Genworth(US:GNW)2021-08-04 16:00Part I: Financial Information This section provides the unaudited condensed consolidated financial statements, management's discussion and analysis, and disclosures on market risk and internal controls Financial Statements This section presents the unaudited condensed consolidated financial statements for Genworth Financial, Inc. as of June 30, 2021, and for the three and six months ended June 30, 2021 and 2020, along with detailed notes Condensed Consolidated Balance Sheets Total assets decreased to $100.65 billion from $105.75 billion, and total liabilities decreased to $85.49 billion from $89.93 billion, primarily due to the sale of the Australian mortgage insurance business Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $100,650 | $105,747 | | Total Investments | $73,018 | $74,701 | | Assets related to discontinued operations | $— | $2,817 | | Total Liabilities | $85,486 | $89,927 | | Long-term borrowings | $2,924 | $3,403 | | Liabilities related to discontinued operations | $346 | $2,370 | | Total Equity | $15,164 | $15,820 | Condensed Consolidated Statements of Income The company reported net income of $240 million in Q2 2021 and $427 million for H1 2021, a significant turnaround from prior-year losses driven by improved continuing operations and reduced discontinued operations losses Consolidated Income Statement Summary (in millions, except per share data) | Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $2,041 | $2,003 | $4,026 | $3,812 | | Income (loss) from continuing operations | $245 | $55 | $419 | $(5) | | Income (loss) from discontinued operations | $(5) | $(473) | $16 | $(485) | | Net income (loss) | $240 | $(418) | $435 | $(490) | | Net income (loss) available to stockholders | $240 | $(441) | $427 | $(507) | | Diluted EPS | $0.47 | $(0.86) | $0.83 | $(1.00) | Condensed Consolidated Statements of Cash Flows Net cash from operating activities decreased to $229 million in H1 2021 from $1.3 billion in H1 2020, while investing activities generated $541 million, primarily from the Australian business sale Cash Flow Summary for the Six Months Ended June 30 (in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash from operating activities | $229 | $1,299 | | Net cash from (used by) investing activities | $541 | $(887) | | Net cash used by financing activities | $(1,213) | $(1,144) | | Net change in cash | $(442) | $(744) | Notes to Condensed Consolidated Financial Statements The notes provide detailed disclosures on business segments, the sale of the Australian mortgage insurance business, accounting policies, investment portfolio, derivatives, liabilities, debt, segment performance, legal contingencies, and discontinued operations - The company operates through three segments: Enact (U.S. Mortgage Insurance), U.S. Life Insurance (long-term care, life, fixed annuities), and Runoff (non-strategic products)28 - On March 3, 2021, the company completed the sale of its 52% interest in Genworth Mortgage Insurance Australia Limited, which is now reported as a discontinued operation30 - The company believes its current liquidity is sufficient to meet obligations for one year, supported by $823 million in unrestricted cash and liquid assets at the holding company level as of June 30, 2021, and proceeds from the Genworth Australia sale3335 Management's Discussion and Analysis (MD&A) Management discusses strategic priorities, financial results, and operational performance, focusing on liquidity, the potential Enact segment sale, and stabilizing U.S. life insurance through rate actions - Strategic priorities include raising liquidity to address future debt maturities, strengthening the financial position, and creating shareholder value, with a key component being the potential partial sale of Enact Holdings291292 - The company continues its multi-year long-term care insurance in-force rate action plan, having achieved an estimated $15.5 billion in net present value of approved rate increases since 2012294 - Net income available to common stockholders was $240 million in Q2 2021, a significant improvement from a net loss of $441 million in Q2 2020, with adjusted operating income at $194 million compared to a $23 million loss in the prior-year quarter296 Consolidated Results of Operations Total revenues increased slightly to $2.04 billion in Q2 2021, while total benefits and expenses decreased significantly to $1.72 billion, leading to a substantial increase in income from continuing operations Consolidated Results of Operations - Q2 2021 vs Q2 2020 (in millions) | Line Item | Q2 2021 | Q2 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $2,041 | $2,003 | $38 | 2% | | Benefits and other changes in policy reserves | $1,161 | $1,447 | $(286) | (20)% | | Total benefits and expenses | $1,721 | $1,925 | $(204) | (11)% | | Income from continuing operations | $245 | $55 | $190 | >200% | - The decrease in benefits was largely driven by the Enact segment, where reserves decreased by $198 million due to lower new delinquencies and the absence of prior-year unfavorable reserve adjustments related to COVID-19323 Enact Segment Analysis The Enact segment reported adjusted operating income of $135 million in Q2 2021, a strong recovery from a $3 million loss, driven by a significantly lower loss ratio of 12% and a strong PMIERs sufficiency ratio of 165% Enact Segment Financial Highlights - Q2 (in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Adjusted operating income (loss) | $135 | $(3) | | Premiums | $243 | $243 | | Benefits and other changes in policy reserves | $30 | $228 | - The loss ratio improved dramatically to 12% in Q2 2021 from 94% in Q2 2020, primarily due to lower new delinquencies and the absence of prior-year unfavorable reserve adjustments related to COVID-19375413 - As of June 30, 2021, the Enact segment's PMIERs sufficiency ratio was 165%, with available assets of $4.9 billion against required assets of $3.0 billion, representing a $1.9 billion surplus301384 U.S. Life Insurance Segment Analysis The U.S. Life Insurance segment generated adjusted operating income of $71 million in Q2 2021, primarily driven by the long-term care business's $98 million income due to in-force rate actions and favorable claim development U.S. Life Insurance Adjusted Operating Income (Loss) by Business - Q2 (in millions) | Business | 2021 | 2020 | | :--- | :--- | :--- | | Long-term care insurance | $98 | $48 | | Life insurance | $(40) | $(81) | | Fixed annuities | $13 | $28 | | Total U.S. Life Insurance | $71 | $(5) | - The LTC business's improved performance was driven by higher reduced benefits from in-force rate actions, including a legal settlement, and favorable development on IBNR claims465 - The company continues to manage the impact of COVID-19, which has led to elevated but fluctuating mortality, with a cumulative claims reserve of $143 million for expected lower future claim termination rates remaining as of June 30, 2021431432 Runoff Segment Analysis The Runoff segment reported adjusted operating income of $15 million in Q2 2021, a decrease from $24 million in Q2 2020, primarily due to lower net investment income and less favorable equity market performance Runoff Segment Financial Highlights - Q2 (in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Adjusted operating income | $15 | $24 | | Total revenues | $88 | $90 | | Income from continuing operations | $22 | $28 | - The decrease in adjusted operating income was predominantly due to lower investment income and less favorable equity market performance in the current year500 Investments and Derivative Instruments Total cash and invested assets were $75.2 billion as of June 30, 2021, with 78% in investment-grade fixed maturity securities, and net investment income increased to $844 million in Q2 2021 Investment Portfolio Composition as of June 30, 2021 (in millions) | Asset Class | Carrying Value | % of Total | | :--- | :--- | :--- | | Fixed maturity securities, available-for-sale | $61,649 | 82% | | Commercial mortgage loans, net | $6,879 | 9% | | Other invested assets | $2,260 | 3% | | Cash, cash equivalents and restricted cash | $2,214 | 3% | | Other (Equity & Policy Loans) | $2,230 | 3% | | Total | $75,232 | 100% | - The company is managing the transition away from LIBOR, having formed a working group to evaluate exposure and already terminated some LIBOR-based swaps in favor of alternative rate swaps535536 Liquidity and Capital Resources Genworth Holdings held $742 million in cash, actively managed its debt, and utilized $370 million net proceeds from the Genworth Australia sale to prepay the AXA promissory note - Genworth Holdings held $742 million in cash, cash equivalents, and restricted cash as of June 30, 2021580 - In July 2021, the company fully redeemed its 7.625% senior notes due September 2021 with a cash payment of approximately $532 million583589 - The sale of Genworth Australia generated $370 million in net proceeds, of which $247 million was used to prepay the AXA promissory note, with the remaining note balance estimated at $344 million due in September 2022582592 - GMICO received regulatory approval for a $200 million dividend to be distributed to the holding company at year-end 2021, an important step in restarting capital returns from Enact577 Quantitative and Qualitative Disclosures About Market Risk The company reports no material changes in its market risks, including interest rates, foreign currency exchange rates, and equity prices, since December 31, 2020 - There were no material changes in the company's market risks since December 31, 2020620 Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2021621 - There were no material changes to the internal control over financial reporting during the second quarter of 2021622 Part II: Other Information This section covers legal proceedings, risk factors, and a list of exhibits filed with the quarterly report Legal Proceedings The company refers to Note 11 of the financial statements for details on material pending litigation and regulatory matters, including shareholder derivative suits and class action lawsuits - For details on material pending litigation and regulatory matters, the company directs readers to Note 11 in the financial statements623 Risk Factors The company states there have been no material changes to the risk factors previously disclosed in its 2020 Annual Report on Form 10-K as of June 30, 2021 - There have been no material changes to the risk factors set forth in the company's 2020 Annual Report on Form 10-K624 Exhibits This section lists the exhibits filed with the quarterly report, including amended bylaws, incentive plans, a separation agreement, and required CEO/CFO certifications - Exhibits filed include the 2021 Omnibus Incentive Plan, a separation agreement with a former executive, and CEO/CFO certifications625