Business context and reporting period
Genworth Financial, Inc. filed this unaudited Form 10-Q for the quarter ended June 30, 2020. Its businesses include U.S. and Australian mortgage insurance, U.S. life insurance (including long-term care), and runoff operations. The results reflect COVID-19 disruption and a material AXA settlement loss reported in discontinued operations.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $2.138 billion | $1.994 billion | $3.975 billion | $4.038 billion |
| Income from continuing operations | $102 million | $158 million | $30 million | $326 million |
| Net income (loss) available to common stockholders | $(441) million | $168 million | $(507) million | $342 million |
| Adjusted operating income (loss), non-GAAP | $(21) million | $178 million | $12 million | $273 million |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $1.299 billion | $795 million |
Amounts are in U.S. dollars. The reported Q2 and first-half net losses were driven mainly by a $520 million after-tax loss from discontinued operations related to AXA; continuing operations remained profitable. The company reported no consolidated profit margin measure in the provided filing text.
- Cash and liquidity: Consolidated cash, cash equivalents and restricted cash were $2.597 billion at June 30, 2020, versus $3.341 billion at year-end 2019. Six-month investing cash outflow was $887 million and financing cash outflow was $1.144 billion. Genworth Holdings, the parent-level issuer, had $494 million of unrestricted cash at June 30; consolidated cash should not be read as freely available holding-company liquidity.
- Debt and balance sheet: Long-term borrowings were $2.817 billion, down from $3.277 billion at year-end. Total assets were $103.637 billion and total equity was $15.088 billion. Genworth Holdings had $356 million of 7.20% notes maturing in February 2021 and $661 million of 7.625% notes maturing in 2021.
- Investment portfolio: Total investments were $75.322 billion; available-for-sale fixed maturities had a $63.544 billion fair value. Higher unrealized investment gains helped lift accumulated other comprehensive income to $4.447 billion from $3.433 billion at year-end.
- Mortgage insurance indicators: U.S. mortgage insurance reported a 94% Q2 loss ratio, compared with zero in Q2 2019, amid a surge in COVID-related delinquencies. Australia’s Q2 loss ratio was 63%, versus 34% a year earlier.
- Long-term care: The U.S. long-term care loss ratio was 69% for Q2, compared with 74% a year earlier. Management cited higher mortality and favorable prior-year claim development, partly offset by higher new-claim frequency and severity.
Material changes versus comparable periods
- Q2 revenue rose 7% year over year, but continuing-operations income fell to $102 million from $158 million as benefits and policy-reserve expenses increased. First-half revenue declined 2%, while continuing-operations income fell to $30 million from $326 million.
- U.S. mortgage insurance adjusted operating results swung to a $3 million Q2 loss from $147 million income. New flow delinquencies rose to 48,249 in Q2; 87% were subject to forbearance plans. The U.S. business reported 53,894 primary delinquent loans at quarter-end, versus 16,607 at year-end 2019.
- U.S. life insurance had a $5 million Q2 adjusted operating loss versus $66 million income a year earlier; first-half adjusted results were a $75 million loss versus $61 million income. The life insurance business was notably affected by post-level-premium term policy lapses, reserve increases and higher mortality.
- Genworth recorded a $5 million goodwill impairment for its Australian mortgage insurance business. Q2 net investment gains were $159 million, compared with a $46 million loss a year earlier; first-half net investment gains were $7 million versus $29 million.
Outlook, management commentary, risks and unusual items
- AXA settlement: The company recorded a $653 million liability at June 30 in connection with its settlement with AXA over payment-protection-insurance mis-selling claims, generating a $516 million after-tax loss plus $4 million of other after-tax legal fees and expenses in discontinued operations. Genworth paid £100 million (approximately $125 million) on July 21, 2020 and issued a secured note for deferred payments of approximately £317 million in 2022; certain future claims, estimated at approximately £107 million, may be added to the later payment. The note accrues interest at 5.25%, subject to potential reduction under specified conditions.
- Liquidity and going concern: Management said conditions raised doubt about the company’s ability to meet obligations for the next year, but concluded its plans alleviate that doubt. It expects a debt financing through its U.S. mortgage insurance business later in 2020. If the China Oceanwide transaction does not close, it is preparing a potential 19.9% public offering of that business, subject to market conditions. The filing identifies the financing and alternative transaction as plans, not completed transactions.
- China Oceanwide transaction: The proposed $5.43-per-share, approximately $2.7 billion acquisition remained pending. A June 30 waiver extended the deadline to September 30, 2020, subject to funding evidence due August 31. A separate $1.5 billion post-closing capital contribution is conditional on the merger closing and regulatory approvals and was not counted as available liquidity.
- COVID-19 and capital: The company expected no further 2020 dividends from its mortgage insurance subsidiaries, citing higher delinquencies and capital impacts. U.S. mortgage insurance PMIERs available assets were estimated at 143% of required assets, with $1.275 billion of excess; that position benefited materially from a temporary 0.30 multiplier for certain COVID-related non-performing loans. Australia mortgage insurance reported an estimated 177% PCA ratio and also expected no further 2020 dividends.
- Other risks and contingencies: Management highlighted uncertain pandemic duration and recovery, mortgage-insurance claim severity, long-term-care reserve assumptions and rate-action approvals, investment credit losses, low interest rates, ratings pressure, and dependence on external financing. The filing describes multiple litigation and regulatory matters; it says outcomes and reasonably possible losses generally cannot be estimated clearly. A long-term-care assumptions and reserve review was expected in Q4 2020.
- Debt and other unusual items: In January, Genworth Holdings redeemed $397 million of 7.70% notes for a $9 million pretax loss; it repurchased $66 million principal of 2021 notes for $4 million of pretax gains. Rivermont I redeemed $315 million of non-recourse obligations, recording a $4 million pretax loss. These items affected reported results and cash flows.
Important facts for investors to verify
- Whether the planned U.S. mortgage insurance debt financing is completed on terms and timing sufficient to meet holding-company obligations, including 2021 maturities and AXA payments.
- Whether China Oceanwide provides the required funding evidence and closes by the extended deadline; whether the conditional $1.5 billion capital contribution follows.
- How AXA note payments, interest, added claims and any third-party recoveries compare with the company’s estimates.
- Whether COVID-related forbearances convert into claims, how mortgage-insurance losses and PMIERs capital develop, and when subsidiary dividends can resume.
- Results of the planned fourth-quarter long-term-care reserve and assumption review, including the effect of mortality, claims, rate approvals and policyholder behavior.
- Changes in investment credit quality, liquidity, ratings, and the company’s ability to fund obligations without relying on uncompleted transactions.