GENWORTH FINANCIAL INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included herein and with our
2021 Annual Report on Form 10-K. Unless the context otherwise requires,
references to "
Financial, Inc.
refer solely to
subsidiaries.
Cautionary note regarding forward-looking statements
This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
may be identified by words such as "expects," "intends," "anticipates," "plans,"
"believes," "seeks," "estimates," "will," or words of similar meaning and
include, but are not limited to, statements regarding the outlook for our future
business and financial performance. Examples of forward-looking statements
include statements we make relating to future reductions of debt, potential
dividends or share repurchases, future Enact Holdings, Inc. ("
quarterly and special dividends, the cumulative amount of rate action benefits
required for our long-term care insurance business to achieve break-even, future
financial performance of our businesses, liquidity and future strategic
investments, including new products and services designed to assist individuals
with navigating and financing long-term care, and potential third-party
relationships or business arrangements relating thereto, as well as statements
we make regarding the potential impacts of the coronavirus pandemic
("COVID-19"). Forward-looking statements are based on management's current
expectations and assumptions, which are subject to inherent uncertainties, risks
and changes in circumstances that are difficult to predict. Actual outcomes and
results may differ materially from those in the forward-looking statements due
to global political, economic, inflation, business, competitive, market,
regulatory and other factors and risks, including but not limited to, the
following:
• we may be unable to successfully execute our strategic plans
: to strengthen our financial position and create long-term shareholder
value, including with respect to reducing debt of Genworth Holdings, Inc.
("Genworth Holdings "); maximizing the value of Enact Holdings; achieving
economic breakeven on and stabilizing the legacy long-term care insurance
in-force block; advancing our long-term care growth initiatives,
including launching either unilaterally or with a strategic partner new
product and service offerings designed to assist individuals with
navigating and financing long-term care; and returning capital to
Genworth Financial shareholders, due to numerous risks and constraints,
including but not limited to: Enact Holdings' ability to pay dividends,
including as a result of the government-sponsored enterprises' ("GSEs")
amendments to the private mortgage insurer eligibility requirements
("PMIERs") in response to COVID-19, as well as additional PMIERs
requirements or other restrictions that the GSEs may place on the ability
of Enact Holdings to pay dividends; an inability to increase the capital
needed in our businesses in a timely manner and on anticipated terms,
including through improved business performance, reinsurance or similar
transactions, asset sales, debt issuances, securities offerings or
otherwise, in each case as and when required; our strategic priorities
change or become more costly or difficult to successfully achieve than
currently anticipated or the benefits achieved being less than
anticipated; an inability to identify and contract with a strategic
partner regarding a new long-term care insurance business; an inability
to establish a new long-term care insurance business or product offerings
due to commercial and/or regulatory challenges; an inability to reduce
costs proportionate with Genworth's reduced business activity, including
as forecasted and in a timely manner; and adverse tax or accounting
charges, including new accounting guidance (that is effective for us on
January 1, 2023 ) related to long-duration insurance contracts;
• risks relating to estimates, assumptions and valuations
including: inadequate reserves and the need to increase reserves
(including as a result of any changes we may make in the future to our
assumptions, methodologies or otherwise in connection with periodic or
other reviews); risks related to the impact of our annual review of
assumptions and methodologies related to our long-term care insurance
claim reserves and margin reviews, including risks that additional
information obtained in the future or other
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changes to assumptions or methodologies materially affect margins; or
other changes to assumptions or methodologies materially affect margins;
the inability to accurately estimate the impacts of COVID-19 and other
novel diseases; inaccurate models; the need to increase our reserves as a
result of deviations from our estimates and actuarial assumptions or
other reasons; accelerated amortization of deferred acquisition costs
("DAC") and present value of future profits ("PVFP") (including as a
result of any future changes we may make to our assumptions,
methodologies or otherwise in connection with periodic or other reviews);
adverse impact on our financial results as a result of projected profits
followed by projected losses (as is currently the case with our long-term
care insurance business); changes in valuation of fixed maturity and
equity securities; and the benefits Enact Holdings realizes from its
future loss mitigation actions or programs may be limited;
• liquidity, financial strength and credit ratings, and counterparty and
credit risks
including: the impact on Genworth Financial's and Genworth Holdings'
liquidity caused by the inability to receive dividends or other returns
of capital from Enact Holdings, including as a result of COVID-19;
limited sources of capital and financing, including under certain
conditions we may seek additional capital on unfavorable terms; future
adverse rating agency actions against us or Enact Holdings, including
with respect to rating downgrades or potential downgrades or being put on
review for potential downgrade, all of which could have adverse
implications, including with respect to key business relationships,
product offerings, business results of operations, financial condition
and capital needs, strategic plans, collateral obligations and
availability and terms of hedging, reinsurance and borrowings; defaults
by counterparties to reinsurance arrangements or derivative instruments;
and defaults or other events impacting the value of our invested assets,
including but not limited to, our fixed maturity and equity securities,
commercial mortgage loans, policy loans and limited partnership
investments;
• risks relating to economic, market and political conditions
including: downturns and volatility in global economies and equity and
credit markets, including as a result of inflation and supply chain
disruptions, a potential recession, continued labor shortages and other
displacements caused by COVID-19; interest rates and changes in rates
could adversely affect our business and profitability; deterioration in
economic conditions (including as a result of the Russian invasion of
Ukraine ) or a decline in home prices or home sales that adversely affect
Enact Holdings' loss experience and/or business levels; political and
economic instability or changes in government policies; and fluctuations
in international securities markets;
• regulatory and legal risks
including: extensive regulation of our businesses and changes in
applicable laws and regulations (including changes to tax laws and
regulations); litigation and regulatory investigations or other actions,
including commercial and contractual disputes with counterparties;
heightened regulatory restrictions and other insurance, regulatory or
corporate law restrictions; the inability to successfully seek in-force
rate action increases (including increased premiums and associated
benefit reductions) in our long-term care insurance business, including
as a result of COVID-19; adverse changes in regulatory requirements,
including risk-based capital; inability of Enact Holdings to continue to
meet the requirements mandated by PMIERs, including as a result of
increased delinquencies caused by COVID-19; inability of Enact Holdings'
U.S. mortgage insurance subsidiaries to meet minimum statutory capital
requirements; the influence of Federal National Mortgage Association
("Fannie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac")
and a small number of large mortgage lenders in the U.S. mortgage
insurance market and adverse changes to the role or structure of Fannie
Mae and Freddie Mac; adverse changes in regulations affecting Enact
Holdings, including any additional restrictions placed on Enact Holdings
by government and government-owned enterprises and the GSEs in connection
with additional capital transactions; inability to continue to implement
actions to mitigate the impact of statutory reserve requirements; changes
in accounting and reporting standards, including new accounting guidance
(that is effective for us on January 1, 2023 ) related to long-duration
insurance contracts;
• operational risks
including: the inability to retain, attract and motivate qualified
employees or senior management; Enact Holdings' reliance on, and loss of,
key customers or distribution relationships;
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competition with government-owned and government-sponsored enterprises
may put Enact Holdings at a competitive disadvantage on pricing and other
terms and conditions; the design and effectiveness of our disclosure
controls and procedures and internal control over financial reporting may
not prevent all errors, misstatements or misrepresentations; and failure
or any compromise of the security of our computer systems, disaster
recovery systems, business continuity plans and failures to safeguard or
breaches of confidential information;
• insurance and product-related risks
including: Enact Holdings' inability to maintain or increase capital in
its mortgage insurance subsidiaries in a timely manner; our inability to
increase premiums and reduce benefits sufficiently, and in a timely
manner, on our in-force long-term care insurance policies, in each case,
as currently anticipated and as may be required from time to time in the
future (including as a result of a delay or failure to obtain any
necessary regulatory approvals, including as a result of COVID-19, or
unwillingness or inability of policyholders to pay increased premiums
and/or accept reduced benefits), including to offset any negative impact
on our long-term care insurance margins; availability, affordability and
adequacy of reinsurance to protect us against losses; decreases in the
volume of mortgage originations or increases in mortgage insurance
cancellations; increases in the use of alternatives to private mortgage
insurance and reductions in the level of coverage selected; potential
liabilities in connection with Enact Holdings' U.S. contract underwriting
services; Enact Holdings' delegated underwriting program may subject its
mortgage insurance subsidiaries to unanticipated claims; and medical
advances, such as genetic research and diagnostic imaging, and related
legislation that impact policyholder behavior in ways adverse to us;
• other general risks
including: the occurrence of natural or man-made disasters, including
geopolitical tensions and war (including the Russian invasion of
Ukraine ), or a public health emergency, including pandemics, climate
change or cybersecurity breaches, could materially adversely affect our
financial condition and results of operations.
We provide additional information regarding these risks and uncertainties in our
Annual Report on
Form 10-K,
filed with the U.S. Securities and Exchange Commission ("SEC") on February 28,
2022 . Unlisted factors may present significant additional obstacles to the
realization of forward-looking statements. Accordingly, for the foregoing
reasons, we caution you against relying on any forward-looking statements. We
undertake no obligation to publicly update any forward-looking statement,
whether as a result of new information, future developments or otherwise, except
as may be required under applicable securities laws.
Overview
mortgage and long-term care insurance products.
company of Enact Holdings, a leading provider of private mortgage insurance in
Financial's
also manage in-force blocks of life insurance and annuity products which are no
longer sold.
Enact Holdings is a public company traded on the Nasdaq Global Select Market
exchange under the ticker symbol "ACT."
Enact Holdings through an indirect majority voting interest and accordingly,
Enact Holdings remains a consolidated subsidiary of
Enact segment predominantly includes Enact Holdings and its mortgage insurance
subsidiaries. There are minor financial reporting differences between our Enact
segment and the standalone financial results of Enact Holdings, which are
separately disclosed with the
Notwithstanding these differences, we commonly make references to "Enact," our
"Enact segment" and "our
Quarterly Report on Form 10-Q, which generally can be viewed as references to
Enact Holdings and its mortgage insurance subsidiaries, unless the context
otherwise requires.
We report our business results through three operating business segments: Enact;
Our
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insurance, life insurance and fixed annuity products. The Runoff segment
primarily includes variable annuity, variable life insurance and corporate-owned
life insurance products, which have not been actively sold since 2011.
Strategic Update
of
approximately
achieving economic breakeven on and stabilizing the legacy long-term care
insurance in-force block; advancing
initiatives; and returning capital to
the second quarter of 2022, we continued to make meaningful progress on our
strategic priorities. On
authorized a share repurchase program under which
repurchase up to
to the program, in the second quarter of 2022,
3,869,494 shares of its common stock at an average price of
a total cash outlay of
repurchases through a Rule 10b5-1 trading plan under which 4,034,794 shares of
its common stock were repurchased during
per share for a total cash outlay of
million
the first return of capital to
We expect the majority of share repurchases to occur following the repayment of
During the second quarter of 2022,
principal amount of its
of
business conditions, among other considerations. If we are able to retire the
will be approximately
billion
Stabilizing our
long-term goals. Our
its multi-year long-term care insurance in-force rate action plan, receiving
approvals of approximately
six months ended
economic benefit of our long-term care insurance multi-year in-force rate action
plan through the second quarter of 2022 was approximately
net present value basis, of the total expected amount required of
We continue to work closely with the
Commissioners
for actuarially justified rate increases and associated benefit reductions in
order to pay future claims.
Financial Strength and Credit Ratings
On
rating of
provided a Stable outlook. The reasons cited for the ratings upgrade include
improvement in
leverage, including the expectation that its remaining
be paid in the third quarter of 2022. The reasons cited also include the
expectation of continued dividends from
Holdings. Moody's also upgraded the financial strength rating of
Insurance Corporation
reasons cited for the upgrade include improvements in the overall
insurance sector and Enact's overall credit profile, including its market
position, profitability, capital adequacy and financial flexibility. The upgrade
also reflects Enact's solid position in the
good client diversification, as well as its consistent PMIERs sufficiency.
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On
(Speculative) and maintained a Positive outlook. The ratings upgrade was mostly
due to the reduction in
past 12 months, resulting in the Company's improved financial flexibility and
lower liquidity risk. In addition, S&P affirmed its "BBB" (Good) financial
strength rating of EMICO and maintained a Positive outlook.
There were no other changes in the financial strength ratings of our insurance
subsidiaries or the credit ratings of
subsequent to
Form 10-K. For additional information regarding the financial strength ratings
of
business, see "Item 1-Ratings" in our 2021 Annual Report on Form 10-K.
Our Financial Information
The financial information in this Quarterly Report on Form 10-Q has been derived
from our unaudited condensed consolidated financial statements.
Revenues and expenses
Our revenues consist primarily of the following:
• Premiums.
Premiums consist primarily of premiums earned on insurance products for
mortgage, long-term care and term life insurance.
• Net investment income.
Net investment income represents the income earned on our investments.
For discussion of the change in net investment income, see the comparison
for this line item under "-Investments and Derivative Instruments."
• Net investment gains (losses).
Net investment gains (losses) consist primarily of realized gains and
losses from the sale of our investments, credit losses, unrealized and
realized gains and losses from our equity securities, limited partnership
investments and derivative instruments. For discussion of the change in
net investment gains (losses), see the comparison for this line item
under "-Investments and Derivative Instruments."
• Policy fees and other income.
Policy fees and other income consists primarily of fees assessed against
policyholder and contractholder account values, surrender charges, cost
of insurance assessed on universal and term universal life insurance
policies, advisory and administration service fees assessed on investment
contractholder account values, broker/dealer commission revenues, fee
revenue from contract underwriting services and other fees.
Our expenses consist primarily of the following:
• Benefits and other changes in policy reserves.
Benefits and other changes in policy reserves consist primarily of
benefits paid and reserve activity related to current claims and future
policy benefits on insurance and investment products for long-term care
insurance, life insurance, accident and health insurance, structured
settlements and single premium immediate annuities with life
contingencies, and claim costs incurred related to mortgage insurance
products.
• Interest credited.
Interest credited represents interest credited on behalf of policyholder
and contractholder general account balances.
• Acquisition and operating expenses, net of deferrals.
Acquisition and operating expenses, net of deferrals, represent costs and
expenses related to the acquisition and ongoing maintenance of insurance
and investment contracts, including commissions, policy issuance expenses
and other underwriting and general operating costs. These costs and
expenses are net of amounts that are capitalized and deferred,
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which are costs and expenses that are related directly to the successful
acquisition of new or renewal insurance policies and investment
contracts, such as first-year commissions in excess of ultimate renewal
commissions and other policy issuance expenses.
• Amortization of deferred acquisition costs and intangibles.
Amortization of DAC and intangibles consists primarily of the
amortization of acquisition costs that are capitalized, PVFP and
capitalized software.
• Interest expense.
Interest expense represents interest related to our borrowings that are
incurred at Genworth Holdings or Enact Holdings, and interest expense
related to the Tax Matters Agreement previously owed to General Electric
Company ("GE") and certain reinsurance arrangements being accounted for
as deposits.
• Income taxes.
We tax our businesses at the U.S. corporate federal income tax rate of
21%. Each segment is then adjusted to reflect the unique tax attributes
of that segment, such as permanent differences between U.S. generally
accepted accounting principles ("U.S. GAAP") and tax law. The difference
between the consolidated provision for income taxes and the sum of the
provision for income taxes in each segment is reflected in Corporate and
Other activities.
• Net income from continuing operations attributable to noncontrolling
interests.
Net income from continuing operations attributable to noncontrolling
interests represents the portion of income from continuing operations in
a subsidiary attributable to third parties.
The effective tax rates disclosed herein are calculated using whole numbers. As
a result, the percentages shown may differ from an effective tax rate calculated
using rounded numbers.
The annually-determined tax rates and adjustments to each segment's provision
for income taxes are estimates which are subject to review and could change from
year to year.
We allocate corporate expenses to each of our operating segments using various
methodologies.
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