Genworth Financial, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Amounts are USD millions unless stated otherwise. The company reports Enact, Long-Term Care Insurance, Life and Annuities, and Corporate and Other. It adopted long-duration targeted improvements (LDTI) accounting on January 1, 2023 and recast comparative periods; accounting changes affect comparability and reported equity, but management says they do not change underlying economics or cash flows.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $1,854 | $1,893 |
| Income before tax from continuing operations | $133 | $291 |
| Net income available to Genworth common stockholders | $62 | $191 |
| Diluted EPS | $0.12 | $0.37 |
| Adjusted operating income available to common stockholders (non-GAAP) | $84 | $120 |
| Net cash from (used by) operating activities | $17 | $(92) |
- Revenue declined 2%; pre-tax income fell 54%, as benefits and expenses rose 7% to $1,721 while revenue was lower. Net investment income increased 3% to $787, but net investment gains shifted from a $42 gain to an $11 loss.
- Adjusted operating income declined 30%. Enact earned $143 (up 6%); Long-Term Care Insurance recorded a $37 loss versus $27 income; Life and Annuities recorded a $4 loss versus a $30 loss; Corporate and Other loss widened to $18 from $12.
- At March 31, total assets were $91,178, total liabilities $82,953, and total equity $8,225. Cash, cash equivalents and restricted cash were $1,752. Long-term borrowings on the consolidated balance sheet were $1,600; Genworth Holdings separately reported $876 of outstanding principal and $233 of unrestricted cash. It reported no debt maturities until June 2034 and said holding-company cash was sufficient for obligations over the next 12 months.
- Operating cash flow improved from a $92 outflow to a $17 inflow. Investing activities provided $364; financing activities used $428, including $68 of share repurchases. Cash declined by $47 during the quarter.
- Genworth common stockholders’ equity was $7,432, down from $7,686 at year-end. Accumulated other comprehensive loss was $2,858. Market-driven changes in discount rates for future policy benefits and investment values contributed to substantial OCI volatility.
Material changes and operating developments
- Long-Term Care Insurance adjusted operating results deteriorated mainly because of an unfavorable assumption update related to the timing of in-force rate actions, higher new claims and benefit utilization, and expenses associated with policyholder benefit-reduction elections. Management cited elevated terminations as a partial offset.
- The long-term care in-force rate action plan had an estimated cumulative economic benefit of $23.8 billion on a net-present-value basis through Q1, against $30.3 billion expected. Q1 approvals represented about $50 million of incremental annual premiums; management also reported approximately $50 million of approvals in its strategic update. Timing and regulatory approvals remain important.
- Enact’s new insurance written declined 30% to $13.2 billion, largely reflecting lower mortgage originations amid elevated interest rates. Primary persistency rose to 85% from 76%, and primary insurance in-force increased 9% year over year to $252.5 billion. Its delinquency rate was 1.93%, versus 2.40% a year earlier.
- Enact recorded a $70 million favorable reserve adjustment, primarily reflecting better-than-expected cures on COVID-era delinquencies; the comparable prior-year reserve release was $50 million. Its negative loss ratio of 5% therefore reflects reserve releases and should not be read as a normal recurring underwriting margin.
- Effective March 1, 2023, the GSEs removed capital restrictions previously imposed on Enact. Enact’s PMIERs sufficiency ratio was 164%, or $2.098 billion above required assets, at quarter-end.
- Genworth repurchased 11.2 million shares in Q1 for about $68 million excluding excise taxes. It repurchased another 9.1 million shares for $50 million in April; approximately $168 million remained under its $350 million authorization. Enact capital returns provided Genworth Holdings $37 million during Q1.
Outlook, commentary and risks
- The filing provides no consolidated earnings or revenue guidance. Management described possible U.S. recession risk amid inflation, elevated interest rates, tighter lending conditions and banking-sector disruption. It expects holding-company liquidity to depend significantly on future Enact dividends and other capital returns.
- CareScout launched the initial phase of its senior-care services business in March 2023, beginning with a digital platform and preferred home-care provider network. This is a growth initiative with execution risk; the filing does not provide a quantified return target.
- Key exposures include long-term-care claims, morbidity, mortality, persistency, benefit utilization, timing and approval of premium increases, investment yields, interest-rate-driven reserve and equity volatility, mortgage delinquencies and home prices, reinsurance and counterparty performance, and Enact’s ability to meet regulatory capital requirements.
- The company reported $3,961 of gross unrealized losses on fixed-maturity securities in loss positions without credit-loss allowances, and a $15 credit-loss allowance was recorded during the quarter. Management attributed most unrealized declines to interest rates and credit spreads and said it did not intend or expect to be required to sell the securities before recovering amortized cost. It also disclosed selling most of its First Republic Bank holdings after credit deterioration; a related loss was expected in Q2, with remaining exposure described as nominal.
- Pending legal and regulatory matters include long-term-care rate and disclosure disputes, life-insurance cost-of-insurance cases, an employee retirement-plan fiduciary suit, and a BCBSNE arbitration concerning recapture of long-term-care reinsurance. Management said it could not estimate reasonably possible losses for the identified matters.
- LDTI increased reported sensitivity of insurance liabilities and equity to interest rates. The company reported that adoption reduced stockholders’ equity by $13.7 billion after tax as of the January 1, 2021 transition date. Q1 2023 life-insurance experience also included higher-than-expected mortality; long-term-care results included higher new claims and benefit utilization.
Important facts for investors to verify
- Whether long-term-care rate approvals and implementation progress toward the stated $30.3 billion economic-benefit target, and how policyholder elections affect premiums, claims and expenses.
- How much Q1 earnings depended on Enact reserve releases and other excluded or volatile items; compare GAAP net income with the company’s non-GAAP adjusted operating income and review its reconciliation.
- Enact’s future delinquencies, cure and claim severity, new-business trends, PMIERs capital position, and ability to make dividends and repurchases without weakening policyholder protection or growth capacity.
- Holding-company liquidity after share repurchases, debt service and anticipated taxes, including the amount and timing of future Enact distributions; distinguish holding-company cash from consolidated cash.
- Investment-portfolio credit quality and liquidity, realized losses from First Republic Bank holdings, unrealized fixed-income losses, and the impact of interest-rate changes on reserves, OCI and equity.
- Developments and potential financial exposure in the disclosed litigation and BCBSNE arbitration; the filing does not provide a clear estimate of possible losses.