Genworth Financial, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless noted otherwise, amounts are in millions of dollars. Genworth operates Enact (mortgage insurance), U.S. Life Insurance, and Runoff businesses; Enact remained consolidated, with Genworth owning 81.6% following its 2021 minority IPO.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior year-end |
|---|---|---|
| Total revenue | $1,892 | $1,985; down 5% year over year |
| Income from continuing operations | $181 | $174 |
| Net income attributable to Genworth common stockholders | $149; $0.29 diluted per share | $187; $0.37 diluted per share |
| Adjusted operating income attributable to common stockholders (non-GAAP) | $131; $0.25 diluted per share | $168; $0.33 diluted per share |
| Cash from operating activities | $(92) | $(247) |
| Cash from investing activities | $138 | $335 |
| Cash used in financing activities | $(326) | $(780) |
| Cash, cash equivalents and restricted cash | $1,291 at quarter-end | $1,571 at December 31, 2021 |
| Total assets / total equity | $93,487 / $15,152 | $99,171 / $16,266 at December 31, 2021 |
| Long-term borrowings | $1,819 | $1,899 at December 31, 2021 |
- Premiums were $931 (down 4%), net investment income was $764 (down 5%), and net investment gains were $28. Benefits and expenses totaled $1,653, down 6%; lower interest expense was a notable contributor.
- Net income includes a $2 discontinued-operations loss in Q1 2022, compared with $21 of discontinued-operations income in Q1 2021. The comparison also reflects $30 of continuing income attributable to Enact noncontrolling interests in 2022.
- Other comprehensive loss was $1,292, largely reflecting falling fair values of fixed-income securities and losses on hedges as interest rates rose. Accumulated other comprehensive income fell to $2,610 from $3,861 at year-end. Fixed-maturity securities’ fair value declined to $55,027 from $60,480; management attributed the decrease principally to higher rates and portfolio sales and maturities exceeding purchases.
- Genworth Holdings repurchased $82 principal amount of 4.80% notes due 2024, leaving $200 principal outstanding. Consolidated long-term borrowings include $741 at Enact and $1,078 at Genworth Holdings, net of related accounting adjustments.
Material changes and segment results
- Enact: Adjusted operating income rose 7% to $135. Revenue declined 6% to $270, while lower losses and reserve releases more than offset lower premiums and the effect of Genworth’s reduced ownership. The segment’s mortgage insurance loss ratio was negative 4%, versus 22% a year earlier, reflecting favorable reserve adjustments and fewer new delinquencies. New insurance written fell 25% to $18.8 billion; primary insurance in-force increased 10% year over year to $231.9 billion. Delinquency rate was 2.40%, down from 4.48% a year earlier.
- U.S. Life Insurance: Adjusted operating loss was $4, versus $62 of income. Long-term care (LTC) adjusted income fell $36 to $59, as lower mortality, higher claim severity and frequency, less favorable IBNR development, lower premiums and investment income outweighed rate actions. Life insurance’s adjusted loss widened to $79, including a legal-settlement accrual; fixed-annuity income declined to $16.
- Runoff: Adjusted operating income declined to $9 from $12, primarily as market declines and higher rates reduced variable-annuity account values and fee income.
- Corporate and Other: Adjusted operating loss narrowed to $9 from $32, mainly because of lower interest expense.
Outlook, management commentary and risks
- Management’s priorities include reducing Genworth Holdings’ debt to approximately $1.0 billion or less, maximizing Enact’s value, stabilizing the legacy LTC block, developing LTC-related offerings, and returning capital to shareholders. Management said it planned to retire the remaining $200 principal of 2024 notes in Q3 2022, subject to economic and business conditions.
- On May 2, 2022, after quarter-end, Genworth authorized a share-repurchase program of up to $350. Management expects most repurchases to follow repayment of the remaining 2024 notes. Enact’s board approved a quarterly dividend program after quarter-end; future payments remain subject to review, approvals, capital needs and business conditions.
- LTC in-force rate actions received approvals representing approximately $101 of incremental annual premiums in Q1. Management estimated cumulative economic benefits of approximately $20.4 billion on a net-present-value basis against an estimated $28.7 billion total required. LTC projections include profits followed by losses; accrued reserves for this pattern were $1,473 at March 31, up from $1,274 at year-end.
- Enact reported PMIERs available assets of $5,222 against $2,961 of net required assets, a 176% sufficiency ratio based on published requirements. The calculation does not reflect separate GSE restrictions on Enact, which include additional capital and liquidity conditions.
- Management reported $214 of unrestricted cash, cash equivalents and liquid assets at Genworth Holdings and said it believed this was sufficient for its obligations over the next 12 months. Holding-company liquidity depends significantly on Enact dividends; management does not expect U.S. life subsidiaries to pay dividends for the foreseeable future. Operating cash flow was negative in the quarter.
- Market risks include inflation, rising interest rates, widening credit spreads, potential recession, geopolitical tensions and possible effects on investments, policyholder behavior and mortgage-insurance claims. Enact’s forbearance-related delinquencies and future cure or claim outcomes remain uncertain.
- Genworth expects the long-duration insurance accounting standard effective January 1, 2023 to significantly affect its statements and reduce equity at transition, primarily because of the required current discount rate for future policy benefits.
- Contingencies include multiple insurance-related class actions and regulatory matters. Genworth accrued $25 for a proposed settlement of one cost-of-insurance case, subject to court approval. It stated it could not predict the ultimate outcome of various other proceedings or estimate reasonably possible losses for them. The filing reported no material changes to its risk factors and no material changes to market risks since year-end.
Most important facts for investors to verify
- Whether operating cash flow recovers and Genworth Holdings can maintain liquidity while meeting debt and other obligations.
- Whether the planned repayment of the remaining 2024 notes occurs as expected, and how any share repurchases are funded and timed.
- Whether Enact can sustain favorable claims experience, meet GSE and PMIERs requirements, and make dividends available to Genworth.
- Whether LTC rate approvals, benefit reductions and claims experience support the estimated path toward economic stabilization, including the profits-followed-by-losses reserve estimates.
- The magnitude of investment and equity effects from continued rate changes, and the eventual transition impact of the new long-duration insurance accounting rules.
- Developments in pending litigation, including court approval of the proposed $25 settlement and outcomes of other material cases.