, including improved performance in Queensland and Western Australia. Results versus the prior quarter were lower by $6 million from the companys further sell down of approximately 14 percent of its ownership in the Australia business in May 2015, less favorable tax benefits and unfavorable foreign exchange. Results versus the prior year were also impacted by less favorable tax benefits of $15 million, an unfavorable $8 million related to the further sell down in May 2015 and unfavorable foreign exchange of $6 million. Flow NIW was up two percent

sequentially and down two percent

year over year.

Other Countries Mortgage Insurance

Other Countries had a net operating loss of $5 million, flat to the prior quarter and down from a net operating loss of $7 million in the prior year.

U.S. Mortgage Insurance

U.S. MI net operating income was $37 million, compared with net operating income of $49 million in the prior quarter and a net operating loss of $2 million in the prior year. The prior year included an unfavorable impact of $34 million related to loss mitigation settlements. The loss ratio in the current quarter was 43 percent, up 10 points sequentially reflecting normal seasonal variation in new flow delinquencies which increased approximately 13 percent from the prior quarter and decreased approximately 11 percent from the prior year, reflecting the continued burn through of delinquencies from the 2005 to 2008 book years. Results versus the prior year also reflected lower net investment income, primarily related to an approximately $8 million reduction from the affiliated preferred securities that were transferred to the holding company in July 2015.

Flow NIW of $9.3 billion increased 13 percent from the prior quarter from a larger purchase originations market and increased 24 percent versus the prior year primarily from a larger purchase originations market and higher refinance activity. During the third quarter, the company increased its single premium lender paid new insurance written and continues its selective participation in this market. Future volumes of this product will vary in part depending on the companys evaluation of the risk return profile of these transactions.

U.S. Life Insurance Division net operating income was $40 million, compared with net operating income of $57 million in the prior quarter and a net operating loss of $322 million a year ago.

U.S. Life Insurance Division

Long Term Care Insurance

Fixed Annuities

Total U.S. Life Insurance

(Amounts in millions)

Individual

Term Life

Universal Life

Linked Benefits

Long Term Care Insurance

Long term care insurance (LTC) had a net operating loss of $10 million, compared with net operating income of $10 million in the prior quarter and a net operating loss of $361 million in the prior year. Results in the quarter reflected $21 million of after-tax unfavorable items, due largely to corrections to reinsurance, premium taxes and group LTC reserves. The current quarter included favorable mortality on existing claims versus the prior year, unfavorable severity given the mix of new claims with a higher average reserve versus the prior year and less favorable benefits from reinsurance versus both the prior quarter and prior year. Results in the prior quarter included net favorable items of $12 million after-tax while results in the prior year included $380 million after-tax of unfavorable items. The loss ratio in the current quarter was 76 percent. Given that experience in aggregate included in this years claim reserves review was in line with expectations, the company made no significant adjustments in the current quarter to its assumptions and methodologies related to its LTC claim reserves.

Results for the quarter included a favorable impact from higher premiums and reduced benefit options of $19 million after-tax versus the prior quarter and $16 million after-tax versus the prior year related to premium increases from in force rate actions approved and implemented to date.

Individual LTC sales of $7 million were lower than the prior quarter and the prior year. Sales are expected to continue at low levels in the near term due to the 2014 introduction of a higher priced LTC product and lower ratings, but build over time as new products and distribution strategies are introduced.

Life...


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