Genworth Financial, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited consolidated results are presented in U.S. dollars; amounts below are in millions unless stated otherwise. Genworth operates Enact (U.S. mortgage insurance), U.S. Life Insurance, and Runoff. Australia mortgage insurance is presented as discontinued operations following its sale in March 2021.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $2,070 | $2,318 | $6,096 | $6,130 |
| Income from continuing operations | $306 | $402 | $725 | $397 |
| Net income (loss) attributable to common stockholders | $314 | $418 | $741 | $(89) |
| Adjusted operating income attributable to common stockholders (non-GAAP) | $239 | $125 | $601 | $122 |
| Net cash from operating activities | Not provided for quarter | Not provided for quarter | $290 | $1,452 |
Q3 diluted GAAP EPS was $0.61, versus $0.82; continuing-operations diluted EPS was $0.59, versus $0.79. Nine-month diluted GAAP EPS was $1.44, versus a loss of $0.17; adjusted operating income per diluted share was $1.17, versus $0.24.
- Revenue drivers: Q3 revenue fell 11%, largely because net investment gains declined to $88 from $351; premiums were $944 versus $963 and net investment income rose to $859 from $820. Nine-month revenue was broadly flat; net investment income increased to $2,504 from $2,381, while investment gains declined to $191 from $345.
- Expenses and margins: Q3 benefits and expenses were $1,697 versus $1,786, but acquisition and operating expenses rose 23% to $290. Nine-month benefits and expenses declined 7% to $5,170, while acquisition and operating expenses increased 27% to $869. Enact’s loss ratio was 14% in Q3 versus 18% and 16% for nine months versus 41%. Long-term care insurance’s nine-month loss ratio was 61% versus 73%.
- Balance sheet and debt: At September 30, total assets were $99,875, total liabilities $83,823, and total equity $16,052. Consolidated long-term borrowings were $2,412, down from $3,403 at year-end 2020. Genworth Holdings’ debt carrying value was $1,672; it had no additional debt maturities until August 2023.
- Liquidity: Consolidated cash, cash equivalents and restricted cash were $1,937, down from $2,561 at December 31, 2020. Genworth Holdings reported $635 of unrestricted cash, cash equivalents and liquid assets and said it expects to meet obligations for one year from issuance of the statements. The company cautioned that subsidiary dividend restrictions and business conditions affect holding-company liquidity.
- Cash flow: Nine-month investing activities provided $469, compared with $1,279 used in 2020; financing activities used $1,478, versus $734. Operating cash flow fell to $290. The filing attributes the decline in part to lower derivative collateral inflows and higher AXA payments; investment sales and divestiture proceeds supported investing cash flow.
Material changes and notable events
- Genworth sold 18.4% of Enact Holdings in a September IPO and concurrent private sale, receiving approximately $529 net proceeds; it retained about 81.6% ownership. The transaction reduced Genworth’s share of Enact income and created noncontrolling interest.
- Genworth sold its approximately 52% stake in Genworth Australia in March for approximately $370 net cash proceeds. Australia is reported as discontinued operations; comparative periods were re-presented.
- Genworth repaid the remaining AXA secured promissory note balance of approximately $296 in September, after a $245 payment associated with the Australia sale. Approximately $32 remained payable for estimated claims still being processed; management estimated approximately $36 of AXA payments over the next year.
- Genworth Holdings repaid its 7.20% notes at maturity and early redeemed its remaining 7.625% notes, including a $6 make-whole premium. The company stated its strategic goal is to reduce Genworth Holdings debt to approximately $1 billion over time. Completed expense initiatives are expected to generate about $50 annualized savings.
- Enact’s estimated PMIERs available assets were $5,126 against $2,839 required, a 181% sufficiency ratio. Enact’s statutory regulator approved a $200 dividend for year-end 2021, but any payment remained subject to business conditions and approvals.
- Net unrealized investment gains attributable to Genworth declined to $1,847 from $2,214 at year-end, mainly reflecting higher interest rates. Total other comprehensive income was a loss of $453 for the first nine months.
Outlook, commentary, risks and contingencies
- No formal earnings or revenue guidance is provided in the supplied filing text. Management says liquidity is sufficient for one year and continues to prioritize debt reduction, expense control, stabilizing U.S. life insurance, and a planned long-term care insurance joint venture.
- Long-term care rate actions remain central to management’s plan: approvals during the first nine months represented approximately $323 of incremental annual premiums. The company reported a $1,120 reserve accrual for projected profits followed by losses, up from $625 at year-end 2020, with projected profitable periods currently extending through 2031.
- Management expects to complete its annual long-term-care claim-reserve and broader life-insurance assumption reviews in Q4 2021. It noted that changes to assumptions could materially affect reserves, margins, DAC and results; review work to date had not indicated a need to strengthen claim reserves, but was not complete.
- COVID-19 impacts remain uncertain. Risks include mortgage delinquencies and forbearance cures or claims, changing mortality and claim incidence, economic recovery, inflation, supply-chain disruption, interest-rate and equity-market volatility, and regulatory or rating changes. About 3% of Enact active primary policies were reported in forbearance at quarter-end; approximately 36% of Q3 new primary delinquencies were in forbearance.
- Other significant risks include long-term-care rate approvals and policyholder responses, adequacy of insurance reserves, restricted subsidiary dividends, GSE/PMIERs requirements, investment and counterparty credit risk, and litigation. The filing says pending legal matters’ ultimate outcomes and potential losses generally cannot be estimated; a nationwide long-term-care disclosure settlement had preliminary approval, with final approval hearing scheduled for February 2022.
- Adopted income-tax accounting guidance had no significant impact. Long-duration insurance accounting guidance effective in 2023 is expected to significantly affect the financial statements and materially reduce equity at transition; Genworth does not intend early adoption.
Most important facts for investors to verify
- Whether Enact’s earnings, capital adequacy and any proposed $200 dividend remain consistent with GSE restrictions, regulatory requirements and Genworth’s holding-company liquidity needs.
- Results of the Q4 2021 long-term-care reserve and assumption reviews, including impacts on the $1,120 profits-followed-by-losses accrual, DAC and statutory capital.
- Actual resolution and claim rates for COVID-related mortgage delinquencies and forbearance, alongside changes in Enact’s loss ratio and PMIERs capital cushion.
- Whether the approximately $50 in annualized cost savings are realized and whether Genworth makes further debt repayments toward its approximately $1 billion holding-company debt goal.
- Final approval and financial effects of the long-term-care settlement, remaining AXA claims, and other pending litigation and regulatory proceedings.