The following table sets forth selected financial information. The selected financial information as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017 has been derived from our audited consolidated financial statements, which are included elsewhere herewith. You should read this information in conjunction with the information under “
Item 7 of our Annual Report on Form 10-K generally discusses year-to-year comparisons between the years ended December 31, 2019 and 2018. Other than our “Executive Summary of Financial Results” and “Consolidated Results of Operations,” which include comparative discussions between 2018 and 2017 that have been re-presented to reflect our former Canada mortgage insurance business as held for sale reported as discontinued operations, discussions of information related to 2017 and year-to-year comparisons between 2018 and 2017 are not included in this Form 10-K. Other than the aforementioned sections re-presented to reflect our former Canada mortgage insurance business reported as discontinued operations, comparative discussions between 2018 and 2017 can be found in “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018.
• net investment income and net investment gains (losses) on the segment’s separate investment portfolio; and
• net investment income and net investment gains (losses) on the segment’s separate investment portfolio.
• net premiums earned on individual and group long-term care insurance, individual term life insurance and single premium immediate annuities with life contingencies;
• net investment income and net investment gains (losses) on the segment’s separate investment portfolios; and
• net premiums earned primarily on mortgage insurance policies in certain smaller international mortgage insurance businesses;
• unallocated net investment income and net investment gains (losses); and
• acquisition and operating expenses, including commissions, marketing expenses, legal expenses, policy and contract servicing costs, overhead and other general expenses that are not capitalized (shown net of deferrals);
• We had net income available to Genworth Financial, Inc.’s common stockholders of $343 million and $119 million in 2019 and 2018, respectively. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders was $420 million in 2019 compared to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $5 million in 2018.
• Our U.S. Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $568 million and $490 million in 2019 and 2018, respectively. The increase was mainly from higher insurance in-force and an increase in investment income, partially offset by higher operating costs and an increase in losses largely from lower net benefits from cures and aging of existing delinquencies in 2019. The years ended December 31, 2019 and 2018 included favorable reserve adjustments of $18 million and $22 million, respectively, which were mostly associated with lower expected claim rates. The year ended December 31, 2019 also included a favorable adjustment of $11 million related to our single premium earnings pattern review.
• Our U.S. Life Insurance segment had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $55 million and $376 million in 2019 and 2018, respectively.
• Our long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $57 million in 2019 compared to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $348 million in 2018. The increase to income in 2019 from a loss in 2018 was primarily attributable to $360 million of higher premiums and reduced benefits in 2019 from in-force rate actions approved and implemented, favorable impacts from benefit utilization rate updates and favorable development on prior year incurred but not reported claims. For more information on in-force rate actions see “-Significant Developments-U.S. Life Insurance.” These increases were partially offset by higher severity and frequency of new claims, unfavorable claim terminations driven in part by the updates from the 2018 claim reserve review and an increase in incremental reserves of $162 million recorded in connection with an accrual for profits followed by losses in 2019. Included in 2018 was higher claim reserves of $230 million due to the completion of our annual review of our claim reserves in the fourth quarter of 2018 (see “-Critical Accounting Estimates-Liability for policy and contract claims” for additional information). Also included in 2018 was a refinement to our estimate of unreported policy terminations, which resulted in an unfavorable reserve adjustment of $28 million.
• Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased $10 million in our fixed annuities business mainly attributable to $14 million of higher unfavorable charges in connection with loss recognition testing in our fixed immediate annuity products (see “-Critical Accounting Estimates-Future policy benefits” for additional information), partially offset by lower interest credited due to block runoff in 2019.
• Our Australia Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $76 million in 2018 compared to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $88 million in 2017. The increase to income in 2018 from a loss in 2017 was primarily driven by a net unfavorable adjustment of $141 million from a review of our premium earnings pattern in 2017, which also resulted in higher earned premiums on our existing insurance in-force in 2018 (see “-Critical Accounting Estimates-Unearned premiums” for additional information). The increase was partially offset by lower net investment income in 2018.
• Our U.S. Life Insurance segment had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $376 million in 2018 compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $22 million in 2017. The decrease from income in 2017 to a loss in 2018 was principally related to our long-term care and life insurance businesses.
• Our long-term care insurance business had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $348 million in 2018 compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $59 million in 2017. The decrease to a loss in 2018 from income in 2017 was predominantly attributable to the completion of our annual review of our claim reserves in the fourth quarter of 2018 which resulted in higher claim reserves of $230 million (see “-Critical Accounting Estimates-Liability for policy and contract claims” for additional information). We also refined our estimate of unreported policy terminations, which resulted in an unfavorable reserve adjustment of $28 million in 2018. The
decrease was also related to unfavorable existing claim performance from higher utilization of available benefits and lower terminations, as well as higher severity of new claims in 2018. These decreases were partially offset by higher premiums and reduced benefits in 2018 from in-force rate actions approved and implemented. For more information on in-force rate actions see “-Significant Developments-U.S. Life Insurance.”
• The adjusted operating loss in our life insurance business increased $28 million primarily from higher ceded reinsurance and unfavorable mortality in our universal and term universal life insurance products.
• Corporate and Other Activities had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $230 million in 2018 compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $234 million in 2017. The decrease to a loss in 2018 from income in 2017 was primarily driven by changes resulting from the implementation of the TCJA in December 2017 that did not recur. In the fourth quarter of 2017, we recorded a net tax benefit of $456 million primarily attributable to a $258 million release of a valuation allowance, the impact from changes in the federal tax rates and the release of shareholder liability taxes. These decreases in 2017 were partially offset by higher transition taxes, $11 million of higher taxes associated with our tax allocation methodology, which was driven by the premium earnings pattern review in our Australia mortgage insurance business and other items. The year ended December 31, 2018 included lower operating costs, partially offset by higher interest expense.
Our U.S. mortgage insurance business has been compliant with the original requirements under the PMIERs since its introduction into the private mortgage insurance industry in 2015. These requirements set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible to offer private mortgage insurance. On March 31, 2019, revisions to the original PMIERs became effective for our U.S. mortgage insurance business. The major revisions include the elimination of any credit for future premiums that had previously been allowed on insurance policies written in 2008 and earlier. Our U.S. mortgage insurance business had available assets of approximately 138% of the required assets under PMIERs as of December 31, 2019. The PMIERs sufficiency ratio was in excess of $1.0 billion of available assets above the requirements as of December 31, 2019. For additional information related to PMIERs, see “Item 1 - Business-Regulation-Mortgage Insurance Regulation-Other U.S. regulation.”
Our U.S. mortgage insurance business paid a $250 million dividend in 2019. The evaluation of future dividends is subject to capital requirements of our U.S. mortgage insurance subsidiaries, capital needs of our holding companies and market conditions, among other factors, which are subject to change.
As of December 31, 2019, our Australia mortgage insurance business estimated its PCA ratio was approximately 191%, representing a decrease from 194% as of December 31, 2018. The decrease was principally driven by dividends paid and share repurchase activity exceeding earnings in 2019.
. In the fourth quarter of 2019, we completed our annual assumption review for our long-term care insurance business and our U.S. GAAP margins remained in the same range as our 2018 margins. For additional information on reserves, see “-Critical Accounting Estimates-Future policy benefits.”
. We completed our annual assumption reviews for our universal and term universal life insurance products. In the fourth quarter of 2019, as a result of the review, we recorded a $107 million unfavorable adjustment to net income in our universal and term universal life insurance products. The negative impact was primarily driven by the lower interest rate environment. In the fourth quarter of 2018, as a result of the review, we recorded a $91 million unfavorable adjustment to net income in our universal and term universal life insurance products. The negative impact was primarily driven by lower expected growth in interest rates and emerging mortality experience mostly in our term universal life insurance product. For additional information see “-Critical Accounting Estimates-Policyholder account balances.”
On December 1, 2015, we completed the sale of our lifestyle protection insurance business. In the fourth quarter of 2019, we recorded an after-tax loss of approximately $110 million primarily in connection with pending litigation involving two insurance companies that were part of the sale of the lifestyle protection insurance business. This amount is included in income (loss) from discontinued operations for the year ended December 31, 2019. We retained liabilities for certain claims, taxes and sales practices that occurred while we owned the lifestyle protection insurance business. We have established our current best estimates for these liabilities where we are able to estimate; however, there may be future adjustments to these estimates, including additional contingent liabilities, which are not currently recorded. See notes 21 and 24 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information.
See notes 2 and 4 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to other-than-temporary impairments on fixed maturity securities.
We enter into freestanding derivative transactions primarily to manage the risk associated with variability in cash flows. We also use derivative instruments to hedge certain currency exposures. Additionally, we purchase investment securities, issue certain insurance policies and engage in certain reinsurance contracts that have embedded derivatives. The associated financial statement risk is the volatility in net income which can result from among other things: (i) changes in the fair value of derivatives not qualifying as accounting hedges; (ii) changes in the fair value of embedded derivatives required to be bifurcated from the related host contract; and (iii) counterparty default. Accounting for derivatives is complex, as evidenced by significant authoritative interpretations of the primary accounting standards which continue to evolve. See notes 2, 5 and 16 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for an additional description of derivative instruments and fair value measurements of derivative instruments.
We review DAC for recoverability at least annually. For deferred annuity and universal life insurance contracts, if the present value of expected future gross profits is less than the unamortized DAC for a line of business, a charge to net income is recorded for additional DAC amortization. For traditional long-duration and short-duration contracts, if the benefit reserves plus the current estimate of expected future gross premiums and interest income for a line of business are less than the current estimate of expected future benefits and expenses (including any unamortized DAC), a charge to net income is recorded for additional DAC amortization or for increased benefit reserves. The evaluation of DAC recoverability is subject to inherent uncertainty and requires significant judgment and estimates to determine the present values of future premiums, estimated gross profits and expected benefits and expenses of our businesses.
As part of our annual premium earnings pattern review, we decreased DAC amortization by $18 million in our mortgage insurance business in Australia in the fourth quarter of 2017. The review indicated an observed and expected continuation of a longer duration between policy inception and first-loss event. This was primarily attributable to the economic downturn in mining regions, which comprised a large proportion of incurred losses in 2017, and a prolonged low interest rate environment resulting in robust housing markets in other parts of the country. The review resulted in a refinement of premium recognition factors and a cumulative adjustment that was applied retrospectively as of October 1, 2017. The application of the new premium earnings pattern only impacts the timing of our premium recognition, as the amount of total earned premiums recognized over the lifetime of the policies is unchanged. See “-Unearned premiums” below for additional details on our Australian mortgage insurance business premium earnings pattern review.
December 31, 2018, due primarily to an increase in interest rates decreasing unrealized gains, we increased the DAC balance, with an offsetting amount recorded in other comprehensive income (loss). There was no impact to net income in 2019 or 2018.
See notes 2 and 7 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to PVFP.
We calculate and maintain reserves for the estimated future payment of claims to our policyholders and contractholders based on actuarial assumptions and in accordance with U.S. GAAP and industry practice. We build these reserves as the estimated value of those obligations increases, and we release these reserves as those future obligations are paid, experience changes or policies lapse. The reserves we establish reflect estimates and actuarial assumptions and methodologies with regard to our future experience. These estimates and actuarial assumptions and methodologies involve the exercise of significant judgment and are inherently uncertain. These estimates and actuarial assumptions and methodologies are subjected to a variety of internal reviews and, in some cases, external independent reviews. Our future financial results depend significantly upon the extent to which our actual future experience is consistent with the assumptions we have used in determining our reserves as well as the assumptions originally used in pricing our products. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past had, material impacts on our reserves, results of operations and financial condition.
Many factors, and changes in these factors, can affect future experience including, but not limited to: interest rates; investment returns and volatility; economic and social conditions, such as inflation, unemployment, home price appreciation or depreciation, and healthcare experience; policyholder persistency or lapses; insured mortality; insured morbidity; future premium rate increases and associated benefit reductions; expenses; and doctrines of legal liability and damage awards in litigation. 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 had, material impacts on our reserve levels, results of operations and financial condition. Moreover, we may not be able to mitigate the impact of unexpected adverse experience by increasing premiums and/or other charges to policyholders (where we have the right to do so) or by offering benefit reductions as an alternative to increasing premiums.
The liability for future policy benefits is equal to the present value of expected future benefits and expenses, less the present value of expected future net premiums based on assumptions including projected interest rates and investment returns, health care experience, policyholder persistency or lapses, insured mortality, insured morbidity and expenses, all of which are locked-in at the time the policies are issued or acquired. In our long-term care insurance business, our assumptions used in loss recognition testing also include significant premium rate increases and associated benefit reductions that have been filed and approved or are anticipated to be approved (including premium rate increases and associated benefit reductions not yet filed). The liability for future policy benefits is reviewed at least annually as a part of our loss recognition testing using current assumptions based on the manner of acquiring, servicing and measuring the profitability of the insurance contracts. Loss recognition testing is generally performed at the line of business level, with acquired blocks and certain reinsured blocks tested separately. Changes in how we manage certain polices could require separate loss recognition testing and could result in future charges to net income. If loss recognition testing indicates a
deficiency, the liability for future policy benefits is measured using updated assumptions, which become the new locked-in assumptions utilized going forward unless another premium deficiency charge is recorded.
We annually perform loss recognition testing for the liability for future policy benefits for our long-term care insurance products in the aggregate, excluding our acquired block of long-term care insurance, which is tested separately. The results of loss recognition testing are driven by changes to assumptions and methodologies primarily impacting claim termination rates, incidence and benefit utilization rates, as well as in-force rate actions. Claim termination rates refer to the expected rates at which claims end. Incidence rates represent the likelihood the policyholder will go on claim. Benefit utilization rates estimate how much of the available policy benefits are expected to be used.
The impact on our 2019 long-term care insurance loss recognition testing margin for select sensitivities were as follows:
The margin impacts in the table above are each discrete and do not reflect the impact one factor may have on another. For example, the increases in claim costs do not include any offsetting impacts from potential future in-force rate actions. Any such offset from in-force rate actions would primarily impact our long-term care insurance block, excluding the acquired block.
strategy involving premium rate increases and associated benefit reductions. For our long-term care insurance block, excluding the acquired block, any adverse changes in assumptions would only be reflected in net income
profits in earlier periods followed by projected losses in later periods. As a result of this pattern of projected profits followed by projected losses, we will ratably accrue additional future policy benefit reserves over the profitable periods, currently expected to be through 2033, by the amounts necessary to offset estimated losses during the periods that follow. Such additional reserves are updated each period and calculated based on our estimate of the amount necessary to offset the losses in future periods utilizing expected income and current best estimate assumptions based on actual and anticipated experience, consistent with our loss recognition testing. We adjust the accrual rate prospectively, over the remaining profit periods, without any catch-up adjustment. During the years ended December 31, 2019 and 2018, we increased our long-term care insurance future policy benefit reserves by $213 million and $8 million, respectively, to accrue for profits followed by losses. As of December 31, 2019, the total amount accrued for profits followed by losses was $323 million. The accrual is impacted by the pattern and present value of expected future losses and is updated annually at the time in which we perform loss recognition testing. During the fourth quarter of 2019, we updated our loss recognition testing assumptions, which included changes from our annual assumption review completed in the fourth quarter of 2019 as well as updates to our future in-force rate actions. Even though the 2019 total loss recognition testing margin was relatively consistent with the 2018 margin, our projected present value of expected future losses increased in 2019. The present value of expected future losses was approximately $2.0 billion and $1.1 billion as of December 31, 2019 and 2018, respectively. The increase in the present value of expected future losses was driven mostly by higher projected future claims, partially offset by future in-force rate actions. As of December 31, 2019, we estimate a factor of approximately 80% of those profits on our long-term care insurance block, excluding the acquired block, will be accrued in the future to offset estimated future losses during later periods. As of December 31, 2018, we estimated a factor of approximately 76% to ratably accrue additional future policy benefits. The increase in the factor was largely driven by the updated profit pattern from our annual assumption review completed in the fourth quarter of 2019 as well as updates to our future in-force rate actions. There may be future adjustments to this estimate reflecting any variety of new and adverse trends that could result in increases to future policy benefit reserves for our profits followed by losses accrual, and such future increases could possibly be material to our results of operations and financial condition and liquidity.
In 2019, our acquired block of long-term care insurance had positive margin of approximately $100 million to $300 million, and approximately $200 million to $400 million in 2018. Our discount rate assumption was 7.00% and 7.02% in 2019 and 2018, respectively. As of December 31, 2019 and 2018, the liability for future policy benefits associated with our acquired block of long-term care insurance was $2.1 billion and $1.9 billion, respectively.
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 (loss), and would result in higher income recognition over the remaining duration of the in-force block.
Similar to our long-term care insurance products, we annually perform loss recognition testing for the liability for future policy benefits for our term and whole life insurance products in the aggregate, excluding our acquired block, which is tested separately. The margin of our term and whole life insurance products has fluctuated over the years. As of December 31, 2019 and 2018, we had margin of approximately $200 million to $600 million and zero to $200 million, respectively, and a DAC balance of $1.2 billion and $1.3 billion, respectively, on our term and whole life insurance products, excluding the acquired block. If our margin is reduced below zero for our term and whole life insurance products, excluding our acquired block, we would amortize DAC up to the amount of DAC recorded on our balance sheet and if DAC was fully written off, establish additional future policy benefit reserves, either of which would result in a charge to net income (loss).
The risks we face mostly include adverse variations in mortality and lapse assumptions. Adverse experience in one or all of these risks could result in the DAC associated with our term and whole life insurance products, excluding our acquired block and PVFP associated with our acquired block of term and whole life insurance products to no longer be fully recoverable as well as the required establishment of additional future policy benefit reserves. Any favorable variation would result in additional margin in our DAC and PVFP loss recognition analysis and would result in higher income recognition over the remaining duration of the in-force block. The sensitivities in the table below are changes that we consider to be reasonably possible given historical changes in market conditions and our experience with these products.
The margin impacts in the table above are each discrete and do not reflect the impact one factor may have on another.
loss recorded to net income. The 2019 test results were principally driven by the lower interest rate environment. The 2018 and 2017 test results were predominantly impacted by emerging mortality experience, lower expected growth in interest rates and a prolonged low interest rate environment.
our universal and term universal life insurance products, we estimate that a 100 basis point reduction in interest rates from the December 31, 2019 level, or 2% higher mortality, scenarios that we consider to be reasonably possible given historical changes in market conditions and experience on these products, would result in a loss recorded to net income of approximately $60 million or $63 million, respectively. Adverse experience in persistency could also result in the DAC amortization associated with these products to be accelerated as well as the establishment of higher additional benefit reserves. Any favorable changes in these assumptions would result in lower DAC amortization as well as a reduction in the liability for policyholder account balances.
Our liability for policy and contract claims is reviewed regularly, with changes in our estimates of future claims recorded through net income.
there is a potential for future assumption reviews to result in further updates.
During the third quarter of 2017, we reviewed our assumptions and methodologies relating to our claim reserves of our long-term care insurance business and determined, based on our experience, no adjustments were required.
In our U.S. mortgage insurance business, the majority of our insurance contracts have recurring premiums. We recognize recurring premiums over the terms of the related insurance policy on a pro-rata basis (i.e., monthly). Changes in market conditions could cause a decline in mortgage originations, mortgage insurance penetration rates and our market share, all of which could impact new insurance written. For example, a decline in flow new insurance written of $1.0 billion would result in a reduction in earned premiums of approximately $4 million in the first full year. Likewise, if flow persistency declined on our existing insurance in-force by 10%, earned premiums would decline by approximately $90 million during the first full year, potentially offset by lower reserves due to policies no longer being in-force.
Our ability to realize our net deferred tax asset of $425 million, which includes deferred tax assets related to NOL and foreign tax credit carryforwards, is primarily dependent upon generating sufficient taxable income in future years. Management has concluded that there is sufficient positive evidence to support the expected
realization of the net operating losses and foreign tax credit carryforwards. This positive evidence includes the fact that: (i) we are currently in a cumulative three-year income position; (ii) our U.S. operating forecasts are profitable, which include: in-force premium rate increases and associated benefit reductions already obtained in our long-term care insurance business; and (iii) overall domestic losses that we have incurred are allowed to be reclassified as foreign source income which, along with future projections of foreign source income, is sufficient to cover the foreign tax credits being carried forward. After consideration of all available evidence, we have concluded that it is more likely than not that our deferred tax assets, with the exception of certain foreign net operating losses and state deferred tax assets for which a valuation allowance has been established, will be realized. If our actual results do not validate the current projections of pre-tax income, we may be required to record an additional valuation allowance that could have a material impact on our consolidated financial statements in future periods.
In 2017, we released $258 million of our valuation of allowance that was recorded in 2016 related to judgments regarding the future realization of certain foreign tax credits. In light of our 2017 financial projections, which included the impact of changes in U.S. tax legislation under the TCJA and improvements in business performance, mostly in our U.S. mortgage insurance business, as well as lower operating earnings volatility in our U.S. life insurance business, we believed that it is more likely than not that the benefits of these foreign tax credits would be realized (see “Regulation-Changes in tax law”). The financial projections did not include any benefits or aspects of the proposed transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership.
A liability is contingent if the amount is not presently known, but may become known in the future as a result of the occurrence of some uncertain future event. We estimate our contingent liabilities based on management’s estimates about the probability of outcomes and their ability to estimate the range of exposure. Accounting standards require that a liability be recorded if management determines that it is probable that a loss has occurred and the loss can be reasonably estimated. In addition, it must be probable that the loss will be confirmed by some future event. As part of the estimation process, management is required to make assumptions about matters that are by their nature highly uncertain.
We were named as defendants in a case captioned AXA S.A. v. Genworth Financial International Holdings, LLC et al.,
Premiums consist primarily of premiums earned on insurance products for mortgage, long-term care, life insurance, single premium immediate annuities and structured settlements with life contingencies.
• Our U.S. Mortgage Insurance segment increased $110 million mainly attributable to higher insurance in-force and from higher policy cancellations in our single premium mortgage insurance product driven largely by mortgage refinancing, partially offset by lower average premium rates in 2019. The year ended December 31, 2019 also included a favorable adjustment of $14 million related to our single premium earnings pattern review.
• Our Runoff segment decreased $13 million principally from lower fee income driven mostly by a decline in the average account values in our variable annuity products in 2019.
• Our U.S. Life Insurance segment decreased $437 million. Our long-term care insurance business decreased $393 million principally related to a higher favorable impact of $357 million from reduced benefits in 2019 related to in-force rate actions approved and implemented. The decrease was also attributable to favorable impacts from benefit utilization rate updates and favorable development on prior year incurred but not reported claims. These decreases were partially offset by the aging of the in-force block (including higher frequency and severity of new claims), unfavorable claim terminations driven in part by the updates from the 2018 claim reserve review and an increase in incremental reserves of $205 million recorded in connection with an accrual for profits followed by losses in 2019. Included in 2018 was higher claim reserves of $291 million, net of reinsurance, related to the
• Our Runoff segment decreased $12 million primarily attributable to lower GMDB reserves in our variable annuity products due to favorable equity market performance in 2019.
Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.
• Our Runoff segment increased $8 million largely related to higher account values in our corporate-owned life insurance products in 2019.
• Corporate and Other activities decreased $22 million mainly driven by lower employee-related expenses and operating costs in 2019.
• Our Australia Mortgage Insurance segment decreased $10 million largely from lower contract fees amortization in 2019.
• Our U.S. Mortgage Insurance segment increased $51 million mainly attributable to higher average flow insurance in-force, partially offset by lower average rates on our mortgage insurance in-force in 2018.
• Our U.S. Life Insurance segment decreased $55 million. Our long-term care insurance business increased $68 million largely from $70 million of increased premiums in 2018 from in-force rate actions approved and implemented and from a $60 million unfavorable correction in 2017 related to
certain limited pay policies that had reached their paid up status that did not recur. These increases were partially offset by policy terminations in 2018. Our life insurance business decreased $123 million mainly attributable to higher ceded premiums in 2018 from new reinsurance treaties effective in December 2017 and the continued runoff of our term life insurance products in 2018.
• Our U.S. Mortgage Insurance segment decreased $71 million primarily from lower new delinquencies, favorable net cures and aging of existing delinquencies and a $28 million favorable reserve adjustment in 2018 mostly driven by lower expected claim rates. The year ended December 31, 2017 included a $15 million favorable reserve adjustment and approximately $5 million of losses attributable to new delinquencies in areas impacted by hurricanes Harvey and Irma.
• Corporate and Other activities decreased $25 million mainly driven by lower compensation expenses and consulting fees, as well as lower net expenses after allocations in 2018. These decreases were partially offset by $6 million of broker, advisor and investment banking fees associated with Genworth Holdings’ bond consent solicitation in October 2018.
• Our U.S. Life Insurance segment increased $12 million mostly attributable to our long-term care insurance business largely from higher operating costs associated with our in-force rate action plan, partially offset by guaranty fund assessments in 2017 in connection with the Penn Treaty liquidation that did not recur.
• Our U.S. Mortgage Insurance segment increased $4 million largely from higher compensation and benefit expenses in 2018.
• Our U.S. Life Insurance segment decreased $71 million mostly attributable to our life insurance business largely from a $41 million unfavorable term conversion mortality assumption correction in 2017 that did not recur. The decrease was also attributable to a favorable unlocking of $4 million in our universal and term universal life insurance products as part of our annual review of assumptions in the fourth quarter of 2018 compared to an unfavorable unlocking of $44 million in 2017 (see “-Critical Accounting Estimates-Deferred acquisition costs” for additional information) and from lower lapses in 2018. These decreases were partially offset by prior year transactions that did not recur: a net $15 million favorable model refinement and an $11 million refinement related to reinsurance rates.
• Our Australia Mortgage Insurance segment increased $19 million primarily as a result of an $18 million decrease in amortization of DAC in 2017 related to our premium earnings pattern review that did not recur and higher contract fees amortization in 2018.
• Our Runoff segment increased $9 million related to our variable annuity products mainly from unfavorable equity market performance, partially offset by higher net investment losses on embedded derivatives in 2018.
Corporate and Other activities decreased $11 million largely driven by lower interest expense associated with the redemption of $597 million of Genworth Holdings’ senior notes in May 2018, partially offset by a favorable correction of $11 million related to our Tax Matters Agreement liability in 2017 that did not recur and from our junior subordinated notes which had a higher floating rate of interest in 2018.
Prior year amounts have not been re-presented 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.
The following table includes a reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the years ended December 31:
For the years ended December 31, 2019, 2018 and 2017, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(11) million, $(12) million and $(3) million, respectively, and adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $11 million, $(7) million and $12 million, respectively.
In 2019, 2018 and 2017, we recorded a pre-tax expense of $4 million, $2 million and $1 million, respectively, related to restructuring costs as part of an expense reduction plan as we evaluate and appropriately size our organizational needs and expenses.
There were no infrequent or unusual items excluded from adjusted operating income (loss) during the periods presented other than fees incurred in 2018 related to Genworth Holdings’ bond consent solicitation of $6 million for broker, advisor and investment banking fees.
system to a territorial international tax system. Therefore, beginning on January 1, 2018 we tax our international businesses at their local jurisdictional tax rates and our domestic businesses at the U.S. corporate federal income tax rate of 21%. Our segment tax methodology applies the respective jurisdictional or domestic tax rate to the pre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign withholding taxes and permanent differences between U.S. GAAP and local 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.
Management regularly monitors and reports sales metrics as a measure of volume of new business generated in a period. Sales refer to new insurance written for mortgage insurance products. We consider new insurance written to be a measure of our operating performance because it represents a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period.
Management regularly monitors and reports insurance in-force and risk in-force. Insurance in-force for our mortgage insurance businesses is a measure of the aggregate original loan balance for outstanding insurance policies as of the respective reporting date. Risk in-force for our U.S. mortgage insurance business is based on the coverage percentage applied to the estimated current outstanding loan balance. Risk in-force in our Australia mortgage insurance business is computed using an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents the highest expected average per-claim payment for any one underwriting year over the life of our mortgage insurance business in Australia. We also have certain risk share arrangements in Australia where we provide pro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicable pro-rata coverage amount provided is used when applying the factor. We consider insurance in-force and risk in-force to be measures of our operating performance because they represent measures of the size of our business at a specific date which will generate revenues and profits in a future period, rather than measures of our revenues or profitability during that period.
These operating performance measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.
Results of our U.S. mortgage insurance business are affected primarily by the following factors: competitor actions; unemployment or underemployment levels; other economic and housing market trends, including interest rates, home prices, the number of first-time homebuyers, and mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies; the effect of seasonal variations including the adverse
impact of seasonality that we experience historically in the second half of the year; the inventory of unsold homes; loan modification and other servicing efforts; and litigation, among other items.
Estimated mortgage origination volume increased in 2019, primarily due to higher refinance originations driven by lower interest rates. The estimated private mortgage insurance available market increased in 2019 driven in large part by higher refinance originations, including higher market penetration. Our flow persistency was 78% in 2019 compared to 84% in 2018, due in part to lower interest rates. Our U.S. mortgage insurance estimated market share for 2019 increased compared to 2018. Our market share is influenced by the execution of our go to market strategy, including but not limited to, the market adoption of our proprietary risk-based pricing engine, GenRATE, and our selective participation in forward commitment transactions. Our market share remains impacted by the negative ratings differential relative to our competitors, concerns expressed about Genworth’s financial condition, the proposed transaction with China Oceanwide and pricing competition. For more information on the potential impacts due to competition, see “Item 1A - Risk Factors-Competitors could negatively affect our ability to maintain or increase our market share and profitability.”
Our loss ratio was 6% for the year ended December 31, 2019, compared to 5% for the year ended December 31, 2018. The 2019 loss ratio increased primarily from lower net benefits from cures and aging of
existing delinquencies and from less favorable reserve adjustments, partially offset by a lower average reserve on new delinquencies and higher net earned premiums in 2019, which included a $14 million favorable adjustment associated with the review of our single premium earnings pattern. We recorded $23 million of favorable reserve adjustments in 2019 compared to a $28 million favorable reserve adjustment in 2018. These favorable reserve adjustments were mostly associated with lower expected claim rates. The favorable reserve adjustments of $23 million and the $14 million favorable adjustment from the single premium earnings pattern review reduced the loss ratio by three percentage points in 2019. The favorable reserve adjustment of $28 million reduced the loss ratio by four percentage points in 2018.
Our U.S. mortgage insurance business paid a $250 million dividend in 2019. We regularly evaluate business conditions, the macro-economic environment, regulatory requirements, PMIERs sufficiency and business needs, among other things, to determine the amount and timing of future dividends.
Under PMIERs, we are subject to operational and financial requirements that mortgage insurers must meet in order to remain eligible. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as to its compliance with PMIERs. The revised PMIERs was effective on March 31, 2019. As of December 31, 2019, we estimate our U.S. mortgage insurance business had available assets of approximately 138% of the required assets under PMIERs compared to approximately 129% under the previous PMIERs requirements as of December 31, 2018. As of December 31, 2019 and 2018, the PMIERs sufficiency ratios were in excess of $1.0 billion and $750 million, respectively, of available assets above the current and previous PMIERs requirements, respectively. The increase in the PMIERs sufficiency ratio during 2019 was primarily driven by positive cash flows, the execution of reinsurance transactions and an increase in the stock price of Genworth Canada that was realized in cash upon the sale of GMICO’s ownership in Genworth Canada that eliminated the PMIERs discount on affiliated stock. These increases were partially offset by higher risk in-force from new insurance written, a $250 million paid dividend and the exclusion of the credit for future premiums on insurance policies written in 2008 or earlier, which was allowed under the previous PMIERs. Effective July 1, 2019, our U.S. mortgage insurance business executed an excess of loss reinsurance transaction with a panel of reinsurers covering a portion of the loss tier on current and expected new insurance written for the 2019 book year. In addition, effective November 25, 2019, our U.S. mortgage insurance business obtained approximately $303 million of excess of loss reinsurance coverage on a portfolio of existing mortgage insurance policies written from January 1, 2019 through September 30, 2019. See note 8 in our consolidated financial statements under “Part II-Item 8 - Financial Statements and Supplementary Data” for additional information on this transaction. Reinsurance transactions provided an aggregate of approximately $870 million of PMIERs capital credit as of December 31, 2019.
Premiums increased mainly attributable to higher insurance in-force and from higher policy cancellations in our single premium mortgage insurance product driven largely by mortgage refinancing, partially offset by lower average premium rates in 2019. The year ended December 31, 2019 also included a favorable adjustment of $14 million related to our single premium earnings pattern review.
Net investment income increased primarily due to higher average invested assets and investment yields in 2019.
The following table sets forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:
Primary insurance in-force represents the aggregate original loan balance for outstanding insurance policies and is used to determine premiums. Original loan balances are presented for policies with level renewal premiums. Amortized loan balances are presented for policies with annual, amortizing renewal premiums.
Net premiums written increased primarily from higher average flow insurance in-force in 2019.
The loss ratio increased primarily from lower net benefits from cures and aging of existing delinquencies and from less favorable reserve adjustments, partially offset by a lower average reserve on new delinquencies and higher net earned premiums in 2019, which included a $14 million favorable adjustment associated with the review of our single premium earnings pattern. We recorded $23 million of favorable reserve adjustments in 2019 compared to a $28 million favorable reserve adjustment in 2018. These favorable reserve adjustments were mostly associated with lower expected claim rates. The favorable reserve adjustments of $23 million and the $14 million favorable adjustment from the single premium earnings pattern review reduced the loss ratio by three percentage points in 2019. The favorable reserve adjustment of $28 million reduced the loss ratio by four percentage points in 2018.
Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 348, 403 and 614 as of December 31, 2019, 2018 and 2017, respectively.
Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.
The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of December 31, 2019:
For policy years after 2008, the average annual mortgage interest rate has been consistently below 5%, with its lowest point at 3.89% for policy year 2016. The largest portion of our loss reserves continues to reside in policy years 2005 through 2008. The size of these policy years at origination combined with the significant decline in home prices led to significant losses in years prior to 2015. Although uncertainty remains with respect to the ultimate losses we will experience on these policy years, they have become a smaller percentage of our total mortgage insurance portfolio. As of December 31, 2019, our 2005 through 2008 policy years represent
The ratio of the claim paid to the current risk in-force for a loan is referred to as “claim severity.” The current risk in-force is equal to the unpaid principal amount multiplied by the coverage percentage. The main determinants of claim severity are the age of the mortgage loan, the value of the underlying property, accrued interest on the loan, expenses advanced by the insured and foreclosure expenses. These amounts depend partly upon the time required to complete foreclosure, which varies depending upon state laws. Pre-foreclosure sales, acquisitions and other early workout and claim administration actions help to reduce overall claim severity. Our average primary flow mortgage insurance claim severity was 112%, 118% and 120% for the years ended December 31, 2019, 2018 and 2017, respectively. The average claim severities do not include the effects of agreements on non-performing loans.
The Australian GDP is expected to have experienced modest growth in 2019 with a rise in resource exports, partially offset by soft consumption growth and declines in housing activity and business investment. The Reserve Bank of Australia official cash rate was reduced to 0.75% in 2019, down from 1.5% at the end of 2018. The December 2019 unemployment rate increased slightly to 5.1% from 5.0% at the end of 2018.
Certain areas of Australia have been impacted by bushfires that occurred in late 2019 and continued into the first quarter of 2020. At this time, we do not believe there will be a significant impact to the business, and we expect our exposure to be limited to any economic downturn that may occur in the impacted regions. We continue to monitor the bushfires and are working with our lender customers to support borrowers who have been impacted.
The adjustment to our premium earnings pattern in the fourth quarter of 2017 was applied on a retrospective basis under U.S. GAAP, however, under local Australian Accounting Standards this adjustment was applied on a prospective basis. Due to this divergence in accounting application, the financial results and certain metrics, such as the loss ratio and expense ratios, for our mortgage insurance business in Australia were different between the two accounting standards through the fourth quarter of 2019. These differences will continue in future periods but will become less significant as time passes.
We had lower losses in 2019 compared to 2018 attributable to changes in foreign exchange rates. Excluding the impacts of foreign exchange, losses increased primarily from higher reserves on new delinquencies in 2019. This increase was
offset by favorable cure activity in 2019. The loss ratio in Australia for the year ended December 31, 2019 was 33%. We expect the full year 2020 Australia loss ratio to be comparable to the 2019 loss ratio.
In 2019, new insurance written increased compared to 2018 primarily due to higher mortgage origination volume from certain key customers as housing markets improved and from a higher level of bulk insurance activity in 2019. We had higher gross written premiums in 2019 compared to 2018 largely as a result of higher flow new insurance written from higher mortgage origination volumes in 2019. Net earned premiums were lower in 2019 compared to 2018 primarily from portfolio seasoning and lower policy cancellations.
Our mortgage insurance business in Australia is concentrated in a small number of key customers. In October 2019, we renewed our supply and service contract with our largest customer, effective January 1, 2020, for a term of three years. In November 2018, we entered into a new contract with our second largest customer, effective November 21, 2018, with a term of two years and the option to extend for an additional year at the customer’s discretion. These two customers represented 57% and 11%, respectively, of our gross written premiums for the year ended December 31, 2019.
For the years ended December 31, 2019, 2018 and 2017, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $11 million, $(7) million and $12 million, respectively.
Premiums decreased predominantly from portfolio seasoning and lower policy cancellations in 2019. The year ended December 31, 2019 included a decrease of $24 million attributable to changes in foreign exchange rates.
Net investment income decreased primarily from lower yields in 2019. The year ended December 31, 2019 included a decrease of $5 million attributable to changes in foreign exchange rates.
Net investment gains in 2019 were primarily driven by net gains from the sale of investment securities. Net investment losses in 2018 were largely from derivative losses and changes in the fair market value of equity securities, partially offset by net gains from the sale of investment securities.
Amortization of DAC and intangibles decreased largely from lower contract fees amortization in 2019.
The effective tax rate was 30.0% for both the year ended December 31, 2019 and 2018, consistent with our jurisdictional rate.
As of December 31, 2019, our mortgage insurance business in Australia had structured insurance transactions with three lenders where it was in a secondary loss position. The insurance portfolio metrics associated with these transactions, which include insurance in-force, risk in-force, new insurance written, loans in-force and delinquent loans, are excluded from the following tables. These arrangements represented approximately $162 million and $154 million of risk in-force as of December 31, 2019 and 2018, respectively.
The following table sets forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated:
Our mortgage insurance business in Australia currently provides 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a
factor of 35% that represents our highest expected average per-claim payment for any one underwriting year over the life of our business in Australia. We also have certain risk share arrangements where we provide pro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicable pro-rata coverage amount provided is used when applying the factor.
Primary insurance in-force and risk in-force decreased primarily due to policy cancellations and changes in foreign exchange rates in 2019. Primary insurance in-force and risk in-force included decreases of $800 million and $300 million, respectively, from changes in foreign exchange rates.
New insurance written increased for the year ended December 31, 2019 primarily due to higher mortgage origination volume from certain key customers in 2019 and an increase in new bulk insurance written. The year ended December 31, 2019 included a decrease $1.4 billion attributable to changes in foreign exchange rates.
Net premiums written increased for the year ended December 31, 2019 primarily due to higher mortgage origination volume from certain key customers driven principally by improvements in housing markets. The increase was also attributable to
new bulk insurance written. The year ended December 31, 2019 included a decrease of $20 million attributable to changes in foreign exchange rates.
The loss ratio increased for the year ended December 31, 2019 primarily from lower net earned premiums mainly driven by portfolio seasoning and lower policy cancellations in 2019.
The expense ratio (net earned premiums) increased for the year ended December 31, 2019 primarily from lower net earned premiums as discussed above and higher operating expenses, partially offset by lower contract fees amortization in 2019.
Overall risk in-force decreased $300 million attributable to changes in foreign exchange rates in 2019.
Our U.S. life insurance subsidiaries are subject to the NAIC’s RBC standards and other minimum statutory capital and surplus requirements. The consolidated RBC ratio of our U.S. domiciled life insurance subsidiaries was approximately 213% and 199% as of December 31, 2019 and 2018, respectively. The increase was largely
driven by higher statutory income as a result of benefits in our long-term care insurance business from in-force rate actions. Additionally, in December 2019, GLAIC, one of our U.S. domiciled life insurance companies, executed a reinsurance transaction by restructuring and consolidating three existing captive reinsurance companies that were used to finance excess statutory reserves for term and universal life insurance products. This increased GLAIC’s statutory capital and reduced annual financing and administrative costs as well as improved the consolidated RBC ratio by approximately 14 points.
Our assumptions are sensitive to slight variability in actual experience and small changes in assumptions could result in decreases in the margin of our long-term care insurance blocks to at/or below zero in future years. To the extent, based on reviews, the margin of our long-term care insurance block, excluding the acquired block, is negative, we would be required to recognize a loss, by amortizing more DAC and/or establishing additional benefit reserves. For our acquired block of long-term care insurance, the impacts of adverse changes in assumptions would also be reflected as a loss if our margin for this block is reduced below zero by establishing
additional benefit reserves. A significant decrease in our loss recognition testing margin of our long-term care insurance blocks could have a material adverse effect on our business, results of operations and financial condition.
During the third quarter of 2019, we reviewed our assumptions and methodologies relating to our claim reserves of our long-term care insurance business but did not make any significant changes to the assumptions or methodologies, other than routine updates to investment returns and benefit utilization rates as we typically do each quarter. These updates in the third quarter of 2019 did not have a significant impact on claim reserve levels. The prior year claim reserve review, which we completed during the fourth quarter of 2018, resulted in recording higher claim reserves of $308 million and reinsurance recoverables of $17 million. Based on this review, we updated several assumptions and methodologies, including benefit utilization rates, claim termination rates and other assumptions. For a discussion of additional information related to changes to our assumptions and methodologies to our long-term care insurance claim reserves, see “-Critical Accounting Estimates-Liability for policy and contract claims.”
Given the ongoing challenges in our long-term care insurance business, we continue pursuing initiatives to improve the risk and profitability profile of our business including: premium rate increases and associated benefit reductions on our in-force policies; managing expense levels; executing investment strategies targeting higher returns; and enhancing our financial and actuarial analytical capabilities. Executing on our multi-year long-term care insurance in-force rate action plan with premium rate increases and associated benefit reductions on our legacy long-term care insurance policies is critical to the business. For an update on in-force rate actions, refer to “Significant Developments-U.S. Life Insurance.” As of December 31, 2019, we have suspended sales in Hawaii, Massachusetts, New Hampshire, Vermont and Montana, and will consider taking similar actions in the future in other states where we are unable to obtain satisfactory rate increases on in-force policies. We will also consider litigation against states that decline actuarially justified rate increases. As of December 31, 2019, we were in litigation with one state that has refused to approve actuarially justified rate increases.
The approval process for in-force rate actions and the amount and timing of the premium rate increases and associated benefit reductions approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take a significant amount of time, and the approved amount may be phased in over time. After approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary date. As a result, the benefits of any rate increase are not fully realized until the implementation cycle is complete and are, therefore, expected to be realized over time.
Our U.S. Life Insurance segment is taxed at 21%, the enacted tax rate under TCJA. However, gains on forward starting swaps settled prior to the enactment of the TCJA are tax effected at 35% as they are amortized into net investment income. This will negatively impact our long-term care insurance business given the majority of our forward starting swaps are in this business.
We also manage risk and capital allocated to our long-term care insurance business through utilization of external reinsurance in the form of coinsurance. We executed external reinsurance agreements to reinsure 20% of all sales of our individual long-term care insurance products that have been introduced since early 2013. External new business reinsurance is dependent on a number of factors, including price, availability, risk tolerance and
capital levels. Over time, there can be no assurance that affordable, or any, reinsurance will continue to be available. We also have external reinsurance on some older blocks of business which includes a treaty on a yearly renewable term basis on business that was written between 1998 and 2003. This yearly renewable term reinsurance provides coverage for claims on those policies for 15 years after the policy was written. After 15 years, reinsurance coverage ends for policies not on claim, while reinsurance coverage continues for policies on claim until the claim ends. The 15-year coverage on the policies written in 2003 expired in 2018; therefore, any new claims will not have reinsurance coverage under this treaty. Since 2013, we have seen, and may continue to see, an increase in our benefit costs as policies with reinsurance coverage exhaust their benefits or terminate and policies which are not covered by reinsurance go on claim.
Mortality levels may deviate each period from historical trends. Overall mortality experience was lower in 2019 compared to 2018; however, we have experienced higher mortality than our then-current and priced-for assumptions in recent years for our universal life insurance blocks. We have also been experiencing higher mortality related charges resulting from an increase in rates charged by our reinsurance partners reflecting natural block aging and higher mortality compared to expectations.
In the fourth quarters of 2019 and 2018, we performed our annual review of life insurance assumptions and completed our loss recognition testing. Our reviews focused on assumptions for mortality, particularly for our conversion products, persistency and interest rates, among other assumptions. As part of our review in the fourth quarter of 2019, we recorded $107 million of after-tax charges in our universal and term universal life insurance products primarily from assumption changes related to the lower interest rate environment. As part of our review in the fourth quarter of 2018, we recorded $91 million of after-tax charges in our universal and term universal life insurance products primarily driven by assumption changes due to lower expected growth in interest rates and emerging mortality experience primarily in our term universal life insurance product.
We also updated mortality assumptions for certain universal and term universal life insurance products as well as our term life insurance products in the fourth quarters of 2019 and 2018. Our mortality experience for older ages and late-duration premium periods and conversion products is emerging. Assumption changes in our term life insurance products focused on mortality improvements during the post-level premium period based on observed trends in emerging experience. This change to the mortality assumption increased the loss recognition testing margin in our term life insurance products. We will continue to regularly review our mortality assumptions as well as all of our other assumptions in light of emerging experience. We may be required to make further adjustments in the future to our assumptions which could impact our universal and term universal life insurance reserves or our loss recognition testing results of our term life insurance products. Any further materially adverse changes to our assumptions, including mortality or interest rates, could have a materially negative impact on our results of operations, financial condition and business. For a discussion of additional information related to changes to our life insurance assumptions, see “-Critical Accounting Estimates.”
amortization in 2019. We anticipate this trend will continue into 2020 for the 1999 block as it reaches the end of its level premium period. Additionally, we expect similar experience with the 20-year level premium period business written in 2000 as it enters its post-level period during 2020 and into 2021. In the future, as additional 10-, 15- and 20-year level premium period blocks enter their post-level guaranteed premium rate period, we expect to experience volatility in DAC amortization, premiums and mortality experience, which we expect to reduce profitability in our term life insurance products, in amounts that could be material, if persistency is lower than our original assumptions as experience has emerged on earlier blocks. We have taken actions to mitigate potentially unfavorable impacts through the use of reinsurance, particularly for certain term life insurance policies issued between 2001 and 2004.
Results of our fixed annuities business are affected primarily by investment performance, interest rate levels, the slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, persistency and expense and commission levels. We no longer solicit sales of traditional fixed annuity products; however, we continue to service our existing retained and reinsured blocks of business.
We monitor and change crediting rates on fixed annuities on a regular basis to maintain spreads and targeted returns, if applicable. However, if interest rates remain at current levels or decrease, we could see declines in spreads which impact the margins on our products, particularly our fixed immediate annuity products. Due to the premium deficiency that existed in 2016, we continue to monitor our fixed immediate annuity products more frequently than annually and recorded additional charges to net income during 2019, 2018 and 2017. If investment performance deteriorates or interest rates decrease or remain at the current levels for an extended period of time, we could incur additional charges in the future. The impacts of future adverse changes in our assumptions could result in the establishment of additional future policy benefit reserves and would be immediately reflected as a loss if our margin for this block is again reduced below zero. Any favorable variation would result in additional margin but no immediate benefit to income and would result in higher income recognition over the remaining duration of the in-force block. For additional information, see “-Critical Accounting Estimates-Future Policy Benefits.”
• Our long-term care insurance business increased $114 million largely from higher average invested assets and higher gains from limited partnerships in 2019.
• Our life insurance business increased $20 million principally related to an increase in investment yields as well as higher income related to favorable prepayment speed adjustments on mortgage-backed securities in 2019.
• Our life insurance business had net investment gains of $11 million in 2019 compared to net investment losses of $6 million in 2018. The change to net investment gains in 2019 was mainly driven by net gains from the sale of investment securities in 2019 compared to net losses in 2018, partially offset by lower gains on embedded derivatives associated with our indexed universal life insurance products in 2019.
• Our life insurance business decreased $29 million primarily attributable to a less unfavorable unlocking of $30 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-Policyholder account balances” for additional information). The decrease was also attributable to lower mortality in 2019 compared to 2018. These decreases were partially offset by $24 million of unfavorable model corrections in our universal life insurance products in 2019.
• Our life insurance business increased $14 million largely attributable to a net decrease in deferrals in 2019 reflecting recent lapse experience, partially offset by lower operating expenses in 2019 as a result of the continued runoff of our in-force block.
The effective tax rate increased to 72.1% for the year ended December 31, 2019 from 16.3% for the year ended December 31, 2018. In 2019, as a result of recording pre-tax income, gains on forward starting swaps settled prior to the enactment of the TCJA, which are tax effected at 35% as they are amortized into net investment income, increased the effective tax rate. In 2018, as a result of the pre-tax loss, gains on forward starting swaps settled prior to the enactment of the TCJA, decreased the effective tax rate.
The loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums.
Net earned premiums increased in 2019 largely from $107 million of increased premiums from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in 2019.
We no longer solicit sales of our traditional fixed annuity products; however, we continue to service our existing block of business.
Results of our Runoff segment are affected primarily by investment performance, interest rate levels, net interest spreads, equity market conditions, mortality, surrenders and scheduled maturities. In addition, the results of our Runoff segment can significantly impact our regulatory capital requirements, distributable earnings and liquidity. We use hedging strategies as well as liquidity planning and asset-liability management to help mitigate the impacts. In addition, we may consider reinsurance opportunities to further mitigate volatility in results and manage capital in the future.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased predominantly from favorable equity market performance, which drove lower reserves and DAC amortization in 2019.
Net investment income increased mainly driven by higher policy loan income in our corporate-owned life insurance products in 2019.
Net investment losses decreased principally from gains on embedded derivatives associated with our variable annuity products with GMWBs in 2019 compared to losses in 2018, partially offset by derivative losses in 2019 compared to derivative gains in 2018.
Policy fees and other income decreased principally from lower fee income driven mostly by a decline in the average account values in our variable annuity products in 2019.
Acquisition and operating expenses, net of deferrals, decreased mainly from lower commissions in our variable annuity products in 2019.
Amortization of DAC and intangibles decreased mainly related to lower DAC amortization in our variable annuity products principally from favorable equity market performance in 2019.
The following table sets forth selected operating performance measures regarding our variable annuity and variable life insurance products as of or for the dates indicated:
We no longer solicit sales of our variable annuity or variable life insurance products; however, we continue to service our existing blocks of business and accept additional deposits on existing contracts and policies.
The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders decreased primarily related to lower operating costs and interest expense in 2019.
Interest expense decreased largely driven by the redemption of $597 million of Genworth Holdings’ senior notes in May 2018.
The decrease in the benefit for income taxes was primarily attributable to a lower pre-tax loss in 2019 and a reduction in our valuation allowance in 2018 that did not recur, partially offset by discrete tax adjustments in 2018 that did not recur.
Our investment portfolio maintained approximately $2.7 billion of United Kingdom exposure, or approximately 4% of total invested assets as of December 31, 2019. These assets were primarily U.S. dollar-denominated fixed-income investments and we held no direct United Kingdom sovereign exposure. While the ultimate range of Brexit outcomes could lead to potential credit devaluation or rating agency downgrades of our United Kingdom related exposures, at this time, we do not believe there is a material risk of investment impairments arising from the various Brexit scenarios.
As of December 31, 2019, our fixed maturity securities portfolio, which was 97% investment grade, comprised 85% of our total investment portfolio.
Several of our master swap agreements previously contained credit downgrade provisions that allowed either party to assign or terminate the derivative transaction if the other party’s long-term unsecured credit or financial strength rating was below the limit defined in the applicable agreement. Beginning in 2018, we renegotiated with many of our counterparties to remove the credit downgrade provisions from the master swap agreements entirely or replace them with a provision that allows the counterparty to terminate the derivative transaction if the RBC ratio of the applicable insurance company goes below a certain threshold. During 2019, we successfully completed these negotiations and as a result, none of our insurance company master swap agreements have credit downgrade provisions as of December 31, 2019. As of December 31, 2019, the RBC ratios of the respective insurance companies were above the thresholds negotiated in the applicable master swap agreements and therefore, no counterparty had rights to take action against us under the RBC threshold provisions.
We are at different stages of assessing operational readiness for LIBOR cessation related to our various instruments. These stages range from derivatives, where we are fully operationally ready, to other products and instruments, as well as tax impacts, where we have just begun our assessment process. Our Working Group will continue to monitor the process of elimination and replacement of LIBOR. Since the initial announcement, we have terminated a portion of our LIBOR-based swaps and entered into alternative rate swaps. In anticipation of the elimination of LIBOR, we plan to continue to convert our remaining LIBOR-based derivatives in a similar manner. In addition, our non-recourse funding obligations with interest rates based on one-month LIBOR were redeemed in January 2020. We expect to implement additional measures that we believe will ease the transition from LIBOR. Even though we have begun to take these actions, as described above, it is too early to determine the ultimate impact the elimination of LIBOR will have on our results of operations or financial condition.
See note 17 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to consolidated securitization entities.
Investment income for other invested assets includes amortization of terminated cash flow hedges, which have no corresponding book value within the yield calculation and includes limited partnership investments, which are primarily equity-based and do not have fixed returns by period.
Yields are based on net investment income as reported under U.S. GAAP and are consistent with how we measure our investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability.
• We recorded $43 million of higher net gains related to the sale of fixed maturity securities in 2019 compared to 2018 primarily from the sale of corporate securities driven mostly by cash tenders from merger and acquisition activity in 2019.
See note 17 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to a consolidated securitization entity.
For a discussion of the change in cash, cash equivalents, restricted cash and invested assets, see the comparison for this line item under “-Consolidated Balance Sheets.” See note 4 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to our investment portfolio.
We hold fixed maturity and equity securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of December 31, 2019, approximately 7% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 16 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to fair value.
Limited partnerships increased primarily from additional capital investments, partially offset by return of capital in 2019. Derivatives increased largely from a decrease in interest rates in 2019. Bank loan investments increased from funding of additional investments, partially offset by principal repayments in 2019.
The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
The number of policies related to our embedded derivatives decreased as these products are no longer being offered and continue to runoff.
. Total assets increased $419 million from $100,923 million as of December 31, 2018 to $101,342 million as of December 31, 2019.
• Cash, cash equivalents, restricted cash and invested assets increased $7,052 million primarily from increases of $4,750 million, $1,367 million, $560 million, $214 million and $197 million in fixed maturity securities, cash and cash equivalents, other invested assets, commercial mortgage loans and policy loans, respectively. The increase in fixed maturity securities was predominantly related to higher unrealized gains principally from a decrease in interest rates, partially offset by net sales and maturities in 2019. The increase in cash and cash equivalents was principally related to the net cash proceeds received from the Genworth Canada sale. The increase in other invested assets was primarily from higher market values of derivative assets driven mostly by a decrease in interest rates and from an increase in limited partnership and bank loan investments in 2019. Commercial mortgage loans increased from higher originations and lower prepayments in 2019. The increase in policy loans was principally driven by new loans offered through our corporate-owned life insurance policies collateralized by the cash surrender value of the policy.
• Separate account assets increased $249 million primarily due to favorable equity market performance in 2019.
• Assets held for sale related to discontinued operations decreased $5,015 million as a result of the sale of Genworth Canada, which closed on December 12, 2019.
• Policyholder account balances decreased $751 million largely as a result of surrenders and benefits in our fixed annuities business and from scheduled maturities of certain funding agreements in 2019. These decreases were partially offset by an increase associated with shadow accounting adjustments in connection with the recognition of higher unrealized gains mostly in our universal life insurance products in 2019.
• Liability for policy and contract claims increased $663 million due principally to our long-term care insurance business primarily attributable to new claims as a result of the aging of the in-force block, including higher frequency and severity of new claims, partially offset by favorable development on prior year incurred but not reported claims in 2019. These increases were partially offset by lower delinquencies in our U.S. mortgage insurance business in 2019.
• We reported net income available to Genworth Financial, Inc.’s common stockholders of $343 million for the year ended December 31, 2019.
Genworth Financial and Genworth Holdings each act as a holding company for their respective subsidiaries and do not have any significant operations of their own. Dividends from their respective subsidiaries, payments to them under tax sharing and expense reimbursement arrangements with their subsidiaries and proceeds from borrowings or securities issuances are their principal sources of cash to meet their obligations. Insurance laws and regulations regulate the payment of dividends and other distributions to Genworth Financial and Genworth Holdings by their insurance subsidiaries. We expect dividends paid by the insurance subsidiaries will vary depending on strategic objectives, regulatory requirements and business performance.
Genworth Holdings had $1,461 million and $429 million of cash, cash equivalents and restricted cash as of December 31, 2019 and 2018, respectively. Cash, cash equivalents and restricted cash as of December 31, 2018 included approximately $16 million of restricted cash. Genworth Holdings also held $70 million and $75 million in U.S. government securities as of December 31, 2019 and 2018, respectively, which included approximately $48 million and $42 million, respectively, of restricted assets. Genworth Holdings has an intercompany note with a principal amount of $200 million due on March 31, 2020, which we expect to pay on or before maturity.
Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior and subordinated notes and the holders of the senior and subordinated notes, on an unsecured unsubordinated and subordinated basis, respectively, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes and outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior and subordinated notes indentures in respect of such senior and subordinated notes. Genworth Financial and Genworth Holdings had joint and several guarantees associated with Rivermont I’s non-recourse funding obligations prior to their redemption in January 2020. See note 12 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information.
The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of
dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.
Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of December 31, 2019, our total cash, cash equivalents, restricted cash and invested assets were $74.6 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership investments and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 37% of the carrying value of our total cash, cash equivalents, restricted cash and invested assets as of December 31, 2019.
In February 2019, 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 25 million of its shares for AUD$64 million. As the majority shareholder, we participated in on-market sales transactions during the buy-back period to maintain our ownership position of approximately 52.0% and received $23 million in cash, which was paid as dividends to Genworth Holdings. In lieu of continuing with further share buy-backs 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 program. As a result, a dividend of $30 million was paid to Genworth Holdings. In November 2019, Genworth Australia completed a further capital management initiative via an unfranked special dividend of AUD$0.242 per share, which represented an aggregate distribution of approximately AUD$100 million. As a result, a dividend of $34 million was paid to Genworth Holdings in December 2019.
As of December 31, 2019, each of our life insurance subsidiaries exceeded the minimum required RBC levels in their respective domiciliary state. The consolidated RBC ratio of our U.S. domiciled life insurance subsidiaries was approximately 213% as of December 31, 2019, an increase compared to December 31, 2018, mostly from operating earnings in our long-term care insurance business primarily driven by higher premiums and reduced benefits from in-force rate actions approved and implemented.
On January 21, 2020, Genworth Holdings early redeemed $397 million of its 7.70% senior notes originally scheduled to mature in June 2020 using cash proceeds received from the sale of Genworth Canada. The senior notes were fully redeemed with a cash payment of $409 million, comprised of the outstanding principal balance of $397 million, accrued interest of approximately $3 million and a make-whole premium of approximately $9 million.
. In the absence of the transaction with China Oceanwide, we may need to pursue other potential asset sales to address our debt maturities, including a potential transaction with respect to our U.S. mortgage insurance business and/or our mortgage insurance business in Australia. The availability of additional funding will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurance, our credit ratings and credit capacity and the performance of and outlook for our business. For a discussion of certain risks associated with our liquidity, see “Item 1A - Risk Factors-Our internal sources of liquidity may be insufficient to meet our needs and our access to capital may be limited or unavailable. Under such conditions, we may seek additional capital but may be unable to obtain it” and “Litigation and regulatory investigations or other actions are common in the insurance business and may result in financial losses and harm our reputation.”
We enter into obligations with third parties in the ordinary course of our operations. These obligations as of December 31, 2019, are set forth in the table below. However, we do not believe that our cash flow requirements can be assessed based upon the analysis of these obligations as the funding of these future cash obligations will be from future cash flows from premiums, deposits, fees and investment income that are not reflected in the following table. Future cash outflows, whether they are contractual obligations or not, also will vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable rate borrowings and insurance liabilities that depend on future interest rates and market performance. Many of our obligations are linked to cash-generating contracts. These obligations include payments to contractholders that assume those contractholders will continue to make deposits in accordance with the terms of their contracts. In addition, our operations involve significant expenditures that are not based upon “commitments.”
Includes contractual purchase commitments for goods and services entered into in the ordinary course of business and includes obligations under our pension liabilities.
The timing for the return of the collateral associated with our securities lending program is generally overnight and continuous; therefore, the return of collateral is reflected as being due in 2020. See note 12 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information.
Includes amounts we are committed to fund for U.S. commercial mortgage loans, bank loan investments, interests in limited partnerships and private placement investments.
There is also modest delinquency seasonality in our mortgage insurance business in Australia where we generally experience higher new delinquencies and lower cure rates in the first and second quarters of each calendar year. See “-Australia Mortgage Insurance segment-Trends and conditions” for additional information related to our Australia mortgage insurance business.
We do not believe that inflation has had a material effect on our results of operations, except insofar as inflation may affect interest rates or foreign exchange rates.
For a discussion of recently adopted and not yet adopted accounting standards, see note 2 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data.”
We have audited the accompanying consolidated balance sheets of Genworth Financial, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes and financial statement schedules I to III (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of key assumptions used in loss recognition testing for long-term care and traditional life insurance
We identified the evaluation of key assumptions used in loss recognition testing for long-term care insurance (future in-force rate actions and morbidity) and for traditional life insurance (mortality) as a critical audit matter. The evaluation of these key assumptions required complex auditor judgment. Specialized skills were needed to evaluate the future in-force rate actions and morbidity assumptions for long-term care insurance and the mortality assumption for traditional life insurance used in the Company’s loss recognition testing.
• Comparing the Company’s updated future in-force rate actions and morbidity assumptions for long-term care insurance and mortality assumption for traditional life insurance to the Company’s historical experience; and
• Evaluating the impact of the key assumption changes by comparing the actual impact to expected impact of the key assumption changes to the results of the loss recognition test.
Assessment of the estimate of the long-term care insurance liability for policy and contract claims
As discussed in Notes 2 and 10 to the consolidated financial statements, the liability for policy and contract claims for 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 December 31, 2019. The Company’s liability for policy and contract claims related to long-term care insurance was $10,239 million of a total liability for policy and contract claims of $10,958 million as of December 31, 2019.
We identified the assessment of the estimate of the long-term care insurance liability for policy and contract claims as a critical audit matter. The evaluation of the claim termination rates (CTR) and benefit utilization rates (BUR) used in the determination of the morbidity assumption for claim duration and severity within the actuarial model required complex auditor judgment. Specialized skills were needed to evaluate the Company’s assumptions regarding the CTR and BUR and the impact of those assumptions on the actuarial models.
• Evaluating the models and assumptions for consistency with generally accepted actuarial methodologies and industry practice;
• Assessing the consistency of actual historical claims experience compared to the expected claims experience to evaluate the Company’s updated morbidity assumption.
As discussed in Notes 2 and 9 to the consolidated financial statements, the additional benefit reserves for guarantees represents a supplementary reserve established in addition to the contract value and is calculated by applying a benefit ratio to accumulated contract holder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future claims experience. The Company’s policyholder account balances related to universal and term universal life insurance contracts was $10,751 million of total policyholder account balances of $22,217 million as of December 31, 2019. Of the total $10,751 million, a portion of this represents the additional benefit reserves for guarantees related to universal and term universal life insurance contracts.
• Developing independent estimates for a selection of contracts with additional benefit reserves for guarantees and comparing our estimates to the recorded reserves;
As discussed in Notes 2 and 10 to the consolidated financial statements, the Company estimates the liability for policy and contract claims for mortgage insurance based on notices of mortgage loan defaults and estimates of defaults that have been incurred but have not been reported by loan servicers. The estimates are determined using either a factor-based approach, in which assumptions of claim rates for loans in default
and the average amount paid for loans that result in a claim are calculated using actuarial techniques, or a case-based approach, in which each individual delinquent loan is reviewed and a best-estimate loss is determined based on the status of the insured loan and an estimation of net sale proceeds from the disposition of the mortgaged property. The Company’s liability for policy and contract claims related to mortgage insurance policies (mortgage insurance reserves) was $449 million of a total liability for policy and contract claims of $10,958 million as of December 31, 2019.
The primary procedures we performed to address the critical audit matter included the following. We tested certain internal controls over the development and approval of the estimate for mortgage insurance reserves, including the frequency and severity of loans in default. We involved actuarial professionals with specialized knowledge and experience, who assisted in:
• Assessing the Company’s reserving methodology and assumptions by comparing to accepted actuarial methodologies;
• Evaluating the reserve adjustments, assumption changes, and emerging experience including comparing prior period estimates to actual claims payments for the other portion of the reserves.
On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as a direct, wholly-owned subsidiary of Asia Pacific Insurance. China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash.
The accompanying financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or power to direct activities of certain variable interest entities (“VIEs”), which we refer to as “Genworth,” “Genworth Financial,” the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.
In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.
In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.
In addition to our four operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.
Our consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (“U.S. GAAP”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation.
At the time of purchase, we designate our fixed maturity securities as either available-for-sale or trading and report them in our consolidated balance sheets at fair value. Our portfolio of fixed maturity securities comprises primarily investment grade securities. Changes in the fair value of available-for-sale fixed maturity securities, net of the effect on deferred acquisition costs (“DAC”), present value of future profits (“PVFP”), benefit reserves and deferred income taxes, are reflected as unrealized investment gains or losses in a separate component of accumulated other comprehensive income (loss). Equity securities are recorded at fair value in our consolidated balance sheets and changes in the fair value are reflected in net investment gains (losses). Realized and unrealized gains and losses related to trading securities are reflected in net investment gains (losses).
Total other-than-temporary impairments that emerged in the current period are calculated as the difference between the amortized cost and fair value. For other-than-temporarily impaired securities where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery, total other-than-temporary impairments are adjusted by the portion of other-than-temporary impairments recognized in OCI (“non-credit”).
Net other-than-temporary impairments recorded in net income (loss) represent the credit loss on the other-than-temporarily impaired securities with the offset recognized as an adjustment to the amortized cost to determine the new amortized cost basis of the securities.
loss was recorded in OCI, the amount recorded as an unrealized gain (loss) represents the difference between the current fair value and the new amortized cost for each period presented. The unrealized gain (loss) on an other-than-temporarily impaired security is recorded as a separate component in OCI until the security is sold or until we record an other-than-temporary impairment where we intend to sell the security or will be required to sell the security prior to recovery.
of a debt impairment model depends on whether there has been any evidence of deterioration in credit of the issuer, such as a downgrade to below investment grade. Under certain circumstances, evidence of deterioration in credit of the issuer may result in the application of the equity securities impairment model discussed below.
basis based upon consideration of all the evidence available to us, including the magnitude of an unrealized loss and its duration. In any event, this period did not exceed 15 months for common equity securities. We measured other-than-temporary impairments based upon the difference between the amortized cost of a security and its fair value.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. These models are primarily industry-standard models that consider various inputs, such as interest rate, credit spread and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed maturity and equity securities; government or agency securities; certain mortgage-backed and asset-backed securities; securities held as collateral; and certain non-exchange-traded
Level 3 comprises financial instruments whose fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on, nor corroborated by,
status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due. Income on impaired loans is not recognized until the loan is sold or the cash received exceeds the carrying amount recorded.
For loans that are not individually impaired where we evaluate the loans collectively, the allowance for loan losses is maintained at a level that we determine is adequate to absorb estimated probable incurred losses in the loan portfolio. Our process to determine the adequacy of the allowance utilizes an analytical model based on historical loss experience adjusted for current events, trends and economic conditions that would result in a loss in the loan portfolio over the next 12 months. Key inputs into our evaluation include debt service coverage ratios, loan-to-value,
arriving at the allowance for loan losses reported in the consolidated financial statements. Additions and reductions to the allowance through periodic provisions or benefits are recorded in net investment gains (losses). See note 4 for additional disclosures related to commercial mortgage loans.
e engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary. See note 12 for additional information related to our securities lending activity.
Certificates of deposit, money market funds and other time deposits with original maturities of 90
. Acquisition costs include commissions in excess of ultimate renewal commissions and for contracts issued, certain other costs such as underwriting, medical inspection and issuance expenses. DAC for traditional long-duration insurance contracts, including term life and long-term care insurance, is amortized as a level percentage of premiums based on assumptions, including, 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 life expectancy or longevity, insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, established when the contract is issued. Amortization is adjusted each period to reflect actual lapse or termination rates.
Therefore, DAC amortized based on expected gross profits is adjusted to reflect the effects that would have been recognized had the unrealized investment (gains) losses been actually realized with a corresponding amount recorded in other comprehensive income (loss). DAC associated with traditional long-duration insurance contracts is not adjusted for unrealized investment (gains) or losses unless a premium deficiency would have resulted upon the (gain) or loss being realized.
Acquisition costs primarily consist of commissions and premium taxes and are amortized ratably over the terms of the underlying policies.
We regularly review our assumptions and test DAC for recoverability at least annually. For deferred annuity and universal life insurance contracts, if the present value of expected future gross profits is less than the unamortized DAC for a line of business, a charge to net income (loss) is recorded for additional DAC amortization. For traditional long-duration and short-duration contracts, if the benefit reserve plus anticipated future premiums and interest income for a line of business are less than the current estimate of future benefits and expenses (including any unamortized DAC), a charge to net income (loss) is recorded for additional DAC amortization or for increased benefit reserves. See note 6 for additional information related to DAC including loss recognition and recoverability.
We defer sales inducements to contractholders for features on variable annuities that entitle the contractholder to an incremental amount to be credited to the account value upon making a deposit, and for fixed annuities with crediting rates higher than the contract’s expected ongoing crediting rates for periods after the inducement. Deferred sales inducements to contractholders are reported as a
Goodwill is not amortized but is tested for impairment annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The determination of fair value requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment, or a business, one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the component level. If the reporting unit’s fair value is below its carrying value, we recognize an impairment in an amount equal to the difference between the carrying value and the fair value of the reporting unit up to the amount of recorded goodwill. No
reported as a component of OCI. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative continues to be carried in the consolidated balance sheets at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in net income (loss). When the hedged forecasted transaction is no longer probable, but is reasonably possible, the accumulated gain or loss remains in OCI and is recognized when the transaction affects net income (loss); however, prospective hedge accounting for the transaction is terminated. In all other situations in which hedge accounting is discontinued on a cash flow hedge, amounts previously deferred in OCI are reclassified into net income (loss) when net income (loss) is impacted by the variability of the cash flow of the hedged item.
We may enter into contracts that are not themselves derivative instruments but contain embedded derivatives. For each contract, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to those of the host contract and determine whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.
If it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and accounted for as a stand-alone derivative. Such embedded derivatives are recorded in the consolidated balance sheets at fair value and are classified consistent with their host contract. Changes in their fair value are recognized in current period net income (loss). If we are unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried in the consolidated balance sheets at fair value, with changes in fair value recognized in current period net income (loss).
collateral received was $112 million and $18 million, respectively, and the underlying assets were not sold or re-pledged.
We pledged $405 million and $535 million of fixed maturity securities as of December 31, 2019 and 2018, respectively. Additionally, as of December 31, 2019 and 2018, we pledged $64 million and $57 million, respectively, of cash as collateral to derivative counterparties. Fixed maturity securities that we pledge as collateral remain on our balance sheet within fixed maturity securities available-for-sale. Any cash collateral pledged to a derivative counterparty is derecognized with a receivable recorded in other assets for the right to receive our cash collateral back from the counterparty. Daily changes in the fair value of the derivative contract, commonly referred to as variation margin, for derivatives cleared through a Central Clearing Party, such as the Chicago Mercantile Exchange are treated as daily settlements of the derivative contract.
rate actions used in loss recognition testing for our long-term care insurance business include assumptions for significant premium rate increases and associated benefit reductions that have been approved or are anticipated to be approved (including premium rate increases and associated benefit reductions not yet filed). These anticipated future increases are based on our best estimate of the rate increases we expect to obtain, considering, among other factors, our historical experience from prior rate increase approvals and based on our best estimate of expected claim costs.
We are also required to accrue additional future policy benefit reserves when the overall reserve is adequate, but profits are projected in early periods followed by losses projected in later periods. When this pattern of profits followed by losses exists, we ratably accrue this additional profits followed by losses liability over time, increasing reserves in the profitable periods to offset estimated losses expected during the periods that follow. We calculate and adjust the additional reserves using our current best estimate of the amount necessary to offset the losses in future periods, based on the pattern of expected income and current best estimate assumptions consistent with our loss recognition testing. We adjust the accrual rate prospectively, going forward over the remaining profit periods, without any catch-up
For single premium insurance contracts, we recognize premiums over the policy life in accordance with the expected pattern of risk emergence. We recognize a portion of the revenue in premiums earned in the current period, while the remaining portion is deferred as unearned premiums and earned over time in accordance with the expected pattern of risk emergence. If single premium policies are cancelled and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. Expected pattern of risk emergence on which we base premium recognition is inherently judgmental and is based on actuarial analysis of historical experience. We periodically review our premium earnings recognition models with any adjustments to the estimates reflected as a cumulative adjustment in current period net income (loss). Our reviews include the consideration of recent and projected loss experience, policy cancellation experience and refinement of actuarial methods. In 2019, the review resulted in an increase in earned premiums
The determination of the functional currency is made based on the appropriate economic and management indicators. The assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Translation adjustments are included as a separate component of accumulated
We hold investments in certain structures that are considered VIEs. Our investments represent beneficial interests that are primarily in the form of structured securities or alternative investments. Our involvement in these structures typically represents a passive investment in the returns generated by the VIE and typically does not result in having significant influence over the economic performance of the VIE.
On January 1, 2019, we adopted new accounting guidance related to benchmark interest rates used in derivative hedge accounting. The guidance adds an additional permissible U.S. benchmark interest rate, the Secured Overnight Financing Rate, for hedge accounting purposes. We adopted this new accounting guidance using the prospective method, which did not have any impact on our consolidated financial statements and disclosures.
On January 1, 2019, we adopted new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-of-use
accrued rent expense of $3 million recorded under the previous accounting guidance. The right-of-use
components are included in the calculation of our lease liability as opposed to being separated and accounted for as consideration under the new revenue recognition standard. Our remaining lease terms ranged from less than 1 year to 19 years and had a weighted-average remaining lease term of 9.8 years as of December 31, 2019. The implicit rate of our lease agreements was not readily determinable; therefore, we utilized our incremental borrowing rate to discount future lease payments. The
Annual rental expense and future lease payments were not significantly different under this new accounting guidance as compared to the previous guidance.
On January 1, 2018, we early adopted new accounting guidance on the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act (“TCJA”), or “stranded tax effects.” Under U.S. GAAP, deferred tax assets and liabilities are adjusted for the effect of a change in tax laws or rates with the effect included in income (loss) from continuing operations in the period that the changes were enacted. This also includes situations in which the related tax effects were originally recognized in other comprehensive income (loss) as opposed to income (loss) from continuing operations.
2 million in accumulated other comprehensive income with a corresponding decrease to retained earnings at adoption. This gain was the cumulative amount of hedge ineffectiveness related to active hedges that was previously included in earnings.
changes to the fair value, vesting conditions or classification as a liability or equity of the share-based
On January 1, 2018, we adopted new accounting guidance that clarifies the scope and accounting for gains and losses from the derecognition of nonfinancial assets or an in substance nonfinancial asset that is not a business and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control. We adopted this new accounting guidance using the modified retrospective method, which had no impact on our consolidated financial statements at adoption.
On January 1, 2018, we adopted new accounting guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted this new accounting guidance using the modified retrospective method, which did not have a significant impact on our consolidated financial statements or disclosures at adoption.
On January 1, 2018, we adopted new accounting guidance related to the classification of certain cash payments and cash receipts on our statement of cash flows. The guidance reduces diversity in practice related to eight specific cash flow issues. We adopted this new accounting guidance retrospectively and reclassified
On January 1, 2017, we adopted new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.
On January 1, 2017, we adopted new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through
On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, had no impact on our consolidated financial statements.
assumptions will no longer be locked-in at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits (except the discount rate) will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required. Changes will be recorded in net income (loss) using a retrospective approach with a cumulative catch-up adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;
the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a single-A rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);
the provision for adverse deviation and the premium deficiency test will be eliminated;
disclosures will be greatly expanded to include significant assumptions and product liability rollforwards.
In August 2018, the FASB issued new accounting guidance related to fair value disclosure requirements as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for fair value measurements. The guidance includes new disclosure requirements related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. We adopted this new accounting guidance on January 1, 2020 using the prospective method for disclosures related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty and the retrospective method for all other disclosures. This accounting guidance did not have a significant impact on our consolidated financial statements and disclosures.
debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. We adopted this new accounting guidance on January 1, 2020 using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of approximately
share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted common shares outstanding for the years ended December 31:
antidilutive to the calculation. If we had not incurred a loss from continuing operations available to
million of net investment income related to trading securities for the year ended December 31, 2017.
The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in OCI as of and for the years ended December 31:
investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of December 31:
For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost.
As of December 31, 2019, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.
As of December 31, 2019 and 2018, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual
, with a total carrying value of $16 million and $12 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result
in any forgiveness of the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.
As of December 31, 2019, we had no individually impaired loans. As of December 31, 2018 and 2017, we had one individually impaired loan within the office property type with a recorded investment and unpaid principal balance of $3 million and $6 million, respectively.
In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value
ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value
indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time
events such as capital expenditures, prepaid or late real estate tax payments or non-recurring
of commercial mortgage loans by property type as of December 31:
million in good standing, where the borrower continued to make timely payments, with a loan-to-value
%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.
We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to a securitization entity. See note 17 for additional information related to this consolidated securitization entity.
The fair value of derivative positions presented above was not offset by the respective collateral amounts received or provided under these agreements.
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; and (v) other instruments to hedge the cash flows of various
income effects of cash flow hedges for the year ended December 31, 2019:
income effects of cash flow hedges for the year ended December 31, 2018:
Represents ineffective portion of cash flow hedges, as there were no amounts excluded from the measurement of effectiveness.
The total of derivatives designated as cash flow hedges of $2,002 million, net of taxes, recorded in stockholders’ equity as of December 31, 2019 is expected to be reclassified to net income (loss
in the future, concurrently with and primarily offsetting changes in interest expense and interest
income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $119 million, net of taxes, is expected to be reclassified to net income in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2057. During the years ended December 31, 2019, 2018 and 2017, we reclassified $5 million, $9 million and $6 million, respectively, to net income in connection with forecasted transactions that were no longer considered probable of occurring.
See note 17 for additional information related to consolidated securitization entities.
in our universal and term universal life insurance products reflecting updated assumptions primarily related to the lower interest rate environment
The percentage of the December 31, 2019 PVFP balance net of interest accretion, before the effect of unrealized investment gains or losses, estimated to be amortized over each of the next five years is as follows:
We reinsure a portion of our policy risks to other insurance companies in order to reduce our ultimate losses, diversify our exposures and provide capital flexibility. We also assume certain policy risks written by other insurance companies. Reinsurance accounting is followed for assumed and ceded transactions when there is adequate insurance
blocks of variable annuities issued prior to 2004 and a block of long-term care insurance policies that we reinsured in 2000 from legal entities now a part of Brighthouse Life Insurance Company. Although we remain directly liable under these contracts and policies as the ceding insurer, the Reinsurance Transactions have the effect of transferring the financial results of the reinsured blocks to UFLIC. As of December 31, 2019 and 2018, we had a reinsurance recoverable of $13,752 million and $13,975 million, respectively, associated with those Reinsurance
To secure the payment of its obligations to us under the reinsurance agreements governing the Reinsurance Transactions, UFLIC has established trust accounts to maintain an aggregate amount of assets with a statutory
book value at least equal to the statutory general account reserves attributable to the reinsured business less an amount required to be held in certain claims-
Ltd. (“Triangle Re”), on a portfolio of existing mortgage insurance policies written from January 2019 through September 2019.
The excess of loss reinsurance coverage is fully collateralized by a reinsurance trust agreement that provides that the trust assets may only be invested in (i) money market funds; (ii) U.S. Treasury securities; and (iii) uninvested cash. In connection with entering into the reinsurance agreement with Triangle Re, we concluded that the risk transfer requirements for reinsurance accounting were met as Triangle Re is assuming significant insurance risk and a reasonable possibility of significant loss. Triangle Re is a VIE and special purpose insurer domiciled in Bermuda. See note 17 for additional information. For the reinsurance coverage, we retain the first layer of aggregate losses up to $237 million. Triangle Re and other reinsurers provide 95% reinsurance coverage for losses above our retained first layer up to $713 million of total losses. We are responsible for losses on the portfolio above the reinsurance coverage amount of $713 million.
The following table sets forth our recorded liabilities and the major
The 1983 Individual Annuitant Mortality Table or the 2000 U.S. Annuity Table, or the 1983 Group Annuitant Mortality Table or the 1994 Group Annuitant Mortality Table and company experience.
As of December 31, 2019 and 2018, we accrued future policy benefit reserves of $323 million and $110 million, respectively, in our consolidated balance sheets for profits followed by losses in our long-term care insurance business. The present value of expected future losses was
approximately $2.0 billion and $1.1 billion as of December 31, 2019 and 2018, respectively. The increase in the present value of expected future losses was
In the fourth quarter of 2019, as part of our annual review of assumptions, we increased our liability for policyholder account balances by $72 million in
our universal and term universal life insurance products due principally to the lower
our universal and term universal life insurance products due principally to lower expected growth in interest rates and emerging mortality experience primarily in our term universal life insurance product.
a letter of credit related to one FHLB which was terminated in 2019
were collateralized by fixed maturity securities with a fair value of $608 million and $785 million, respectively. The amount of funding agreements outstanding with the FHLBs was $441 million and $594 million, respectively, as of December 31, 2019 and 2018 which was included in policyholder account balances. Included in the amount of funding agreements outstanding with the FHLBs as of December 31, 2019
and 2018, are FHLB agreements entered into by our universal life insurance business of $188 million and $213 million, respectively, which were included in universal and term universal life insurance contracts in the table above.
As of December 31, 2019 and 2018, we accrued future policy benefit reserves of $2.6 billion and $0.5 billion, respectively, with an offsetting amount recorded in other comprehensive income (loss) related to shadow accounting adjustments. The higher amounts accrued for the year ended December 31, 2019 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 were recorded in our long-term care insurance business, which
As of December 31, 2019 and 2018, our total liability associated with variable annuity contracts with minimum guarantees was approximately $4,738 million and $4,642 million, respectively. Account value increased from 2018 principally driven by favorable equity market performance, partially offset by the continued runoff of these products. The liability, net of reinsurance, for our variable annuity contracts with GMDB and guaranteed annuitization benefits was $114 million and $110 million as of December 31, 2019 and 2018, respectively.
contracts that were considered “in the money” was $715 million and $888 million, respectively. For GMWBs and guaranteed annuitization benefits, the only way the contractholder can monetize the excess of the benefit base over the account value of the contract is through lifetime withdrawals or lifetime income payments after annuitization.
The liability for policy and contract claims represents our current best estimate; however, there may be future adjustments to this estimate and related assumptions. Such adjustments, reflecting any variety of new and adverse trends, could possibly be significant, and result in increases in reserves by an amount that could be material to our results of operations and financial condition and liquidity.
In 2019, the liability for policy and contract claims increased $723 million in our long-term care insurance business. The increase was primarily attributable to new claims as a result of the aging of the in-force
In 2018, the liability for policy and contract claims increased $968
million in our long-term care insurance business largely from new claims as a result of the aging
as well as the completion of our annual review of assumptions and methodologies in the fourth quarter of 2018 which increased reserves by $308
liabilities plus expected development on reported claims included within the net incurred claims amounts for our U.S. Mortgage Insurance segment as of December 31, 2019. The information about the incurred claims development for the years ended December 31, 2010 to 2018 and the historical reported delinquencies as of December 31, 2018 and prior are presented as supplementary information.
The following table sets forth paid claims development, net of reinsurance, for our U.S. Mortgage Insurance segment for the year ended December 31, 2019. The information about paid claims development for the years ended December 31, 2010 to 2018, is presented as supplementary information.
claims, as well as cumulative number of reported delinquencies and the total of incurred-but-not-reported
liabilities plus expected development on reported claims included within the net incurred claims amounts for our Australia Mortgage Insurance segment as of December 31, 2019. The information about the incurred claims development for the years ended December 31, 2010 to 2018 and the historical reported delinquencies as of December 31, 2018 and prior are presented as supplementary information.
Represents outstanding delinquencies plus paid claims as of December 31, 2019 for each respective accident year.
The following table sets forth paid claims development, for our Australia Mortgage Insurance segment for the year ended December 31, 2019. The information about paid claims development for the years ended December 31, 2010 to December 31, 2018, is presented as supplementary information:
The following table sets forth our average payout of incurred claims by age for our Australia Mortgage Insurance segment as of December 31, 2019:
increase of $5 million, respectively, in OCI, excluding amounts related to our Canada mortgage insurance business which was classified as held for sale prior to the fourth quarter of 2019.
We provide health and welfare benefits to our employees, including health, life, disability, dental and long-term care insurance, among others. Our long-term care insurance is provided through our group long-term care insurance products. The premiums recorded by this business related to these benefits were insignificant during 2019, 2018 and 2017.
As of December 31, 2019, Genworth Holdings had outstanding six series of fixed rate senior notes with varying interest rates between 4.80% and 7.70% and maturity dates between 2020 and 2034. The senior notes are Genworth Holdings’ direct, unsecured obligations and rank equally in right of payment with all of its existing and future unsecured and unsubordinated obligations. Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior notes and the holders of the senior notes, on an
million, comprised of the outstanding principal balance of $397 million, accrued interest of approximately $3 million and a make-whole premium of
On October 3, 2018, Genworth Holdings received the requisite consents, pursuant to a solicitation of consents (the “Consent Solicitation”), to amend the indenture dated as of June 15, 2004, by and between Genworth Holdings and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as successor to JP Morgan Chase Bank, N.A., as amended and supplemented from time to time (as so amended and supplemented, the “Senior Notes Indenture”). Genworth Holdings, Genworth Financial, as guarantor, and the Trustee entered into Supplemental Indenture No. 13 to the Senior Notes Indenture that amended the Senior Notes Indenture to clarify that Genworth Life and Annuity Insurance Company (“GLAIC”) and the subsidiaries of Genworth Life Insurance Company (“GLIC”), GLAIC and Genworth Life Insurance Company of New York (“GLICNY”) are excluded from the class of subsidiaries for which a bankruptcy, insolvency or other similar proceeding would
The amendments to the Senior Notes Indenture became operative on October 4, 2018 upon the payment of the applicable consent fees payable under the terms of the Consent Solicitation. We paid total fees related to the Consent Solicitation of $11 million, including bond consent fees of $5 million, which were deferred, as well as broker, advisor and investment banking fees of $6 million, which were expensed in the fourth quarter of 2018.
As of December 31, 2019, Genworth Holdings had outstanding floating rate junior notes having an aggregate principal amount of $598 million, with an annual interest rate equal to three-month London Interbank Offered Rate (“LIBOR”) plus 2.0025% payable quarterly, until the notes mature in November 2066 (“2066 Notes”). Subject to certain conditions, Genworth Holdings has the right, on one or more occasions, to defer the payment of interest on the 2066 Notes during any period of up to 10 years without giving rise to an event of default and without permitting acceleration under the terms of the 2066 Notes. Genworth Holdings will not be required to settle deferred interest payments until it has deferred interest for five years or made a payment of current interest. In the event of our bankruptcy, holders will have a limited claim for deferred interest.
In connection with the issuance of the 2066 Notes, we entered into a Replacement Capital Covenant, whereby we agreed, for the benefit of holders of our 6.5% Senior Notes due 2034, that Genworth Holdings will not repay, redeem or repurchase all or any part of the 2066 Notes on or before November 15, 2046, unless such repayment, redemption or repurchase is made from the proceeds of the issuance of certain replacement capital securities and pursuant to the other terms and
As of December 31, 2019 and 2018, Rivermont Life Insurance Company I (“Rivermont I”), our wholly-owned special purpose consolidated captive insurance subsidiary, had outstanding non-
of $311 million, net of $4 million of deferred borrowing charges, due in 2050 with an interest rate based on one-month
In January 2020, upon receipt of approval from the Director of Insurance of the State of South Carolina, Rivermont I redeemed all of its $315 million of outstanding non-recourse
funding obligations by maturity were as follows as of December 31, 2019:
On January 21, 2020, Genworth Holdings fully redeemed its 7.70% senior notes of $397 million originally scheduled to mature in June 2020.
funding obligations of $315 million due in 2050 were fully redeemed in January 2020.
collateral provided by the borrowers in our securities lending program as of December 31, 2019 and 2018.
Our securities lending program exposes us to liquidity risk if we did not have enough cash or collateral readily available to return to the counterparty when required to do so under the agreement. We manage this risk by regularly monitoring our available sources of cash and collateral to ensure we can meet short-term liquidity demands under normal and stressed scenarios.
tax expense related to gains on forward starting swaps settled prior to the enactment of the TCJA.
foreign net operating losses. The state deferred tax assets related primarily to the future deductions associated with the Section 338 elections and non-insurance
million as of December 31, 2019, and will begin to expire in 2024.
Our ability to realize our net deferred tax asset of $425 million, which includes deferred tax assets related to NOL and foreign tax credit carryforwards, is primarily dependent upon generating sufficient taxable income in
As a consequence of our separation from GE and our joint election with GE to treat that separation as an asset sale under Section 338 of the Internal Revenue Code, we became entitled to additional tax deductions in post IPO periods. We are obligated, pursuant to our Tax Matters Agreement with GE, to make fixed payments to GE over the next five years on an after-tax
million, respectively, as a liability in our consolidated balance sheets. Both our IPO-related
million as of December 31, 2019, which if recognized would affect the effective tax rate on continuing operations by $43 million. These unrecognized tax benefits included the impact of foreign currency translation from our international operations.
million in 2017 related to remeasurement of certain deferred tax assets and liabilities as a result of the newly enacted tax rate. The Internal Revenue Service has indicated that additional guidance will be forthcoming with respect to several technical areas within the TCJA, which could affect the measurement of these balances or potentially give rise to new deferred tax amounts. In the fourth quarter of 2018, we reversed a previously recorded $19
million provisional tax expense related to a revaluation of deferred tax assets and liabilities on our foreign subsidiaries. This reversal was the result of a change in expected filing position on our 2018 tax return in light of the TCJA, bringing our net adjustment for this provisional item to zero for 2018.
transition tax on mandatory deemed repatriation of earnings and profits. During 2018 we recorded a tax benefit of $10
transition tax as we refined our calculations of post-1986 foreign earnings and profits previously deferred from U.S. federal taxation, related tax pools and the amounts held in cash and other specified assets.
We recorded a provisional reclassification in deferred tax assets and liabilities in the amount of $134
We have completed the analysis of state income tax effects of the TCJA, including the treatment of the one-time
Net cash paid for taxes was $31 million, $33 million and $46 million and cash paid for interest was $292 million, $309 million and $301 million for the years ended December 31, 2019, 2018 and 2017, respectively.
million equity awards, plus a number of additional shares not to exceed 25
million underlying awards outstanding under the 2004 Omnibus Incentive Plan. In December 2018, the 2018 Genworth Financial, Inc. Omnibus Incentive Plan (the “2018 Omnibus Incentive Plan”), together with the 2004 Omnibus Incentive Plan and the 2012 Omnibus Incentive Plan, the “Omnibus Incentive
million equity awards, plus a number of additional shares not to exceed 20
We recorded stock-based compensation expense under the Omnibus Incentive Plans of $26 million, $35 million and $30 million, respectively, for the years ended December 31, 2019, 2018 and 2017. For awards issued prior to January 1, 2006, stock-based compensation expense was recognized on a graded vesting attribution method over the awards’ respective vesting schedule. For awards issued after January 1, 2006, stock-based compensation expense was recognized evenly on a straight-line attribution method over the awards’ respective vesting period.
PSUs may be earned over a three-year period based upon the achievement of certain performance goals.
The PSUs granted in 2019 have a three-year measurement period starting on January 1, 2019 going through December 31, 2021. The performance metric is based on consolidated adjusted operating income. See note 19 for our definition of adjusted operating income. The compensation committee of our Board of Directors determines and approves, no later than March 15, 2022 following the end of the final year of the three-year performance period, the number of units earned and vested for the three-year measurement period.
In 2019, 2018 and 2017, we granted cash awards with a fair value of $1.00. We have time-based cash awards, which vest over three years
, with a third of the payout occurring per year as determined by the vesting period, beginning on the first anniversary of the grant date. We also have performance-based cash awards which vest and payout after three years.
The following table summarizes cash award activity as of December 31, 2019 and 2018:
The following table summarizes stock option activity as of December 31, 2019 and 2018:
As of December 31, 2019 and 2018, total unrecognized stock-based compensation expense related to non-vested
In 2019 and 2018, there was less than $1 million in cash received from stock options exercised in each year. New shares were issued to settle all exercised awards. The actual tax benefit realized for the tax deductions from the exercise of share-based awards was $7 million and $4 million as of December 31, 2019 and 2018, respectively.
As of December 31, 2019 and 2018, none of the restricted share rights balances were vested. For the year ended December 31, 2019, we recorded $1 million of stock-based compensation. For the years ended December 31, 2018 and 2017, we recorded less than
million of stock-based compensation in each year. We also estimated total unrecognized expense of less than $1
The fair value of fixed maturity securities, short-term investments and equity securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or broker quotes, which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, a security is valued using that market information for similar securities, which is also a market approach. When market information is not available for a specific security or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including mortgage-backed or asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.
The primary inputs to the valuation of exchange-traded equity securities include quoted prices for the identical instrument.
In estimating the fair value of fixed maturity securities, approximately 90% of our portfolio is priced using third-party pricing sources as of December 31, 2019. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by third-party pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our third-party pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers.
pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $288 million as of December 31, 2019.
income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.
risk resulted in a lower fair value of our GMWB liabilities of $62 million and $64 million, respectively.
risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.
risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in non-performance
risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.
We have fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance
counterparty arrangements, we determined that any adjustment for credit risk would not be material and we have not recorded any incremental adjustment for our non-performance
risk of the derivative counterparty for our derivative assets or liabilities. We determine fair value for our derivatives using an income approach with internal models based on relevant market inputs for each derivative instrument. We also compare the fair value determined using our internal model to the valuations provided by our derivative counterparties with any significant differences or changes in valuation being evaluated further by our derivatives professionals that are familiar with the instrument and market inputs used in the valuation.
We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rates, equity index volatility, equity index and time value component associated with the
The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.
for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
The following table presents the gains and losses included in net income from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the years ended December 31:
The amount presented for realized and unrealized gains (losses) included in net income for available-for-sale
securities primarily represents amortization and accretion of premiums and discounts on certain fixed maturity securities.
The following table presents a summary of the significant unobservable inputs used for certain asset fair value measurements that are based on internal models and classified as Level 3 as of December 31, 2019:
The following table presents the gains and losses included in net (income) from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the years ended December 31:
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
entered into a reinsurance agreement with an entity that is considered a VIE. Our involvement with this VIE includes significant insurance risk and a reasonable possibility of a significant loss but does not result in the unilateral power to direct the activities that most significantly affect the VIE’s economic performance or result in the obligation to absorb losses or the right to receive benefits. Accordingly, consolidation of the VIE is not required. The assets of the VIE are deposited in a reinsurance trust for our benefit that will be the source of reinsurance claim payments.
We have used former affiliates and third-party entities to facilitate asset securitizations. Disclosure requirements related to off-balance
The following table shows the assets that were recorded for the consolidated securitization entity as of December 31:
As of December 31, 2017, we had borrowings related to the securitization entity required to be consolidated. These borrowings were required to be paid down as principal was collected on the restricted commercial mortgage loans held by the securitization entity and accordingly the repayment of these borrowings followed the maturity or prepayment, as permitted, of the restricted commercial mortgage loans. During 2018, all of the borrowings related to the securitization entity were repaid due to prepayments made on the related restricted commercial mortgage loans; therefore, as of December 31, 2019 and 2018, there were no remaining principal or carrying amounts related to these borrowings. In addition, this securitization entity did not have any other liabilities as of December 31, 2019 or 2018.
Dividends received from our domestic insurance subsidiaries is highly dependent on the performance of our U.S. mortgage insurance subsidiaries and their ability to pay dividends to us as anticipated. Given the performance of our U.S. life insurance subsidiaries, dividends will not be paid by these subsidiaries for the foreseeable future.
As of December 31, 2019, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $13.8 billion and $14.8 billion, respectively. There are no regulatory restrictions on the ability of Genworth Financial to pay dividends. Our Board of Directors has suspended the payment of dividends on our common stock indefinitely. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will be dependent on many factors including the receipt of dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our debt obligations, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant
Permitted statutory accounting practices encompass all accounting practices not so prescribed but that have been specifically allowed by individual state insurance authorities. Our U.S. domiciled insurance subsidiaries have no material permitted accounting practices, except for River Lake Insurance Company VI (“River Lake VI”), River Lake Insurance Company VII (“River Lake VII”), River Lake Insurance Company VIII (“River Lake VIII”), River Lake Insurance Company IX (“River Lake IX”) and River Lake Insurance Company X (“River Lake X”), together with River Lake VI, River Lake VII, River Lake VIII, River Lake IX and River Lake X, the “SPFCs.
The impact of these permitted accounting practices on our combined U.S. domiciled life insurance subsidiaries’ statutory capital and surplus was zero as of December 31, 2019 and 2018. If these permitted accounting practices had not been used, no regulatory event would have been triggered.
million and $217 million as of December 31, 2019 and 2018, respectively.
In December 2019, GLAIC, one of our U.S. domiciled life insurance companies, recaptured its term life insurance business previously ceded to River Lake IX and its universal life insurance business previously ceded
and returned contributed surplus of $198 million to GLAIC in February 2020
The NAIC has adopted RBC requirements to evaluate the adequacy of statutory capital and surplus in relation to risks associated with: (i) asset risk; (ii) insurance risk; (iii) interest rate and equity market risk; and (iv) business risk. The RBC formula is designated as an early warning tool for the states to identify possible undercapitalized companies for the purpose of initiating regulatory action. In the course of operations, we periodically monitor the RBC level of each of our life insurance subsidiaries. As of December 31, 2019 and 2018, each of our life insurance subsidiaries exceeded the minimum required RBC levels in their respective domiciliary state. The consolidated RBC ratio of our U.S. domiciled life insurance subsidiaries was approximately 213% and 199% as of December 31, 2019 and 2018,
During 2019 and 2018, we established $54 million and $120 million, respectively, of additional statutory reserves resulting from updates to our universal and term universal life insurance products with secondary guarantees in our Virginia and Delaware licensed life insurance subsidiaries.
The New York State Department of Financial Services (“NYDFS”) annually informs the industry that it does not permit in-force rate increases for long-term care insurance to be used in asset adequacy analysis until such increases have been approved. However, the NYDFS has allowed GLICNY, our New York insurance subsidiary, to incorporate recently filed in-force rate actions in its asset adequacy analysis prior to approval in the past. Moreover, the NYDFS has consistently granted approval for GLICNY to spread asset adequacy analysis reserve deficiencies related to its long-term care insurance business over future years.
As a result of its 2017 asset adequacy analysis, GLICNY recorded an additional $188 million of statutory reserves in the fourth quarter of 2017.
Following its recording of the additional statutory reserves in the fourth quarter of 2017, GLICNY had a remaining asset adequacy deficit of approximately $302 million, which
reserves established by GLICNY for asset adequacy deficits to $470 million as of December 31, 2019.
loss ratios exceed 35% or (ii) 10 years. However, approval by the North Carolina Department of Insurance (“NCDOI”) is required for contingency reserve releases when loss ratios exceed 35%. The statutory contingency reserve for our U.S. mortgage insurers was approximately $2.0 billion and $1.6 billion, respectively, as of December 31, 2019 and 2018 and was included in the table above containing combined statutory capital and surplus balances.
requirements. As of December 31, 2019 and 2018, Genworth Mortgage Insurance Corporation’s (“GMICO”) risk-to-capital
ratio under the current regulatory framework as established under North Carolina law and enforced by the NCDOI, GMICO’s domestic insurance regulator, was approximately 12.5:1.
Mortgage insurers must meet the private mortgage insurer eligibility requirements (“PMIERs”) as set forth by each government-sponsored enterprise (“GSE”) in order to remain eligible. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as to its compliance with PMIERs. We have met all PMIERs reporting requirements as required by the GSEs. As of December 31, 2019 and 2018, we estimate our U.S. mortgage insurance business had available assets of
prior to the sale date and those written approximately 90 days subsequent to the date of the sale, and AmTrust Financial Services, Inc. has agreed to provide us with a limited indemnification in the event there is any exposure under the guarantee. As of December 31, 2019, the risk in-force
We have the following four operating business segments: U.S. Mortgage Insurance; Australia Mortgage Insurance; U.S. Life Insurance (which includes our long-term care insurance, life insurance and fixed annuities businesses); and Runoff (which includes the results of products which have not been actively sold since 2011
Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.
On December 22, 2017, the TCJA was signed into law. The TCJA reduced the U.S. corporate federal income tax rate to 21% effective for taxable years beginning on January 1, 2018 and migrated the worldwide tax system to a territorial international tax system. Therefore, beginning on January 1, 2018 we tax our international businesses at their local jurisdictional tax rates and our domestic businesses at the U.S. corporate federal income tax rate of 21%. Our segment tax methodology applies the respective jurisdictional or domestic tax rate to the pre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign withholding taxes and permanent differences between U.S. GAAP and local 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.
size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from adjusted operating income (loss) available to
Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusual
items are also excluded from adjusted operating income (loss) available to
While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the
In 2019, we revised how we tax the adjustments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders to align the tax rate used in the reconciliation to each segment’s local jurisdictional tax rate. Beginning in 2019, we used a tax rate of 30% for our Australia Mortgage Insurance segment to tax effect its adjustments. Our domestic segments remain at a 21% tax rate. In 2018 and 2017, we assumed a flat 21% and 35% tax rate, respectively, on adjustments for all of our segments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to
during the periods presented other than fees incurred in 2018 related to
The following is a summary of our segments and Corporate and
The following tables present the reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities for the years ended December 31:
Our unaudited quarterly results of operations for the year ended December 31, 2019 are summarized in the table below.
Our life insurance business completed its annual review of assumptions in the fourth quarter of 2019, which resulted in higher total benefits and expenses of $145
unlocking in our universal and term universal life insurance products driven mostly by the lower
favorable adjustments in our U.S. mortgage insurance business, including a favorable update of
In the fourth quarter of 2018, our long-term care insurance business recorded a $230 million unfavorable adjustment, net of taxes, related to its annual review of claim reserves, as described above. In addition, our long-term care insurance business recorded a $28 million unfavorable reserve adjustment, net of taxes, related to a refined estimate of unreported policy terminations. Our life insurance business recorded an unfavorable adjustment, net of taxes, of $91 million resulting from its annual review of assumptions, as described above.
Includes net investment losses of $107 million recorded in the fourth quarter of 2018 in our Canada mortgage insurance business reported as discontinued operations. These losses were primarily related to derivative losses on foreign currency swaps and forwards, and losses on preferred equity securities primarily driven by a decrease in interest rates in Canada during the fourth quarter of 2018.
Our Canada mortgage insurance business, reported as discontinued operations, recorded net investment losses, net of taxes, of $107 million, of which the amount attributable to noncontrolling interests was $45 million, net of taxes.
We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force
In our investment-related operations, we are subject to litigation involving commercial disputes
with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships, post-closing obligations associated with previous dispositions and securities lawsuits. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.
In January 2016, Genworth Financial, its current chief executive officer, its former chief executive officer, its former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by International Union of Operating Engineers Local No. 478 Pension Fund, Richard L. Salberg and David Pinkoski in the Court of Chancery of the State of Delaware. The case was captioned Int’l Union of Operating Engineers Local No. 478 Pension Fund, et al v. McInerney, et al.
In February 2016, Genworth Financial, its current chief executive officer, its former chief executive officer, its former chief financial officer and current and former members of its board of directors were named in a second shareholder derivative suit filed by Martin Cohen in the Court of Chancery of the State of Delaware. The case was captioned Cohen v. McInerney, et al
. On March 28, 2016, plaintiffs in the consolidated action filed an amended complaint. The amended complaint alleges breaches of fiduciary duties concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an IPO of the business and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the C
ourt may deem proper. The amended consolidated complaint also adds Genworth’s current chief financial officer as a defendant, based on the current chief financial officer’s alleged conduct in her former capacity as Genworth’s controller and principal accounting officer. We moved to dismiss the consolidated action on May 27, 2016. Thereafter, plaintiffs filed a substantially similar second amended complaint which we moved to dismiss on September 16, 2016. The motion is fully briefed and awaiting disposition by the C
ourt. The action is stayed pending the completion of the proposed China Oceanwide transaction.
ourt may deem proper. We filed a motion to dismiss on November 14, 2016. The action is stayed pending the completion of the proposed China Oceanwide transaction.
In December 2017, GFIH and Genworth Financial were named as defendants in an action captioned AXA S.A. v. Genworth Financial International Holdings, LLC et al.,
indemnity provided for in the 2015 agreement pursuant to which Genworth sold to AXA two
claims. The damages hearing has been postponed and is now scheduled to commence on June 15, 2020. Although AXA’s current amended and updated demand is for £265 million, AXA also alleges, as previously disclosed, that it is incurring losses on an ongoing basis and therefore that further significantly larger sums will be demanded. To date, AXA has submitted to us invoices claiming aggregate losses of approximately $560 million, of
. Plaintiff alleges unlawful and excessive cost of insurance charges were imposed on policyholders. The complaint asserts claims for breach of
enjoin the case in the Middle District of Georgia, and a motion to dismiss and motion to stay in the Eastern District of Virginia. We moved to enjoin the prosecution of the Eastern District of Virginia action on the basis that it involves claims released in a prior nationwide class action settlement that was approved by the Middle District of Georgia. Plaintiff filed an amended complaint on November 13, 2018. On December 6, 2018, we moved the Middle District of Georgia for leave to file our counterclaim, which alleges that plaintiff breached the covenant not to sue contained in the prior settlement agreement by filing its current action. On March 15, 2019, the Middle District of Georgia granted our motion to enjoin and denied our motion for leave to file our counterclaim. As such, plaintiff is enjoined from pursuing its class action in the Eastern District of Virginia. On March 29, 2019, plaintiff filed a notice of appeal in the Middle District of Georgia, notifying the C
ourt of its appeal to the United States Court of Appeals for the Eleventh Circuit from the order granting our motion to enjoin. On March 29, 2019, we filed our notice of cross-appeal in the Middle District of Georgia, notifying the Court of our cross-appeal to the Eleventh Circuit from the portion of the order denying our motion for leave to file our counterclaim. On April 8, 2019, the Eastern District of Virginia dismissed the case without prejudice, with leave for plaintiff to refile an amended complaint only if a final appellate C
ourt decision vacates the injunction and reverses the Middle District of Georgia’s opinion. On May 21, 2019, plaintiff filed its appeal and memorandum in support in the Eleventh Circuit. We filed our response to plaintiff’s appeal memorandum on
now fully briefed and waiting for disposition by the Eleventh Circuit. We intend to continue to vigorously defend the dismissal of this action.
, Thomas R. Pratt, Gerald Green, individually and on behalf of all other persons similarly situated v.
. Plaintiffs allege that GLIC paid dividends to its parent and engaged in certain reinsurance transactions causing it to maintain inadequate capital capable of meeting its obligations to GLIC policyholders and agents. The complaint alleges causes of action for intentional fraudulent transfer and constructive fraudulent transfer, and seeks injunctive relief. We moved to dismiss this action in December 2018. On January 29, 2019, plaintiffs exercised their right to amend their complaint. On March 12, 2019, we moved to dismiss plaintiffs’ amended complaint. On April 26, 2019, plaintiffs filed a memorandum in opposition to our motion to dismiss, which we replied to on June 14, 2019. On August 7, 2019, plaintiffs filed a motion seeking to prevent proceeds that GFIH expect
Canada from being transferred out of GFIH. On September 11, 2019, plaintiffs filed a renewed motion seeking the same relief from their August 7, 2019 motion with an exception that allowed GFIH to transfer $450 million of expected proceeds from the sale of
Canada through a dividend to Genworth Holdings to allow the pay off of a senior secured term loan facility dated March 7, 2018 among Genworth Holdings as the borrower, GFIH as the limited guarantor and the lending parties thereto. Oral arguments on our motion to dismiss and plaintiffs’ motion occurred on October 21, 2019, and plaintiffs’ motion was denied.
In January 2019, Genworth Financial and GLIC were named as defendants in a putative class action lawsuit pending in the United States District Court for the Eastern District of Virginia captioned Jerome Skochin, Susan Skochin, and Larry Huber, individually and on behalf of all other persons similarly situated v. Genworth Financial, Inc. and Genworth Life Insurance Company
. Plaintiffs seek to represent long-term care insurance policyholders, alleging that Genworth made misleading and inadequate disclosures regarding premium increases
we do not anticipate the result to have a material adverse
impact on our results of operations or financial position. If the court does not approve the final settlement, we intend to continue to vigorously defend this action
As of December 31, 2019, we were committed to fund $976 million in limited partnership investments, $30 million in U.S. commercial mortgage loan investments and $39 million in private placement investments. As of December 31, 2019, we were also committed to fund $52 million of bank loan investments which had not yet been drawn.
funding obligations by Rivermont I, Genworth previously entered into a liquidity commitment agreement with Rivermont I and a third-party trust which issued the floating rate notes. The liquidity agreement required Genworth to establish a line of credit facility in 2040 for the benefit of the trust and required at the note maturity date, that Genworth loan the trust any liquidity commitment amounts. In January 2020, Rivermont I redeemed all of its $315 million of outstanding non-recourse
Amounts exclude adjustments to DAC, PVFP, sales inducements and benefit reserves.
program for shares up to a maximum aggregate amount of AUD$100 million. Pursuant to the program, Genworth Australia repurchased approximately 25 million of its shares for AUD$64 million. As the majority shareholder, we participated in on-market
AUD$0.242 per share, which represented an aggregate distribution of approximately AUD$100 million.
In May 2018, Genworth Australia announced its intention to commence an on-market
period to maintain our ownership position and received $20 million in cash. 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.
In 2019, 2018 and 2017, dividends of $87 million, $40 million and $53 million, respectively, were paid to the noncontrolling interests of Genworth Australia.
million from Genworth Canada. This special dividend reduced the sales price on a per purchased share basis by
The following table provides a summary of the loss on sale recorded in connection with the disposition of Genworth Canada for the year ended December 31, 2019
Consists primarily of cumulative losses on foreign currency translation adjustments of $369 million
Interest on debt assumed by Brookfield and interest on debt that was repaid as a result of the sale of Genworth Canada was allocated and reported in discontinued operations. The Term Loan, owed by Genworth Holdings and secured by GFIH’s ownership interest in Genworth Canada’s outstanding common shares, was repaid in connection with the close of the Genworth Canada sale. Accordingly, interest expense related to the Term Loan
of $34 million, $25 million and $- million for the years ended December 31, 2019, 2018 and 2017, respectively, was allocated and reported in discontinued operations.
The years ended December 31, 2019, 2018 and 2017 include pre-tax
On December 1, 2015, we completed the sale of our lifestyle protection insurance business. In the fourth quarter of 2019, we recorded an after-tax
$110 million primarily in connection with pending litigation involving two insurance companies that were part of the sale of the lifestyle protection insurance business to AXA. This amount is included in income (loss) from discontinued operations for the year ended December 31, 2019. See note 21 for additional details related to asserted claims regarding the sale of our
lifestyle protection insurance business. In 2017, we recorded an additional after-tax loss of $9 million primarily related to an adjustment of certain claims previously included in discontinued operations and tax items. We
retained liabilities for certain claims, taxes and sales practices that occurred while we owned the lifestyle protection insurance business. We have established our current best estimates for these liabilities where we are able to estimate; however, there may be future adjustments to these estimates, including
The following condensed consolidating financial information of Genworth Financial and its direct and indirect subsidiaries has been prepared pursuant to rules regarding the preparation of consolidating financial information of Regulation S-X.
The condensed consolidating financial information reflects Genworth Financial (“Parent Guarantor”), Genworth Holdings (“Issuer”) and each of Genworth Financial’s other direct and indirect subsidiaries (the “All Other Subsidiaries”) on a combined basis, none of which guarantee the senior notes or subordinated notes, as well as the eliminations necessary to present Genworth Financial’s financial information on a consolidated basis and total consolidated amounts.
The accompanying condensed consolidating financial information is presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries and intercompany activity.
In November 2019, in connection with but prior to the closing of the Genworth Canada sale, we completed an internal reorganization whereby Genworth Financial contributed 100% of its ownership interest in Genworth Mortgage Holdings, Inc. (“GMHI”) to Genworth Holdings. As a result of this contribution, Genworth Holdings now owns 100% of GMHI, which owns 100% of the issued and outstanding voting securities of our U.S. mortgage insurance companies, including GMICO. Accordingly, Genworth Holdings reflected its investment in GMHI in the condensed consolidating financial information as of and for the ye
The following table presents the condensed consolidating balance sheet information as of December 31, 2019:
The following table presents the condensed consolidating comprehensive income statement information for the year ended December 31, 2018:
The following table presents the condensed consolidating cash flow statement information for the year ended December 31, 2018:
For information on significant restrictions on dividends by subsidiaries of Genworth Financial and Genworth Holdings, and the restricted net assets of those subsidiaries, see note 18.
On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd., a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as a direct, wholly-owned subsidiary of Asia Pacific Insurance. China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The closing of the transaction remains subject to other closing conditions and
Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior and subordinated notes and the holders of the senior and subordinated notes, on an unsecured unsubordinated and subordinated basis, respectively, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes and outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior and subordinated notes indentures in respect of such senior and subordinated notes. Genworth Financial and Genworth Holdings have joint and several guarantees associated with the Tax Matters Agreement and had joint and several guarantees associated with Rivermont I’s non-recourse
% under the TCJA. The revaluation resulted in a reduction to the deferred tax asset of $18
as of December 31, 2018. Net cash received (paid) for taxes was
for the years ended December 31, 2019, 2018 and 2017, respectively.