Genworth Financial, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Genworth operates U.S., Canadian and Australian mortgage insurance businesses, U.S. life insurance (primarily long-term care), and runoff businesses. It suspended sales of traditional life insurance and fixed annuities in March 2016. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Total revenue | $8.369 billion | $8.548 billion | Down 2%; premiums fell 9% to $4.160 billion |
| Net income (loss) available to common stockholders | $(277) million | $(615) million | Improved, but remained a loss |
| Continuing-operations loss available to common stockholders | $(248) million | $(208) million | Worsened; 2016 includes a $358 million tax provision despite $320 million of pretax income |
| Adjusted operating income (loss), non-GAAP | $(316) million | $255 million | Turned to a loss; company-defined measure |
| Net investment income | $3.159 billion | $3.138 billion | Up 1%; reported yield was 4.5% |
| Cash from operating activities | $1.852 billion | $1.591 billion | Up $261 million |
| Cash from investing activities | $(2.120) billion | $(404) million | Greater investment outflows |
| Cash from financing activities | $(2.931) billion | $(42) million | Includes $1.620 billion of non-recourse funding obligation redemptions |
| Cash and cash equivalents, year-end | $2.784 billion | $5.965 billion | Down $3.181 billion |
| Total assets / total equity, year-end | $104.658 billion / $14.467 billion | $106.431 billion / $14.637 billion | Both declined |
| Long-term borrowings / non-recourse funding obligations, year-end | $4.180 billion / $310 million | $4.570 billion / $1.920 billion | Debt reduction included redemptions and repayment |
Segment results
- U.S. Mortgage Insurance: Revenue $726 million; income available to common stockholders $249 million; adjusted operating income $250 million. Loss ratio improved to 24% from 37%.
- Canada Mortgage Insurance: Revenue $645 million; income available to common stockholders $159 million; adjusted operating income $146 million. Loss ratio was 22%, versus 21%.
- Australia Mortgage Insurance: Revenue $440 million; income available to common stockholders $65 million; adjusted operating income $62 million. Loss ratio rose to 34% from 23%.
- U.S. Life Insurance: Revenue $6.250 billion; loss available to common stockholders $146 million; adjusted operating loss $215 million, versus adjusted income of $43 million in 2015. Long-term care insurance generated a $200 million adjusted operating loss.
- Runoff: Adjusted operating income was $28 million. Corporate and Other: Adjusted operating loss was $587 million.
Material changes versus 2015
- Long-term care claims assumption changes increased claim reserves by $460 million and reinsurance recoverables by $25 million; the filing reports a $283 million after-tax charge. Life insurance assumption changes generated a $196 million after-tax charge, primarily reflecting mortality experience at older ages.
- Long-term care loss-recognition margin excluding the acquired block fell to approximately $0.8–$1.3 billion from $2.5–$3.0 billion. The filing says the margin depends materially on anticipated future rate actions, which added about $7.3 billion to the 2016 margin calculation.
- U.S. mortgage insurance new insurance written increased 35% to $42.7 billion, and primary insurance in-force rose 12% to $137.5 billion. Delinquent loans declined to 25,709 from 31,663.
- Australia new insurance written fell 20% to $19.8 billion; delinquent loans and the loss ratio increased. Canada new insurance written rose 18% to $47.8 billion, driven mainly by bulk activity ahead of regulatory changes; flow business declined.
- Genworth sold its European mortgage insurance business in May 2016 for approximately $50 million net proceeds. The lifestyle protection insurance business sale closed in December 2015; a further $29 million loss was recorded in 2016.
- Consolidated U.S. life subsidiary RBC ratio declined to approximately 329% from 372%. U.S. mortgage insurance PMIERs available assets were approximately 115% of required assets, with more than $350 million in excess.
Outlook, strategic developments and risks
- China Oceanwide transaction: Agreement announced October 21, 2016, to acquire all common shares for $5.43 per share in cash, approximately $2.7 billion in total transaction value. At filing, closing was expected by mid-2017, subject to stockholder and regulatory approvals and other conditions. China Oceanwide also committed $600 million toward 2018 debt maturity needs and $525 million for U.S. life insurance restructuring. These commitments depend on completion and applicable conditions.
- U.S. life restructuring: Genworth planned to separate and isolate long-term care insurance from other U.S. life businesses through transfers and reinsurance, subject to regulatory approval. China Oceanwide stated it had no future obligation or intention to provide additional capital for legacy long-term care.
- Management outlook: Genworth expected Canada’s loss ratio to be higher in 2017 if economic volatility continued; it expected elevated Australian delinquencies and a higher loss ratio in 2017. Management also expected the remaining quarterly benefit from long-term care rate actions to be lower in 2017 than in 2016. No consolidated earnings or revenue guidance is provided in the filing text.
- Long-term care: In 2016, the company received 96 rate-filing approvals across 25 states, representing a weighted-average increase of 28% on about $719 million of annualized in-force premiums, and submitted 79 additional filings across 32 states. Approvals and implementation timing vary by state; assumed future actions may not be approved or achieved.
- Debt and liquidity: Genworth Holdings had approximately $3.8 billion of outstanding debt, including $597 million due in 2018. The company said existing resources were insufficient to repay all debt as it matured. It terminated its $300 million revolving credit facility in April 2016. If the Oceanwide deal or alternative financing does not occur, management cited potential asset sales, including Canadian, Australian or partial U.S. mortgage insurance businesses.
- Other significant risks and items: A $258 million deferred-tax valuation allowance was recorded in 2016. Rating downgrades had adversely affected life insurance sales and distributor relationships. Low interest rates, reserve-estimate uncertainty, reinsurance counterparty exposure, regulatory capital requirements, mortgage market conditions, customer concentration and pending litigation are material risks. Common-stock dividends remain suspended.
- Audit and controls: KPMG issued an unqualified opinion on the financial statements and internal control over financial reporting; management concluded disclosure controls and internal controls were effective at year-end.
Most important facts for investors to verify
- Whether the China Oceanwide transaction received all required approvals and closed, and whether the $600 million debt support and $525 million life-business contribution were delivered as described.
- Long-term care claims experience, future reserve adequacy and whether state regulators approve the rate increases assumed in the company’s loss-recognition and statutory capital analyses.
- Actual liquidity available at the holding company, debt refinancing or repayment plans for the 2018 maturity, and restrictions on dividends from insurance subsidiaries.
- Subsequent U.S. life RBC and U.S. mortgage PMIERs capital levels, including the impact of reserve changes, reinsurance and asset valuations.
- Whether rising Australian delinquencies, Canadian housing and regulatory changes, and customer contract renewals affect mortgage insurance volumes and loss ratios as projected.
- Potential additional tax valuation allowances, litigation and regulatory exposures, and the company’s dependence on assumptions and models for insurance reserves.