GENWORTH FINANCIAL INC annual report, FY2017

Genworth Financial, Inc. — 2017 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2017. Unless noted otherwise, financial amounts are in U.S. dollars. The filing was signed February 28, 2018; certain transaction and ratings updates describe events through that date.

Business context and reporting period

Genworth provides mortgage insurance in the United States, Canada and Australia, and long-term care insurance in the United States. It also services legacy life, annuity and other runoff businesses. Sales of traditional life insurance and fixed annuities were suspended in March 2016. The company operates through five segments, plus Corporate and Other.

Financial results and key metrics

Metric	2017	2016
Total revenue	$8.295 billion	$8.369 billion
Income (loss) from continuing operations before taxes	$729 million	$320 million
Net income (loss) available to common stockholders	$817 million	$(277) million
Adjusted operating income (loss), a non-GAAP measure	$696 million	$(316) million
Net cash from operating activities	$2.554 billion	$1.852 billion
Total assets at year-end	$105.297 billion	$104.658 billion
Total equity at year-end	$15.328 billion	$14.467 billion
Long-term borrowings at year-end	$4.224 billion	$4.180 billion
Cash and cash equivalents at year-end	$2.875 billion	$2.784 billion

• Revenue fell about 1%. Premiums declined 4% to $4.004 billion, while net investment income rose 1% to $3.200 billion and net investment gains were $265 million, up from $72 million.
• Benefits and expenses totaled $7.566 billion, down 6%. Acquisition and operating expenses declined 20% to $1.022 billion; interest expense fell 16% to $284 million.
• The 2017 income tax benefit was $207 million. Fourth-quarter tax benefits included a $258 million release of a deferred-tax valuation allowance and tax effects of the Tax Cuts and Jobs Act (TCJA). The company reported a $154 million benefit from remeasuring deferred taxes at the new federal rate, alongside other tax items.
• Consolidated cash flow from operations increased; investing activities used $759 million and financing activities used $1.768 billion. Genworth Holdings, the debt-issuing holding company, had $795 million of cash and cash equivalents at year-end, including restricted assets; this is distinct from consolidated cash.
• Genworth Holdings had about $3.8 billion of debt principal outstanding, including approximately $597 million maturing in 2018, $397 million in 2020 and $1.085 billion in 2021. The company said its existing holding-company cash was not sufficient to repay all debt at maturity.

Material changes versus the prior comparable period

• Common-stockholder results swung to $817 million net income from a $277 million loss, driven in part by tax benefits, lower expenses and improved mortgage insurance loss experience. Adjusted operating income also improved to $696 million from a $316 million loss.
• U.S. Mortgage Insurance adjusted operating income rose to $311 million from $250 million; its loss ratio improved to 15% from 24%. New insurance written decreased 9% to $38.9 billion, while primary insurance in-force increased 10% to $151.8 billion.
• Canada Mortgage Insurance adjusted operating income increased to $157 million from $146 million, and its loss ratio fell to 10% from 22%. New insurance written dropped 49% to $24.2 billion, primarily reflecting regulatory changes and lower bulk demand.
• Australia Mortgage Insurance recorded an adjusted operating loss of $88 million versus adjusted income of $62 million. A change in the expected premium-earning pattern reduced 2017 earned premiums by $468 million and net income by $141 million after tax and noncontrolling interests. The change affects recognition timing, not total lifetime premiums.
• U.S. Life Insurance adjusted operating income was $22 million versus a $215 million loss. Long-term care results improved from 2016’s reserve charge, but the segment remained exposed to claims, mortality, interest rates and the success of future premium rate actions.

Outlook, management commentary, risks and unusual items

• China Oceanwide transaction: The proposed acquisition was valued at about $2.7 billion, or $5.43 per share in cash. China Oceanwide also committed $600 million for Genworth debt and $525 million for U.S. life businesses, in addition to $175 million previously committed by Genworth Holdings for restructuring. The transaction remained subject to CFIUS and other regulatory approvals, including resolution of a GLAIC valuation issue. The parties extended their termination waiver to April 1, 2018; completion was not assured.
• Financing alternatives: As of the filing, Genworth was pursuing a senior secured term loan of up to $450 million, with closing subject to definitive documents and conditions. An affiliate of China Oceanwide had committed up to $110 million toward the loan, subject to terms. If the transaction did not close, the company said it might pursue asset sales, potentially including its Canadian or Australian mortgage insurance businesses or a partial U.S. mortgage insurance sale.
• Insurance-company capital and liquidity: U.S. life subsidiaries’ consolidated risk-based capital ratio was approximately 286%, down from 329%. The company did not expect U.S. life subsidiaries to pay dividends to holding companies in the foreseeable future. U.S. mortgage insurance met current PMIERs, with available assets estimated at 121% of requirements and more than $550 million of excess; proposed PMIERs 2.0 could materially reduce that cushion. Canada’s MCT ratio was about 172% against a 150% supervisory target; Australia’s PCA ratio was 193%.
• Long-term care assumptions: The 2017 annual review left GAAP margins positive but reduced the margin for the non-acquired block to approximately $0.4–$0.8 billion from $0.8–$1.3 billion. The company’s assumed future rate actions contributed about $7.9 billion to that margin; approvals and timing are uncertain. In 2017, 114 approvals across 36 states represented a weighted-average 28% increase on about $714 million of annualized premiums; 226 additional filings were submitted in 45 states on about $1.3 billion of annualized premiums. The acquired block had a thinner margin of about $100–$200 million.
• Other reserve and earnings items: The company recorded $74 million of after-tax charges in universal and term universal life products after its 2017 assumption review. Fixed immediate annuities incurred $89 million of additional reserves in 2017 due largely to low interest rates. U.S. life subsidiaries recorded $188 million of additional GLICNY statutory reserves in fourth-quarter 2017; a further asset-adequacy deficit of approximately $302 million was to be phased in over two years, subject to updated assumptions.
• Mortgage and market risks: Management cited potential deterioration in housing or employment, interest-rate and investment risks, regulatory changes, reliance on mortgage lenders and rating agencies, reinsurance counterparty exposure, and uncertainty in actuarial models and long-duration claims. Australia’s negative loss ratio in 2017 was materially affected by the premium-recognition change and should not be read as a normal-period claims margin.
• Ratings and shareholder returns: Rating downgrades had affected U.S. life insurance ratings and sales. One derivatives counterparty terminated about $800 million of notional exposure in 2017; Genworth re-hedged it with financial futures. The common-stock dividend remained suspended, with no stated resumption date.
• Reporting and audit: KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective as of year-end.

Most important facts for investors to verify

• Whether the China Oceanwide deal received required approvals and closed, and whether the promised capital contributions were delivered.
• Whether the proposed term loan closed on acceptable terms, and how the 2018 and subsequent holding-company maturities were refinanced or repaid.
• Actual holding-company liquidity and subsidiary dividend capacity, separately from consolidated cash and assets.
• Long-term care rate approvals, policyholder benefit elections, claims experience, and whether margins and statutory capital remain adequate.
• The Australian premium-earning adjustment’s effect on subsequent reported premiums, earnings and loss ratios, and the underlying claims trend.
• PMIERs 2.0 requirements and the resulting U.S. mortgage insurer capital cushion, alongside lender demand and ratings.
• Whether deferred tax assets remain realizable and whether updated reserve assumptions or legal matters produce further material charges.