• benefits provided to policyholders and contractholders and changes in reserves;
• Our U.S. Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $490 million and $311 million in 2018 and 2017, respectively. The increase was primarily from lower losses, which included a $22 million favorable reserve adjustment in 2018 principally from lower expected claim rates. The increase was also attributable to higher premiums due to an increase in mortgage insurance in-force, higher investment income and lower taxes in 2018. The year ended December 31, 2017 included a $10 million favorable reserve adjustment.
Certain areas of Australia have been impacted by bushfires that occurred in late 2019 and continued into the first quarter of 2020. Although we do not cover property damage and continue to monitor the effect of the bushfires, it is too early to determine the impacts on the housing market or economy, if any. At this time, we do not believe there will be a significant impact to our Australia mortgage insurance business, however, we will work with our lender customers to support borrowers who have been impacted.
. We conduct a detailed annual review of our claim reserve assumptions for our long-term care insurance business. In 2019 and 2017, we did not make any significant changes to the assumptions or methodologies. However, in 2018, we recorded a charge of $230 million to net income based upon the completion of our annual claims assumption review. See “-Critical Accounting Estimates-Liability for policy and contract claims” for additional information.
As of each balance sheet date, we evaluate fixed maturity securities in an unrealized loss position for other-than-temporary impairments. We consider all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected.
Our assumption for future in-force rate actions is based on our best estimate of the rate increases we expect given our claim cost expectations and uses our historical experience from rate increase approvals. In addition, we review other assumptions, particularly related to lapse rates, morbidity, mortality improvement and expenses, and update these assumptions as appropriate.
The impact on our 2019 term and whole life insurance loss recognition testing margin for select sensitivities were as follows:
, and continue to impact, the margins of our fixed immediate annuity products. In 2019, 2018 and 2017, we performed loss recognition testing and determined that we had premium deficiencies in our fixed immediate annuity products. In 2019, 2018 and 2017, we increased our future policy benefit reserves and recognized expenses of $39 million, $22 million and $89 million, respectively, as a result of loss recognition testing. The premium deficiency test results were primarily driven by the low interest rate environment and updated assumptions. The updated assumptions will remain locked-in until such time as we determine another premium deficiency exists. The impacts of future adverse changes in our assumptions would result in the establishment of additional future policy benefit reserves and would be immediately reflected as a loss in net income if our margin for this block is again reduced below zero. Any favorable variation would result in additional margin but no immediate benefit to net income, and would result in higher income recognition over the remaining duration of the in-force block.
The risks we face include adverse variations in interest rates, credit spreads and/or mortality. Adverse experience in one or all of these risks would result in the establishment of additional benefit reserves and would be immediately reflected as a loss in net income if our margin for this block is again reduced below zero. As of December 31, 2019, for our fixed immediate annuity products, we estimate that a 100 basis point reduction in interest rates from the December 31, 2019 level, or 2% lower mortality, scenarios that we consider to be reasonably possible given historical changes in market conditions and experience on these products, would result in additional future policy benefit reserves and a loss recorded to net income of approximately $7 million or $24 million, respectively.
In considering the potential sensitivity of the factors underlying management’s best estimate of our mortgage insurance reserves for losses, it is possible that even a relatively small change in estimated delinquency-to-claim rate (“frequency”) or a relatively small percentage change in estimated claim amount
• Our U.S. Mortgage Insurance segment increased $14 million primarily from lower net benefits from cures and aging of existing delinquencies and from less favorable reserve adjustments in 2019. We recorded $23 million of favorable reserve adjustments in 2019 compared to a $28 million favorable reserve adjustment in 2018. These adjustments were mostly associated with lower expected claim rates. These increases were partially offset by a lower average reserve on new delinquencies in 2019.
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, 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.
The expense ratio (net premiums written) increased largely due to higher operating costs, mostly offset by higher net premiums written in 2019.
Acquisition and operating expenses, net of deferrals, increased primarily related to higher operating expenses in 2019. The year ended December 31, 2019 included a decrease of $4 million attributable to changes in foreign exchange rates.
• The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders in our life insurance business increased $74 million largely from higher lapses primarily associated with our large 20-year term life insurance block issued in 1999 entering its post-level premium period and the continued runoff of our life insurance products. The increase also included a more unfavorable unlocking of $16 million in our universal and term universal life insurance products as part of our annual review of assumptions in the fourth quarter of 2019 compared to 2018 (see “-Critical Accounting Estimates” for additional information). These increases were partially offset by lower mortality in 2019 compared to 2018.
reserves recorded in connection with loss recognition testing in our fixed immediate annuity products primarily as a result of a decline in interest rates (see “-Critical Accounting Estimates-Future policy benefits” for additional information).
Account value as of December 31, 2019 decreased compared to December 31, 2018 as surrenders and benefits exceeded interest credited, deposits and unrealized investment gains.
Interest credited increased largely related to higher account values in our corporate-owned life insurance products in 2019.
• Net investment losses related to derivatives of $72 million in 2019 were primarily associated with hedging programs that support our runoff variable annuity products, losses related to hedging programs for our fixed indexed annuity products and decreases in the values of investments used to protect statutory surplus from equity market fluctuations. These losses were partially offset by gains from hedging programs related to our indexed universal life insurance products.
• Future policy benefits increased $2,444 million primarily driven by shadow accounting adjustments associated with the recognition of higher unrealized gains. The shadow accounting adjustments
We had higher cash inflows from operating activities in 2019 mainly attributable to posting lower collateral with our derivative counterparties and higher cash received on increased premiums associated with in-force rate actions in our long-term care insurance business, partially offset by new policy loans issued in our corporate-owned life insurance product in 2019.
In August 2017, Genworth Australia announced its intention to commence an on-market share buy-back program for shares up to a maximum aggregate amount of AUD$100 million. Pursuant to the program, Genworth Australia repurchased approximately 17 million of its shares for AUD$51 million in 2017. As the majority shareholder, we participated in on-market sales transactions during the buy-back period to maintain our ownership position and received $20 million in cash, which was paid as dividends to Genworth Holdings. In February 2018, Genworth Australia completed its share repurchases under this program, repurchasing approximately 19 million of its shares for AUD$49 million. We participated in on-market sales transactions to maintain our ownership position and received $20 million in cash, which was paid as a dividend to Genworth Holdings.
Includes payments of principal and interest on our long-term borrowings and non-recourse funding obligations. On January 21, 2020, Genworth Holdings early redeemed $397 million of its 7.70% senior notes originally scheduled to mature in June 2020. The senior notes were fully redeemed with a cash payment of $409 million, comprised of the outstanding principal balance, accrued interest and a make-whole premium of approximately $9 million. In January 2020, Rivermont I redeemed all of its $315 million of outstanding non-recourse funding obligations due in 2050. The total amount for borrowings and interest in this table does not equal the amounts on our consolidated balance sheet as it excludes debt issuance costs, premiums and discounts and includes interest that is expected to be payable in future years. See note 12 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for information related to the timing of payments and the maturity dates of these borrowings.
In general, our business as a whole is not seasonal in nature. However, in our U.S. mortgage insurance business, the level of delinquencies, which increases the likelihood of losses, generally tends to decrease in mid-first quarter and continue through second quarter while increasing in the third and fourth quarters of the calendar year. Therefore, we typically experience lower levels of losses resulting from delinquencies in the first and second quarters, as compared with those in the third and fourth quarters. See “-U.S. Mortgage Insurance segment-Trends and conditions” for additional information related to our U.S. mortgage insurance business.
• Developing independent estimates for a selection of long-term care insurance liability for policy and contract claims using the Company’s assumptions and comparing our estimates to the recorded policy level claim liability; and
We identified the evaluation of the estimate of the liability for policy and contract claims related to mortgage insurance policies to be a critical audit matter. The ultimate amounts and timing of claim payments was inherently uncertain and, therefore, assessment required complex auditor judgment and specialized knowledge and experience.
insurance contracts, we report premiums over the estimated policy life in accordance with the expected pattern of risk emergence as further described in our accounting policy for unearned premiums. In addition, we have a practice of refunding the post-delinquent premiums in our U.S. mortgage insurance business to the insured party if the delinquent loan goes to claim. We record a liability for premiums received on the delinquent loans where our practice is to refund post-delinquent premiums.
While the other-than-temporary impairment model for debt securities generally includes fixed maturity securities, there are certain hybrid securities that are classified as fixed maturity securities where the application
The liability for policy and contract claims for our long-term care insurance products represents the present value of the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. Key assumptions include projected interest rates and investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used. Both claim termination rates and benefit utilization rates are influenced by, among other things, gender, age at claim, diagnosis, type of care needed, benefit period, and daily benefit amount. Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition.
income (loss) in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.
On January 1, 2019, we adopted new accounting guidance related to accounting for nonemployee share-based payments. The guidance aligns the measurement and classification of share-based payments to
removed the requirements to separately measure and report hedge ineffectiveness. We adopted this new accounting using the modified retrospective method and recognized a gain of $
In August 2018, the FASB issued new accounting guidance related to disclosure requirements for defined benefit plans as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for defined benefit pension and other postretirement benefit plans. We adopted this new accounting guidance on January 1, 2020 using the retrospective method, which did not have a significant impact on our consolidated financial statements and disclosures.
We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the years ended December 31, 2019, 2018 and 2017 was $1,293 million, $3,027 million and $1,876 million, respectively, which was approximately 97%, 96% and 97%, respectively, of book value.
Amounts reclassified out of accumulated other comprehensive income (loss) to net investment gains (losses) include realized gains (losses) on sales of securities, which are determined on a specific identification basis.
Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iii) interest rate caps where the hedging relationship does not qualify for hedge accounting; (iv) foreign currency forward contracts to mitigate currency risk associated with non-functional
Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of December 31:
by $1.4 billion, $0.5 billion and $1.7 billion, respectively, with an offsetting amount recorded in other comprehensive income (loss). The higher amounts recorded for the years ended December 31, 2019 and 2017 were primarily due to the decline in interest rates increasing unrealized investment gains. The majority of the shadow accounting adjustments, as of December 31, 2019 and 2017, were recorded in our long-term care insurance business, which reduced its DAC balance to zero in each year. As of December 31, 2019 and 2017, our long-term care insurance business recorded shadow accounting adjustments of $1.1 billion and $1.3 billion, respectively, out of the total shadow accounting adjustments recorded of $1.4 billion and $1.7 billion, respectively. There was no impact to net income (loss) related to our shadow accounting adjustments. See note 2 for further information related to shadow accounting adjustments.
of service. As of December 31, 2019 and 2018, we recorded a liability related to these benefits of $12 million and $11 million, respectively.
We provide retiree health benefits to domestic employees hired prior to January 1, 2005 who meet certain service requirements. Under this plan, retirees over 65 years of age receive a subsidy towards the purchase of a Medigap policy, and retirees under 65 years of age receive medical benefits similar to our employees’ medical benefits. In December 2009, we announced that eligibility for retiree medical benefits would be limited to associates who were within 10 years of retirement eligibility as of January 1, 2010. This resulted in a negative plan amendment which will be amortized over the average future service of the participants. We also provide retiree life and long-term care insurance benefits. The plans are funded as claims are incurred. As of December 31, 2019 and 2018, the accumulated postretirement benefit obligation associated with these benefits was $71 million and $65 million, respectively, which we accrued in other liabilities in the consolidated balance sheets. In 2019 and 2018, we recognized a decrease of $5 million and
basis. We make matching contributions equal to 100% of the first 4% of pay deferred by an employee and 50% of the next 2% of pay deferred by an employee so that our matching contribution did not exceed 5% of an employee’s pay. Employees do not vest immediately in Genworth matching contributions but fully vest in the matching contributions after two complete years of service. One option available to employees in the defined contribution savings plan is the ClearCourse®
100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread.
The 2066 Notes will be subordinated to all existing and future senior, subordinated and junior subordinated debt of Genworth Holdings, except for any future debt that by its terms is not superior in right of payment, and will be effectively subordinated to all liabilities of our subsidiaries. Genworth Financial provides a full and unconditional guarantee to the trustee of the 2066 Notes and the holders of the 2066 Notes, on an unsecured subordinated basis,
of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, the outstanding 2066 Notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the 2066 Notes indenture in respect of the 2066 Notes.
operations before income taxes included the following components for the years ended December 31:
million as of December 31, 2019 and 2018, respectively, related to state deferred tax assets and
million as of December 31, 2019, and, if unused, will expire beginning in 2028.
basis and subject to a cumulative maximum of $640 million, which is 80% of the projected tax savings associated with the Section 338 deductions. We recorded net interest expense of $4
We utilize certain third-party data providers when determining fair value. We consider information obtained from pricing services as well as broker quotes in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. For pricing services, we analyze the prices provided by our primary pricing services to other readily available pricing services and perform a detailed review of the assumptions and inputs from each pricing service to determine the appropriate fair value when pricing differences exceed certain thresholds. We evaluate changes in fair value that are greater than certain pre-defined
The valuation of interest rate caps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, forward interest rate volatility and time value component associated with the optionality in the derivative which are generally considered observable inputs and results in the derivatives being classified as Level 2.
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance
The statutory net income (loss) from our captive life reinsurance subsidiaries relates to the reinsurance of term and universal life insurance statutory reserves assumed from our U.S. domiciled life insurance companies. These reserves are, in turn, secured by excess of loss reinsurance treaties with third parties or, in the case of Rivermont I, funded through the issuance of non-recourse
ratio not to exceed 25:1. Fifteen other states maintain similar risk-to-capital
129%, respectively, of the required assets under PMIERs. As of December 31, 2019 and 2018, the PMIERs sufficiency ratios were in excess of approximately $
discussed in note 21, we have provided guarantees to third parties for the performance of certain obligations of our subsidiaries. We estimate that our potential obligations under such guarantees was $5 million and $6 million as of December 31, 2019 and 2018, respectively. Genworth Financial and Genworth Holdings also
As of December 31, 2018, the restricted cash balance associated with this former guarantee was $16 million.
Genworth Financial, Inc.’s common stockholders. These adjustments are also net of the portion attributable to noncontrolling interests and net investment gains (losses) are adjusted for DAC and other intangible amortization and certain benefit reserves.
to reflect this revised presentation; however, the previous methodology would not have resulted in a materially different segment-level adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders.
in the High Court of Justice, Business and Property Courts of England and Wales. In the action, AXA initially sought in excess of £28 million on an
ourt dismissed our counterclaims. On November 15, 2018, AXA amended its claim and updated its demand to £237 million. We filed our amended Particulars of Defence and amended counterclaim on December 13, 2018, seeking, among other forms of relief, a declaration that in the event we make any payment to AXA pursuant to the indemnity, we are subrogated to FICL’s and FACL’s rights against Santander with respect to those amounts. On February 25, 2019, AXA amended its claim and updated its demand to £265 million. The C
claims. As of December 31, 2019 and in connection with the Court’s ruling, we accrued a contingent liability of approximately $143 million, including associated lawyer fees and expenses. In January 2020, we made an interim
under this program, Genworth Australia paid an unfranked special dividend of AUD$0.219 per share in the third quarter of 2019, part of which constituted the remaining AUD$36 million of the buy-back
ar ended December 31, 2019 in accordance with the equity method of accounting described above.
On January 1, 2018, we adopted new accounting guidance related to the classification and presentation of changes in restricted cash. The new guidance requires that changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents be shown in the statements of cash flows and requires additional disclosures related to restricted cash and restricted cash equivalents. We adopted this new accounting guidance retrospectively and modified the line item descriptions on our balance sheets and statements of cash flows in our financial statements. The other impacts from this new accounting guidance did not have a significant impact on our financial statements or disclosures.
million, which was recorded through income from continuing operations. These amounts are undiscounted pursuant to the applicable rules governing deferred taxes. Genworth Financial’s