May 4, 2011

Q1 2011 Earnings: Genworth Profits Fall 54%; Mortgage Losses a Factor

Retirement unit sees sales gains, but long term care insurance income stays flat

As first-quarter 2011 earnings season wraps up with the insurance sector reporting numbers, Genworth Financial Inc. (GNW) disappointed analysts with earnings per share of $0.17 versus expectations for EPS of $0.21 due to mortgage losses, which were offset by solid retirement sales and a strong performance in the international unit.

Genworth reported that Q1 2011 profits were 54% lower than this time a year ago, at $82 million, or 17 cents a share, versus $178 million, or 36 cents a share, in 2010. Revenues rose 6.1% to $2.57 billion from $2.42 billion last year.

The drop in profits was partly attributable to Genworth’s one-time 2010 tax boost. Last year, net income included a $106 million, or $0.21per share, non-recurring tax benefit and a $26 million, or $0.05per diluted share, higher level of investment losses, net of tax and other adjustments.

In addition, in Q1 2011 the U.S. mortgage insurance business reported an operating loss of $81 million in the first quarter versus a loss of $36 million a year earlier.

“In the first quarter, we continued to deliver strong international performance, demonstrated sales and earnings progress in Retirement and Protection, and are seeing improving credit trends in U.S. Mortgage Insurance," said Genworth Chairman and CEO Michael D. Fraizer in a statement. “In U.S. Mortgage Insurance, we continued to execute our plan to return to profitability. Flow delinquencies declined on a sequential basis, loss mitigation benefits are on track to achieve full year targets, we added high margin new business and continued to implement actions to maintain capital flexibility.”

In Genworth’s Retirement and Protection unit, earnings increased 4% to $127 millioncompared with $122 milliona year ago. Results in the current quarter included a $7 millionexit charge associated with the previously announced plans to discontinue annuities sales of both individual variable and group annuities.

Life insurance net operating income supported an otherwise weak quarter in the unit, at $52 million versus last year’s $37 million. Income in the long-term care insurance group was flat year over year, at $40 million in Q1 2011 and Q1 2010, but sales rose to $65 million from $56 million a year ago.

Long-term care earnings were $40 million and included a $4 million unfavorable adjustment related to the accounting for interest rate swaps. Results in the current quarter reflected sound new business performance and the LTC loss ratio was consistent with the prior year. Individual LTC insurance sales increased $15 million year over year, mainly from growth in the independent channel. During the quarter, the company launched a new wellness program, in collaboration with Mayo Clinic, to promote healthy aging and independent living.

Wealth management income fell to $10 million from $11 million a year ago on a drop in sales to $355 million in net flows compared with $504 million last year. Profits for both spread-based and fee-based retirement income also fell. Spread-based dropped to $14 million versus $17 million, and fee-based dropped to $11 million from $17 million.

Wealth management’s earnings included an unfavorable tax adjustment, Genworth reported, noting that on a pre-tax basis, income increased $3 million from the prior year to $17 million. Wealth management net flows were $355 million, the eighth consecutive quarter of positive net flows, and assets under management (AUM) grew to $25.6 billion from $20.0 billion a year ago.

Also in the retirement and wealth management area, Genworth credited a sound consolidated risk based capital (RBC) ratio in excess of the company's year-end 2011 base target.

International earnings increased 30% to $124 million, driven primarily by a $20 million increase in international mortgage insurance and a $13 million increase in lifestyle protection. Lifestyle protection insurance is designed to pay off if a person stops working due to accident, sickness or involuntary unemployment.

For more information on earnings read AdvisorOne’s 2011 Q1 Earnings Calendar for the Financial Sector.

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