Business context and reporting period
Genworth Financial, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. Its businesses include U.S. and Australian mortgage insurance, U.S. life insurance (principally long-term care, plus runoff life and annuity blocks), and runoff operations. Genworth Canada was sold on December 12, 2019; its results are presented as discontinued operations, and prior periods were recast accordingly.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $8.096 billion | $7.901 billion |
| Income from continuing operations | $519 million | $67 million |
| Net income available to common stockholders | $343 million | $119 million |
| Adjusted operating income (non-GAAP) | $420 million | $(5) million |
| Net cash from operating activities | $2.079 billion | $1.633 billion |
| Net cash from (used by) investing activities | $1.301 billion | $(622) million |
| Net cash used by financing activities | $(2.217) billion | $(1.621) billion |
| Total assets / total liabilities / total equity | $101.342 billion / $86.710 billion / $14.632 billion | $100.923 billion / $86.734 billion / $14.189 billion |
| Long-term borrowings | $3.277 billion | $3.707 billion |
Net income includes discontinued operations: Genworth reported $11 million of income from discontinued operations in 2019, but the amount attributable to common stockholders was a loss of $112 million. The consolidated effective tax rate was 27.3%, versus 50.8% in 2018. The filing does not provide a single consolidated operating-margin measure.
- U.S. Mortgage Insurance adjusted operating income rose to $568 million from $490 million; new insurance written increased 56% to $62.4 billion. Its loss ratio was 6%, versus 5%.
- Australia Mortgage Insurance adjusted operating income fell to $51 million from $76 million, mainly on lower earned premiums; its loss ratio was 33%, versus 30%. Management expected the full-year 2020 loss ratio to be comparable to 2019.
- U.S. Life Insurance adjusted operating loss narrowed to $55 million from $376 million. Long-term care insurance moved to $57 million of adjusted operating income from a $348 million loss, while the life insurance business’s adjusted operating loss widened to $181 million from $107 million. Fixed annuities contributed $69 million, down from $79 million.
- Cash, cash equivalents and restricted cash were $3.341 billion at year-end. Genworth Holdings, the debt-issuing holding company, held $1.461 billion of cash, cash equivalents and restricted cash. The filing states that holding-company cash alone is not sufficient to repay all debt as it falls due.
- Fixed maturity securities were $60.339 billion at fair value; approximately 97% of the portfolio was investment grade. Reinsurance recoverables were $17.1 billion.
Material changes versus the prior comparable period
- Common-stockholder net income increased to $343 million from $119 million; continuing-operations income rose to $519 million from $67 million. Adjusted operating income improved to $420 million from a $5 million loss.
- The improvement in long-term care results reflected $360 million of higher premiums and reduced benefits from approved and implemented in-force rate actions, favorable benefit-utilization updates and favorable prior-year claims development. These gains were partly offset by higher new-claim severity and frequency and a $162 million increase in the profits-followed-by-losses reserve accrual.
- U.S. mortgage insurance benefited from higher insurance in-force and investment income, partly offset by higher expenses and losses. Australia mortgage insurance earnings declined with portfolio seasoning and fewer policy cancellations.
- Operating cash flow increased, while investing cash flow turned positive, primarily reflecting net proceeds from the Canada sale and investment activity. Financing cash outflows increased, including repayment of the $445 million secured term loan upon the sale.
- Year-end total assets increased modestly, while total liabilities were broadly unchanged. Long-term borrowings declined by $430 million, principally because of the term-loan repayment.
Outlook, management commentary, risks and unusual items
- China Oceanwide transaction: The proposed $2.7 billion acquisition, or $5.43 per share in cash, remained uncompleted at the filing date. The December 2019 waiver extended the parties’ termination rights to no later than March 31, 2020, subject to its terms. Fannie Mae and Freddie Mac re-approved the transaction in January 2020; NYDFS re-approval remained unresolved, with the regulator indicating it would be contingent on a capital contribution to Genworth Life Insurance Company of New York. China Oceanwide’s promised $1.5 billion capital contribution is conditional on closing; the parties also agreed that Genworth Holdings would contribute $175 million to GLIC after closing. China Oceanwide has no future obligation and no current intention to contribute additional capital for legacy long-term care.
- Alternatives and debt: If the transaction failed, management said it would continue to assess strategic and financing alternatives, potentially including sales or reduced ownership of U.S. or Australian mortgage insurance businesses. Genworth Holdings reported approximately $3.1 billion of outstanding debt at year-end. It expected to repay a $200 million intercompany note due March 31, 2020. In January 2020, it redeemed $397 million of 7.70% notes due June 2020 for $409 million, including accrued interest and a make-whole premium; Rivermont I also redeemed $315 million of non-recourse funding obligations.
- Long-term care assumptions: The long-term care business’s positive loss-recognition margin depends substantially on future rate increases and benefit reductions. The company estimated $7.6 billion of future in-force rate actions in its 2019 testing. It reported a $323 million cumulative reserve accrual for profits followed by losses and estimated the present value of future losses at approximately $2.0 billion. Regulatory approval, timing and policyholder response remain uncertain. In 2019, 116 filings were approved in 29 states, representing a weighted-average 41% increase on approximately $817 million of annualized premiums; 98 additional filings were submitted in 37 states.
- Other assumption-sensitive items: The company recorded a $107 million after-tax unfavorable adjustment in universal and term universal life products in 2019, primarily due to lower interest rates. Fixed immediate annuities incurred $39 million of additional reserves and expense from loss-recognition testing, mainly reflecting low interest rates. Mortgage-insurance earned-premium recognition also depends on estimated loss development and cancellations.
- Legal and contingent exposure: In the AXA dispute concerning the former lifestyle protection business, the company recognized approximately $143 million of losses, including legal fees and expenses, after an adverse court ruling. It paid AXA approximately $134 million in January 2020. AXA had submitted invoices totaling approximately $680 million, including a tax gross-up; Genworth could not estimate any additional loss, and the amount claimed could increase. The company also reported litigation with one state over actuarially justified long-term care rate increases.
- Ratings and capital: As of February 2020, Genworth Holdings’ senior unsecured debt was rated B by S&P and B2 by Moody’s. U.S. life subsidiaries had weak or poor financial-strength ratings, while the principal U.S. mortgage insurer was rated BB+ by S&P and Baa3 by Moody’s. Further downgrades could affect sales, refinancing, liquidity and mortgage-insurance market access. The U.S. mortgage business reported approximately $1.0 billion of PMIERs assets above requirements and a 12.5:1 statutory risk-to-capital ratio; the Australian business’s PCA ratio was 191%.
- Distributions and external conditions: Common-stock dividends remained suspended. Management said U.S. life subsidiaries were not expected to pay dividends for the foreseeable future. Low interest rates, housing and employment conditions, mortgage-insurance competition, reinsurance/counterparty risk, and regulatory or GSE changes remain material risks. Australian bushfires were being monitored; management did not then expect a significant business impact but said the ultimate effect was uncertain.
- Audits and controls: KPMG issued an unqualified opinion on the financial statements and an unqualified opinion on internal control over financial reporting; management also concluded disclosure controls and procedures were effective.
Most important facts an investor should verify
- Whether the China Oceanwide transaction closed or was terminated, and the status of required regulatory re-approvals, the NYDFS capital condition and the proposed capital contributions.
- Genworth Holdings’ available liquidity and ability to meet remaining debt maturities, including the $200 million intercompany note and 2021 maturities, without relying on restricted insurance-subsidiary capital or uncertain asset sales.
- Actual long-term care claims, reserve development and the timing and amount of state-approved rate increases compared with the assumptions supporting the reported reserve margin.
- The ultimate AXA litigation exposure, including any appeal outcome, further claims, tax gross-up and amounts beyond the $143 million recognized and $134 million paid.
- Mortgage-insurance capital and ratings, PMIERs compliance, customer concentration, policy persistency and claims experience; also verify the expected 2020 Australian loss ratio against reported results.
- Whether investment returns, interest rates, foreign exchange movements and deferred tax asset realization differ materially from the assumptions underlying reported earnings and capital.