GENWORTH FINANCIAL INC annual report, FY2021

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Business context and reporting period

Genworth Financial, Inc.’s Form 10-K covers the fiscal year ended December 31, 2021; it is an annual filing, not a standalone fourth-quarter report. Genworth operates Enact (U.S. mortgage insurance), U.S. Life Insurance (including long-term care, legacy life insurance and fixed annuities), and Runoff, plus Corporate and Other activities. Enact became publicly traded after Genworth sold a minority interest in September 2021; Genworth retained 81.6% ownership and continued to consolidate it.

Key financial results and position

  • Revenue: $7.832 billion, down 5% from $8.284 billion in 2020. Premiums fell 10% to $3.435 billion, partly offset by net investment income rising 4% to $3.370 billion. Net investment gains were $323 million versus $492 million.
  • Profit: Net income available to Genworth common stockholders was $904 million, compared with $178 million in 2020. Income from continuing operations available to common stockholders was $885 million versus $698 million. Adjusted operating income, a non-GAAP measure, was $765 million versus $310 million. Results include $19 million of discontinued-operations income available to common stockholders, compared with a $520 million loss in 2020.
  • Segment performance: Enact adjusted operating income rose 36% to $520 million. U.S. Life Insurance reported $267 million, versus $68 million; long-term care insurance contributed $445 million, while life insurance recorded a $269 million adjusted operating loss. Runoff contributed $54 million; Corporate and Other recorded a $76 million adjusted operating loss.
  • Mortgage insurance indicators: Enact’s loss ratio improved to 13% from 39%; its expense ratio rose to 25% from 23%. New insurance written decreased 3% to $97.0 billion, while primary insurance in-force grew 9% to $226.5 billion. Year-end delinquency rate fell to 2.65% from 4.86%.
  • Long-term care: The loss ratio decreased to 61% from 71%. Approved 2021 rate actions represented approximately $403 million of incremental annual premiums. Management estimated cumulative net-present-value benefit from its rate-action plan at $19.6 billion through 2021, against an expected total of $28.7 billion.
  • Cash flow: Net cash from operating activities was $437 million, down from $1.960 billion. Investing activities provided $896 million, compared with $1.153 billion used in 2020; financing activities used $2.419 billion. Cash, cash equivalents and restricted cash decreased by $1.085 billion.
  • Balance sheet and investments: Total assets were $99.171 billion, down from $105.747 billion; total equity was $16.266 billion, up from $15.820 billion. Invested assets totaled $72.278 billion, including $60.480 billion of fixed-maturity securities. The filing reports that 95% of the fixed-maturity portfolio was investment grade.
  • Debt and liquidity: Genworth Holdings repaid approximately $2.1 billion of debt and other obligations during 2021. It reported $1.2 billion of outstanding long-term debt and no maturities until February 2024; the February 2024 notes had $282 million principal outstanding at year-end. Genworth Holdings reported $353 million of unrestricted cash, cash equivalents and liquid assets in the liquidity discussion; another section cites $356 million of cash, equivalents and liquid assets. These figures may reflect different definitions. Consolidated long-term borrowings were $1.899 billion, including Enact Holdings debt.

Material changes versus the prior comparable period

  • Profit improved substantially: common-stockholder net income rose to $904 million from $178 million, and adjusted operating income rose to $765 million from $310 million. The comparison is affected by a $486 million discontinued-operations loss in 2020, versus $27 million of income in 2021 before noncontrolling interests.
  • Enact earnings improved as new delinquencies and losses declined and reserve development turned favorable. The 2020 comparison included COVID-19-related mortgage forbearance and reserve strengthening.
  • Long-term care results improved with higher investment income and the effects of approved rate actions and benefit reductions. Genworth also accrued $649 million of pre-tax reserves in 2021 for projected profits followed by losses; the cumulative accrual was $1.274 billion.
  • Net investment gains were lower, mainly because large gains from 2020 sales of U.S. government securities did not recur. Rising interest rates also reduced the fair value of fixed-maturity securities and unrealized investment gains.
  • Operating cash flow declined sharply, in part due to a $360 million initial payment for a life reinsurance transaction, higher payments to AXA, and lower collateral received from derivative counterparties.
  • The Enact minority IPO raised approximately $529 million net for Genworth Holdings, and Genworth sold its Australian mortgage insurance business for approximately $370 million net. Proceeds supported debt repayment, including repayment of the AXA promissory note.

Outlook, management commentary, risks and unusual items

  • Management’s priorities include reducing Genworth Holdings debt toward approximately $1.0 billion, maximizing Enact’s value, stabilizing legacy long-term care insurance, developing long-term care growth initiatives and potentially returning capital to shareholders.
  • Enact intended to establish a formal dividend policy and begin regular common dividends in 2022, subject to business conditions, capital requirements, regulatory and GSE constraints, and board approval. Genworth said it expected to outline a more specific shareholder capital-management plan later in 2022. No guaranteed dividend, buyback or earnings guidance was provided.
  • Management said it may seek to repay the February 2024 Genworth Holdings debt early. Enact’s year-end PMIERs sufficiency was 165% of published minimum required assets, but this measure excludes the GSE Restrictions. Future Enact dividends depend partly on those restrictions and the resolution of COVID-related delinquencies.
  • Long-term care profitability and reserve adequacy depend materially on future premium increases and benefit reductions receiving regulatory approval. Genworth reported that in January 2022 it began litigation with two states that had refused to approve actuarially justified rate increases. Management also identified higher expected long-term benefit utilization, including cost-of-care growth associated with inflation, as an adverse assumption update.
  • COVID-19-related forbearance, delayed foreclosures, future claim severity, home prices and employment remain uncertainties for Enact. Long-term care claims, mortality and care-setting changes also remain difficult to predict. Reserve estimates and rate-action assumptions are judgmental and can materially affect earnings and capital.
  • Other risks include dependence of holding-company liquidity on Enact dividends and intercompany tax payments; the weak financial-strength ratings of principal life insurance subsidiaries; reinsurance counterparty concentration (including a large UFLIC recoverable secured by trust accounts); interest-rate and investment risks; and regulatory or competitive changes affecting private mortgage insurance.
  • Unusual items included a $92 million pre-tax loss ($73 million after tax) from a life block reinsurance transaction in the fourth quarter, which generated more than approximately $170 million of statutory capital for U.S. life subsidiaries; $34 million of restructuring expense; and debt-extinguishment losses and make-whole payments. The filing expects new long-duration insurance accounting guidance effective in 2023 to significantly reduce equity at transition and may increase earnings volatility.
  • KPMG issued an unqualified opinion on the financial statements and on internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021.

Important facts for investors to verify

  • Reconcile the reported Genworth Holdings liquidity figures ($353 million versus $356 million) and distinguish parent-company cash from consolidated cash and regulated insurance-company assets.
  • Track Enact’s dividend policy, actual distributions to Genworth, GSE Restrictions and PMIERs capital sufficiency after accounting for those restrictions.
  • Monitor long-term care rate approvals and implementation, the outcome of the two state lawsuits, and whether actual claims, care costs and policyholder behavior match reserve assumptions.
  • Review the quality and sustainability of 2021 earnings, including investment gains, discontinued operations, noncontrolling interests, reserve accruals and the non-GAAP adjustments used in adjusted operating income.
  • Assess liquidity and debt repayment plans through the February 2024 maturity, including reliance on Enact dividends and intercompany tax payments, and consider the potential equity impact of the 2023 long-duration accounting changes.