Genworth Financial, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Genworth operates through Enact (mortgage insurance), U.S. Life Insurance (including long-term care), and Runoff.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $1,839 | $2,070 | $5,612 | $6,096 |
| Income from continuing operations | $134 | $306 | $535 | $725 |
| Net income available to Genworth common stockholders | $104 | $314 | $434 | $741 |
| Adjusted operating income available to common stockholders | $159 | $239 | $466 | $601 |
| Diluted GAAP EPS | $0.20 | $0.61 | $0.85 | $1.44 |
| Diluted adjusted operating EPS | $0.31 | $0.46 | $0.91 | $1.17 |
- Cash flow: Nine-month operating cash flow was $645, versus $290 in 2021; investing activities provided $452, versus $469; financing activities used $1,107, versus $1,478. Cash, cash equivalents and restricted cash ended at $1,561, compared with $1,571 at year-end 2021.
- Balance sheet and capital: Total assets were $85.9 billion, down from $99.2 billion at year-end 2021. Total equity was $10.0 billion, down from $16.3 billion; Genworth stockholders’ equity was $9.3 billion. Accumulated other comprehensive loss was $2.8 billion, versus income of $3.9 billion at year-end 2021.
- Investments: Fixed maturity securities at fair value were $46.2 billion, down from $60.5 billion. The filing attributes the decline principally to rising interest rates and wider credit spreads, along with net sales and maturities. Management said unrealized losses were mainly market-related and it did not intend, nor expect to be required, to sell the securities before recovery of amortized cost.
- Debt and liquidity: Long-term borrowings were $1.62 billion, down from $1.90 billion. Genworth Holdings had $900 million principal outstanding and $145 million of unrestricted cash, cash equivalents and liquid assets; no Genworth Holdings debt maturity was due until June 2034. Enact’s $200 million revolving facility was undrawn. Consolidated cash is not the same as cash available at the parent.
- Business indicators: Enact’s PMIERs sufficiency was 174%, or $2.249 billion above published requirements; its risk-to-capital ratio was approximately 12.3:1, below the 25:1 state maximum. The U.S. life subsidiaries’ estimated consolidated company-action-level RBC ratio was 285% at September 30, versus 289% at year-end 2021.
Material changes and segment performance
- Q3 revenue declined 11% and common-stockholder GAAP net income declined 67% year over year. Nine-month revenue fell 8% and common-stockholder net income fell 41%. Lower investment income and a swing from investment gains to losses weighed on reported results; Q3 net investment losses were $69 million, compared with gains of $88 million.
- Adjusted operating income fell 33% in Q3 and 22% for the nine-month period. The measure excludes items including investment gains and losses and is not a substitute for GAAP income.
- Enact: Adjusted operating income rose 16% to $156 million in Q3 and to $458 million for nine months. Favorable reserve development tied mainly to COVID-era delinquencies curing above expectations supported results. Enact recorded a Q3 $80 million net favorable reserve adjustment, including $105 million of releases partly offset by $25 million of strengthening for 2022 delinquencies. New insurance written fell 37% in Q3 to $15.1 billion; primary persistency increased to 82%, and primary insurance in-force rose 9% year over year to $241.8 billion. The Enact IPO reduced Genworth’s ownership to 81.6%, lowering the parent’s share of Enact earnings.
- U.S. Life Insurance: Adjusted operating income fell to $11 million in Q3 from $93 million and to $28 million for nine months from $226 million. Long-term care adjusted income was $25 million in Q3, down from $133 million, reflecting higher claim severity and frequency, fewer claim terminations, greater benefit utilization, lower renewal premiums and investment income, and less favorable rate-action effects. Its loss ratio rose to 83% from 58% in Q3 and to 76% from 61% for nine months. Life insurance remained loss-making, while fixed annuity income also declined.
- Runoff: Adjusted operating income was $9 million in Q3 and $20 million for nine months, down from $11 million and $38 million, respectively, primarily due to unfavorable equity markets and higher rates affecting variable annuities.
Outlook, management commentary and risks
- Genworth said it achieved its strategic goal of reducing Genworth Holdings’ debt to approximately $1.0 billion through repayment and early redemption of the February 2024 notes. It also cited priorities of maximizing Enact’s value, stabilizing the long-term care block, pursuing long-term care growth initiatives, and returning capital to shareholders. The filing provides no consolidated earnings or revenue guidance.
- Enact satisfied certain GSE financial metrics in Q3 and expects to do so again in Q4. If confirmed by the GSEs, two consecutive quarters could satisfy conditions for lifting restrictions in early 2023. This is conditional, not assured. Enact announced a $1.12-per-share special dividend for Q4 2022; Genworth expected to receive approximately $150 million based on its ownership. Enact also authorized a share repurchase program of up to $75 million.
- Genworth authorized up to $350 million of parent share repurchases. Through September it repurchased 8.98 million shares for $34 million; in October it repurchased a further 6.27 million shares for $25 million, leaving approximately $291 million available under the program.
- The long-term care rate-action plan had an estimated cumulative economic benefit of $21.0 billion, net present value, against a stated total expected requirement of $28.7 billion. The company received approvals representing approximately $200 million of incremental annual premiums during the first nine months. Results depend on further regulatory approvals, implementation timing and policyholder elections.
- Management said its Q4 2022 long-term care claim-reserve and other assumption reviews were ongoing. Preliminary work did not indicate a need to strengthen claim reserves or significant active-life reserve assumption changes, but the reviews were not complete and outcomes could materially affect results.
- Adoption of the long-duration insurance accounting standard is scheduled for January 1, 2023. Genworth estimated a $12.0–$13.0 billion decrease in long-term care AOCI at the January 1, 2021 transition date, partly offset by an approximately $4.0 billion after-tax benefit from eliminating shadow adjustments. The estimate remains subject to change; the full effects on retained earnings, total equity and other products were not yet determined. The standard changes reported accounting, not underlying economics, statutory net income or risk-based capital, according to the company.
- Key risks include long-term care claims and reserve estimation, rate-action execution, interest-rate and equity-market volatility, credit-spread widening, Enact’s housing and delinquency trends, access to subsidiary dividends, regulatory and GSE restrictions, litigation, and the potential for recession and persistent inflation. Enact’s loss reserves on newer delinquencies remain uncertain, including whether borrowers in forbearance cure or generate claims.
- Legal matters include cost-of-insurance and long-term care disclosure lawsuits. A $25 million cost-of-insurance settlement was approved in October 2022 and had been paid; another long-term care settlement was expected to have a net favorable earnings effect, subject to policyholder elections. Other pending matters have uncertain outcomes, and the company said it generally could not estimate reasonably possible losses.
Most important facts for investors to verify
- Whether Enact meets the GSE financial metrics in Q4 and receives confirmation that restrictions will be lifted, and how those restrictions affect dividends and parent liquidity.
- Results of the Q4 long-term care reserve, loss-recognition and assumption reviews, plus regulatory approvals and policyholder elections under rate actions and settlements.
- The actual transition impact of the 2023 long-duration accounting standard, especially effects on AOCI, retained earnings and total equity.
- Whether investment losses remain unrealized or lead to credit impairments or sales, and how further rate and credit-spread changes affect capital and liquidity.
- Enact’s delinquency, cure and claim trends, new insurance written, persistency and PMIERs capital position as mortgage activity and housing conditions change.
- Parent-level cash flows, Enact distributions, remaining share repurchases and debt reduction; consolidated cash should not be treated as freely available holding-company liquidity.