Genworth Holdings Inc. (Genworth) have posted their full 2016 results, reporting a statutory net loss
Results
Genworth have reported a statutory net loss of $196m, impacted by net investment gains, net of taxes and other adjustments of $19 million in the quarter, compared to net investment losses of $1 million in the prior year.
The net loss in the current quarter and prior year quarter is also reflected in after tax losses of $196 million and $194 million respectively, related to assumption updates in universal life insurance. Approximately $214 million in the prior year quarter is related to the pending and completed sale of the European mortgage and lifestyle protection insurance businesses.
Net investment income was $786 million in the quarter, down from $805 million in the prior quarter and up from $781 million in the prior year. Prepayment speed adjustments related to residential mortgage backed securities were unfavourable, versus the prior quarter and prior year. The reported yield and core yield for the current quarter were 4.50% and 4.47% respectively.
Adjusted operating income results are summarised in table 1.1.
Table 1.1
Source: Genworth Holdings Inc.
China Oceanwide acquisition update
- Genworth is to hold a meeting to obtain stockholder approval on 7 March
- All filings required under the merger agreement for regulatory approval of the transaction have been submitted in U.S., China, and other international markets
- Genworth and China Oceanwide continue to expect the transaction to close by mid 2017
Sustainability of business
Genworth’s results continue to be dragged down by its long term care (LTC) businesses. The value in Genworth is primarily embedded in its global mortgage insurance operations, with its US mortgage insurance business increasing in importance considering the improvement in performance.
Positively, in February 2016, Genworth announced it was considering restructuring options to separate and isolate its LTC business. We believe the announcement is credit positive for Genworth Holdings’ creditors because it insulates them from LTC related risks, including material interest rate sensitivity and recent business underperformance. According to Moody’s, a more stable life and fixed annuity business also has the potential to remain a resource to debtholders, with emerging profits and released capital available to the holding company. The full de stacking would take place in stages over the next several years.
Refinance/liquidity risks
Genworth has large medium term debt maturities of USD600m in 2018, USD400m in 2020 and USD1.1bn in 2021 (including the 7.625% Sep 2021 USD bond).
However the company maintains a solid amount of cash and liquid securities at the holding company level of USD1.09bn at December 2016. If for any reason maturing obligations could not be refinanced in the normal course of business, these cash resources could be utilised. Genworth targets holding liquidity of $350m above 1.5x debt interest expense and restricted cash.
Genworth could also generate more cash if needed by selling down its interest in its listed Australian or Canadian businesses. At December 2016, Genworth’s share of Genworth Australia and Genworth Canada were worth USD651m and USD1.56bn respectively.
Therefore, even if the takeover or the LTC separation does not progress, the company has options in terms of managing maturing obligations.
Takeover
In October 2016, it was announced that China Oceanwide entered into a definitive agreement to acquire all of Genworth’s outstanding shares for approximately USD2.7bn. If the deal closes, we believe it would be credit positive, as China Oceanwide will contribute USD525m of cash to the US life insurance businesses to facilitate regulatory approval for the restructuring plan to separate the LTC business. Refinancing risk would also be reduced, with China Oceanwide committing another USD600m of cash to address Genworth’s debt maturing in 2018.
Summary
While being negatively impacted some parts of the business, there is particular value in Genworth’s global mortgage insurance platform. Genworth is restructuring to protect this value. Its 7.625% September 2021 USD bondholders benefit from significant cash reserves at the holding company/issuing entity level, and other potential liquidity sources which mitigate refinance risks. If the China Oceanwide takeover does proceed, the situation would further improve with China Oceanwide proposing USD525m to facilitate the restructuring plan, and another USD600m to address near term maturities.