Genworth Financial, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 26, 2016. This is an annual report, not a standalone fourth-quarter filing. The company reorganized its reporting segments beginning in Q4 2015 and recast prior-period segment information. The lifestyle protection business is reported as discontinued operations; the European mortgage insurance business was classified as held for sale.
Business context and financial results
Genworth is an insurer focused on U.S., Canadian and Australian mortgage insurance, U.S. long-term care and life insurance, and runoff products. It reported 2015 revenue of $8.548 billion and total assets of $106.431 billion. All dollar amounts below are U.S. dollars unless otherwise noted.
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $8.548 billion | $8.729 billion |
| Net income (loss) available to common stockholders | $(615) million | $(1.244) billion |
| Continuing-operations income (loss) available to common stockholders | $(208) million | $(1.401) billion |
| Net operating income (loss), a non-GAAP measure | $255 million | $(398) million |
| Net cash from operating activities | $1.591 billion | $2.438 billion |
| Total assets | $106.431 billion | $111.316 billion |
| Total equity | $14.637 billion | $16.797 billion |
| Long-term borrowings | $4.570 billion | $4.612 billion |
| Non-recourse funding obligations | $1.920 billion | $1.981 billion |
Cash, cash equivalents and invested assets totaled $75.093 billion at year-end, including $5.965 billion of cash and cash equivalents. Genworth Holdings, the debt-issuing holding company, held $1.124 billion of cash and cash equivalents, including restricted cash, plus $250 million in U.S. government securities. The company’s cash-flow summary reported net cash from investing activities of $(404) million and net cash from financing activities of $(42) million in 2015.
Segment performance and material changes
- U.S. Mortgage Insurance: 2015 revenue was $665 million; income available to common stockholders and net operating income were each $179 million, up from $91 million in 2014. The loss ratio improved to 37% from 62%. New insurance written rose 30% to $31.6 billion; year-end risk in-force was $31.1 billion.
- Canada Mortgage Insurance: Revenue was $564 million, down 16%, substantially affected by foreign-exchange translation. Income available to common stockholders was $140 million and net operating income was $152 million. The loss ratio was 21%, versus 20%. Year-end risk in-force declined 5% to $102.4 billion in U.S.-dollar terms.
- Australia Mortgage Insurance: Revenue was $474 million, down 12%, with currency effects contributing to the decline. Income available to common stockholders was $103 million and net operating income was $102 million. The loss ratio rose to 23% from 19%; new insurance written fell 24% to $24.9 billion.
- U.S. Life Insurance: Revenue was $6.545 billion. The segment recorded a GAAP loss of $253 million available to common stockholders but net operating income of $43 million, compared with a $641 million net operating loss in 2014. Long-term care insurance produced $29 million of net operating income versus an $815 million loss in 2014; its loss ratio fell to 74% from 129%, reflecting the absence of the large 2014 reserve charges.
- Runoff: Net operating income was $27 million, down from $48 million in 2014. Corporate and Other reported a net operating loss of $248 million, including holding-company debt costs and the estimated European mortgage insurance sale loss.
Revenue declined 2% year over year. The common-stockholder net loss narrowed, but remained substantial; the 2015 result included a $407 million loss from discontinued operations. Benefits and expenses declined from 2014, when Genworth recorded $849 million of goodwill impairments and significant long-term care reserve increases. In 2015, the company recorded a $455 million pre-tax DAC impairment on term life policies in connection with a life-block transaction and a $194 million charge from its annual universal and term universal life assumption review. Net investment income was nearly flat at $3.138 billion; net investment losses widened to $75 million from $22 million. Investment yield declined to 4.5% from 4.6%.
Outlook, management commentary and risks
- Management’s strategy is to grow mortgage insurance selectively, maintain capital buffers and restructure U.S. life insurance. As of year-end, U.S. mortgage insurance met PMIERs operational and financial requirements; three reinsurance transactions and other actions generated approximately $535 million of PMIERs capital credit. GMICO’s statutory risk-to-capital ratio was 16.4:1, below the 25:1 limit described in the filing.
- The company announced on February 4, 2016 that it would suspend sales of traditional life insurance and fixed annuity products after Q1 2016, while continuing to service existing policies. It expects this action to reduce annual pre-tax cash expenses by approximately $50 million and expected a roughly $15 million pre-tax restructuring charge in Q1 2016. A separate cost-reduction plan targeted annual cash savings above $100 million; 2015 actions were expected to produce approximately $90 million to $100 million or more of annualized pre-tax savings.
- Management planned to repatriate business from Bermuda-based BLAIC, then separate and potentially isolate the long-term care business, aiming to complete the steps over 12–18 months. The plan requires regulatory and potentially third-party approvals and includes a commitment to contribute $200 million to GLIC, funded from an anticipated tax benefit associated with a life-block transaction.
- Long-term care results and reserves remain highly dependent on future claims, policyholder behavior, investment returns and regulatory approval of premium increases or benefit reductions. The non-acquired long-term care block had a reported loss-recognition margin of approximately $2.5 billion to $3.0 billion, substantially dependent on anticipated rate actions. The filing’s sensitivities show that a 5% relative increase in future claim costs could reduce that margin by $2.0 billion; a 25-basis-point discount-rate decrease by $1.0 billion; and a 10% reduction in the benefit of future rate actions by $600 million.
- Management expected Canada’s 2016 mortgage originations market to be modestly smaller, potentially resulting in flat or modestly lower flow net premiums written, while earned premiums could be marginally higher excluding currency effects. In Australia, tighter lending standards, lower high-LTV lending and a lost customer relationship were expected to pressure 2016 premiums despite a planned price increase.
- After the Q4 2015 results and restructuring announcement, rating agencies downgraded the principal life subsidiaries in February 2016; S&P also placed GMICO’s BB+ rating on negative credit watch. Genworth reported that distributors representing more than 20% of 2015 individual long-term care sales suspended distribution. Management warned that current ratings would continue to weigh on sales and financing flexibility.
- Liquidity depends on subsidiary dividends and other distributions, which are subject to regulation and capital needs. Genworth Holdings targeted cash and highly liquid securities of at least 1.5 times debt service plus a $350 million buffer. It expected international subsidiaries to be the sole source of holding-company dividends in 2016. The common-stock dividend has been suspended indefinitely.
- The securities class action concerning disclosures about long-term care reserves had a trial scheduled for May 2016. The company said additional losses beyond amounts accrued were reasonably possible and could be material, but it could not estimate a reasonable loss range. A material settlement or judgment could materially affect near-term results and liquidity.
Key investor verification points
- Reconcile GAAP net loss to the $255 million non-GAAP net operating income, including the DAC impairment, life-assumption charges, European sale loss and discontinued-operations loss.
- Track long-term care claims, reserve adequacy, the acquired block’s narrow margin, and the timing and amount of rate increases or benefit changes actually approved and implemented.
- Confirm PMIERs compliance and capital headroom after reinsurance credits, asset valuations and foreign-exchange movements; monitor statutory risk-to-capital and U.S. life RBC ratios.
- Assess holding-company liquidity, debt maturities and refinancing access, subsidiary dividend capacity, the planned $200 million life-company contribution, and the impact of post-year-end ratings downgrades.
- Monitor suspended life and annuity sales, distributor participation, promised expense savings, regulatory approvals for the restructuring and the European mortgage insurance sale.
- Review the outcome and any updated loss assessment for the securities litigation, as well as any developments in reinsurance recoverables, particularly the large UFLIC exposure.
KPMG issued an unqualified opinion on the consolidated financial statements and on internal control over financial reporting as of December 31, 2015. Management reported that the previously identified long-term care reserve implementation material weakness had been remediated.