Genworth Financial, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted. Genworth operates U.S. and Australian mortgage insurance, U.S. life insurance (including long-term care), and runoff businesses. Canada mortgage insurance was sold in December 2019 and is reported as discontinued operations.
Financial performance and condition
| Metric | Q1 2020 | Q1 2019 or prior balance-sheet date |
|---|---|---|
| Total revenue | $1,837 | $2,044; down 10% |
| Net income (loss) available to common stockholders | $(66); $(0.13) per diluted share | $174; $0.34 per diluted share |
| Adjusted operating income available to common stockholders (non-GAAP) | $33; $0.07 per share | $95; $0.19 per share |
| Net investment gains (losses) | $(152) | $75 |
| Net cash from operating activities | $680 | $134 |
| Cash, cash equivalents and restricted cash | $2,483 | $3,341 at December 31, 2019 |
| Total assets / total liabilities | $98,844 / $84,010 | $101,342 / $86,710 at December 31, 2019 |
| Total equity | $14,834 | $14,632 at December 31, 2019 |
| Long-term borrowings | $2,851 | $3,277 at December 31, 2019 |
Revenue fell primarily because net investment gains in the prior-year quarter became losses, including losses on derivatives, limited partnerships and equity securities. Benefits and expenses rose 6% to $1,919, including higher policy benefits and DAC/intangible amortization. The reported loss includes market-related investment losses; adjusted operating income excludes specified items, including net investment gains and losses and early debt-extinguishment losses.
Operating cash flow improved year over year, but investing and financing activities used $551 and $957, respectively. Cash declined by $858 during the quarter. The reduction in debt reflects early redemption of $397 of 2020-maturity notes, repurchase of $14 of 2021 notes, and redemption of $315 of non-recourse funding obligations.
The investment portfolio was $70.7 billion at quarter-end, with fixed-maturity securities representing approximately 84%. Credit-spread widening drove approximately $1.7 billion of net unrealized losses on fixed-maturity securities recorded in accumulated other comprehensive income, not Q1 earnings. Genworth reported no allowance for credit losses on those securities at quarter-end, stating that it expected to recover amortized cost and did not expect to sell them before recovery.
Material changes and segment results
- U.S. Mortgage Insurance: Adjusted operating income increased to $148 from $124. New insurance written rose 86% to $17.9 billion; primary insurance in-force was $198.5 billion. The loss ratio was 8%, unchanged year over year. PMIERs available assets were approximately 142% of required assets, with more than $1.1 billion of excess assets.
- Australia Mortgage Insurance: Adjusted operating income declined to $9 from $14, mainly on lower earned premiums and portfolio seasoning. The loss ratio was 34%. Estimated PCA ratio declined to 178% from 191%, principally following an AUD$182 million DAC write-off under Australian accounting liability adequacy testing; the filing says no corresponding deficiency adjustment was required under U.S. GAAP.
- U.S. Life Insurance: Adjusted operating loss widened to $70 from $5. Long-term care insurance improved to $1 of adjusted operating income from a $20 loss, supported by rate actions and favorable prior-year claim development, partly offset by higher new-claim frequency and severity. Life insurance adjusted loss widened to $77, with higher lapses, reserves and mortality. Fixed annuities adjusted income declined to $6 from $17.
- Runoff: Adjusted operating result shifted to a $13 loss from $20 income, reflecting equity-market and interest-rate declines and related reserve and DAC effects.
- Corporate and Other: Adjusted operating loss narrowed to $41 from $58, largely due to lower interest expense and higher investment income.
Outlook, risks and unusual items
- COVID-19: Management said the ultimate effects were uncertain and largely not reflected in the Q1 results. Risks include weaker investment values, credit losses, commercial mortgage loan modifications, increased mortgage delinquencies and claims, lower originations, capital pressure, low interest rates, reserve changes, and operational disruption. Management expected elevated U.S. mortgage delinquencies as forbearance use and unemployment rose; it had not identified COVID-related delinquencies in Q1. The company expected its PMIERs sufficiency to decline and said U.S. mortgage insurance dividends might not be paid in 2020. Australian regulators also urged limits on discretionary capital distributions, and Australian dividends might not be received for the rest of 2020.
- Liquidity and capital: Management stated that Genworth Holdings had adequate liquidity and near-term options, but highlighted dependence on subsidiary dividends, financing access and potential asset or business transactions. Its next holding-company debt maturity was February 2021. Operating subsidiary dividends and future liquidity remain subject to regulatory limits and pandemic impacts. Common-stock dividends and repurchases remained suspended indefinitely.
- China Oceanwide transaction: The proposed $5.43-per-share cash acquisition remained pending. The parties extended the termination date to June 30, 2020, subject to stated conditions. China Oceanwide had a financing commitment of up to $1.8 billion, but was still finalizing its funding plan. A proposed $1.5 billion post-closing capital contribution is contingent on closing and regulatory approvals; the filing says China Oceanwide has no broader obligation to provide additional capital for legacy long-term care business. Failure to close could require alternative strategic or financing actions.
- Long-term care rate actions: In Q1, the company received 32 approvals across 15 states, representing a weighted-average 35% increase on approximately $130 million of annualized in-force premiums, or about $45 million of incremental annual premiums. Rate approvals, implementation timing and policyholder response remain risks.
- AXA litigation: Genworth paid AXA approximately $134 million in January 2020 under an interim payment following an English court ruling related to the sale of its former lifestyle protection business. AXA’s amended demand was £265 million; the filing also described aggregate invoices of approximately £489 million and a potential tax gross-up of £115 million or more. The amount of any additional loss was not estimable, and a damages hearing was scheduled for June 2020.
- Other notable items: Adoption of expected-credit-loss guidance reduced retained earnings by $55 million, net of tax. The filing reported a $39 million incremental long-term-care reserve associated with profits-followed-by-losses accounting. It also described other pending litigation and regulatory matters whose outcomes or losses generally could not be estimated.
No specific consolidated earnings or revenue guidance was provided. Management emphasized continued focus on mortgage insurance, stabilizing U.S. life insurance, reducing debt and pursuing long-term-care in-force rate actions.
Most important facts for investors to verify
- Whether the China Oceanwide transaction closed by the extended deadline, and whether its financing, regulatory conditions and proposed capital contribution were completed.
- Subsequent COVID-19 effects on mortgage delinquencies, claims, PMIERs assets, subsidiary capital ratios, business volumes and dividend capacity.
- Whether the $1.7 billion fixed-maturity unrealized loss position recovered, and whether credit deterioration led to impairments, allowances or forced sales.
- The outcome and final financial exposure from the AXA damages proceeding and other material litigation.
- Progress on long-term-care rate approvals and implementation, claim experience, reserve assumptions and capital generation.
- Holding-company liquidity, subsidiary dividend availability, debt refinancing or repayments, and the impact of the February 2021 maturity.