Genworth Financial, Inc. — 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018, with comparisons primarily to 2017. Genworth provides mortgage insurance in the United States, Canada and Australia; its U.S. Life Insurance business is largely a legacy long-term-care, life and annuity portfolio, while Runoff services discontinued or non-strategic products. The company’s stated priorities are improving mortgage-insurance performance, stabilizing U.S. life insurance, reducing debt and increasing financial flexibility.
Financial results and key metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $8.430 billion | $8.295 billion |
| Income before taxes | $448 million | $729 million |
| Net income | $297 million | $927 million |
| Net income attributable to common stockholders | $119 million; $0.24 per share | $817 million; $1.64 per share |
| Adjusted operating income attributable to common stockholders (non-GAAP) | $179 million | $696 million |
| Net cash from operating activities | $1.633 billion | $2.554 billion |
| Cash, cash equivalents and restricted cash | $2.177 billion | $2.875 billion |
| Total assets / total equity | $100.923 billion / $14.189 billion | $105.297 billion / $15.328 billion |
| Long-term borrowings | $4.025 billion | $4.224 billion |
Revenue, earnings and cash flow. Revenue rose 2%, as premiums increased 13% and net investment income increased 2%; these gains were partly offset by net investment losses of $146 million, compared with gains of $265 million in 2017. Benefits and expenses increased 5%, chiefly reflecting higher insurance reserves. Operating cash flow declined about 36%. The filing reports no single consolidated operating-margin measure; net income attributable to common stockholders was about 1.4% of revenue.
Liquidity and capital. Genworth Holdings reported $429 million of cash, cash equivalents and restricted cash at year-end. It has approximately $3.6 billion of debt principal outstanding, including about $0.4 billion due in 2020 and $1.1 billion due in 2021; management says existing holding-company cash is insufficient to repay all debt at maturity. The $450 million secured term loan closed in March 2018, matures in March 2023 and carried a 7.0% rate at year-end. Common-stock dividends have been suspended since 2008. Management does not expect dividends from U.S. life subsidiaries in the foreseeable future.
- U.S. life subsidiaries’ consolidated RBC ratio was approximately 199%, down from 282% in 2017.
- U.S. mortgage insurance had estimated available assets equal to 129% of PMIERs requirements, with more than $750 million of excess assets; estimated coverage under PMIERs 2.0 was 120%, or more than $550 million above requirements.
- GMICO’s risk-to-capital ratio was 12.5:1, versus a 25:1 state maximum. Canada’s MCT ratio was about 172%; Australia’s PCA ratio was about 194%.
Material changes versus 2017
- U.S. Mortgage Insurance adjusted operating income increased to $490 million from $311 million, supported by lower losses, higher in-force business and investment income.
- Canada Mortgage Insurance adjusted operating income increased to $187 million from $157 million, although losses rose and new insurance written fell 30%.
- Australia Mortgage Insurance returned to adjusted operating income of $76 million from an $88 million loss. Comparability is significantly affected by a 2017 premium-earnings-pattern revision that reduced 2017 earned premiums by $468 million and shifted recognition into later periods.
- U.S. Life Insurance moved to a $376 million adjusted operating loss from $22 million of income. Long-term-care insurance alone recorded a $348 million adjusted operating loss, versus $59 million of income.
- Corporate and Other shifted to a $233 million adjusted operating loss from $243 million of income, largely because the 2017 tax-reform benefit did not recur.
- Total equity fell $1.139 billion. Other comprehensive loss was $1.270 billion, mainly reflecting lower unrealized investment gains and currency translation effects.
Outlook, commentary and risks
- China Oceanwide transaction: The proposed acquisition is valued at approximately $2.7 billion, or $5.43 per share in cash. U.S. domestic insurance approvals had been received by January 2019, but Canadian regulatory approval and China currency-conversion/funds-transfer clearance remained outstanding. The parties extended their termination waiver through March 15, 2019. A proposed $1.5 billion post-closing capital plan is conditional on closing and regulatory approvals; final contributions were expected by December 31, 2019. The company warns that failure to close could intensify ratings, liquidity and refinancing pressure and lead to strategic asset sales, including possible sales of its Canadian or Australian mortgage-insurance businesses.
- Debt actions: The term loan proceeds, together with $175 million of cash, funded redemption of the $597 million May 2018 senior notes. China Oceanwide’s originally contemplated $600 million contribution toward those notes was waived. The company also waived the proposed GLAIC unstacking; after a merger closing, Genworth Holdings agreed to contribute $175 million to GLIC in three tranches through January 2020, and GLAIC is to purchase a $200 million intercompany note at fair value, no less than principal.
- Long-term care: The fourth-quarter annual claims review increased claim reserves by $308 million and reinsurance recoverables by $17 million; management reported a $230 million charge to net income from the review. The segment’s loss ratio rose to 95% from 76%. In-force rate actions remain critical: 120 approvals in 33 states in 2018 represented a weighted-average increase of 45% on about $875 million of annualized premiums. Management estimated cumulative rate-action benefit of $10.5 billion in net present value, about 65% of its plan. Approval timing and amounts are uncertain, and one state was in litigation over rate actions.
- Other assumption and market effects: The annual review of universal and term universal life assumptions produced a $91 million unfavorable after-tax adjustment. Rising interest rates reduced fixed-income fair values and contributed to lower accumulated other comprehensive income; equity-market weakness also affected runoff variable-annuity guarantees. Investment gains and losses and actuarial estimates can make reported earnings volatile.
- Ratings and contingencies: Moody’s affirmed Genworth Holdings’ unsecured debt rating with a negative outlook in February 2019 and placed principal life subsidiaries under review for downgrade, citing holding-company liquidity, debt-service capacity, fourth-quarter operating losses and transaction delays. Litigation includes claims concerning insurance practices and the transaction; the filing says ultimate outcomes and possible losses are generally not predictable. The filing also identifies reserve adequacy, rate approvals, mortgage-market conditions, PMIERs requirements, reinsurer/counterparty performance, foreign exchange, cybersecurity and regulatory change as material risks.
- Management outlook: Management expected Canadian and Australian mortgage-insurance loss ratios in 2019 to be similar to or modestly higher than 2018, respectively. It anticipated interest rates would continue to rise in 2019 but noted uncertainty about pace and effects. No consolidated earnings guidance was provided in the filing text.
Most important facts for investors to verify
- Whether the China Oceanwide transaction closed, whether the $1.5 billion capital plan was funded, and what conditions applied.
- Holding-company cash, debt maturities, refinancing options and actual dividend capacity from regulated subsidiaries.
- Subsequent U.S. life RBC and financial-strength ratings, and whether reserve reviews or in-force rate approvals changed materially.
- Performance against PMIERs 2.0 and capital levels in Canada and Australia, particularly if housing or currency conditions weaken.
- The assumptions behind long-term-care claims, reserve margins and projected rate actions, including the risk that approvals fall short of expectations.
- Reported GAAP results versus adjusted operating income, including the impact of investment marks, tax items and the Australian premium-recognition timing shift.
Audit note: KPMG issued an unqualified opinion on the consolidated financial statements and concluded that internal control over financial reporting was effective as of December 31, 2018.