Genworth Financial, Inc. — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2021; dollar amounts are in millions unless noted. Genworth operates U.S. Mortgage Insurance, U.S. Life Insurance and Runoff segments. On March 3, it completed the sale of its approximately 52% interest in Genworth Australia, and reports that business as discontinued operations. The proposed China Oceanwide transaction was terminated on April 6, after quarter-end.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 / prior date |
|---|---|---|
| Total revenue | $1,985 | $1,809 |
| Income (loss) from continuing operations | $174 | $(60) |
| Net income (loss) attributable to common stockholders | $187; $0.37 diluted per share | $(66); $(0.13) diluted per share |
| Adjusted operating income (non-GAAP) | $168; $0.33 per diluted share | $20; $0.04 per diluted share |
| Net cash from (used by) operating activities | $(247) | $680 |
| Net cash from (used by) investing activities | $335 | $(551) |
| Net cash used by financing activities | $(780) | $(957) |
| Cash, cash equivalents and restricted cash | $1,964 | $2,561 at Dec. 31, 2020 |
| Total assets / total equity | $98,558 / $14,758 | $105,747 / $15,820 at Dec. 31, 2020 |
| Long-term borrowings | $2,922 | $3,403 at Dec. 31, 2020 |
Net investment gains were $33, versus a $99 loss a year earlier. Benefits and expenses fell to $1,752 from $1,874; acquisition and operating expenses rose to $275 from $237. The effective tax rate was 25.3%, versus 7.7%. Other comprehensive loss was $603, driven in part by losses on hedges and securities; total comprehensive loss was $408.
Segment adjusted operating income (loss): U.S. Mortgage Insurance $126 (prior $148); U.S. Life Insurance $62 (prior loss $70); Runoff $12 (prior loss $13); Corporate and Other loss $32 (prior loss $45). Within U.S. Life, long-term care insurance earned $95 (prior $1), life insurance recorded a $63 loss (prior $77 loss), and fixed annuities earned $30 (prior $6).
Margins and operating indicators: U.S. Mortgage Insurance loss ratio rose to 22% from 8%; its expense ratio was 24% in both periods. Long-term care insurance loss ratio declined to 62% from 78%. New mortgage insurance written increased 39% to $24.9 billion; primary insurance in-force rose 12% to $210.2 billion. Mortgage delinquency rate was 4.48%, versus 1.78% a year earlier, and primary persistency fell to 56% from 74%.
Material changes and significant developments
- Revenue increased 10%, while common-stockholder earnings swung from a loss to a profit. Adjusted operating income rose to $168 from $20, but results included significant differences in investment gains and segment experience.
- The Australia sale generated approximately $370 in net cash proceeds. Genworth recorded a $122 pre-tax sale loss, largely offset by a $119 tax benefit, for a $3 after-tax sale loss. Proceeds helped repay approximately $247 to AXA.
- Genworth repaid $338 principal on 7.20% notes due February 2021 and repurchased $146 principal of 7.625% notes due September 2021, recording a $4 pre-tax loss on that repurchase. The September notes had $514 outstanding at quarter-end.
- Accumulated other comprehensive income declined to $3,675 from $4,425, mainly reflecting market-related losses. Fixed-maturity securities at fair value fell to $60,231 from $63,495 as interest rates rose.
Outlook, liquidity, risks and contingencies
- Management stated that holding-company liquidity was sufficient to meet obligations and maintain operations for one year from filing issuance, based on known and reasonably estimable conditions and management actions. Genworth Holdings had $697 of unrestricted cash at March 31. This assessment includes the September 2021 note maturity; it does not remove longer-term financing needs.
- Remaining AXA promissory-note obligations, including expected future claims, were estimated at $343 and are due in September 2022. Genworth also has $400 of senior notes due in August 2023 and $400 due in February 2024. Management is preparing a planned partial sale of U.S. mortgage insurance, subject to market conditions, approvals and other conditions, and remains open to alternatives.
- Management warned that COVID-19’s duration and economic effects are uncertain. Mortgage-insurance claims depend on whether borrowers in forbearance cure or make claims; approximately 4.9% of active primary policies were reported in forbearance at quarter-end, and about 64% of those were delinquent. COVID-related forbearance also affects reserve estimates and regulatory capital requirements.
- Long-term care results benefited from higher claim terminations, largely associated with higher mortality, and favorable prior-claim development. The company increased reserves for COVID-related incidence and mortality experience, which it believes may be temporary. It also reported $799 of accrued reserves for projected profits followed by future losses in the long-term care block, versus $625 at year-end.
- The long-term care business depends on actuarial assumptions and approved in-force premium increases and benefit reductions. During Q1, approvals represented approximately $157 of incremental annual premiums; management reported approximately $15.2 billion of approved in-force rate increases on a net-present-value basis since 2012.
- U.S. Mortgage Insurance had estimated available assets of $4,769 against $3,005 of PMIERs required assets (159% sufficiency). This measure does not reflect GSE-imposed restrictions. Temporary PMIERs capital relief and dividend restrictions were in effect through June 30, 2021; future subsidiary dividends remain subject to regulatory and business conditions.
- Restructuring expense was $21 in Q1, versus $1 a year earlier. Management said completed expense reductions were expected to yield approximately $50 in annualized savings. Common-stock dividends and stock repurchases remained suspended indefinitely.
- Material litigation and regulatory matters include claims concerning long-term care premium increases and life-insurance cost-of-insurance charges, as well as derivative shareholder suits. The company said it could not predict the ultimate outcomes or estimate reasonably possible losses for the identified matters. It also has $1,192 of limited-partnership funding commitments, plus other investment commitments.
- On May 4, after quarter-end, S&P changed outlooks for Genworth and GMICO from Negative to Creditwatch Positive; ratings were unchanged. S&P indicated potential upgrades depended on successful execution of the strategic plan.
Most important facts for investors to verify
- Whether the planned partial U.S. Mortgage Insurance sale can be completed, on acceptable terms, and in time to address 2022–2024 obligations.
- Holding-company cash availability and the ability to refinance or repay the $514 September 2021 notes and $343 AXA obligation, including restrictions on subsidiary dividends and proceeds.
- Mortgage-insurance reserve adequacy as forbearance plans expire, and the effect of delinquencies, cures, claims and GSE/PMIERs rules on capital and dividends.
- Whether favorable long-term care claim experience is temporary, and whether approved rate actions, reserve assumptions and future-loss accruals remain adequate.
- How much reported earnings depend on investment-market movements, sale-related tax effects, restructuring costs and other items excluded from adjusted operating income.
- Potential outcomes and financial exposure from litigation, regulatory matters and investment commitments; the filing does not provide a clear loss estimate for the identified legal matters.