Genworth Financial Inc. reported results for the first quarter of 2014. The company reported net income of $184 million, or $0.37 per diluted share, compared with net income of $103 million, or $0.21 per diluted share, in the first quarter of 2013. Net operating income for the first quarter of 2014 was $194 million, or $0.39 per diluted share, compared with net operating income of $151 million, or $0.30 per diluted share, in the first quarter of 2013.

“Genworth’s first quarter 2014 results reflect continued progress in our turnaround strategy,” said Tom McInerney, president and CEO. “Our mortgage insurance businesses benefitted from improved loss ratios, and long term care premium increases continued to positively impact earnings in our U.S. Life Insurance Division.”

Net investment losses, net of tax and other adjustments, were $10 million in the quarter, compared to $28 million in the prior year. Total investment impairments, net of tax, were $1 million in the current quarter and $7 million in the prior year.

Net operating income excludes net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, restructuring charges, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions 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 first quarter of 2014 was an unfavorable impact of $5 million versus the prior quarter and an unfavorable impact of $16 million versus the prior year.

U.S. life insurance division

U.S. Life Insurance Division net operating income was $94 million, compared with $119 million in the prior quarter and $85 million a year ago.

Key points

• U.S. Life Insurance Division net operating income was $94 million, compared with $119 million in the prior quarter and$85 million a year ago.
• Compared to the prior quarter, sales of life insurance products were higher, lower in individual long term care insurance (LTC) and lower in fixed annuities.
• The consolidated risk-based capital (RBC) ratio is estimated to be approximately 480%, compared to 487% at the end of the fourth quarter of 2013.
• As of March 31, 2014, the number of states approved as part of the 2012 in force premium rate increases remained at 41. The company expects to achieve $250 to $300 million of premium increases when fully implemented.
• In September 2013, the company announced that it began filing for LTC premium rate increases on certain Privileged Choice and Classic Select policies sold between 2003 and 2012. As of March 31, 2014, 11 states have approved these rate increases.

Life insurance

Life insurance net operating income was $21 million, compared with $56 million in the prior quarter and $36 million in the prior year. Results in the current quarter reflected unfavorable mortality experience from higher frequency of claims in both term and universal life insurance versus the prior quarter and from both higher frequency in term life insurance and higher severity of claims in universal life insurance versus the prior year. Higher mortality drove an increase in claims paid and a reduction in product fees partially offset by reduced amortization. Results in the prior quarter included $14 million of favorable items.

Sales increased versus the prior quarter and prior year from increased sales of term life insurance. The company is transitioning to a broader set of competitive product offerings and sales are expected to increase in 2014 from current levels.

Long term care insurance

Long term care insurance net operating income was $46 million, compared with $42 million in the prior quarter and $20 million in the prior year. Results benefitted from premium increases and reduced benefits of $10 million versus the prior quarter and$40 million versus the prior year related to the premium increases approved and implemented to date. Current quarter results included a $5 million favorable correction to investment amortization for preferred stock that was more than offset by lower variable investment income versus the prior quarter. Results versus the prior year included less favorable claim terminations related to mortality and higher reserves related to certain policies with survivorship benefits. The reported loss ratio for the current quarter was approximately 63%, five points lower than the prior quarter and three points lower than the prior year.

Individual LTC sales of $21 million were $3 million lower than the prior quarter. The company is continuing to invest in distribution and marketing to increase LTC sales over time and expects to begin seeing some impact from these actions during the second half of the year. In the fourth quarter of 2013, the company announced that it has started to file for regulatory approval of its Privileged Choice Flex 3.0 product and expects to launch this product in July 2014.

Fixed annuities

Fixed annuities net operating income was $27 million, compared with $21 million in the prior quarter and $29 million in the prior year. Results in the quarter included improved mortality versus the prior quarter, but unfavorable mortality versus the prior year. Sales in the quarter totaled $520 million, down sequentially and consistent with interest rate declines during the current quarter.

U.S. life companies capital

The consolidated RBC ratio is estimated to be approximately 480%, compared to 487%at the end of the fourth quarter of 2013 and the consolidated U.S. life insurance companies unassigned surplus is estimated to be approximately $440 million, in line with the end of the fourth quarter of 2013 as positive statutory income was offset by an unfavorable tax reserve correction and lower reinsurance credit.

Global mortgage insurance division

Global Mortgage Insurance Division had net operating income of $132 million, compared with $107 million in the prior quarter and $102 million a year ago.

International mortgage insurance segment key points

• Reported International Mortgage Insurance segment net operating income was $99 million, compared with $101 million in the prior quarter and $81 million a year ago. Foreign exchange had an unfavorable impact of $5 million versus the prior quarter and an unfavorable impact of $16 million versus the prior year. The loss ratio in Canada was 20% and the loss ratio in Australia was 17% for the quarter.
• In Canada, flow new insurance written (NIW) was down 40% sequentially and down 3% year over year. In addition, in the current quarter, the company completed $2.9 billion of bulk transactions, consisting of low loan-to-value prime loans. In Australia, flow NIW was down 9% sequentially and up 15% year over year.
• The Canadian and Australian businesses continue to maintain sound capital positions.
• Dividends of $31 million were paid to the holding company in the first quarter of 2014.
• On April 23, 2014, the Australian mortgage insurance business filed a prospectus related to its IPO with the Australian Securities and Investments Commission.

Canada mortgage insurance

Canada reported net operating income of $41 million versus $44 million in the prior quarter and $42 million in the prior year. The loss ratio in the quarter was 20%, down two points from the prior quarter and down 11 points from the prior year reflecting the strong credit quality of recent books and the overall stable economic environment. Earnings were impacted by unfavorable foreign exchange versus the prior quarter and versus the prior year. Flow NIW was down 40%sequentially from normal seasonal variation and the severe winter season and down 3% year over year reflecting the severe winter season. In addition, the company completed several bulk transactions in the quarter, consisting of low loan-to-value prime loans, of approximately $2.9 billion reflecting its selective participation in this market. At quarter end, the Canada mortgage insurance business had a minimum capital test (MCT) ratio of 229%, in excess of the targeted level. GAAP book value was $2.9 billion, of which $1.6 billion represented Genworth’s 57.4% ownership interest, in line with the prior quarter.

Australia mortgage insurance

Australia reported net operating income of $62 million versus $66 million in the prior quarter and $46 million in the prior year. The loss ratio in the quarter was 17%, down four points sequentially and down 30 points from the prior year primarily from favorable aging of late stage delinquencies compared to both the prior quarter and prior year. New delinquencies were up 13% from the prior quarter and cures were down 5% from the prior quarter reflecting normal seasonal variation. Results compared to the prior quarter included less favorable taxes and unfavorable foreign exchange partially offset by lower expenses. Results compared to the prior year included unfavorable foreign exchange of $12 million partially offset by higher revenue from the aging of the in force block. Flow NIW was down 9% sequentially from normal seasonal variation and up 15% year over year from a larger origination market. At quarter end, the Australia mortgage insurance business had a prescribed capital amount (PCA) ratio of 147%, slightly in excess of the targeted range. The GAAP book value was $2.1 billion as of the end of the quarter, up $0.2 billion from the prior quarter primarily from changes in foreign exchange.

The company previously announced a plan to pursue a sale of up to 40% of its Australian mortgage insurance business, which is a strategic priority for 2014. Executing the planned sale through an IPO remains a key priority in reducing its exposure to mortgage insurance risk, rebalancing capital among its three main mortgage insurance platforms and generating capital. As previously announced, on April 8, 2014, institutional investor education activities were commenced in Australia ahead of a possible IPO, and on April 23, 2014, the Australian mortgage insurance business filed a prospectus related to the IPO with the Australian Securities and Investments Commission. The company is seeking to complete the IPO during the first half of 2014, but its execution is subject to market conditions and valuation considerations, including business performance.

Other countries mortgage insurance

Other Countries had a net operating loss of $4 million, compared to net operating losses of $9 million in the prior quarter and $7 million in the prior year as the business had improved loss performance in the current quarter.

U.S. mortgage insurance segment key points

U.S. MI net operating income was $33 million, compared with $6 million in the prior quarter and $21 million in the prior year. Results in the current quarter included $6 million of unfavorable tax adjustments. The loss ratio in the quarter was 46%.

Flow NIW decreased 20% from the prior quarter and decreased 17% from the prior year to $3.9 billion.

The risk-to-capital ratio for Genworth Mortgage Insurance Corporation (GMICO) is estimated at 18.4:1 and the combined risk-to-capital ratio is estimated at 18.7:1 as of March 31, 2014.

Total flow delinquencies decreased 11% sequentially and decreased 27% versus the prior year. New flow delinquencies decreased approximately 8% from the prior quarter and decreased approximately 18% from the prior year, reflecting the continued burn through of delinquencies from the 2005 to 2008 book years. The flow average reserve per delinquency was $30,300, up slightly from the prior quarter.

Total losses were down $45 million compared to the prior quarter from the net effect of lower new delinquency development and favorable changes in aging of existing delinquencies, partially offset by a modest strengthening of loss reserves. The increase in loss reserves of approximately $11 million after-tax reflects the expectation of increased severity of claims primarily in late stage delinquencies, partially offset by lower claim rates for early stage delinquencies. Loss mitigation savings were $114 million in the quarter, down $10 million from the prior quarter.

Flow NIW of $3.9 billion decreased 20% from the prior quarter reflecting normal seasonal variation in the purchase market, the impact of the severe winter season and a smaller refinance origination market and decreased 17% versus the prior year primarily from a smaller refinance origination market. Overall private mortgage insurance market penetration was flat compared with the prior quarter and up approximately five points year over year. The company’s estimate of market share at the end of the quarter is approximately 13%. Flow persistency was 85%.

The combined U.S. MI statutory risk-to-capital ratio is estimated at 18.7:1 at the end of the first quarter with the risk-to-capital ratio for GMICO estimated at 18.4:1. GMICO is in compliance with the maximum state regulatory limit of 25.0:1 and, as a result, GMICO is authorized and currently writes new business in all states.

In December 2013, Genworth Holdings, Inc. completed a $400 million senior notes offering and the company subsequently made capital contributions of $300 million to Genworth Mortgage Holdings, LLC and $100 million to GMICO in anticipation of the higher capital requirements expected to be required by the government-sponsored enterprises (GSEs) as a part of the anticipated revisions to their eligibility standards for qualifying mortgage insurers. The $300 million remains at Genworth Mortgage Holdings LLC, and if contributed to GMICO as of March 31, 2014, would have resulted in a favorable impact to GMICO’s risk-to-capital ratio of approximately four points under the current risk-to-capital framework.

Corporate and other division

Corporate and Other Division net operating loss was $32 million, compared with $33 million in the prior quarter and $36 million in the prior year.

International protection segment

International Protection reported net operating income of $7 million, compared with $13 million in the prior quarter and $6 million in the prior year. Results in the prior quarter reflected $10 million of favorable adjustments, including $8 million of favorable taxes. Results in the current quarter included $4 million of favorable tax adjustments. The business continues to be impacted by the slow consumer lending environment in Europe, and high unemployment in Southern Europe continues to keep losses elevated. At quarter end, the lifestyle protection business had a regulatory capital ratio of approximately 362%, well in excess of regulatory requirements.

Runoff segment

The Runoff segment’s net operating income was $12 million, compared with $19 million in the prior quarter and $16 million in the prior year. Results in the current quarter reflected lower equity market growth versus the prior quarter and prior year primarily impacting the variable annuity business.

Corporate and other

Corporate and Other’s net operating loss was $51 million, compared with $65 million in the prior quarter and $58 million in the prior year. Results in the quarter reflected $17 million of favorable tax adjustments, primarily from the release of a valuation allowance and state and federal true-ups related to the prior year tax return.

Investment portfolio performance

Net investment income decreased to $805 million, compared to $835 million in the prior quarter primarily from less favorable limited partnership performance and an unfavorable impact from prepayment speeds on structured securities partially offset by a favorable correction to preferred stock amortization. The reported yield for the current quarter was approximately 4.6%. The core yield was down from the prior quarter at approximately 4.4%.

Net income in the quarter included $10 million of net investment losses, net of tax, DAC amortization and other items. Total investment impairments, net of tax, were $1 million in the current quarter and $7 million in the prior year.

Net unrealized investment gains were $1.6 billion, net of tax and other items, as of March 31, 2014 compared with $0.9 billion as of December 31, 2013 and $2.4 billion as of March 31, 2013. The fixed maturity securities portfolio had gross unrealized investment gains of $4.3 billion compared with $6.2 billion as of March 31, 2013 and gross unrealized investment losses of$0.6 billion compared with $0.5 billion as of March 31, 2013.

Holding company

Genworth’s holding company ended the quarter with approximately $1.3 billionof cash and liquid assets, down approximately $100 million compared to the prior quarter, from $57 million of debt interest payments and $75 million of net other expenses, partially offset by $31 million of dividends received from the operating companies. The holding company targets maintaining cash balances of at least one and a half times its annual debt service expense plus a risk buffer of $350 million. After deducting for the net proceeds from the sale of the wealth management business and cash on hand at Genworth Holdings, Inc. that will be used to address the remaining $485 million 2014 debt at maturity or before, cash and highly liquid securities were approximately $780 million at the end of the quarter.