Genworth Financial, Inc. — 2020 Form 10-K
Business context and reporting period. This is Genworth Financial’s annual report for the fiscal year ended December 31, 2020, not a standalone fourth-quarter filing. The company operates U.S. and Australian mortgage insurance, U.S. life insurance, and runoff businesses. Genworth Canada was sold in December 2019 and is reported as discontinued operations.
Key financial results
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $8.658 billion | $8.096 billion |
| Income from continuing operations | $761 million | $519 million |
| Net income available to common stockholders | $178 million | $343 million |
| Adjusted operating income available to common stockholders (non-GAAP) | $317 million | $420 million |
| Net cash from operating activities | $1.960 billion | $2.079 billion |
| Net cash from (used by) investing activities | $(1.153) billion | $1.301 billion |
| Net cash used by financing activities | $(1.507) billion | $(2.217) billion |
| Total assets / liabilities / equity at year-end | $105.747 billion / $89.927 billion / $15.820 billion | $101.342 billion / $86.710 billion / $14.632 billion |
Revenue rose 7%, but included $558 million of net investment gains, versus $50 million in 2019; 2020 gains included $478 million of realized gains on available-for-sale fixed maturities. Net income fell 48%, primarily reflecting a $549 million after-tax loss from discontinued operations associated with the AXA settlement. The effective tax rate was 26.2%, compared with 27.3%.
Segment adjusted operating income (loss), available to common stockholders: U.S. Mortgage Insurance $381 million (2019: $568 million); Australia Mortgage Insurance $1 million ($51 million); U.S. Life Insurance $68 million (2019 loss: $55 million); Runoff $43 million ($56 million); Corporate and Other loss $176 million ($200 million).
Selected operating metrics: U.S. mortgage insurance new insurance written increased 60% to $99.9 billion; primary persistency fell to 59% from 76%, and the delinquency rate rose to 4.86% from 1.93%. U.S. mortgage insurance’s loss ratio was 39% versus 6%; Australia’s was 65% versus 33%; long-term care’s was 71% versus 77%.
Fixed-maturity securities totaled $65.790 billion at fair value and represented 82% of cash, restricted cash and invested assets. Total cash, cash equivalents and restricted cash were $2.656 billion. Genworth Holdings, the debt-issuing holding company, had approximately $1.078 billion of cash, cash equivalents and restricted cash at year-end, including $46 million restricted; the filing reports approximately $1.032 billion of unrestricted cash and cash equivalents.
Material changes and unusual items
- U.S. mortgage insurance earnings declined as COVID-19 forbearance drove new delinquencies and reserve strengthening; higher insurance in-force and refinancing-related single-premium cancellations partly offset the impact. New delinquencies contributed $308 million of loss expense, and existing reserves were strengthened by $65 million.
- Australia Mortgage Insurance earnings fell sharply, including $91 million of reserve strengthening attributed to COVID-19 impacts and revised claims estimates. A $5 million goodwill impairment eliminated the segment’s remaining goodwill. Its largest customer generated 58% of 2020 gross written premiums; a second-largest customer, representing 11%, did not renew its contract, reducing expected 2021 premiums.
- U.S. Life Insurance results improved, mainly from long-term care claim terminations, higher mortality and investment income. The company also recorded $157 million of long-term-care reserves related to COVID-19 experience, which it believes is temporary, and a $63 million universal-life DAC impairment.
- The AXA settlement resulted in an approximately £425 million ($581 million) obligation at December 31, 2020, due in two 2022 installments. The settlement-related discontinued-operations loss was $549 million after tax in 2020. Certain dividends, capital raises and sale proceeds above thresholds are subject to mandatory prepayment provisions benefiting AXA.
- The company issued $750 million of 6.50% GMHI senior notes due 2025. A $437 million dividend funded from the proceeds was paid to Genworth Holdings; the remainder was retained by GMHI. Genworth Holdings also redeemed $397 million of 2020 notes, repurchased $84 million of 2021 notes, and paid $338 million of notes at maturity in February 2021.
Liquidity, outlook and risks
Management disclosed a projected cash shortfall of approximately $15 million in connection with repaying Genworth Holdings’ $659 million of senior notes due September 2021, and stated that conditions raised doubt about the company’s ability to meet obligations. Management concluded its plans alleviate that doubt, citing preparation for a potential partial public offering of U.S. mortgage insurance, possible convertible or equity-linked securities or other transactions, future subsidiary cash flows, and possible asset sales. The filing says existing cash alone is insufficient to repay all debt as it comes due. It also identifies approximately $2.7 billion of Genworth Holdings debt outstanding at year-end, with maturities from 2021 to 2066; the $338 million February 2021 maturity has since been paid.
The China Oceanwide merger agreement, under which the buyer agreed to acquire Genworth for approximately $2.7 billion, or $5.43 per share, remained in effect, but on January 4, 2021 the parties announced they would not seek an extension of the December 31, 2020 end date because of uncertainty over remaining closing steps. Either party could terminate the agreement. The transaction and associated planned $1.5 billion of post-closing capital contributions were not included in management’s liquidity evaluation.
U.S. mortgage insurance met published PMIERs requirements at year-end, with estimated available assets of $4.588 billion against $3.359 billion of net required assets, or $1.229 billion of excess. This calculation excludes GSE-imposed capital restrictions. Those restrictions require elevated capital buffers, retention of $300 million at GMHI for limited purposes, and GSE approval before additional debt issuance; they also constrain dividends. Management said it intended to defer additional U.S. mortgage insurance dividends in 2021.
Management reported approximately $50 million of anticipated annualized savings from completed expense-reduction initiatives. Long-term care remains dependent on regulatory approval and implementation of rate increases and associated benefit reductions: 144 approvals in 37 states during 2020 represented about $344 million of incremental annual premiums, while the company submitted 245 additional filings in 50 states. The company estimated $14.5 billion of cumulative approved rate increases on a net-present-value basis since 2012.
Principal risks include COVID-19 and its effects on employment, housing, claims and investments; liquidity and debt refinancing; dependence on subsidiary dividends; China Oceanwide uncertainty; long-term-care reserve assumptions and rate approvals; mortgage delinquencies and home prices; GSE/PMIERs requirements; ratings downgrades; reinsurance and counterparty exposure; interest rates; litigation; and model estimates. KPMG issued an unqualified opinion on the financial statements and internal controls; the company reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether Genworth completed a partial U.S. mortgage-insurance offering, refinancing or other transaction sufficient to meet the September 2021 maturity and subsequent obligations, and the resulting dilution, cost and restrictions.
- Current cash available at Genworth Holdings, debt maturities and interest, the AXA note balance and payment terms, and the effect of AXA’s mandatory prepayment provisions.
- Whether the China Oceanwide agreement was terminated, extended or otherwise advanced, and whether any new regulatory or GSE approvals or conditions apply.
- U.S. mortgage-insurance delinquency cures, claims and reserves as forbearance plans expire; PMIERs sufficiency after the GSE restrictions; and the timing and amount of any permitted dividends.
- Actual long-term-care rate approvals and realized premium benefits versus the material future rate-action assumptions used in reserve testing, including sensitivity to claims, interest rates and mortality.
- Australia customer retention, post-contract premium trends and claim-reserve development, together with the sustainability of both mortgage-insurance segments’ earnings.