Genworth Financial, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Genworth operates U.S. and Australian mortgage insurance, U.S. life insurance, and runoff businesses.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $2,420 | $2,020 | $6,395 | $6,058 |
| Income from continuing operations | $435 | $138 | $465 | $464 |
| Net income (loss) available to common stockholders | $418 | $18 | $(89) | $360 |
| Adjusted operating income available to common stockholders | $132 | $123 | $144 | $396 |
| Net cash from operating activities | Not separately provided for quarter | Not separately provided for quarter | $1,452 | $1,608 |
Q3 revenue and GAAP earnings benefited substantially from $375 million of net investment gains, mainly realized gains on sales of U.S. government securities. The nine-month net loss primarily reflects a $519 million after-tax discontinued-operations loss associated with the AXA settlement; continuing-operations income was broadly flat year over year. Adjusted operating income, a non-GAAP measure, fell year over year for the nine-month period.
- Cash flows: Nine-month investing cash outflow was $1,279 million and financing cash outflow was $734 million. Consolidated cash, cash equivalents and restricted cash declined $561 million to $2,780 million.
- Balance sheet at September 30: Assets were $104,925 million; total equity was $15,232 million; long-term borrowings were $3,570 million. Consolidated cash is not the same as parent holding-company liquidity: Genworth Holdings reported $740 million of unrestricted cash.
- Segment adjusted operating income (loss), nine months: U.S. Mortgage Insurance $286 million (versus $408 million); Australia Mortgage Insurance $17 million (versus $39 million); U.S. Life Insurance $(61) million (versus $60 million); Runoff $30 million (versus $39 million); Corporate and Other $(128) million (versus $(150) million).
- Selected loss ratios: U.S. Mortgage Insurance was 41% for nine months (versus 6%); Australia Mortgage Insurance was 44% (versus 34%); long-term care insurance was 73% (versus 77%).
Material changes and notable items
- COVID-19-related borrower forbearance drove higher U.S. mortgage insurance delinquencies and reserves. At September 30, 6.7% of active policies, or 61,183, were reported in forbearance; approximately 63% of those were delinquent. U.S. primary delinquency was 5.44%, versus 1.93% at year-end 2019.
- U.S. mortgage insurance adjusted operating income for Q3 was $141 million, versus $137 million. Higher premiums were partly offset by new-delinquency losses. For the nine months, losses and reserve strengthening reduced segment adjusted operating income to $286 million.
- Long-term care insurance benefited from higher claim terminations, largely associated with higher mortality, and approved rate actions; lower new claims during the pandemic were treated as potentially temporary, and reserves were strengthened accordingly. Genworth recorded $247 million of additional long-term-care reserves for projected profits followed by losses in the first nine months; the cumulative reserve was $570 million.
- The Australia mortgage insurance business recorded a $5 million goodwill impairment, its remaining goodwill. It also reported that a major customer representing 11% of nine-month gross written premiums would not renew its contract after November 2020.
- Q3 comprehensive income was $143 million, compared with $641 million a year earlier, reflecting a $293 million other comprehensive loss, including movements in hedges and investment-related items.
Liquidity, outlook and risks
- Near-term funding: Genworth Holdings had $338 million of 7.20% notes due February 2021 and $659 million of 7.625% notes due September 2021; forecast interest on senior notes for the next 12 months was $144 million. The filing estimates a roughly $215 million cash shortfall over the coming year absent additional liquidity or completion of the China Oceanwide transaction.
- Management’s plans: Management said its plans, together with existing cash, are expected to provide sufficient liquidity for one year. GMHI issued $750 million of 6.50% senior notes due 2025; $436 million was distributed to Genworth Holdings and is intended to cover the February 2021 maturity. Genworth was preparing a possible public offering or partial sale of its U.S. mortgage insurance business and evaluating other financing alternatives. These plans are subject to market conditions and execution risk.
- China Oceanwide transaction: The proposed acquisition is for $5.43 per share in cash. The parties extended the deadline to November 30, 2020, but closing remained dependent on funding and outstanding regulatory steps. A proposed $1.5 billion post-closing capital contribution was contingent on the merger and was not included in the company’s liquidity assessment.
- Mortgage insurance capital: U.S. MI reported estimated PMIERs available assets at 132% of published requirements, or $1.074 billion above requirements. This measure benefited by $1.217 billion from a temporary 0.30 required-asset multiplier on eligible non-performing loans. GSE-imposed restrictions require additional capital buffers and constrain dividends and debt issuance; the temporary benefit may diminish if loans do not cure or the relief expires.
- AXA settlement and contingencies: The AXA settlement led to a secured promissory note with $549 million of amounts due or estimated future billings at September 30, including installments in 2022. It accrues interest at 5.25% and includes mandatory prepayment provisions tied to specified financings, asset sales, dividends and the China Oceanwide transaction. The filing also describes ongoing litigation and regulatory matters, including long-term-care and cost-of-insurance class actions; outcomes and possible losses are not generally estimable.
- Other principal risks: COVID-19 duration and recovery, insurance reserve assumptions, long-term-care rate approvals and claims, persistently low interest rates, investment and commercial mortgage credit quality, subsidiary dividend restrictions, ratings, and the ability to refinance or raise capital. Management planned fourth-quarter 2020 reviews of long-term-care claim assumptions and life insurance assumptions; results could materially affect reserves and earnings.
Important facts for investors to verify
- Whether the China Oceanwide transaction closed or was extended, and whether its funding and regulatory conditions were satisfied.
- Genworth Holdings’ actual liquidity, debt repayment or refinancing plans for the 2021 maturities, and progress on any U.S. mortgage insurance capital-raising transaction.
- Subsequent U.S. mortgage insurance delinquency, cure and claim experience, including the effect of expiration or modification of PMIERs relief and GSE restrictions.
- Results of the fourth-quarter long-term-care and life insurance assumption reviews, including changes to claims reserves, loss-recognition margins and deferred acquisition costs.
- Actual AXA payments, future-claims estimates and any related mandatory prepayments, along with developments in material litigation and regulatory matters.
- Underlying operating performance apart from investment gains, discontinued operations, and other items excluded from adjusted operating income.