Genworth Financial, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; filed August 5, 2021. Amounts below are in U.S. dollars. Genworth operates Enact (U.S. mortgage insurance), U.S. Life Insurance and Runoff. Comparatives reflect Australia mortgage insurance as discontinued operations.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $2.041 billion | $2.003 billion | $4.026 billion | $3.812 billion |
| Continuing-operations income (loss) | $245 million | $55 million | $419 million | $(5) million |
| Net income (loss) available to common stockholders | $240 million | $(441) million | $427 million | $(507) million |
| Adjusted operating income (loss), non-GAAP | $194 million | $(23) million | $362 million | $(3) million |
| Diluted EPS | $0.47 | $(0.86) | $0.83 | $(1.00) |
- Q2 revenue grew 2%; six-month revenue grew 6%. Six-month net investment income was $1.645 billion versus $1.561 billion. Net investment gains were $103 million versus a $6 million loss, including favorable limited-partnership results; Q2 gains were $70 million versus $93 million.
- Q2 benefits and expenses were $1.721 billion versus $1.925 billion, helped by lower insurance reserves and mortgage-insurance claims. Acquisition and operating expenses rose to $304 million from $210 million, including costs associated with long-term-care rate actions and policyholder benefit elections.
- Adjusted operating results improved notably at Enact and U.S. Life Insurance. Enact reported Q2 adjusted income of $135 million versus a $3 million loss; its loss ratio fell to 12% from 94%. U.S. Life Insurance reported $71 million versus a $5 million loss, including long-term-care income of $98 million versus $48 million. Runoff Q2 adjusted income declined to $15 million from $24 million.
- Operating cash flow for the first half was $229 million versus $1.299 billion; investing activities provided $541 million versus using $887 million, and financing activities used $1.213 billion versus $1.144 billion. Cash, cash equivalents and restricted cash ended at $2.214 billion, all attributed to continuing operations.
- At June 30, total assets were $100.650 billion, total liabilities $85.486 billion and equity $15.164 billion. Long-term borrowings were $2.924 billion, down from $3.403 billion at year-end 2020. Genworth Holdings reported $823 million of unrestricted cash, cash equivalents and liquid assets for its liquidity assessment.
Material changes and business developments
- Genworth sold its approximately 52% interest in Genworth Australia on March 3 for net proceeds of about $370 million and recorded a $3 million after-tax sale loss. The business is reported as discontinued operations. Its sale contributed to the year-over-year improvement in consolidated net income, alongside the prior-year Australia-related loss and AXA settlement impacts.
- Enact primary insurance in-force increased 10% year over year to $217.5 billion; Q2 new insurance written fell 6% to $26.7 billion, while six-month new insurance written rose 11% to $51.6 billion. Its delinquency rate declined to 3.60% from 5.98% a year earlier, but forbearance and eventual claim outcomes remain uncertain.
- Enact’s reported PMIERs sufficiency was 165% at June 30, with $1.941 billion above published requirements. This measure excludes GSE restrictions. A $303 million insurance-linked reinsurance transaction contributed PMIERs capital credit.
- Long-term-care rate actions generated approximately $206 million of incremental annual premiums approved in the first half. The company recorded $957 million of accruals for projected profits followed by losses, up from $625 million at year-end 2020.
Outlook, liquidity, risks and unusual items
- Management gave no specific earnings or revenue guidance. It said 2021 expense-reduction initiatives completed to date are expected to deliver about $50 million in annualized savings. A potential partial sale of Enact is a key part of the plan to address debt and strengthen the holding company, but timing, size, terms and completion are uncertain and depend on markets, approvals and other conditions.
- Genworth Holdings early redeemed the remaining 7.625% notes on July 21, 2021, after the June 30 reporting date, for about $532 million. Management said this left approximately $1.7 billion of holding-company debt and no debt maturity until August 2023. The remaining AXA promissory note, including expected future claims, was estimated at $344 million and is due September 2022; $400 million of notes is due in each of August 2023 and February 2024.
- Management stated that holding-company liquidity was sufficient for obligations for one year after issuance of the statements. It also noted COVID-19, economic recovery, interest rates, capital-market access, ratings, subsidiary dividends and the potential Enact transaction as important uncertainties. Enact’s GSE restrictions and capital requirements could affect dividends; a $200 million subsidiary dividend was approved for year-end 2021, subject to applicable conditions.
- Key insurance risks include long-term-care claim incidence, mortality and benefit utilization; approvals and effectiveness of premium increases and benefit reductions; mortgage delinquencies and forbearance cures; investment returns; and reserve and DAC estimates. Management expects to complete annual long-term-care and other life-business assumption reviews in Q4 2021. It warned that the long-duration insurance accounting standard effective in 2023 is expected to significantly affect statements and may reduce equity at transition.
- Litigation and regulatory matters include long-term-care rate and disclosure disputes, cost-of-insurance class actions and shareholder derivative suits. A nationwide settlement was agreed in principle in June 2021 in one long-term-care case, but a definitive agreement and court approval remained outstanding; management did not expect a material negative impact if completed on the stated basis. Outcomes for other proceedings and reasonably possible losses were not estimable from the filing.
- Unusual and non-operating items include investment gains, debt repurchases and restructuring costs. The company excludes certain items from adjusted operating income, a non-GAAP measure that is not a substitute for GAAP income and may not be comparable with other companies’ measures.
Most important facts for investors to verify
- Whether the Enact partial sale proceeds, timing and approvals meet the company’s holding-company debt-reduction objectives and whether GSE restrictions change.
- Holding-company liquidity after the July 2021 note redemption, the $344 million AXA obligation due in 2022, and the 2023–2024 maturities.
- Enact’s forbearance cures, claims, PMIERs capital position and ability to pay dividends under GSE and regulatory constraints.
- Long-term-care claim experience, rate-action approvals and realized premium/benefit effects versus the reserve and profits-followed-by-losses assumptions.
- Final terms and approval of the proposed class-action settlement, other litigation outcomes, and the effect of market movements on investment values, reserves and equity.