GENWORTH FINANCIAL INC quarterly report, Q2 FY2022

Genworth Financial, Inc. — Q2 2022 Form 10-Q

Business context and period. The unaudited filing covers the quarter and six months ended June 30, 2022, with comparisons to 2021. Genworth operates Enact (U.S. mortgage insurance), U.S. Life Insurance (including long-term care), and Runoff businesses. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions.

Financial performance and position

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$1,881	$2,041	$3,773	$4,026
Income from continuing operations before tax	$293	$320	$532	$553
Net income available to Genworth common stockholders	$181	$240	$330	$427
Adjusted operating income available to common stockholders	$176	$194	$307	$362
Diluted GAAP earnings per share	$0.35	$0.47	$0.64	$0.83

For Q2, consolidated net income was $219 million, including $38 million attributable to Enact noncontrolling interests. The effective tax rate was 24.9% for the quarter and 24.6% for the half year.

Cash flow: Six-month operating cash flow was $337 million versus $229 million; investing activities provided $535 million versus $541 million; financing used $719 million versus $1,213 million. Cash, cash equivalents and restricted cash ended at $1.724 billion, up from $1.571 billion at year-end.
Balance sheet and debt: Total assets were $89.068 billion, down from $99.171 billion at December 31, 2021; total equity was $12.571 billion, down from $16.266 billion. Consolidated long-term borrowings were $1.773 billion, down from $1.899 billion. Genworth Holdings had $1.052 billion of debt outstanding, including $152 million due February 2024; Enact had $750 million principal of senior notes.
Holding-company liquidity: Genworth Holdings reported $228 million of unrestricted cash, cash equivalents and liquid assets at June 30, including $178 million cash and $50 million in U.S. government securities. Management said it believes this supports obligations over the next 12 months, while noting future liquidity depends materially on Enact dividends.
Investment and equity effects: The six-month other comprehensive loss was $4.075 billion, principally reflecting interest-rate increases and wider credit spreads. Accumulated other comprehensive income moved from $3.861 billion at year-end to a $145 million loss. Available-for-sale fixed maturity securities fell to $49.286 billion fair value from $60.480 billion; gross unrealized losses were $3.305 billion. The company said it did not intend or expect to be required to sell the securities before recovering amortized cost.
Margins and operating indicators: Enact’s Q2 loss ratio was negative 26%, compared with 12% a year earlier, mainly due to favorable reserve releases; its six-month loss ratio was negative 15% versus 17%. Long-term care’s loss ratio rose to 81% in Q2 from 62%, and was 72% for the half year versus 62%.

Material changes versus prior periods

Q2 revenue declined 8%, and common-stockholder net income declined 25%; six-month revenue declined 6%, and common-stockholder net income declined 23%. Net investment income and investment gains were lower in both comparisons.
Enact adjusted operating income increased 24% in Q2 to $167 million and 16% for the half year to $302 million. Favorable reserve adjustments tied mainly to 2020 COVID-19 delinquencies curing above expectations supported results. Genworth’s ownership fell to 81.6% after Enact’s September 2021 IPO, reducing income attributable to Genworth.
U.S. Life Insurance adjusted operating income fell to $21 million in Q2 from $71 million and to $17 million for the half year from $133 million. Long-term care earnings declined; the life insurance business remained loss-making. Runoff adjusted operating income also declined, to $2 million in Q2 and $11 million for the half year, as equity-market declines and higher rates reduced variable-annuity account values and fee income.
Acquisition and operating expenses increased 94% in Q2 and 49% for the half year, partly reflecting a $365 million payment in connection with a third-party recapture of certain single-premium immediate annuity contracts. Lower benefits and policy-reserve changes partly offset this increase.

Outlook, commentary, risks and unusual items

Management’s priorities include reducing Genworth Holdings debt to about $1.0 billion or less, maximizing Enact’s value, stabilizing long-term care, developing long-term-care-related offerings, and returning capital to shareholders. It planned to retire the remaining $152 million February 2024 notes in Q3 2022, subject to business and economic conditions.
Genworth authorized a $350 million share-repurchase program. It repurchased $15 million of shares in Q2 and a further $15 million in July; approximately $320 million remained available after the July purchases. Enact began a quarterly dividend program and expected to return about $250 million of capital to shareholders in 2022; Genworth anticipated approximately $150 million of additional capital returns, beyond quarterly dividends, most likely in Q4. These are expectations, not assured payments.
For long-term care, management estimated $20.7 billion of cumulative net-present-value benefit from in-force rate actions against $28.7 billion expected. It received approvals for about $153 million of incremental annual premiums in the first half. The business also had $1.530 billion accrued for projected profits followed by later losses, versus $1.274 billion at year-end; this accrual is expected to continue through profitable periods currently projected to 2031.
The company described inflation, rate volatility, potential recession, market declines, mortgage origination trends, COVID-related delinquencies and claims, insurance reserve estimates, reinsurance and regulatory constraints as risks. Enact’s PMIERs sufficiency was 166%, or $2.047 billion above published requirements, but this measure excludes GSE restrictions. Enact’s reported forbearance rate was 1.7% of active primary policies, with 36% of those reported as delinquent.
Long-duration insurance accounting guidance becomes effective January 1, 2023. Management expects a significant financial-statement impact and a significant reduction in equity at transition from updated discount rates; it expects the recent rise in rates to partially reverse that reduction afterward.
Legal matters include a $25 million cost-of-insurance settlement paid in Q2, subject to final court approval; a long-term-care settlement finalized July 29, 2022, for which management anticipated a net positive earnings impact; and another proposed settlement awaiting a November 2022 approval hearing, also expected to be net favorable if approved. The company said it cannot estimate reasonably possible losses for other pending matters.
Other notable items: Genworth paid GE $55 million in April to satisfy its remaining Tax Matters Agreement obligation; Genworth Holdings repurchased $130 million principal of 2024 notes during the half year; and a $50 million valuation allowance increase on capital deferred tax assets was recorded through OCI. The 2022 six-month results also included $39 million of DAC impairments in universal and term universal life products.

The filing provides no formal consolidated earnings guidance. Management’s outlook statements and capital-return expectations are subject to stated risks and conditions.

Important facts for investors to verify

Whether Enact can sustain favorable mortgage-insurance claims experience and make the expected dividends or additional capital returns while meeting GSE, PMIERs and regulatory requirements.
Whether long-term-care rate approvals, policyholder elections and claim experience support the projected path to economic break-even, and whether reserve assumptions remain adequate.
The drivers and potential consequences of the large OCI and equity decline, including the effect of further interest-rate or credit-spread changes and the 2023 accounting transition.
Genworth Holdings’ actual liquidity after debt repayment, and its dependence on Enact distributions and subsidiary tax payments.
The final outcomes and financial effects of pending long-term-care and cost-of-insurance litigation and settlements.