We own our headquarters facility in Richmond, Virginia, which consists of approximately 450,000 square feet in four buildings, as well as one facility in Lynchburg, Virginia with approximately 210,000 square feet. In addition, we lease one office space with approximately 100,000 square feet in Lynchburg, Virginia and another 200,000 square feet of office space in 6 locations throughout the United States. We also lease approximately 75,000 square feet in 6 locations outside the United States.
• policy fees and other income, including surrender charges, mortality and expense risk charges, and other administrative charges.
• policy fees and other income, including mortality and expense risk charges, primarily from variable annuity contracts, and other administrative charges.
• policy fees and other income from other businesses that are managed outside of our operating segments and eliminations of inter-segment transactions.
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 taxed our international businesses at their local statutory tax rates and our domestic businesses at the new enacted tax rate of 21%. We allocate our consolidated provision for income taxes to our operating segments. Our allocation methodology applies the jurisdictional or domestic tax rate to the pre-tax income (loss) of the respective 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.
Below is an executive summary of our consolidated financial results for the periods indicated. Amounts below are net of taxes, unless otherwise indicated. After-tax amounts assume a tax rate of 21%, except for 2017 which assumed a 35% tax rate.
• Our Australia Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $51 million and $76 million in 2019 and 2018, respectively. The decrease was largely driven by lower earned premiums largely from portfolio seasoning and lower policy cancellations, partially offset by lower contract fees amortization in 2019.
as part of our annual review of assumptions in the fourth quarter of 2019 compared to 2018 (see “-Critical Accounting Estimates” for additional information). These increases were partially offset by lower mortality in 2019 compared to 2018.
• Our Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $56 million and $35 million in 2019 and 2018, respectively. The increase was predominantly from favorable equity market performance, which drove lower reserves and DAC amortization in 2019.
• We had net income available to Genworth Financial, Inc.’s common stockholders of $119 million and $817 million in 2018 and 2017, respectively. In 2018, we reported an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $5 million compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $530 million in 2017.
• Adjusted operating income in our fixed annuities business increased $37 million mainly attributable to $41 million of lower unfavorable charges in connection with loss recognition testing in our fixed immediate annuity products (see “-Critical Accounting Estimates-Future policy benefits” for additional information) and from lower interest credited in 2018. These decreases were partially offset by lower investment income in 2018.
• Our Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $35 million and $51 million in 2018 and 2017, respectively. The decrease was primarily driven by unfavorable equity market performance and higher interest credited, partially offset by lower taxes and higher investment income in 2018.
Our U.S. mortgage insurance business increased its estimated market share during 2019 compared to 2018. Market share of our U.S. mortgage insurance business is influenced by the execution of its go to market strategy, including but not limited to, the market adoption of its proprietary risk-based pricing engine, GenRATE, and its selective participation in forward commitment transactions.
. Our U.S. mortgage insurance business continues to grow its insurance in-force through higher new insurance written, which increased 56% in 2019 compared to 2018. This increase was primarily driven by a larger private mortgage insurance available market and an increase in estimated market share.
As part of our strategy for our long-term care insurance business, we have been implementing, and expect to continue to pursue, significant premium rate increases and associated benefit reductions on older generation blocks of business in order to bring those blocks closer to a break-even point over time and reduce the strain on earnings and capital. We are also requesting premium rate increases and associated benefit reductions on newer blocks of business, as needed, some of which may be significant, to help bring their loss ratios back towards their original pricing. For all of these in-force rate action filings, we received 116 filing approvals from 29 states in 2019, representing a weighted-average increase of 41% on approximately $817 million in annualized in-force premiums, or approximately $334 million of incremental annual premiums. We also submitted 98 new filings in 37 states in 2019 on approximately $975 million in annualized in-force premiums.
. We estimate that since 2012 the cumulative economic benefit of our rate increases equals approximately $12.5 billion, on a net present value basis, of the total amount required under our multi-year in-force rate action plan in our long-term care insurance business. For additional information on the impact in-force rate actions have on loss recognition testing of our long-term care insurance business, see “-Critical Accounting Estimates-Future policy benefits.”
On December 12, 2019, Genworth Holdings repaid its senior secured term loan facility (“Term Loan”), which was originally closed on March 7, 2018 and was scheduled to mature in March 2023. Prior to the repayment, GFIH provided a limited recourse guarantee to the lenders of Genworth Holdings’ outstanding Term Loan, which was secured by GFIH’s ownership interest in Genworth Canada’s outstanding common shares. Due to the sale of the underlying collateral, the Term Loan was required to be repaid upon the sale of Genworth Canada. A cash payment of $445 million was used to fully repay the outstanding principal and accrued interest of the Term Loan.
. On January 21, 2020, Genworth Holdings early redeemed $397 million of its 7.70% senior notes originally scheduled to mature in June 2020. The senior notes were fully redeemed with a cash payment of $409 million, comprised of the outstanding principal balance of $397 million, accrued interest of approximately $3 million and a make-whole premium of approximately $9 million.
In January 2020, upon receipt of approval from the Director of Insurance of the State of South Carolina, Rivermont Life Insurance Company I (“Rivermont I”), our indirect subsidiary, redeemed all of its $315 million of outstanding non-recourse funding obligations due in 2050. The early redemption resulted in a pre-tax loss of $4 million from the write-off of deferred borrowing costs.
. Genworth Holdings has an intercompany note due to GLIC on March 31, 2020 with a principal amount of $200 million that we expect to pay on or before maturity.
. On May 22, 2018, Genworth Holdings redeemed $597 million of its 6.52% senior notes that were issued in May 2008 and matured in May 2018 (the “May 2018 senior notes”). A cash payment of $616 million
net proceeds of $441 million from the Term Loan and $175 million of existing cash on hand was used to fully redeem the principal and accrued interest balance of the May 2018 senior notes.
. On October 4, 2018, Genworth Holdings completed a bond consent solicitation whereby it amended its senior notes indenture to clarify that GLAIC and the subsidiaries of GLIC, GLAIC and GLICNY are excluded from the class of subsidiaries for which a bankruptcy, insolvency or other similar proceeding would result in an event of default under the indenture. In the fourth quarter of 2018, we paid $11 million of total fees, which consisted of bond consent fees, broker, advisor and investment banking fees. The bond consent fees of $5 million were deferred and the remaining fees of $6 million were expensed in the fourth quarter of 2018.
• The effective tax rate decreased to 27.3% for the year ended December 31, 2019 compared to 50.8% for the year ended December 31, 2018. The decrease in the effective tax rate was primarily attributable to higher pre-tax income in 2019. The higher pre-tax income in 2019 resulted in a lower impact to the effective tax rate from gains on forward starting swaps settled prior to the enactment of the TCJA and from foreign operations. See note 13 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information.
On December 12, 2019, we completed the sale of Genworth Canada, our former Canada mortgage insurance business, to Brookfield and received approximately $1.7 billion in net cash proceeds. During 2019, we recorded an after-tax loss of $121 million related to the sale. See note 24 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to discontinued operations.
Our business is, and we expect will continue to be, influenced by a number of industry-wide and product-specific trends and conditions. We have described certain material trends and conditions in the relevant consolidated and segment discussions below.
The amortization of DAC for traditional long-duration insurance products (including term life insurance, life-contingent structured settlements and immediate annuities and long-term care insurance) is determined as a level proportion of premiums based on accepted actuarial methods and reasonable assumptions, including related to projected interest rates and investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, established when the contract or policy is issued. U.S. GAAP requires that assumptions for these types of products not be modified (or unlocked) unless recoverability testing, also known as loss recognition testing, deems them to be inadequate. Amortization is adjusted each period to reflect actual lapses or terminations. Accordingly, we could experience accelerated amortization of DAC and a charge to net income if policies lapse or terminate earlier than originally assumed, or if we fail recoverability testing.
Amortization of DAC for deferred annuity and universal life insurance contracts is based on expected gross profits. Expected gross profits are adjusted quarterly to reflect actual experience to date or for the unlocking of underlying key assumptions including interest rates, policyholder persistency or lapses, insured mortality and expenses. The estimation of expected gross profits is subject to change given the inherent uncertainty as to the underlying key assumptions employed and the long duration of our policy or contract liabilities. Changes in expected gross profits reflecting the unlocking of underlying key assumptions could result in a material increase or decrease in the amortization of DAC depending on the magnitude of the change in underlying assumptions. Significant factors that could result in a material increase or decrease in DAC amortization for these products include material changes in withdrawal or lapse rates, investment spreads or mortality assumptions. For the years ended December 31, 2019, 2018 and 2017, key assumptions were unlocked in our U.S. Life Insurance and Runoff segments to reflect our current expectation of future investment spreads, lapse rates and mortality.
In the fourth quarter of 2019, as part of our annual review of assumptions, we increased DAC amortization by $58 million in our universal and term universal life insurance products, reflecting updated assumptions primarily related to the lower interest rate environment.
In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. These “shadow accounting” adjustments result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the consolidated statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, based on changes in net unrealized investment (gains) losses, these shadow adjustments may reverse from period to period. As of December 31, 2019, due primarily to a decrease in interest rates increasing unrealized investment gains, we decreased the DAC balance with an offsetting amount recorded in other comprehensive income (loss). As of
In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is assigned to the right to receive future gross profits arising from these insurance and investment contracts. This intangible asset, called PVFP, represents the actuarially estimated present value of future cash flows from the acquired policies. PVFP is amortized, net of accreted interest, in a manner similar to the amortization of DAC.
We regularly review our assumptions and periodically test PVFP for recoverability in a manner similar to our treatment of DAC. As of December 31, 2019 and 2018, we believe all of our businesses had sufficient future income, therefore, the related PVFP was recoverable based on our current best estimate of assumptions.
For the years ended December 31, 2019, 2018 and 2017, there were no charges to net income as a result of our PVFP recoverability testing.
Insurance reserves differ for long- and short-duration insurance policies. Measurement of reserves for long-duration insurance contracts (such as life insurance, annuity and long-term care insurance products) is based on approved actuarial methods, and includes assumptions about mortality, morbidity, lapses, interest rates and other
factors. Short-duration contracts are accounted for based on actuarial estimates of the amount of loss inherent in that period’s claims, including losses incurred for which claims have not been reported. Short-duration contract loss estimates rely on actuarial observations of ultimate loss experience for similar historical events.
In addition, as previously described, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. These “shadow accounting” adjustments result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the consolidated statements of comprehensive income and changes in equity. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, based on changes in net unrealized investment (gains) losses, these shadow adjustments may reverse from period to period. As of December 31, 2019, due primarily to a decrease in interest rates increasing unrealized investment gains, we increased the liability for future policy benefits and policyholder account balances with an offsetting amount recorded in other comprehensive income (loss).
See notes 2 and 9 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to insurance reserves.
In 2019 and 2018, the results of our loss recognition testing on our long-term care insurance block, excluding the acquired block, indicated that our DAC was recoverable and reserves were sufficient, with a
margin of approximately $400 million to $700 million as of December 31, 2019 compared to approximately $300 million to $600 million as of December 31, 2018. The margin in 2019 included significant unfavorable updates for incidence, particularly on our newer products, and benefit utilization. We expect overall benefit utilization rates to decline each year as benefit pools grow, however, actual benefit utilization was unfavorable to this expectation which resulted in an unfavorable impact to our 2019 margin. These updates drove material changes to our in-force rate action plan. The margin reflected an assumption for future in-force rate actions (anticipated to be approved, including premium rate increases and associated benefit reductions not yet filed) of approximately $7.6 billion in 2019 and approximately $6.2 billion in 2018. The increase in our future rate actions in 2019 was a result of new future unapproved in-force rate actions added (including newer products for which we have not previously filed rate actions), partially offset by in-force rate action approvals received during the year. A change in the expected amount of in-force rate actions would impact the results of our long-term care insurance margin testing, whereby any unexpected reduction in the amount of in-force rate actions would negatively impact our margins and could result in a premium deficiency.
We assume a static discount rate that is in line with our current portfolio yield. Our discount rate assumption for our long-term care insurance block, excluding the acquired block, was 5.39% and 5.30% in 2019 and 2018, respectively. This rate represents our expected investment returns based on the portfolio of assets supporting the net U.S. GAAP liability as of the calculation date and, therefore, excluded the impacts of qualifying hedge gains that are not currently amortizing. In the select sensitivities below, for both our long-term care insurance block excluding our acquired block and our acquired block, the 25 basis point decrease in the discount rate refers to a reduction in our portfolio yields. As of December 31, 2019 and 2018, the liability for future policy benefits associated with our long-term care insurance block, excluding the acquired block, was $24.1 billion and $21.6 billion, respectively.
In 2014, we had a premium deficiency in our acquired block of long-term care insurance; therefore, our assumptions that were updated in connection with the premium deficiency have remained locked-in. These updated assumptions will remain locked-in unless, and until such time as, another premium deficiency occurs. Due to the premium deficiency that existed in 2014, we monitor our acquired block more frequently than annually.
in-force rate actions. Our acquired block would not benefit significantly from additional in-force rate actions as it is older, and therefore, there is a higher likelihood that adverse changes could result in additional losses on the block.
The impacts of future adverse changes in our assumptions would result in the establishment of additional future policy benefit reserves and would be immediately reflected in net income
As of December 31, 2019 and 2018, we had margin of approximately $100 million to $400 million and zero to $300 million, respectively, and a PVFP balance of $74 million and $77 million, respectively, on our acquired block of term and whole life insurance products. If our margin is reduced below zero for our acquired block of term and whole life insurance products, we would amortize PVFP up to the amount of PVFP recorded on our balance sheet and if PVFP was fully written off, establish additional future policy benefit reserves, either of which would result in a charge to net income (loss).
U.S. GAAP prohibits a change (or unlocking) of assumptions on traditional long-duration insurance products unless recoverability testing, also known as loss recognition testing, deems them to be inadequate. Due to the premium deficiency that existed in 2016, we perform loss recognition testing on our fixed immediate annuity products more frequently than annually. In 2016, a premium deficiency in our fixed immediate annuity products resulted in the write-off of the entire DAC balance associated with these products. Accordingly, the premium deficiencies that occurred subsequent to 2016 resulted in the establishment of additional future policy benefit reserves and were also reflected as a loss in net income.
We perform an annual review of assumptions for our universal and term universal life insurance products, typically in the fourth quarter. Our 2019, 2018 and 2017 tests resulted in an increase in the liability for policyholder account balances of $72 million, $119 million and $70 million, respectively, with a corresponding
As of December 31, 2019 and 2018, we had DAC of $333 million and $577 million, respectively, and total policyholder account balances including reserves in excess of the contract value of $9.0 billion and $8.2 billion, respectively, related to our universal and term universal life insurance products. As of December 31, 2019, for
The liability for policy and contract claims, also known as claim reserves, for our long-term care insurance products represents the present value of the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. Key assumptions include investment returns, health care experience, policyholder persistency or lapses, insured mortality, insured morbidity and expenses. Our discount rate assumption assumes a static discount rate in line with our current portfolio yield.
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. As experience
that have had a material impact on our results of operations and financial position. Our experience will continue to emerge and as a result
During the fourth quarter of 2018, we completed our annual review of our long-term care insurance claim reserve assumptions and methodologies. Based on this review, we updated several assumptions and methodologies, including benefit utilization rates, claim termination rates and other assumptions. The primary impact related to increasing later duration utilization assumptions for claims with lifetime benefits. As a result of this review, we increased our long-term care insurance claim reserves by $308 million and increased reinsurance recoverables by $17 million in the fourth quarter of 2018.
(“severity”) could have a significant impact on reserves and, correspondingly, on results of operations. For example, based on our actual experience during the three-year period ended December 31, 2019 in our U.S. mortgage insurance business, a quarterly change of 3% in the average frequency reserve factor would change the gross reserve amount for such quarter by approximately $19 million for our U.S. mortgage insurance business. Based on our actual experience during 2019, a quarterly increase of $1,000 in the severity of our average reserves combined with a 1% change in the average frequency reserve factor would change the gross reserve amount by approximately $9 million for our mortgage insurance business in Australia based on current exchange rates.
. In our mortgage insurance business in Australia, the majority of our insurance contracts are single premium. We also have single premium insurance contracts in our U.S. mortgage insurance business, although these products make up a smaller portion of our product mix in the United States. The majority of our insurance contracts in our U.S. mortgage insurance business have recurring premiums, as discussed below. 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 as earned premiums upon notification of the cancellation, if not included in our expected earnings pattern. The expected pattern of risk emergence on which we base premium recognition is inherently judgmental and is based on actuarial analysis of historical and expected experience. In our mortgage insurance business in Australia, we recognize unearned premiums over a period of up to 12 years, most of which are recognized between two and six years from issue date. The recognition of earned premiums for our mortgage insurance businesses involves significant estimates and assumptions as to future loss development and policy cancellations. These assumptions are based on our historical experience and our expectations of future performance, which are highly dependent on assumptions as to long-term macroeconomic conditions including interest rates, home price appreciation and the rate of unemployment. We periodically review our expected pattern of risk emergence and make adjustments based on actual experience and changes in our expectation of future performance with any adjustments reflected in current period net income. Changes in market conditions could cause a decline in mortgage originations, mortgage insurance penetration rates or our market share, all of which could impact new insurance written. For example, a decline in flow new insurance written of $1.0 billion in Australia would result in a reduction in earned premiums of approximately $2 million in the first full year following the decline in flow new insurance written based on current pricing and expected pattern of risk emergence. However, this decline would be partially offset by the recognition of earned premiums from established unearned premium reserves primarily from the last three years of business.
As of December 31, 2019 and 2018, we had $1.9 billion and $2.0 billion, respectively, of unearned premiums, of which $1.0 billion and $1.1 billion, respectively, related to our mortgage insurance business in Australia and $0.4 billion related to our U.S. mortgage insurance business in each period. For the year ended December 31, 2019, we increased earned premiums and decreased unearned premiums by $14 million related to our single premium earnings pattern review in our U.S. mortgage insurance business. There were no adjustments to earned premiums in our mortgage insurance businesses for the year ended December 31, 2018. For the year ended December 31, 2017, we decreased earned premiums and increased unearned premiums by $468 million in our mortgage insurance business in Australia as a result of adjustments made to our expected pattern of risk emergence. Our annual premium earnings pattern review in 2017 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
Our expected pattern of risk emergence for our mortgage insurance businesses is subject to change given the inherent uncertainty as to the underlying loss development and policy cancellation assumptions and the long duration of our international mortgage insurance policy contracts. Actual experience that is different than expected loss development or policy cancellations could result in further material increases or decreases in the recognition of earned premiums depending on the magnitude of the difference between actual and expected experience. Additional loss development emergence and policy cancellation variations could result in further increases or decreases in unearned premiums and could impact operating results depending on the magnitude of variation experienced (assuming other assumptions held constant).
The remaining portion of our unearned premiums primarily relates to our long-term care insurance business where the underlying assumptions related to premium recognition are not subject to significant uncertainty. Accordingly, changes in underlying assumptions we consider reasonably possible for this business would not result in a material impact to premium recognition or our results of operations.
Deferred tax assets represent the tax benefit of future deductible temporary differences and operating loss and tax credit carryforwards. Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change in tax law. Under U.S. GAAP, we test the value of deferred tax assets for impairment on a quarterly basis at our taxpaying component level within each tax jurisdiction, consistent with our filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In determining the need for a valuation allowance, we consider carryback capacity, reversal of taxable temporary differences, future taxable income and tax planning strategies. Tax planning strategies are actions that are prudent and feasible, that an entity ordinarily might not take, but would take to prevent an operating loss or tax credit carryforward from expiring unused. The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions regarding future operations that are based on our historical experience and our expectations of future performance. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance, which is impacted by, but not limited to, policyholder behavior, competitor pricing, new product introductions, and specific industry and market conditions. Based on our analysis, we believe it is more likely than not that the results of future operations and reversal of taxable temporary differences will generate sufficient taxable income to enable us to realize the deferred tax assets for which we have not established valuation allowances.
As of December 31, 2019, we had a net deferred tax asset of $425 million. We had a consolidated gross deferred tax asset of $129 million related to NOL carryforwards. In the United States, we had $519 million of federal NOL carryforwards as of December 31, 2019, the benefits of which were recognized in our consolidated financial statements, excluding the impacts of the valuation allowance related to state and foreign taxes of $347 million as of December 31, 2019. Foreign tax credit carryforwards amounted to $320 million as of December 31, 2019, which, if unused, will begin to expire in 2024.
in the High Court of Justice, Business and Property Courts of England and Wales. In this case, AXA alleges, among other items, that it has paid remediation to customers who purchased payment protection insurance from our former lifestyle protection insurance business we sold to AXA in 2015. In December 2019, following an adverse court ruling, we determined a loss was probable and recognized losses of approximately $143 million, including associated lawyer fees and expenses, in discontinued operations. In January 2020, we made an interim payment to AXA for approximately $134 million. To date, AXA has submitted to us invoices claiming aggregate losses of approximately $680 million including a tax gross-up, of which $134 million was paid in January 2020. AXA also is alleging that it is incurring losses on an ongoing basis and claimed amounts may increase further. At this time we are unable to estimate any additional loss, or amounts that may be due or demanded under court ruling and therefore, under U.S. GAAP, have not recognized any additional losses. See notes 21 and 24 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to contingent liabilities and pending litigation.
The stability of both the financial markets and global economies in which we operate impacts the sales, revenue growth and profitability trends of our businesses as well as the value of assets and liabilities. The U.S. and international financial markets in which we operate have been impacted by concerns regarding regulatory changes, global trade and modest global growth. During 2019, the global economy continued to improve and most countries in which we conduct business saw improved levels of gross domestic product (“GDP”) growth, particularly in the United States, which experienced better than expected GDP growth during most of 2019, driven in part by strong consumer spending. In spite of this better than expected 2019 results, many economic uncertainties remain, including global trade tensions, particularly between the U.S. and China, fluctuating oil and commodity prices, a negative inflation outlook and global growth concerns. Near-term inflation remains relatively stable but long-term forecasts indicate signs of volatility, which has resulted in a negative outlook. The U.S. Federal Reserve reduced interest rates three times in 2019; each reduction was a 25 basis point cut. The U.S. Federal Reserve does not project additional interest rate cuts in 2020 given the current economic outlook. Given this forecast, we expect interest rates will remain low as compared to historical norms. Likewise, we remain uncertain at the pace in which future interest rate decreases will occur and its ultimate impact on our businesses. The Reserve Bank of Australia also decreased its cash rate three times in 2019, each decrease representing a 25 basis point cut. The European Central Bank reduced interest rates by 10 basis points in 2019 and resumed its bond purchase program. For a discussion of the risks associated with interest rates, see “Item 1A - Risk Factors-Interest rates and changes in rates could materially adversely affect our business and profitability.” These accommodative monetary policies from the U.S. Federal Reserve and other non-U.S. central banks drove both domestic and foreign government bond yields lower during 2019. Bond yields stabilized in the fourth quarter of 2019 as central bank policies, positive economic data and global trade agreements progressed, resulting in an increase to the government yield curve at the end of 2019. Credit markets tightened in 2019 as the market recovered from spread widening in the fourth quarter of 2018, approaching post-crisis tight spreads at the end of 2019. Accommodative central bank policies, rebounding investor demand for bonds, and progress towards a trade agreement between the U.S. and China helped provide quick recoveries during brief periods of volatility throughout the year.
Varied levels of economic growth, coupled with uncertain economic outlooks, changes in government policy, regulatory and tax reforms, and other changes in market conditions, influenced, and we believe will continue to influence, investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions. These trends change as investor confidence in the markets and the outlook for some consumers and businesses shift. As a result, our sales, revenues and profitability trends of certain insurance and investment products as well as the value of assets and liabilities have been and could be further impacted going forward. In particular, factors such as government spending, monetary policies, the volatility and strength of the capital markets, further changes in tax policy and/or in U.S. tax legislation, international trade and the impact of global financial regulation reform will continue to affect economic and business outlooks, level of interest rates and consumer behaviors moving forward.
• Our Australia Mortgage Insurance segment decreased $61 million 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.
• Our U.S. Life Insurance segment decreased $6 million. Our long-term care insurance business increased $22 million largely from $107 million of increased premiums in 2019 from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in 2019. Our life insurance business decreased $28 million mainly attributable to the continued runoff of our term life insurance products in 2019.
Net investment income represents the income earned on our investments. For discussion of the change in net investment income, see the comparison for this line item under “-Investments and Derivative Instruments.”
Net investment gains (losses) consist primarily of realized gains and losses from the sale or impairment of our investments, unrealized and realized gains and losses from our equity and trading securities and derivative instruments. For discussion of the change in net investment gains (losses), see the comparison for this line item under “-Investments and Derivative Instruments.”
Policy fees and other income consists primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees.
• Corporate and Other activities increased $5 million primarily related to gains from non-functional currency remeasurement transactions in 2019 compared to losses in 2018.
Benefits and other changes in policy reserves consist primarily of benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for long-term care insurance, life insurance, structured settlements and single premium immediate annuities with life contingencies, and claim costs incurred related to mortgage insurance products.
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 $36 million. 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. Our fixed annuities business decreased $15 million largely attributable to lower interest credited due to block runoff, lower reserves in our fixed indexed annuity products driven mostly by favorable market performance and higher mortality. These decreases were partially offset by $17 million of higher reserves recorded in connection with loss recognition testing in our fixed immediate annuity products primarily as a result of a decline in interest rates (see “-Critical Accounting Estimates-Future policy benefits” for additional information).
• Our Australia Mortgage Insurance segment decreased $6 million from changes attributable to foreign exchange rates in 2019. Excluding the effects of changes in foreign exchange rates, benefits and other changes in policy reserves increased primarily from higher reserves on new delinquencies, partially offset by favorable cure activity in 2019.
• Our U.S. Life Insurance segment decreased $42 million. The decrease in interest credited was due to our life insurance and fixed annuities businesses, which decreased $7 million and $35 million, respectively, primarily driven by a decline in average account values and lower crediting rates in 2019.
• Our U.S. Mortgage Insurance segment increased $22 million largely from higher operating costs driven mostly by increased sales in 2019.
• Our U.S. Life Insurance segment increased $20 million. Our long-term care insurance business increased $7 million primarily related to higher general expenses and legal costs 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.
• Our Australia Mortgage Insurance segment increased $4 million primarily related to higher operating expenses in 2019. The year ended December 31, 2019 included a decrease of $4 million attributable to changes in foreign exchange rates.
Amortization of DAC and intangibles consists primarily of the amortization of acquisition costs that are capitalized, PVFP and capitalized software.
• Our U.S. Life Insurance segment increased $115 million driven mostly by our life insurance business associated with higher lapses primarily from our large 20-year term life insurance block issued in 1999 entering its post-level premium period. The increase was also attributable to an unfavorable unlocking of $63 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 a favorable unlocking of $4 million in 2018 (see “-Critical Accounting Estimates-Deferred acquisition costs” for additional information).
• Our Runoff segment decreased $15 million mainly related to lower DAC amortization in our variable annuity products principally from favorable equity market performance in 2019.
Interest expense represents interest related to our borrowings that are incurred at Genworth Holdings or subsidiaries and our non-recourse funding obligations and interest expense related to the Tax Matters Agreement and certain reinsurance arrangements being accounted for as deposits. The decrease was related to Corporate and Other activities mostly attributable to the redemption of $597 million of Genworth Holdings’ senior notes in May 2018.
The effective tax rate was 27.3% and 50.8% for the years ended December 31, 2019 and 2018, respectively. The decrease in the effective tax rate was primarily attributable to higher pre-tax income in 2019. The higher pre-tax income in 2019 resulted in a lower impact to the effective tax rate from 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 and from foreign operations.
• Our Australia Mortgage Insurance segment increased $513 million predominantly from a review of our premium earnings pattern in 2017, which reduced our earned premiums by $468 million in 2017 and increased our earned premiums on our existing insurance in-force in 2018 (see “-Critical Accounting Estimates-Unearned premiums” for additional information). The increase was also attributable to a new structured insurance transaction and higher policy cancellations resulting from an initiative implemented in 2018 to more promptly identify loans that have been discharged or refinanced using newly available data.
• Our U.S. Life Insurance segment decreased $19 million mostly attributable to our life insurance business primarily as a result of a decline in our term universal and universal life insurance in-force blocks in 2018. The decrease was also related to an unfavorable unlocking of $7 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 a favorable unlocking of $3 million in 2017. These decreases were partially offset by an $8 million unfavorable model refinement in 2017 that did not recur.
• Our Runoff segment decreased $10 million principally from lower fee income driven mostly by a decline in the average account values in our variable annuity products in 2018.
• Our U.S. Life Insurance segment increased $536 million. Our long-term care insurance business increased $652 million principally from the completion of our annual review of our claim reserves in the fourth quarter of 2018 which resulted in higher claim reserves of $291 million, net of reinsurance (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 $36 million in 2018. The increase was also attributable to higher reserves as a result of the aging of the in-force block (including higher frequency of new claims), unfavorable existing claim performance from higher utilization of available benefits and lower terminations, as well as higher severity of new claims in 2018. Our life insurance business decreased $35 million primarily attributable to higher ceded benefits in 2018 from new reinsurance treaties effective in December 2017, a $30 million unfavorable model refinement in 2017 that did not recur and lower mortality in our term life insurance products in 2018. These decreases were partially offset by a higher unfavorable unlocking of $39 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 2017 (see “-Critical Accounting Estimates-Policyholder account balances” for additional information) and unfavorable mortality in our universal and term universal life insurance products in 2018. Our fixed annuities business decreased $81 million largely attributable to $67 million of lower reserves in connection with loss recognition testing in our fixed immediate annuity products (see “-Critical Accounting Estimates-Future policy benefits” for additional information).
• Our U.S. Life Insurance segment decreased $45 million primarily due to our fixed annuities business predominantly from a decline in average account values and lower crediting rates in 2018.
• Our Runoff segment increased $10 million largely related to higher account values in our corporate-owned life insurance products in 2018.
• Our Runoff segment decreased $4 million mainly from lower commissions in our variable annuity products in 2018.
The effective tax rate was 50.8% and (319.5)% for the years ended December 31, 2018 and 2017, respectively. The increase in the effective tax rate was primarily due to the impacts of tax reform in 2017 and a release of our valuation allowance in 2017 that did not recur. The 2018 effective tax rate also included the rate differential on our foreign subsidiaries, which are now taxed at a higher marginal rate than our U.S. businesses and tax expense related to gains on forward starting swaps settled prior to the enactment of the TCJA.
Net income (loss) from continuing operations attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties. The increase was predominantly related to our Australia Mortgage Insurance segment from the completion of a premium earnings pattern review, which resulted in an unfavorable adjustment of $151 million in 2017 that did not recur.
Net income from discontinued operations attributable to noncontrolling interests represents the portion of equity in a subsidiary that is held for sale that contains operations attributable to third parties. The decrease was predominantly related to net investment losses mostly related to derivative losses and a decrease in the fair value of preferred equity securities in our former Canada Mortgage Insurance segment in 2018.
We use non-GAAP financial measures entitled “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders” and “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share.” Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share is derived from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. We define adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders as income (loss) from continuing operations excluding the after-tax effects of income (loss) from continuing operations attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and infrequent or unusual non-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the 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 non-operating items are also excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends.
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, including adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis, 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 items excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis are not substitutes for net income (loss) available to Genworth Financial, Inc.’s common stockholders or net income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a
basic and diluted basis determined in accordance with U.S. GAAP. In addition, our definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
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 Genworth Financial, Inc.’s common stockholders. These adjustments are also net of the portion attributable to noncontrolling interests and net investment gains (losses) are adjusted for DAC and other intangible amortization and certain benefit reserves.
Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the year ended December 31, 2018, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share as the inclusion of shares for stock options, RSUs and SARs of 3.8 million would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the year ended December 31, 2018, dilutive potential weighted-average common shares outstanding would have been 504.2 million.
Our chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. See note 19 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities.
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
Management also regularly monitors and reports a loss ratio for our businesses. For our mortgage insurance businesses, the loss ratio is the ratio of benefits and other changes in policy reserves to net earned premiums. For our long-term care insurance business, 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. We consider the loss ratio to be a measure of underwriting performance in these businesses and helps to enhance the understanding of the operating performance of our businesses.
The U.S. private mortgage insurance industry is highly competitive. There are currently six active mortgage insurers, including us. In the fourth quarter of 2018, our U.S. mortgage insurance business launched GenRATE, which provides lenders with a more granular approach to pricing for borrowers. All active U.S. mortgage insurers have now released proprietary risk-based pricing engines. We expect most new insurance written in the market to be priced using opaque pricing that will frequently provide a different price to lenders compared to prevailing rate cards. Given evolving market dynamics, we expect price competition to remain highly competitive.
New insurance written increased 56% in 2019 compared to 2018 primarily due to a larger private mortgage insurance available market and our higher estimated market share. Our largest customer accounted for 16% of our total new insurance written during 2019. No other customer exceeded 10% of our new insurance written during 2019 and no customer exceeded 10% of our new insurance written during 2018. Additionally, no customer had earned premiums that accounted for more than 10% of our U.S. mortgage insurance business total revenues for the years ended December 31, 2019 and 2018. The percentage of single premium new insurance written decreased in 2019 compared to 2018, reflecting our selective participation in this market. Future volumes of these products will vary depending in part on our evaluation of their risk return profile and their concentration in the private mortgage insurance available market. We manage the quality of new business through pricing and our underwriting guidelines, which we modify from time to time when circumstances warrant. For more information on the potential impacts due to customer concentration, see “Item 1A - Risk Factors-Our reliance on key customer or distribution relationships could cause us to lose significant sales if one or more of those relationships terminate or are reduced.”
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased 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.
Benefits and other changes in policy reserves increased primarily from lower net benefits from cures and aging of existing delinquencies and from less favorable reserve adjustments in 2019. We recorded $23 million of favorable reserve adjustments in 2019 compared to a $28 million favorable reserve adjustment in 2018. These adjustments were mostly associated with lower expected claim rates. These increases were partially offset by a lower average reserve on new delinquencies in 2019.
Acquisition and operating expenses, net of deferrals, increased largely from higher operating costs driven mostly by increased sales in 2019.
The effective tax rate was 21.3% and 21.2% for the years ended December 31, 2019 and 2018, respectively, consistent with the U.S. corporate federal income tax rate.
Primary insurance in-force increased largely as a result of higher flow insurance in-force of $25.6 billion, which increased from $165.5 billion as of December 31, 2018 to $191.1 billion as of December 31, 2019 mostly from new insurance written, partially offset by lapses and cancellations during 2019. The increase in flow insurance in-force was partially offset by a decline of $0.2 billion in bulk insurance in-force, which decreased from $1.2 billion as of December 31, 2018 to $1.0 billion as of December 31, 2019 primarily from cancellations and lapses in 2019. In addition, risk in-force increased predominantly from higher flow insurance in-force. Flow persistency was 78% and 84% for the years ended December 31, 2019 and 2018, respectively.
New insurance written increased principally due to a larger private mortgage insurance available market and our higher estimated market share in 2019.
The expense ratio (net earned premiums) decreased primarily from higher net earned premiums, mostly offset by higher operating costs in 2019. Net earned premiums increased mainly attributable to higher insurance in-force, an increase in policy cancellations in our single premium mortgage insurance product driven largely by mortgage refinancing and a $14 million favorable adjustment related to our single premium earnings pattern review, partially offset by lower average premium rates in 2019.
Delinquency rates have declined as the residential real estate market in the United States has strengthened during recent years. Delinquent loans as of December 31, 2017 included approximately three thousand new delinquencies in areas impacted by hurricanes Harvey and Irma.
Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.
Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming.
approximately 8% of our primary risk in-force. Conversely, the three most recent policy years represent approximately 63% of our primary risk in-force as of December 31, 2019. Our “A minus” and “sub-prime” loans continue to have earlier incidences of default than our prime loans. However, based upon FICO at loan closing, prime loans represented 99% of our primary risk in-force as of December 31, 2019 and 2018.
Results of our mortgage insurance business in Australia are affected primarily by changes in regulatory environments, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates. During 2019, the Australian dollar weakened against the U.S. dollar compared to 2018, which negatively impacted the results of our mortgage insurance business in Australia as reported in U.S. dollars. Any future movement in foreign exchange rates could impact future results.
December 2019 home prices in the combined capital cities of Australia were approximately 3% higher compared to December 2018, as housing values in the majority of the capital cities rebounded during the second half of 2019. The Sydney and Melbourne housing markets were the main drivers of growth, both with annual home price increases of approximately 5%, while Perth experienced home price declines due to challenging market conditions throughout 2019.
On July 25, 2019, S&P downgraded the financial strength rating of our principal Australia mortgage insurance subsidiary. One key customer contract contains a provision that was triggered as a result of the ratings change, allowing that customer the option to terminate the contract by providing notice within a specified period of time following the ratings downgrade. Our Australia mortgage insurance business subsequently provided information to this customer to demonstrate its credit strength in an effort to avoid the customer exercising the potential termination right under this provision, and the customer did not provide a notice of termination within the specified period of time following the ratings downgrade. For additional details, see “Item 1 - Business-Ratings.”
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by lower earned premiums largely from portfolio seasoning and lower policy cancellations, partially offset by lower contract fees amortization in 2019.
Benefits and other changes in policy reserves decreased from $8 million of changes attributable to foreign exchange rates in 2019. Excluding the effects of changes in foreign exchange rates, benefits and other changes in policy reserves increased primarily from higher reserves on new delinquencies, partially offset by favorable cure activity in 2019.
Most of our Australian mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of December 31, 2019 and 2018, our unearned premium reserves were $1.0 billion and $1.1 billion, respectively.
The expense ratio (net premiums written) decreased for the year ended December 31, 2019 primarily from higher net premiums written as discussed above, as well as lower contract fees amortization in 2019.
Primary and flow loans in-force decreased primarily from policy cancellations in 2019.
Our liability for policy and contract claims is reviewed quarterly and we completed a detailed review of our claim reserve assumptions and methodologies for our long-term care insurance business in the third quarter of 2019 as discussed further below. In the fourth quarter of 2019, we performed assumption reviews for U.S. life insurance products, including our long-term care and life insurance products, and completed our loss recognition testing as discussed below. Our review of assumptions, as part of our testing in the fourth quarter of 2019, included expected claim incidence, benefit utilization, mortality, persistency, interest rates and in-force rate actions, among other assumptions. In addition, we performed cash flow testing separately for each of our U.S. life insurance companies on a statutory accounting basis in the fourth quarter of 2019.
The RBC of each of our U.S. life insurance subsidiaries exceeded the level of RBC that would require any of them to take or become subject to any corrective action in their respective domiciliary state as of December 31, 2019. However, the RBC ratio of our U.S. life insurance subsidiaries has been negatively impacted over the past few years as a result of statutory losses driven by the declining performance of the business and increases in our statutory reserves, including results of Actuarial Guideline 38, cash flow testing and assumption reviews particularly in our long-term care insurance business. Any future statutory losses would decrease the RBC ratio of our U.S. life insurance subsidiaries. We continue to face challenges in our principal life insurance subsidiaries, particularly those subsidiaries that rely heavily on in-force rate actions as a source of earnings and capital. We may see variability in statutory results and a further decline in the RBC ratios of these subsidiaries given the time lag between the approval of in-force rate actions versus when the benefits from the in-force rate actions (including increased premiums and associated benefit reductions) are fully realized in our financial results. Further declines in the RBC ratio of our life insurance subsidiaries could result in heightened supervision and regulatory action.
The long-term profitability of our long-term care insurance business depends upon how our actual experience compares with our valuation assumptions, including but not limited to morbidity, mortality and persistency. If any of our assumptions prove to be inaccurate, our reserves may be inadequate, which in the past has had, and may in the future have, a material adverse effect on our results of operations, financial condition and business. Results of our long-term care insurance business are also influenced by our ability to achieve in-force rate actions, improve investment yields and manage expenses and reinsurance, among other factors. Changes in regulations or government programs, including long-term care insurance rate action legislation, regulation and/or practices, could also impact our long-term care insurance business either positively or negatively.
In the fourth quarter of 2019, we completed loss recognition and cash flow testing and reviewed key assumptions for future policy benefits, or active life reserves, for our long-term care insurance business, including, expected claim incidence, benefit utilization, interest rates and in-force rate actions, among other assumptions. As of December 31, 2019, our loss recognition testing margin for our long-term care insurance business, excluding the acquired block, was positive and slightly higher than the 2018 level. We continue to test our acquired block of long-term care insurance separately. In 2019, our loss recognition testing margin for the acquired block was positive but slightly lower than the 2018 level. Our long-term care insurance margins in 2019 included significant unfavorable updates for incidence, particularly on our newer products, and benefit utilization, which drove material updates to our in-force rate action plan. We will continue to regularly review our methodologies and assumptions in light of emerging experience and may be required to make adjustments to our long-term care insurance reserves in the future, which could also impact our loss recognition and cash flow testing results. For a discussion of additional information related to margins for our long-term care insurance business, see “ -Critical Accounting Estimates-Future policy benefits.”
As a result of the review of our claim reserves completed in the fourth quarter of 2018 we have been establishing higher claim reserves on new claims throughout 2019, which has negatively impacted earnings and we expect this to continue going forward. Also, average claim reserves for new claims are higher as the mix of claims continues to evolve, with an increasing number of policies with higher daily benefit amounts and higher inflation factors going on claim. In addition, although new claim counts on our older long-term care insurance blocks of business will continue to decrease as the blocks run off, we are gaining more experience on our larger new blocks of business and expect continued growth in new claims on these blocks as policyholders reach older attained ages with higher likelihood of going on claim.
Results of our life insurance business are impacted primarily by mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements, among other factors. We no longer solicit sales of traditional life insurance products; however, we continue to service our existing retained and reinsured blocks of business.
Compared to 1998 and prior years, we had a significant increase in term life insurance sales, between 1999 and 2009, particularly in 1999 and 2000. The blocks of business issued since 2000 vary in size as compared to the large 1999 and 2000 blocks of business. As our large 10- and 15-year level premium period term life insurance policies written in 1999 and 2000 transitioned to their post-level guaranteed premium rate period, we experienced lower persistency compared to our pricing and valuation assumptions which accelerated DAC amortization in previous years. As our large 20-year level premium period business written in 1999 has entered its post-level period during 2019, we have also experienced higher lapses resulting in accelerated DAC
For fixed indexed annuities, equity market performance and volatility could also result in additional gains or losses, although associated hedging activities are expected to partially mitigate these impacts.
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 $(7) million, $(6) million and $(4) million, respectively.
The following table sets forth adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:
• Our long-term care insurance business increased $22 million largely from $107 million of increased premiums in 2019 from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in 2019.
• Our life insurance business decreased $28 million mainly attributable to the continued runoff of our term life insurance products in 2019.
• Our fixed annuities business decreased $63 million largely attributable to lower average invested assets in 2019 due to block runoff.
• Net investment gains in our long-term care insurance business increased $53 million primarily related to an increase in unrealized gains from changes in the fair value of equity securities and from higher net gains from the sale of investment securities, partially offset by lower derivative gains in 2019.
• Net investment losses in our fixed annuities business increased $17 million primarily related to losses on embedded derivatives related to our fixed indexed annuity products in 2019 compared to gains in 2018 and an increase in unrealized losses from changes in the fair value of equity securities, partially offset by gains on derivatives in 2019 compared to losses in 2018.
• 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 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 $36 million.
• Our fixed annuities business decreased $15 million largely attributable to lower interest credited due to block runoff, lower reserves in our fixed indexed annuity products driven mostly by favorable market performance and higher mortality. These decreases were partially offset by $17 million of higher
The decrease in interest credited was due to our life insurance and fixed annuities businesses, which decreased $7 million and $35 million, respectively, primarily driven by a decline in average account values and lower crediting rates in 2019.
The following table sets forth selected operating performance measures regarding our individual and group long-term care insurance products for the periods indicated:
The loss ratio decreased in 2019 largely related to the decrease in benefits and other changes in reserves and from the higher premiums as discussed above.
We no longer solicit sales of our traditional life insurance products; however, we continue to service our existing blocks of business.
Net earned premiums decreased mainly attributable to the continued runoff of our term life insurance products in 2019. Life insurance in-force also decreased as a result of the continued runoff of our term life insurance products in 2019, including higher lapses primarily associated with a large 20-year term life insurance block issued in 1999 entering its post-level premium period.
Net deposits decreased during the year ended December 31, 2019 primarily attributable to $200 million of funding agreements issued with the Federal Home Loan Bank (“FHLB”) of Atlanta in 2018 compared to $50 million in 2019. The decrease was also due to the continued runoff of our universal life insurance products in 2019.
Equity market volatility and interest rate movements have caused fluctuations in the results of our variable annuity products and regulatory capital requirements. In the future, equity and interest rate market performance and volatility could result in additional gains or losses in these products although associated hedging activities are expected to partially mitigate these impacts.
Benefits and other changes in policy reserves decreased primarily attributable to lower GMDB reserves in our variable annuity products due to favorable equity market performance in 2019.
The effective tax rate increased to 17.1% for the year ended December 31, 2019 from 11.5% for the year ended December 31, 2018. The increase in the effective tax rate was primarily attributable to lower pre-tax income in 2018. The lower pre-tax income in 2018 resulted in a higher impact to the effective tax rate from tax favored items.
Account value as of December 31, 2019 increased compared to December 31, 2018 primarily related to favorable equity market performance, partially offset by surrenders in 2019. Average account value was lower in 2019 compared to 2018, which decreased fee income in 2019 compared to 2018.
The following table presents the account value of our funding agreements as of or for the dates indicated:
Net investment losses in 2019 were primarily driven by derivative losses, partially offset by net gains from the sale of investment securities. Net investment gains in 2018 were largely from derivative gains, partially offset by net losses from the sale of investment securities.
The increase in policy fees and other income was primarily related to gains from non-functional currency remeasurement transactions in 2019 compared to losses in 2018.
Acquisition and operating expenses, net of deferrals, decreased mainly driven by lower employee-related expenses and operating costs in 2019.
Ongoing global trade tensions, slower global growth and a negative inflation outlook drove the U.S. Federal Reserve to decrease interest rates three times in 2019, each decrease representing a 25 basis point cut. The U.S. Federal Reserve does not project additional interest rate cuts in 2020 given the current economic outlook. The Reserve Bank of Australia also decreased its cash rate three times in 2019, each decrease representing a 25 basis point cut. The European Central Bank reduced interest rates by 10 basis points in 2019 and resumed its bond purchase program. These accommodative monetary policies from the U.S. Federal Reserve and other non-U.S. central banks drove both domestic and foreign government bond yields lower during 2019. Bond yields stabilized in the fourth quarter of 2019 as central bank policies, positive economic data and global trade agreements progressed, resulting in an increase to the government yield curve at the end of 2019. Credit markets tightened in 2019 as the market recovered from spread widening in the fourth quarter of 2018, approaching post-crisis tight spreads at the end of 2019. Accommodative central bank policies, rebounding investor demand for bonds, and progress towards a trade agreement between the United States and China helped provide quick recoveries during brief periods of volatility throughout the year.
The United Kingdom completed its exit from the European Union on January 31, 2020. Per the current withdrawal agreement, the legal exit is followed by a transition period that ends on December 31, 2020, during which the United Kingdom continues to remain within the European Union’s single market and customs union. During the transition period, the United Kingdom is expected to negotiate and finalize a trade agreement with the European Union which will lay out the terms of the future trading relation between the two parties. The nature, timing and implications of these trade negotiations remain uncertain.
As of December 31, 2019, $8.7 billion notional of our derivatives portfolio was cleared through the Chicago Mercantile Exchange (“CME”). The customer swap agreements that govern our cleared derivatives contain provisions that enable our clearing agents to request initial margin in excess of CME requirements. As of December 31, 2019, we posted initial margin of $194 million to our clearing agents, which represented approximately $59 million more than was otherwise required by the clearinghouse. Because our clearing agents serve as guarantors of our obligations to the CME, the customer agreements contain broad termination provisions that are not specifically dependent on ratings. As of December 31, 2019, $9.3 billion notional of our derivatives portfolio was in bilateral OTC derivative transactions pursuant to which we have posted aggregate independent amounts of $373 million and are holding collateral from counterparties in the amount of $182 million.
In July 2017, the United Kingdom Financial Conduct Authority announced its intention to transition away from the LIBOR, with its full elimination to occur after 2021. The announcement indicates that LIBOR may not continue to be available on the current basis (or at all) after 2021. The last committed publication date for LIBOR is December 31, 2021. The Alternate Reference Rate Committee, convened by the Board of Governors of the Federal Reserve System and the New York Federal Reserve Bank, has endorsed the Secured Overnight Financing Rate (“SOFR”) as its preferred replacement benchmark for U.S. dollar LIBOR. SOFR is calculated and published by the New York Federal Reserve Bank and reflects the combination of three overnight U.S. Treasury Repo Rates. The rate is different from LIBOR, in that it is a risk-free rate, is backward-looking instead of forward-looking, is a secured rate and currently is available primarily as an overnight rate rather than as 1-, 3- and 6-month rates available for LIBOR. Upon the announcement, we formed a working group comprised of finance, investments, derivative, and tax professionals, as well as lawyers (the “Working Group”) to evaluate contracts and perform analysis of our LIBOR-based derivative instrument and investment exposure, as well as debt (including subordinated debt and Federal Home Loan Bank loans), reinsurance agreements and institutional products within the Runoff segment, as a result of the elimination of LIBOR. The Working Group took inventory of all investments with LIBOR exposure and identified nearly 400 instruments.
primarily for the purpose of hedging interest rate risk. The more closely a rate hedging instrument aligns with Treasury rate movements, the more effective it is. As a result, to the extent
changes in SOFR in relation to Treasury movements were to differ meaningfully from those of LIBOR, a SOFR-based hedge could be relatively less effective. We currently track both LIBOR and SOFR changes and analyze each in comparison to Treasury rate movements. We have discovered that the difference between the two comparisons is de minimis. Therefore, we do not believe a move to SOFR will have a material impact on our derivatives portfolio. Although we expect a minimal impact from this conversion, we remain actively engaged with the broader financial services community on the topic of SOFR, including conversations with peers, derivatives clearinghouses, bilateral dealers and external legal counsel. With regard to derivatives, we expect the process for implementing SOFR as a replacement rate to be relatively seamless. The International Swap
Association (“ISDA”) has developed a contractual supplement to derivatives trading documentation that includes triggers and fallbacks for determining the replacement for a benchmark rate. The supplement may be agreed to between counterparties or through an ISDA protocol. In addition, ISDA has drafted an amendment to the 2006 Interbank Offered Rate definitions and a related protocol for legacy transactions.
The annualized weighted-average investment yields increased in 2019 compared to 2018 primarily driven by higher investment income on higher average invested assets. Net investment income included $32 million of higher limited partnership income, $13 million of higher bond call and prepayment income and $13 million of higher prepayment speed adjustments on structured securities, partially offset by $6 million of lower income related to inflation-driven volatility on U.S. Government Treasury Inflation Protected Securities. The year ended December 31, 2019 also included a decrease of $5 million attributable to changes in foreign exchange rates.
Net investment losses related to derivatives of $22 million in 2018 were primarily associated with hedging programs that support our runoff variable annuity products and losses related to hedging programs for our fixed indexed annuity products. These losses were partially offset by gains from hedging programs for our indexed universal life insurance products, gains from amounts reclassified from other comprehensive income (loss) due to sales of previously hedged bond purchases and gains from derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.
• We recorded net unrealized gains related to equity securities of $14 million in 2019 from favorable mark-to-market adjustments compared to net unrealized losses of $34 million in 2018. We also recorded $18 million of higher gains related to limited partnerships primarily driven by changes in the fair value of these investments.
The following table sets forth our cash, cash equivalents, restricted cash and invested assets as of December 31:
As of December 31, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as available-for-sale were as follows:
Fair value included $9 million collateralized by Alt-A residential mortgage loans and $24 million collateralized by sub-prime residential mortgage loans.
Fair value included $19 million collateralized by Alt-A residential mortgage loans and $22 million collateralized by sub-prime residential mortgage loans.
Fixed maturity securities increased $4.8 billion principally from higher net unrealized gains attributable to a decrease in interest rates in 2019.
See notes 4 and 17 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for additional information related to restricted commercial mortgage loans related to a securitization entity.
The decrease in the notional value of derivatives was primarily attributable to terminations in our qualified interest rate swaps related to repositioning our LIBOR-based derivatives and our hedging strategy associated with our long-term care insurance products to better match asset and liability durations. The decrease was also attributable to the termination of our interest rate caps related to the repayment of Genworth Holdings’ Term Loan on December 12, 2019 and a decrease in the financial futures associated with our variable annuity products.
• DAC decreased $1,306 million predominantly driven by shadow accounting adjustments associated with the recognition of higher unrealized gains. The shadow accounting adjustments decreased the DAC balance by $956 million, mostly in our long-term care insurance business, resulting in a cumulative decrease of $1,444 million to the DAC balance as of December 31, 2019, with an offsetting amount recorded in other comprehensive income (loss). For a discussion of additional information related to shadow accounting, see “-Critical Accounting Estimates.” The decrease was also from higher amortization in our life insurance business associated with higher lapses primarily related to our large 20-year term life insurance block issued in 1999 entering its post-level premium period and $58 million in our universal and term universal life insurance products recorded in connection with our annual review of assumptions in the fourth quarter of 2019.
• Reinsurance recoverable decreased $175 million mainly attributable to the runoff of our structured settlement products ceded to UFLIC, an affiliate of our former parent, GE.
• Deferred tax asset decreased $311 million primarily due to higher unrealized gains on investments and derivatives in 2019.
increased future policy benefits by approximately $2,127 million, mostly in our long-term care insurance business, with an offsetting amount recorded in other comprehensive income (loss). The increase was also attributable to aging of our long-term care insurance in-force block and an increase in incremental reserves of $213 million recorded in connection with an accrual for profits followed by losses in 2019.
• Unearned premiums decreased $120 million principally related to our Australia mortgage insurance business due primarily to earned premiums outpacing written premiums. Gross written premiums were lower in 2019 compared to prior years, but have begun to normalize driven in part by higher mortgage origination volume from certain key customers. The decrease was also attributable to our long-term care insurance business predominantly from policy terminations and policies entering paid-up status in 2019.
• Long-term borrowings decreased $430 million mainly attributable to the repayment of Genworth Holdings’ Term Loan, which was originally closed on March 7, 2018 and was scheduled to mature in March 2023. The Term Loan required early repayment due to the sale of Genworth Canada.
• Liabilities held for sale related to discontinued operations decreased $2,112 million as a result of the sale of Genworth Canada, which closed on December 12, 2019.
. Total equity increased $443 million from $14,189 million as of December 31, 2018 to $14,632 million as of December 31, 2019.
• Net unrealized gains and derivatives qualifying as hedges increased $861 million and $221 million, respectively, primarily from a decrease in interest rates in 2019.
• Foreign currency translation and other adjustments increased $307 million principally from the recognition of Genworth Canada’s cumulative foreign currency translation losses as part of the loss on sale recorded in connection with final disposition completed on December 12, 2019.
• Noncontrolling interests decreased $1,292 million predominantly related to the deconsolidation of the ownership interest attributable to noncontrolling interests of Genworth Canada recorded in connection with the final disposition completed on December 12, 2019.
Liquidity and capital resources represent our overall financial strength and our ability to generate cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating and growth needs.
Our principal sources of cash include sales of our products and services, income from our investment portfolio and proceeds from sales of investments. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments typically exceed policy acquisition costs, benefits paid, redemptions and operating expenses. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. Positive cash flows from operating activities are then invested to support the obligations of our insurance and investment products and required capital supporting these products. In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. Changes in cash from financing activities primarily relate to the issuance of, and redemptions and benefit payments on, universal life insurance and investment contracts; deposits from FHLBs; the issuance and acquisition of debt and equity securities; the issuance and repayment or repurchase of borrowings and non-recourse funding obligations; and other capital transactions.
We had cash inflows from investing activities in 2019 primarily driven by net proceeds from the sale of Genworth Canada in December 2019 and net sales of fixed maturity securities, partially offset by net purchases of short-term investments and commercial mortgage loan originations outpacing repayments. We had cash outflows from investing activities in 2018 mainly from net purchases of fixed maturity securities and from commercial mortgage loan originations outpacing repayments, partially offset by net sales of short-term investments.
We had higher cash outflows from financing activities in 2019 principally driven by higher net withdrawals from our investment contracts and higher net cash outflows related to long-term debt transactions. Net cash used in financing activities in 2019 included the repayment of $443 million of Genworth Holdings’ Term Loan in December 2019. Net cash used by financing activities in 2018 included the redemption of $597 million of Genworth Holdings’ senior notes in May 2018, partially offset by $441 million net proceeds from the Term Loan originally closed in March 2018.
We previously had a repurchase program in which we sold an investment security at a specified price and agreed to repurchase that security at another specified price at a later date. In 2017, we repaid $75 million, the entire amount due at maturity related to this repurchase agreement.
The primary uses of funds at Genworth Financial and Genworth Holdings include payment of holding company general operating expenses (including taxes), payment of principal, interest and other expenses on current and any future borrowings, payments under current and any future guarantees (including guarantees of certain subsidiary obligations), payment of amounts owed to GE under the Tax Matters Agreement, payments to subsidiaries (and, in the case of Genworth Holdings, to Genworth Financial) under tax sharing agreements, contributions to subsidiaries, repurchases of debt securities and, in the case of Genworth Holdings, loans, dividends or other distributions to Genworth Financial. In deploying future capital, important current priorities include focusing on our mortgage insurance businesses so they remain appropriately capitalized and accelerating progress on reducing overall indebtedness of Genworth Holdings. We may from time to time seek to repurchase or redeem outstanding notes for cash (with cash on hand, proceeds from the issuance of new debt and/or the proceeds from asset or stock sales) in open market purchases, tender offers, privately negotiated transactions or otherwise. We currently seek to address our indebtedness over time through repurchases, redemptions and/or repayments at maturity.
Our Board of Directors has suspended the payment of stockholder dividends on our Genworth Financial 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. In addition, our Board of Directors has suspended repurchases of our Genworth Financial common stock under our stock repurchase program indefinitely. The resumption of our stock repurchase program will be at the discretion of our Board of Directors.
During the years ended December 31, 2019, 2018 and 2017, Genworth Holdings received cash dividends from its international subsidiaries of $1,486 million, $182 million and $148 million, respectively. Dividends received by Genworth Holdings in 2019 included $1,235 million of net proceeds related to the sale of Genworth Canada. Dividends received by Genworth Holdings in 2019, 2018 and 2017 included $23 million, $57 million and $20 million, respectively, from our participation in the share buy-back programs in Genworth Australia, as discussed below. During 2019 and 2018, Genworth Financial received cash dividends of $250 million and $50 million, respectively, from its U.S. mortgage insurance business. 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 in our U.S. mortgage insurance business. There were no dividends paid to Genworth Holdings by its domestic life insurance subsidiaries during the years ended December 31, 2019, 2018 or 2017. We do not expect our U.S. life insurance businesses to provide dividends to our holding companies in the foreseeable future.
Genworth Financial and Genworth Holdings previously provided a joint and several limited guarantee to Rivermont I, an indirect subsidiary, related to a reinsurance agreement between Rivermont I and GLAIC. On December 1, 2019, the in-force business ceded to Rivermont I was recaptured and the associated joint and several limited guarantee was terminated. Concurrent with the termination, the cash restriction associated with this limited guarantee was withdrawn.
Genworth Holdings provided an unlimited guarantee for the benefit of policyholders for the payment of valid claims by our European mortgage insurance subsidiary prior to its sale in May 2016. Following the sale of this U.K. subsidiary to AmTrust Financial Services, Inc., the guarantee is now limited to the payment of valid claims on policies in-force 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 of the business subject to the guarantee was approximately $1.4 billion.
Genworth Holdings has a Tax Matters Agreement with GE, our former parent company, which represents an obligation of Genworth Holdings to GE. The balance of this obligation was $69 million as of December 31, 2019. Genworth Financial and Genworth Holdings have joint and several guarantees associated with this Tax Matters Agreement.
We also provided guarantees to third parties for the performance of certain obligations of our subsidiaries. We estimate that our potential obligations under such guarantees were $5 million and $6 million as of December 31, 2019 and 2018, respectively.
Insurance laws and regulations regulate the payment of dividends and other distributions to us by our insurance subsidiaries. See note 18 in our consolidated financial statements under “Part II-Item 8 - Financial Statements and Supplementary Data” for additional information regarding the payment of dividends. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. Based on estimated statutory results as of December 31, 2019, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $300 million to us in 2020. However, our insurance subsidiaries may not pay dividends to us in 2020 at this level, if they need to retain capital for growth or need to meet capital requirements and desired thresholds.
As of December 31, 2019, 2018 and 2017, our U.S. mortgage insurance business was compliant with the PMIERs capital requirements, with a prudent buffer. 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. Our U.S. mortgage insurance business may execute future capital transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements given the dynamic nature of asset valuations and requirement changes over time, including additional reinsurance and other credit risk transfer transactions.
In May 2018, 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 36 million of its shares for AUD$100 million. As the majority shareholder, we participated in on-market sales transactions during the buy-back period to maintain our ownership position and received $37 million in cash, which was paid as dividends to Genworth Holdings.
In January 2020, upon receipt of approval from the Director of Insurance of the State of South Carolina, Rivermont I, our indirect subsidiary, redeemed all of its $315 million of outstanding non-recourse funding obligations due in 2050. The early redemption resulted in a pre-tax loss of $4 million from the write-off of deferred borrowing costs.
On December 12, 2019, Genworth Holdings repaid its Term Loan, which was originally closed on March 7, 2018 and was scheduled to mature in March 2023. Prior to the repayment, GFIH provided a limited recourse guarantee to the lenders of Genworth Holdings’ outstanding Term Loan, which was secured by GFIH’s ownership interest in Genworth Canada’s outstanding common shares. Due to the sale of the underlying collateral, the Term Loan was required to be repaid upon the sale of Genworth Canada. A cash payment of $445 million was used to fully repay the outstanding principal and accrued interest of the Term Loan.
On October 4, 2018, Genworth Holdings completed a bond consent solicitation whereby it amended its senior notes indenture to clarify that GLAIC and the subsidiaries of GLIC, GLAIC and GLICNY are excluded from the class of subsidiaries for which a bankruptcy, insolvency or other similar proceeding would result in an event of default under the indenture. We paid $11 million of total fees, which consisted of bond consent fees, broker, advisor and investment banking fees. The bond consent fees were deferred and the remaining fees were expensed in 2018.
On May 22, 2018, Genworth Holdings redeemed $597 million of its 6.52% senior notes that were issued in May 2008 and matured in May 2018. A cash payment of $616 million
For further information about our borrowings, refer to note 12 in our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data.”
We believe existing cash held at Genworth Holdings combined with dividends from operating subsidiaries, payments under tax sharing and expense reimbursement arrangements with subsidiaries, proceeds from borrowings or securities issuances, and if necessary, sales of assets, as described below, will provide us with sufficient capital flexibility and liquidity to meet our projected future operating and financing requirements. We actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. Our cash management target is to maintain a cash buffer of two times expected annual external debt interest payments. We may move below or above our targeted cash buffer during any given quarter due to the timing of cash outflows and inflows or from future actions. We continue to evaluate our target level of liquidity as circumstances warrant. Additionally, we will continue to evaluate market influences on the valuation of our senior debt and may consider additional opportunities to repurchase our debt over time. We cannot predict with certainty the impact to us from future disruptions in the credit markets or the recent or any further future downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings of our holding
The obligations in this table have not been discounted at present value. In contrast to this table, our obligations reported in our consolidated balance sheet are recorded in accordance with U.S. GAAP where the liabilities are discounted consistent with the present value concept under accounting guidance related to accounting and reporting by insurance enterprises, as applicable. Therefore, the estimated obligations for insurance liabilities presented in this table significantly exceed the liabilities recorded in reserves for future policy benefits and the liability for policy and contract claims. These amounts also include estimated claims and benefits, policy surrender and commission obligations calculated consistent with U.S. GAAP on in-force long-duration insurance policies and investment contracts. Also includes amounts established for recourse and indemnification related to our U.S. mortgage insurance contract underwriting business. Estimated claim and benefit obligations are based on mortality, morbidity, lapse and other assumptions. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. We have not included separate account obligations as these obligations are legally insulated from general account obligations and will be fully funded by cash flows from separate account assets. We expect to fully fund the obligations for insurance liabilities from cash flows from general account investments and future deposits and premiums.
Because their future cash outflows are uncertain, the following non-current liabilities are excluded from this table: deferred taxes (except the fixed payments related to the Tax Matters Agreement, which is included, as described in note 13 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data”), derivatives, unearned premiums and certain other items.
Includes the settlement of uncertain tax positions, with related interest, based on the estimated timing of the resolution of income tax examinations in multiple jurisdictions. See notes 2 and 13 to our consolidated financial statements under “Item 8 - Financial Statements and Supplementary Data” for a discussion of uncertain tax positions.
We have used off-balance sheet securitization transactions to mitigate and diversify our asset risk position and to adjust the asset class mix in our investment portfolio by reinvesting securitization proceeds in accordance with our approved investment guidelines. The transactions we have used involved securitizations of some of our receivables and investments that were secured by commercial mortgage loans, fixed maturity securities or other receivables, consisting primarily of policy loans. Total securitized assets remaining as of December 31, 2019 and 2018 were $47 million and $62 million, respectively, which were also securitized assets required to be consolidated. Securitization transactions typically result in gains or losses that are included in net investment gains (losses) in our consolidated financial statements. There were no off-balance sheet securitization transactions executed in 2019, 2018 or 2017.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 27, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
As discussed in Notes 2 and 9 to the consolidated financial statements, of the Company’s total future policy benefits balance of $40,384 million as of December 31, 2019, long-term care insurance contracts were $26,170 million and traditional life insurance contracts were $2,205 million. The Company performs loss recognition testing on at least an annual basis to determine if a premium deficiency exists. If the liability for future policy benefits plus the current present value of expected future gross premiums are less than the current present value of expected future benefits and expenses (including any unamortized deferred acquisition costs (DAC)), a charge to net income (loss) is recorded for accelerated DAC amortization and, if necessary, a premium deficiency reserve is established. The loss recognition test is based upon expected estimated claims and premium payment patterns, which includes assumptions for future in-force rate actions and morbidity for long-term care insurance and mortality for traditional life insurance. Future in-force rate actions include those that are anticipated to be approved, including premium rate increases and associated benefit reductions not yet filed.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s long-term care and traditional life insurance loss recognition process with the assistance of actuarial professionals as appropriate, including controls over the development of future in-force rate actions and the morbidity assumptions for long-term care insurance and the mortality assumption for traditional life insurance. We also involved actuarial professionals with specialized skills and knowledge, who assisted in:
• Evaluating the Company’s key assumptions, including the determination of whether to update the key assumptions in the current year, by assessing the consistency of the assumptions with each other, relevant historical and experience data, and industry data, as applicable;
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s long-term care insurance liability for policy and contract claims process with the assistance of actuarial professionals, as appropriate, including controls over the development of the morbidity assumptions. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
Assessment of the estimate of the additional benefit reserves for guarantees related to universal life and term universal life insurance contracts
We identified the assessment of the estimate of the additional benefit reserves for guarantees related to universal life and term universal life insurance contracts as a critical audit matter. Specifically, the evaluation of the mortality assumption used in the estimation of the additional benefit reserves for guarantees required complex auditor judgment. Specialized skills were needed to evaluate the Company’s mortality assumption and the impact of that assumption on the additional benefit reserves for guarantees.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s process for estimating additional benefit reserves for guarantees related to universal and term universal life insurance contracts with the assistance of actuarial professionals, as appropriate, including controls over the development of the mortality assumption. We involved actuarial professionals with specialized skills and knowledge, who assisted in:
• Evaluating the Company’s mortality assumption and results by assessing the consistency of the mortality assumption with the underlying historical claims experience data and industry data; and
• Comparing expected claims experience that reflects the updated mortality assumption to historical claims experience to evaluate the updated mortality assumption.
Evaluation of the estimate of the liability for policy and contract claims for mortgage insurance policies
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
On December 12, 2019, we completed the sale of Genworth MI Canada Inc. (“Genworth Canada”), our former Canada mortgage insurance business, to an affiliate of Brookfield Business Partners L.P. (“Brookfield”)
1.7 billion in net cash proceeds. Our Canada mortgage insurance business, previously the only business in the Canada Mortgage Insurance segment, is reported as discontinued operations and its financial position, results of operations and cash flows are separately reported for all periods presented. All prior periods reflected herein have been
on this basis. See note 24 for additional information related to discontinued operations.
Unless otherwise indicated, references to the consolidated balance sheets, the consolidated statements of income, the consolidated statements of cash flows and the notes to the consolidated financial statements, exclude amounts related to discontinued operations.
fixed maturity securities is recognized in net investment income, except for hybrid securities where the income or loss upon call is recognized in net investment gains and losses. Investment gains and losses are calculated on the basis of specific identification on the trade date.
• we do not expect full recovery of our amortized cost basis when due,
• the present value of cash flows expected to be collected is less than our amortized cost basis,
• it is more likely than not that we will be required to sell a security prior to recovery.
For securities that were deemed to be other-than-temporarily impaired and a non-credit
To estimate the amount of other-than-temporary impairment attributed to credit losses on debt 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, we determine our best estimate of the present value of the cash flows expected to be collected from a security using the effective yield on the security prior to recording any other-than-temporary impairment. If the present value of the discounted cash flows is lower than the amortized cost of the security, the difference between the present value and amortized cost represents the credit loss associated with the security with the remaining difference between fair value and amortized cost recorded as a non-credit
Prior to adopting new accounting guidance related to the recognition and measurement of financial assets and financial liabilities on January 1, 2018 (see “-Accounting Changes
-Recognition and measurement of financial assets and liabilities” for additional details), we recognized an impairment charge for equity securities in the period in which we determined that the security would not recover to book value within a reasonable period of time. We determined what constituted a reasonable period on a security-by-security
readily available market information. In certain instances, this category may also utilize non-binding
broker quotes. This category primarily consists of certain less liquid fixed maturity, equity and trading securities and certain derivative instruments or embedded derivatives where we cannot corroborate the significant valuation inputs with market observable data.
“Impaired” loans are defined by U.S. GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. In determining whether it is probable that we will be unable to collect all amounts due, we consider current payment status, debt service coverage ratios, occupancy levels and current loan-to-value.
property-type, occupancy levels, geographic region, and probability weighting of the scenarios generated by the model. The actual amounts realized could differ in the near term from the amounts assumed in
days or less are considered cash equivalents in the consolidated balance sheets and consolidated statements of cash flows. Items with maturities greater than 90
days but less than one year at the time of acquisition are considered short-term investments.
Amortization for deferred annuity and universal life insurance contracts is based on expected gross profits. Expected gross profits are adjusted quarterly to reflect actual experience to date or for changes in underlying
assumptions relating to future gross profits. Estimates of gross profits for DAC amortization are based on assumptions including interest rates, policyholder persistency or lapses, insured life expectancy or longevity and expenses.
In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is assigned to the right to receive future gross profits arising from existing insurance and investment contracts. This intangible asset, called PVFP, represents the actuarially estimated present value of future cash flows from the acquired policies. PVFP is amortized, net of accreted interest, in a manner similar to the amortization of DAC.
We discontinue hedge accounting prospectively when: (i) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) the derivative is de-designated
For all qualifying and highly effective cash flow hedges, changes in fair value of the derivative instrument are
The majority of our derivative arrangements require the posting of collateral upon meeting certain net exposure thresholds. The amounts recognized for derivative counterparty collateral received by us are
recorded in cash, cash equivalents and restricted cash with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us. We also receive non-cash
collateral that is not recognized in our balance sheet unless we exercise our right to sell or re-pledge
the underlying asset. As of December 31, 2019 and 2018, the fair value of non-cash
Additionally, some of our variable annuity contracts provide the contractholder with living benefits such as a guaranteed minimum withdrawal benefit (“GMWB”) or certain types of guaranteed annuitization benefits. The GMWB allows contractholders to withdraw a pre-defined
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 (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, all of which are locked-in at the time the policies are issued or acquired. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used.
certain reinsured blocks tested separately. If the liability for future policy benefits plus the current present value of expected future gross premiums are less than the current present value of expected future benefits and expenses (including any unamortized DAC), a charge to net income (loss) is recorded for accelerated DAC amortization and, if necessary, a premium deficiency reserve is established. If a charge is recorded, DAC amortization and the liability for future policy benefits are measured using updated assumptions, which become the new locked-in
The liability for policyholder account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date for investment-type and universal and term universal life insurance contracts. We are also required to establish additional benefit reserves for guarantees or product features in addition to the contract value where the additional benefit reserves are calculated by applying a benefit ratio to accumulated contractholder 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, which includes assumptions for insured mortality (i.e. life expectancy or longevity), interest rates and policyholder persistency or lapses (i.e., the probability that a policy or contract will remain
The liabilities for our mortgage insurance policies represent our best estimates of the liabilities at the time based on known facts, trends and other external factors, including economic conditions, housing prices and
employment rates. For our mortgage insurance policies, reserves for losses and loss adjustment expenses are 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 traditional 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. As is common accounting practice in the mortgage insurance industry and in accordance with U.S. GAAP, we begin to provide for the ultimate claim payment relating to a potential claim on a defaulted loan when the status of that loan first goes delinquent. Over time, as the status of the underlying delinquent loans moves toward foreclosure and the likelihood of the associated claim loss increases, the amount of the loss reserves associated with the potential claims may also increase.
We determine deferred tax assets and/or liabilities by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled if there is no change in law. The effect on deferred taxes of a change in tax rates is recognized in net
Under U.S. GAAP, we are generally required to record U.S. deferred taxes on the anticipated repatriation of foreign income as the income is recognized for financial reporting purposes. An exception under certain accounting guidance permits us not to record a U.S. deferred tax liability for foreign income that we expect to reinvest in our foreign operations and for which remittance will be postponed indefinitely. If it becomes apparent that we cannot positively assert that some or all undistributed income will be reinvested indefinitely, the related deferred taxes are recorded in that period based on the expected form of repatriation (i.e. distribution, loan or sale). In determining indefinite reinvestment, we regularly evaluate the capital needs of our domestic and foreign operations considering all available information, including operating and capital plans, regulatory capital requirements, parent company financing and cash flow needs, as well as the applicable tax laws to which our domestic and foreign subsidiaries are subject. Our estimates are based on our historical experience and our expectation of future performance. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future capital needs, which are impacted by such things as regulatory requirements, policyholder behavior, competitor pricing, new product introductions, and specific industry and market conditions.
Our companies have elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). All companies domesticated in the United States are included in the life/non-life consolidated return as allowed by the tax law and regulations. We have a tax sharing agreement in place and all intercompany balances related to this agreement are settled at least annually.
other comprehensive income (loss). Revenues and expenses of the foreign operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. Gains and losses from foreign currency transactions are reported in net income (loss) and have not been material in any years presented in our consolidated statements of income.
We have a beneficial interest in a VIE where we are the servicer and transferor of certain assets that were sold to the VIE. Our primary economic interest in this VIE represents the excess interest of the commercial mortgage loans and the subordinated notes of the VIE.
We have a reinsurance agreement with an entity that is considered a VIE. Our involvement with this VIE includes mortgage insurance claim coverage through excess of loss reinsurance. This involvement does not result in us having the ability to influence the economic performance of the VIE or result in the obligation to absorb losses or the right to receive benefits from the VIE.
See note 17 for additional information related to these consolidated entities and other VIEs.
asset and a corresponding lease liability on the balance sheet. We adopted this new accounting guidance using the effective date transition method, which permits entities to apply the new lease standard using a modified retrospective transition approach at the date of adoption. As such, historical periods will continue to be measured and presented under the previous guidance while current and future periods will be subject to this new accounting guidance. The package of practical expedients was also elected upon adoption. Upon adoption we recorded a $52 million right-of-use
asset had no significant initial direct costs, prepaid lease payments or lease incentives; therefore, a cumulative-effect adjustment was not recorded to the opening retained earnings balance as a result of the change in accounting principle.
Our leased assets are predominantly classified as operating leases and consist of office space in 11 locations primarily in the United States and Australia. Lease payments included in the calculation of our lease liability include fixed amounts contained within each rental agreement and variable lease payments that are based upon an index or rate. We have elected to combine lease and non-lease
The following summarizes the components for the cumulative effect adjustment recorded on January 1, 2018 related to the adoption of this new accounting guidance, including amounts related to our Canada mortgage insurance business which were classified as held for sale prior to the fourth quarter of 2019:
The accounting for the temporary differences related to investment in foreign subsidiaries recorded in accumulated other comprehensive income (loss) at adoption of the TCJA were provisional. Other than those effects related to the TCJA, our policy is to release stranded tax effects from accumulated other comprehensive income (loss) using the portfolio approach for items related to investments and derivatives, and upon disposition of a subsidiary for items related to outside basis differences.
On January 1, 2018, we early adopted new accounting guidance related to the hedge accounting model. The new guidance amends the hedge accounting model to enable entities to better portray the economics of their derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain situations, the amendments also simplify the application of hedge accounting and
On January 1, 2018, we adopted new accounting guidance that clarifies when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if
compensation. We adopted this new accounting guidance prospectively and therefore, the guidance did not have any impact at adoption.
million make-whole premium, which resulted in an increase in net cash used by financing activities and an increase in net cash from operating activities in our statement of cash flows for the year ended December 31,
tax assets. We adopted this new accounting guidance using the modified retrospective method and reclassified, after adjustments for DAC and other intangible amortization and certain benefit reserves, taxes and noncontrolling interests, $25 million of gains related to equity securities from accumulated other comprehensive income and $17 million of gains related to limited partnerships previously recorded at cost to cumulative effect of change in accounting within retained earnings, including amounts related to our Canada mortgage insurance business which were classified as held for sale prior to the fourth quarter of 2019.
earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This accounting guidance did not have a significant impact on our consolidated financial statements.
In December 2019, the FASB issued new accounting guidance related to simplifying the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is currently effective for us on January 1, 2021 using the retrospective method or modified retrospective method for certain changes and prospective method for all other changes, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements and disclosures.
This guidance is effective for us on January 1, 2022 using the modified retrospective method, with early adoption permitted. Given the nature and extent of the changes to our operations, this guidance is expected to have a significant impact on our consolidated financial statements.
In June 2016, the FASB issued new accounting guidance related to accounting for credit losses on financial instruments. The guidance requires entities to
$30 million, before taxes, for investments carried at amortized cost, after considering our current allowance for credit losses, and
$40 million, before taxes, for reinsurance recoverables, with an offset to cumulative effect of change in accounting within retained earnings and before adjustments for taxes. The FASB also issued an amendment to the guidance allowing entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments, which we did not elect.
Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the year ended December 31, 2018, we were required to use basic weighted-average common shares outstanding as the inclusion of shares for stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) of 3.8
Genworth Financial, Inc.’s common stockholders for the year ended December 31, 2018, dilutive potential weighted-average common shares outstanding would have been
Sources of net investment income were as follows for the years ended December
As of December 31, 2018, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as available-for-sale
The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized
The scheduled maturity distribution of fixed maturity securities as of December 31, 2019 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
As of December 31, 2019, securities issued by finance and insurance, consumer-non-cyclical,
utilities and technology and communications industry groups represented approximately 24%, 15%, 14% and 10%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.
million, respectively, were on deposit with various state government insurance departments in order to comply with relevant insurance regulations.
We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of December 31, 2019, none of our commercial mortgage loans were greater than 90 days past due. As of December 31, 2018, our commercial mortgage loans greater than 90 days past due included one impaired loan with a carrying value of $3 million. This loan was modified and the modification was considered to be a troubled debt restructuring. As part of this troubled debt restructuring, we forgave default interest, penalties and fees, and modified the original contractual interest rate but we did not forgive the outstanding principal amount owed by the borrower.
During the years ended December 31, 2019 and 2018, we also modified or extended two commercial mortgage loans in each period
and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value
third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio is not used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.
Limited partnerships are accounted for at fair value when our partnership interest is considered minor (generally less than 3% ownership in the limited partnerships) and we exercise no influence over operating and financial policies. If our ownership percentage exceeds that threshold, limited partnerships are accounted for using the equity method of accounting. In applying either method, we use financial information provided by the investee generally on a one-to-three month lag. However, we consider whether an adjustment to the estimated fair value is necessary when the measurement date is not aligned with our reporting date.
member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of December 31, 2019 and 2018, the total carrying value of these investments was $616 million and $394 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.
Represents the embedded derivatives associated with our fixed index annuity liabilities.
Represents the embedded derivatives associated with our indexed universal life liabilities.
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:
income effects of cash flow hedges for the year ended December 31, 2017:
Prior to the fourth quarter of 2017, we also had derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only had recourse to the securitization entity. Credit default swaps were utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also included a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.
Included $1 million of accruals on derivatives classified as other assets as of December 31, 2019 and does not include amounts related to embedded derivatives as of December 31, 2019 and 2018.
We regularly review DAC to determine if it is recoverable from future income. In 2019, 2018 and 2017, we performed loss recognition testing and determined that all of our businesses that have a DAC balance had sufficient future income and therefore the related DAC was recoverable. See note 9 for additional information related to loss recognition testing.
In the fourth quarter of 2019, as part of our annual review of assumptions, we increased
As of December 31, 2019, 2018 and 2017, shadow accounting adjustments reduced the DAC balance
We regularly review our assumptions and periodically test PVFP for recoverability in a manner similar to our treatment of DAC. As of December 31, 2019, 2018 and 2017 we believe all of our businesses have sufficient future income and therefore the related PVFP is recoverable.
As of December 31, 2019, the maximum amount of individual ordinary life insurance
normally retained by us on any one individual life policy was $5
blocks of structured settlements issued prior to 2004, substantially all of our in-force
paying accounts. A trustee administers the trust accounts and we are permitted to withdraw from the trust accounts amounts due to us pursuant to the terms of the reinsurance agreements that are not otherwise paid by UFLIC. In addition, pursuant to a Capital Maintenance Agreement, General Electric Company (“GE”) is obligated to maintain sufficient capital in UFLIC to maintain UFLIC’s risk-based capital (“RBC”) at not less than 150% of its company action level, as defined by the National Association of Insurance Commissioners (“NAIC”).
Under the terms of certain reinsurance agreements that our life insurance subsidiaries have with external parties, we pledged assets in either separate portfolios or in trust for the benefit of external reinsurers. These assets support the reserves ceded to those external reinsurers. We have pledged fixed maturity securities and commercial mortgage loans of $11,874 million and $938 million, respectively, as of December 31, 2019 and $10,400 million and $870 million, respectively, as of December 31, 2018 in connection with these reinsurance agreements. However, we maintain the ability to substitute these pledged assets for other qualified collateral, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level.
On November 25, 2019, our U.S. mortgage insurance business obtained $303 million of
Accident and health insurance is comprised almost entirely of our long-term care insurance products.
Reinsurance recoveries recognized as a reduction of benefits and other changes in policy reserves amounted to $2,751
Assumptions for limited-payment contracts come from either the U.S. Population Table, the 1983 Group Annuitant Mortality Table, the 1983 Individual Annuitant Mortality Table, the Annuity 2000 Mortality Table or the 2012 Individual Annuity Reserving Table.
Principally modifications based on company experience of the Society of Actuaries 1965-70
We regularly review our assumptions and perform loss recognition testing at least annually. Due to the premium deficiencies that existed in previous years, we perform loss recognition testing on our fixed immediate annuity products more frequently than annually. Results from our 2019 and 2018 loss recognition testing resulted in premium deficiencies in our fixed immediate annuity products. As a result, we increased our future policy benefit reserves in 2019 and 2018 by $39 million and $22 million, respectively. The premium deficiencies were primarily driven by the low interest rate environment. The liability for future policy benefits for our fixed immediate annuity products 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 result in further increases in the related future policy benefit reserves for these products.
Our long-term care insurance products are among the products tested in connection with our annual loss recognition testing. The 2019 and 2018 tests did not result in a premium deficiency and therefore our liability for future policy benefits was sufficient. The liability for future policy benefits for our long-term care insurance business 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 further increases in the related future policy benefit reserves for this business by an amount that could be material to our results of operations and financial condition and liquidity.
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. In 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
completed in the fourth quarter of 2019 as well as updates to our future in-force
by losses accrual, and such future increases could possibly be material to our results of operations and financial condition and liquidity.
interest rate environment. In the fourth quarter of 2018, as part of our annual review of assumptions, we increased our liability for policyholder account balances by $119 million in
Certain of our U.S. life insurance companies are members of the Federal Home Loan Bank (the “FHLB”) system in their respective regions. As of December 31, 2019 and 2018, we held $43 million and $50 million, respectively, of FHLB common stock related to those memberships which was included in equity securities. We have outstanding funding agreements with the FHLBs and had
. The FHLBs have been granted a lien on certain of our invested assets to collateralize our obligations; however, we maintain the ability to substitute these pledged assets for other qualified collateral, and may use, commingle, encumber or dispose of any portion of the collateral as long as there is no event of default and the remaining qualified collateral is sufficient to satisfy the collateral maintenance level. Upon any event of default by us, the FHLB’s recovery on the collateral is limited to the amount of our funding agreement liabilities to the FHLB. These funding agreements as
of December 31, 2019 and 2018 and the letter of credit as of December 31, 2018
comprised $2.0 billion out of the total $2.6 billion accrued. In addition, as of December 31, 2019, we accrued policyholder account balances of $0.7 billion in our universal and term universal life insurance products with an offsetting amount recorded in other comprehensive income (loss) related to shadow accounting adjustments. There was no impact to net income (loss) related to our shadow accounting adjustments. See note 2 for further information related to shadow accounting adjustments.
The contracts underlying the lifetime benefits such as GMWB and guaranteed annuitization benefits are considered “in the money” if the contractholder’s benefit base, or the protected value, is greater than the account value. As of December 31, 2019 and 2018, our exposure related to GMWB and guaranteed annuitization benefit
block, including higher frequency and severity of new claims, partially offset by favorable development on prior year incurred but not reported claims in 2019. We completed our annual review of assumptions and methodologies in the third quarter of 2019 and did not make any significant changes, other than routine updates.
In 2019, the favorable development of $219 million related to insured events of prior years was primarily attributable to favorable development on prior year incurred but not reported claims and favorable experience on
million. Based on this review, we updated several assumptions and methodologies, including benefit utilization rates, claim termination rates and other assumptions. In connection with updating our benefit utilization rate assumption, we increased later duration utilization assumptions for claims with lifetime benefits. The increase was also attributable to higher severity and frequency of new claims and higher utilization of available benefits in 2018.
million related to insured events of prior years increased largely as a result of the completion of our annual review of our long-term care insurance claim reserves, as described above, which resulted in recording higher reserves of $231
In 2017, the favorable development of $183 million related to insured events of prior years was primarily attributable to favorable claim terminations, including pending claims that did not become
The following table sets forth information about incurred claims, net of reinsurance, as well as cumulative number of reported delinquencies and the total of incurred-but-not-reported
The following table sets forth our average payout of incurred claims by age for our U.S. Mortgage Insurance segment as of December 31, 2019:
Amounts translated into U.S. dollars at the average foreign exchange rates for the year ended December 31, 2019.
Essentially all of our employees are enrolled in a qualified defined contribution pension plan. The plan is 100% funded by Genworth. We make annual contributions to each employee’s pension plan account based on the employee’s age, service and eligible pay. Employees are vested in the plan after three years
In addition, certain employees also participate in non-qualified defined contribution plans and in qualified and non-qualified defined benefit pension plans. The plan assets, projected benefit obligation and accumulated
benefit obligation liabilities of these plans were not material to our consolidated financial statements individually or in the aggregate. As of December 31, 2019 and 2018, we recorded a liability related to these plans of $58 million and $51 million, respectively, which we accrued in other liabilities in the consolidated balance sheets. In 2019 and 2018, we recognized a decrease of $4
an increase of $6 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.
Our cost associated with our pension, retiree health and life insurance benefit plans was $19 million, $18 million and $17 million for the years ended December 31, 2019, 2018 and 2017, respectively.
defined contribution savings plans that allow employees to contribute a portion of their pay to the plan on a pre-tax
variable annuity option offered by certain of our life insurance subsidiaries. The amount of deposits recorded by our life insurance subsidiaries in 2019 and 2018 in relation to this plan option was less than $1 million for each year. Employees also have the option of purchasing a fund which invests primarily in Genworth stock as part of the defined contribution savings plan. Our cost associated with these plans was $13 million, $12 million and $11 million for the years ended December 31, 2019, 2018 and 2017, respectively.
unsecured unsubordinated basis, 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 the full and punctual payment of all other amounts payable by Genworth Holdings under the senior notes indenture in respect of such senior notes. We have the option to redeem all or a portion of each series of senior notes at any time with notice to the noteholders at a price equal to the
On January 21, 2020, Genworth Holdings early redeemed $397 million of its 7.70% senior notes originally scheduled to mature in June 2020. The senior notes were fully redeemed with a cash payment of $409
result in an event of default under the Senior Notes Indenture.
As of December 31, 2019, Genworth Financial Mortgage Insurance Pty Limited, our majority-owned subsidiary, had outstanding one series of subordinated floating rate notes with an interest rate of three-month Bank Bill Swap reference rate plus a margin of 3.50% and maturity date of 2025.
LIBOR that reset every 28 days plus a fixed margin. The weighted-average interest rates on the non-recourse
The surplus notes were deposited into a trust that had issued money market securities. Both principal and interest payments on the money market securities were guaranteed by a third-party insurance company. GLAIC, our wholly-owned subsidiary, agreed to indemnify Rivermont I and the third-party insurer for certain limited costs related to the issuance of these obligations.
Principal amounts under our long-term borrowings (including senior notes) and non-recourse
Under our securities lending program, the borrower is required to provide collateral, which can consist of cash or government securities, on a daily basis in amounts equal to or exceeding 102% of the value of the loaned securities. Currently, we only accept cash collateral from borrowers under the program. Cash collateral received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. The reinvested cash collateral is primarily invested in a money market fund approved by the NAIC, U.S. and foreign government securities, U.S. government agency securities, asset-backed securities, corporate debt securities and equity securities. As of December 31, 2019 and 2018, the fair value of securities loaned under our securities lending program was $49 million and $99 million, respectively. As of December 31, 2019 and 2018, the fair value of collateral held under our securities lending program was $51 million and $102 million, respectively, and the offsetting obligation to return collateral of $51 million and $102 million, respectively, was included in other liabilities in the consolidated balance sheets. We did not have any non-cash
The following tables present the remaining contractual maturity of the agreement
Our current income tax payable was $19 million as of December 31, 2019.
For the year ended December 31, 2019 the decrease in the effective rate compared to the year ended December 31, 2018 was primarily attributable to higher pre-tax income in 2019. The higher pre-tax income in 2019 resulted in a lower impact to the effective tax rate from 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 and from foreign operations.
For the year ended December 31, 2018, the increase in the effective rate compared to the year ended December 31, 2017 was primarily due to the impacts of tax reform in 2017 and a release of our valuation allowance in 2017 that did not recur. The 2018 effective tax rate also included the rate differential on our foreign subsidiaries, which are now taxed at a higher marginal rate than our U.S. businesses and
The components of our deferred income taxes were as follows as of December 31:
The benefits of the NOL carryforwards have been recognized in our consolidated financial statements, except to the extent of the valuation allowances described above relating to state and foreign taxes. Foreign tax credit carryforwards
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,
million for the years ended December 31, 2019, 2018 and 2017, respectively, reflecting accretion of our liability at the Tax Matters Agreement rate of 5.72
%. As of December 31, 2019 and 2018, we have recorded the estimated present value of our remaining obligation to GE of $69
deferred tax assets and our obligation to GE are estimates that are subject to change.
We believe it is reasonably possible that in 2020, due to the potential resolution of certain potential settlements and other administrative and statutory proceedings and limitations, up to approximately $47 million unrecognized tax benefits will be recognized.
We recognize accrued interest and penalties related to unrecognized tax benefits as components of income tax expense. We recorded less than $1
million of benefits, in each respective year, related to interest and penalties for 2019, 2018 and 2017.
Our companies have elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). All companies domesticated in the United States are included in the life/non-life consolidated return as allowed by the tax law and regulations. We have a tax sharing agreement in place and all intercompany balances related to this agreement are settled at least annually. With possible exceptions, we are no longer subject to U.S. federal tax examinations for years through 2015. Potential state and local examinations for those years are generally restricted to results that are based on closed U.S. federal examinations. Our Australia mortgage insurance business is generally no longer subject to examinations by the Australian Tax Office (“ATO”) for years prior to 2014. In September 2019, the ATO completed a Streamlined Assurance Review of Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) for the years 2016 and 2017. The ATO rated Genworth Australia as “high” assurance overall. A rating of “high” means the ATO obtained a high level of assurance that the right Australian income tax outcomes were reported in Genworth Australia’s income tax returns. The “high” rating also means that the ATO is unlikely to contact Genworth Australia in relation to these matters for the income years reviewed unless something new comes to their attention.
Throughout the measurement period, we analyzed the impact of the Global Intangible Low Taxed Income (“GILTI”) and Base Erosion Anti-Abuse Tax (“BEAT”), including accounting policy elections. As part of this analysis, we evaluated several alternatives for our future tax filings in light of the GILTI provisions. During the fourth quarter of 2018 we completed the accounting for the initial impacts of the provisions and no measurement
period adjustments were recorded. Accordingly, we have made a policy election to account for the GILTI tax as incurred (i.e. as a “period cost”) therefore, we have not included deferred taxes on basis differences that may affect the amount of the GILTI inclusion upon reversal. We included the impact of the GILTI and BEAT provisions in our 2018 results, which did not have a significant impact on our consolidated financial statements.
million in 2017 related to the transition adjustment required under the TCJA with respect to life insurance policyholder reserves. Under the TCJA this transition adjustment is to be taken into account ratably over eight taxable years. During 2018, we updated our provisional estimate and identified a measurement period increase to this reclassification of $36
million, which was reflected in our consolidated balance sheet as of December 31, 2018. This measurement period adjustment had no impact on income from continuing operations.
transition tax, and GILTI. We determined that the impact to the financial statements was not significant in 2018, and accordingly no measurement period adjustment was recorded.
Prior to May 2012, we granted share-based awards to employees and directors, including stock options, SARs, RSUs and deferred stock units (“DSUs”) under the 2004 Genworth Financial, Inc. Omnibus Incentive Plan (the “2004 Omnibus Incentive Plan”). In May 2012, the 2012 Genworth Financial, Inc. Omnibus Incentive Plan (the “2012 Omnibus Incentive Plan”) was approved by stockholders. Under the 2012 Omnibus Incentive Plan, we were authorized to grant 16
by stockholders. Under the 2018 Omnibus Incentive Plan, we are authorized to grant 25
For purposes of determining the fair value of stock-based payment awards on the date of grant, we have historically used the Black-Scholes Model. However, no
and 2017 and therefore, the Black-Scholes Model was not used in those respective years.
The Black-Scholes Model requires the input of certain assumptions that involve judgment. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies.
During 2019, 2018 and 2017, we granted performance stock units (“PSUs”) with a fair value of $4.61, $3.58 and $4.01, respectively. The PSUs were granted at market price as of the approved
The PSUs granted in 2018 and 2017 each have three separate and distinct performance measurement periods, each starting on January 1 going through December 31 for the years ended December 31, 2018, 2019 and 2020 and December 31, 2017, 2018 and 2019, respectively. The performance metric is based on a range of consolidated annual adjusted operating income. The compensation committee of our Board of Directors determines and approves, no later than March 15 following the end of the three-year performance period, the number of units earned and vested for each distinct performance period.
For the years ended December 31, 2019, 2018 and 2017, we recorded $5 million, $7 million and $7 million, respectively, of expense associated with our PSUs.
The following tables summarize the status of our other equity-based awards as of December 31, 2019 and 2018:
awards not yet recognized was $17 million and $6 million, respectively. This expense is expected to be recognized over a weighted-average period of approximately two years.
Genworth Australia, our indirect subsidiary and a public company, grants stock options and other equity-based awards to its Australian employees. The following table summarizes the status of Genworth Australia’s restricted share rights and long-term incentive plan as of December 31, 2019 and 2018:
million in each year for the years ended December 31, 2019, 2018 and 2017 related to these awards.
Assets and liabilities that are reflected in the accompanying consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash, cash equivalents and restricted cash, short-term investments, investment securities, separate accounts, securities held as collateral and derivative instruments. Apart from certain of our borrowings and certain marketable securities, few of the instruments are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization
of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.
thresholds each month to further aid in our review of the accuracy of fair value measurements and our understanding of changes in fair value, with more detailed reviews performed by the asset managers responsible for the related asset class associated with the security being reviewed. A pricing committee provides additional oversight and guidance in the evaluation and review of the pricing methodologies used to value our investment portfolio.
threshold is noted, additional review of the price is executed to ensure accuracy. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.
For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. To evaluate the reasonableness of the internal model, we review a sample of private fixed maturity securities each month. In that review we compare the modeled prices to the prices of similar public securities in conjunction with analysis on current market indicators. If a pricing variance greater than a pre-defined
threshold is noted, additional review of the price is executed to ensure accuracy. At the end of each month, all
internally modeled prices are compared to the prior month prices with an evaluation of all securities with a month-over-month change greater than a pre-defined
threshold. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating or public bond spread as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities.
The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of December 31, 2019:
corporate securities are valued using internal models. The fair value of these fixed maturity securities was
$15 million, $1,153 million, and $580 million, respectively, as of December 31, 2019. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.
corporate, residential mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as the interest rate yield curve, as well as published credit spreads for similar securities, which includes significant unobservable inputs. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,903 million as of December 31, 2019.
corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by third-party
The primary inputs to the valuation include broker quotes where the underlying inputs are unobservable and for internal models, structure of the security and issuer rating.
We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an
risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for the non-performance
risk of the GMWB liabilities. As of December 31, 2019 and 2018, the impact of non-performance
We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility and non-performance
risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.
We previously recorded certain borrowings related to securitization entities at fair value. During 2018, the borrowings related to securitization entities were repaid in full. The fair value of these borrowings was determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determined fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may have impacted the valuation. After considering all relevant inputs, we determined fair value of the borrowings using the net valuation of the underlying assets and derivatives that were backing the borrowings. Accordingly, these instruments were classified as Level 3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities resulted in an increase in the fair value of these borrowings.
The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2.
The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered observable inputs, and results in the derivative being classified as Level 2.
optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As equity index volatility increases, our valuation of these options changes favorably.
We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers between levels at the beginning fair value for the reporting period in which the changes occur. Given the types of assets classified as Level 1, which primarily represent equity investments, we typically do not have any transfers between Level 1 and Level 2 measurement categories and did not have any such transfers during any period presented.
See note 17 for additional information related to consolidated securitization entities
Issuances presented for GMWB embedded derivative liabilities are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance. Issuances for fixed index annuity and indexed universal life embedded derivative liabilities represent the amount of the premium received that is attributed to the value of the embedded derivative. Settlements of embedded derivatives are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income)” in the tables presented above.
The following table presents a summary of the significant unobservable inputs used for certain liability fair value measurements that are based on internal models and classified as Level 3 as of December 31, 2019:
sheet arrangements encompass a broader array of arrangements than those at risk for consolidation. These arrangements include transactions with term securitization entities, as well as transactions with conduits that are sponsored by third parties.
As of December 31, 2019 and 2018, we had $47 million and $62 million of total securitized assets required to be consolidated, respectively. We do not have any additional exposure or guarantees associated with these securitization entities.
There has been no new asset securitization activity in 2019 or 2018.
For VIEs related to asset securitization transactions, as of December 31, 2019, we consolidate a securitization entity as a result of our involvement in the entity’s design or having certain decision making ability regarding the assets held by the securitization entity. This securitization entity was designed to have significant limitations on the types of assets owned, the types and extent of permitted activities and decision making rights. The securitization entity that is consolidated comprised an entity backed by commercial mortgage loans. Our primary economic interest in this securitization entity represents the excess interest of the commercial mortgage loans and the subordinated notes of the securitization entity.
The assets held by the securitization entity are restricted and can only be used to fulfill the obligations of the securitization entity.
Our insurance subsidiaries are subject to oversight by applicable insurance laws and regulations as to the amount of dividends they may pay to their parent in any year, the purpose of which is to protect affected insurance policyholders or contractholders, not stockholders. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. Based on estimated statutory results as of December 31, 2019, in accordance with applicable dividend restrictions, our insurance subsidiaries could pay dividends of approximately $300 million to us in 2020. While the approximately $300 million is considered unrestricted, our insurance subsidiaries may not pay dividends to us in 2020 at this level if they need to retain capital for growth or need to meet capital requirements and desired thresholds.
Our domestic insurance subsidiaries paid dividends of $250 million (none of which were deemed “extraordinary”), $60 million (none of which were deemed “extraordinary”) and $36 million (paid to our principal life insurance subsidiaries and none of which were deemed “extraordinary”) during 2019, 2018 and 2017, respectively.
$212 million, $129 million and $147 million during 2019, 2018 and 2017,
Our U.S. domiciled insurance subsidiaries file financial statements with state insurance regulatory authorities and the NAIC that are prepared on an accounting basis either prescribed or permitted by such authorities. Statutory accounting practices differ from U.S. GAAP in several respects, causing differences in reported net income (loss) and stockholders’ equity.
In 2019, River Lake VI was granted a permitted accounting practice from the State of Delaware to carry its excess of loss reinsurance agreement with The Canada Life Assurance Company for its universal life insurance business assumed from GLAIC in 2019 as an admitted asset. In 2018, River Lake VI was granted a permitted accounting practice from the State of Delaware to carry its term life insurance reserves on a basis similar to U.S. GAAP and was subsequently granted an extension of this permitted accounting practice to include additional term life insurance policies assumed from GLAIC in 2019. Prior to 2018, River Lake VI was granted a permitted accounting practice to carry its excess of loss reinsurance agreement with The Canada Life Assurance Company for its term life insurance business as an admitted asset, which was withdrawn in 2018.
In 2019 and 2018, River Lake VII, River Lake VIII, River Lake IX and River Lake X each had a permitted accounting practice from the State of Vermont to carry their reserves on a basis similar to U.S. GAAP. In addition, prior to 2018, River Lake IX and River Lake X were also granted a permitted accounting practice to carry their excess of loss reinsurance agreements with The Canada Life Assurance Company and Hannover Life Reassurance Company of America, respectively, as an admitted asset, which was withdrawn in 2018. As of December 31, 2019, there were no remaining reserves in River Lake IX as discussed below.
funding obligations to third parties. Additionally, the life insurance subsidiaries’ combined statutory net income (loss) and distributable income (loss) are not affected by the statutory net income (loss) of the captives, except to the extent dividends are received from the captives. The combined statutory capital and surplus of our life insurance subsidiaries does not include the capital and surplus of our captive life reinsurance subsidiaries
to Rivermont I. GLAIC then immediately ceded that recaptured business to River Lake VI. Prior to the GLAIC recapture, River Lake IX also recaptured all external reinsurance with third parties and terminated those agreements. As a result, there is no remaining reinsurance (assumed or ceded) in River Lake IX or Rivermont I as of December 31, 2019. River Lake IX also returned capital of $20 million to GLAIC in December 2019. Additionally, the capital and surplus (excluding non-recourse
However, during 2018, the NYDFS approved an in-force rate increase. We incorporated this approved in-force rate increase along with other assumption and methodology updates into GLICNY’s 2018 asset adequacy testing. As a result, GLICNY’s asset adequacy analysis produced a positive margin and no incremental additional asset adequacy analysis reserves were recorded for the year ended December 31, 2018. As of December 31, 2018, the aggregate amount of GLICNY’s statutory reserves established for asset adequacy deficiencies was $454 million.
After discussions with the NYDFS and through the exercise of professional actuarial judgment, GLICNY incorporated in its 2019 asset adequacy analysis recently filed in-force rate actions for newer long-term care insurance
reserves established in 2019, when combined with the $454 million of previously established asset adequacy deficiency reserves as of December 31,
750 million, respectively, of available assets above the PMIERs requirements. Reinsurance transactions provided an aggregate of approximately $
870 million of PMIERs capital credit as of December 31, 2019.
Our international insurance subsidiaries also prepare financial statements in accordance with local regulatory requirements. Our international insurance subsidiaries do not have any material accounting practices that differ from local regulatory requirements. As of December 31, 2019 and 2018, combined local statutory capital and surplus of our international insurance subsidiaries was $1.2 billion and $1.4 billion, respectively. Combined local statutory net income included in continuing operations for our international insurance subsidiaries was $87 million, $57 million and $124
million for the years ended December 31, 2019, 2018 and 2017, respectively. The regulatory authorities in these international jurisdictions generally establish supervisory solvency requirements. Our international insurance subsidiaries had combined surplus levels that exceeded local solvency requirements by $384 million and $462 million as of December 31, 2019 and 2018, respectively.
previously provided a joint and several limited guarantee to Rivermont I related to a reinsurance agreement between
joint and several limited guarantee was terminated. Concurrent with the termination, the cash restriction associated with this limited guarantee was withdrawn.
Genworth Holdings also provided an unlimited guarantee for the benefit of policyholders for the payment of valid claims by our European mortgage insurance subsidiary prior to its sale in May 2016. Following the sale of this U.K. subsidiary to AmTrust Financial Services, Inc., the guarantee is now limited to the payment of valid claims on policies in-force
of the business subject to the guarantee was approximately $1.4 billion.
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
items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the
Genworth Financial, Inc.’s common stockholders if, in our opinion, they are not indicative of overall operating trends.
excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.
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.
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, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $11 million, $(7
In the fourth quarter of 2019, our life insurance business recorded $139
related to its annual review of assumptions in our universal and term universal life insurance products, as described above. This unfavorable unlocking in our life insurance business was partially offset by
million, net of taxes, in connection with a review of its single premium earnings pattern and a favorable reserve adjustment of
million principally in connection with pending litigation involving our former lifestyle protection insurance business. See note 21 for additional information related to asserted claims regarding the sale of our lifestyle protection insurance business. We completed the sale of Genworth Canada on December 12, 2019 and recorded an incremental gain of $43
million in the fourth quarter of 2019 predominantly related to a favorable tax position refinement. In addition, during the fourth quarter of 2019 through the sale closing date of December 12, 2019, we recorded $36
Our long-term care insurance business completed its annual review of claim reserves in the fourth quarter of 2018, which resulted in higher total benefits and expenses of $291 million driven mostly by updates to several assumptions and methodologies, including benefit utilization rates, claim termination rates and other
. Also in our long-term care insurance business, we refined our estimate of unreported policy
erminations, which resulted in an unfavorable reserve adjustment of $36 million in 2018. Our life insurance business completed its annual review of assumptions in the fourth quarter of 2018, which resulted in higher total benefits and expenses of $108 million in our universal and term universal life insurance products driven mostly by lower expected growth in interest rates and emerging mortality experience primarily in our term universal life insurance product.
Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months ended December 31, 2018, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the three months ended December 31, 2018, as the inclusion of shares for stock options, RSUs and SARs of 7.6 million would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months ended December 31, 2018, dilutive potential weighted-average common shares outstanding would have been 508.4 million.
long-term care insurance premiums, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, product administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to customers, including but not limited to breach of customer information. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time.
In October 2016, Genworth Financial, its current chief executive officer, its former chief executive officer, its current chief financial 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 Esther Chopp in the Court of Chancery of the State of Delaware. The case is captioned Chopp v. McInerney, et al.
The complaint alleges that Genworth’s board of directors wrongfully refused plaintiff’s demand to commence litigation on behalf of Genworth and asserts claims for breaches of fiduciary duties, waste, contribution and indemnification, and unjust enrichment 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
insurance companies, Financial Insurance Company Limited (“FICL”) and Financial Assurance Company Limited
(“FACL”), relating to alleged remediation it has paid to customers who purchased payment
In February 2018, we served a Particulars of Defence and counterclaim against AXA, and also served other counterclaims against various parties, including Santander Cards UK Limited (“Santander”), alleging that Santander is responsible for any remediation paid to PPI
ourt for orders dismissing or staying the counterclaims. A hearing on those applications was held in October 2018, and the C
ourt held a case management conference and hearing on February 26, 2019. Santander, FICL and FACL consented to be joined as parties to the proceedings and consented to allow Genworth to amend its pleadings to include the subrogation declarations to reflect the additional parties. On March 29, 2019, AXA, FICL, FACL and Santander filed their respective responses to our amended counterclaim. On June 21, 2019, we filed an application to address certain deficiencies in AXA’s discovery production. On July 18, 2019, we reached an agreement with AXA and Santander regarding our discovery application.
he hearing on liability and subrogation matters concluded on November 12, 2019. On December 6, 2019, the Court issued its judgment, ruling in AXA’s favor with respect to its claim against Genworth for 90% of AXA’s payment of PPI mis-selling
losses. The Court further ruled, among other matters, that Genworth is not entitled to be subrogated to the rights of FICL/FACL against Santander or require AXA to assert reasonable defenses with respect to PPI mis-selling
payment to AXA for approximately $134 million. See note 24 for additional details related to the sale of our lifestyle protection insurance business and amounts recorded related to income (loss) from discontinued operations. On January 10, 2020, Genworth applied to the English Court of Appeal (Civil Division) for permission to appeal certain aspects of the December 6, 2019 judgment including, among other matters, the Court’s determination that Genworth is not entitled to be subrogated to the rights of FICL/FACL against Santander or require AXA to assert reasonable defenses with respect to PPI mis-selling
. In the event AXA amends its claim to demand any such amounts or different amounts, the actual losses to which AXA may be entitled will need to be demonstrated as part of the damages hearing, and any claimed amounts may increase further, including as a result of claimed entitlements to an approximate 20% tax gross up for a total possible additional loss of $120 million or more. At this time, we are uncertain of the ultimate outcome of our appeal and the damages hearing, therefore, we are unable to estimate any additional loss, or amounts that may be due or demanded under Court ruling. We intend to continue to vigorously defend this action.
contract, alleging that Genworth improperly considered non-mortality factors when calculating cost of insurance rates and failed to decrease cost of insurance charges in light of improved expectations of future mortality, and
seeks unspecified compensatory damages, costs, and equitable relief. On October 29, 2018, we filed a motion to
North America Corporation, GFIH and GLIC were named as defendants in a putative class action lawsuit pending in the Court of Chancery of the State of Delaware captioned
31, 2020, the Court granted in part our motion to dismiss, dismissing
paid to its parent from 2012 to 2014 (out of the $410 million in total dividends
leaving a claim relating to $15 million in dividends and unquantified claims relating to the 2016 termination of a reinsurance transaction. We intend to continue to vigorously defend this action
for long-term care insurance policies. The complaint asserts claims for breach of contract, fraud, fraudulent inducement and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (on behalf of the two named plaintiffs who are Pennsylvania residents), and seeks damages (including statutory treble damages under Pennsylvania law) in excess of $5 million. On March 12, 2019, we moved to dismiss plaintiffs’ complaint. On March 26, 2019, plaintiffs filed a memorandum in opposition to our motion to dismiss, which we replied to on April 1, 2019. In July 2019, the C
ourt heard oral arguments on our motion to dismiss. On August 29, 2019, the Court issued an order granting our motion to dismiss the claim with regard to breach of contract, but denied our motion with regard to fraudulent omission, fraudulent inducement and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection law. On September 20, 2019, plaintiffs filed an amended complaint, dropping Genworth Financial as a defendant and reducing their causes of action from four counts to two: fraudulent inducement by omission and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (on behalf of the two named plaintiffs who are Pennsylvania residents). The parties engaged in a mediation process and, on October 22, 2019, reached an agreement in principle to settle this matter on a nationwide basis.
On January 15, 2020, the Court preliminarily approved the settlement and set the final approval hearing for July 10, 2020. Based on the Court’s preliminary approval of the settlement,
funding obligations due in 2050 and the liquidity commitment agreement was terminated.
The foreign currency translation and other adjustments balance in the charts above included $(4) million, $(2) million and $(13) million, respectively, net of taxes of $1 million, $1 million and $6 million, respectively, related to a net unrecognized postretirement benefit obligation as of December 31, 2019, 2018 and 2017. The balance also included taxes of $22 million, $(45) and $- million, respectively, related to foreign currency translation adjustments as of December 31, 2019, 2018 and 2017. These balances include the impact of adopting new accounting guidance related to stranded tax effects.
In May 2014, Genworth Australia, a holding company for our Australian mortgage insurance business, completed an IPO of its ordinary shares and we beneficially owned 66.2% of the ordinary shares of Genworth Australia through subsidiaries. I
In February 2019, Genworth Australia announced its intention to commence an on-market
program. In November 2019, Genworth Australia completed a further capital management initiative via an unfranked special dividend of
In August 2017, Genworth Australia announced its intention to commence an on-market
program for shares up to a maximum aggregate amount of AUD$100 million. Pursuant to the program, Genworth Australia repurchased approximately 17 million of its shares for AUD$51 million in 2017. As the majority shareholder, we participated in on-market
On December 12, 2019, we completed the sale of Genworth Canada to Brookfield and received
approximately $1.7 billion in net cash proceeds. In the fourth quarter of 2019 and prior to sale closing, we also received a special dividend of
million principally driven by cumulative losses on foreign currency translation adjustments and deferred tax losses, partially offset by unrealized investment gains. These amounts, which were previously recorded in accumulated other comprehensive income, were recognized as part of the loss on sale.
The major asset and liability categories of Genworth Canada were as follows as
Deferred tax assets and liabilities that result in future taxable or deductible amounts to the remaining consolidated group have been reflected in assets or liabilities of continuing operations and not reflected in assets or liabilities held for sale related to discontinued operations.
income from discontinued operations available to Genworth Financial, Inc.’s common stockholders of $186 million, $167 million and $344 million, respectively.
liabilities, which are not currently recorded. If the amounts are recorded, it would result in the establishment of a liability and a loss recognized in income (loss) from discontinued operations
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.
The condensed consolidating financial information presents the condensed consolidating balance sheet information as of December 31, 2019 and 2018 and the condensed consolidating income statement information, condensed consolidating comprehensive income statement information and condensed consolidating cash flow statement information for the years ended December 31, 2019, 2018 and 2017.
The following table presents the condensed consolidating income statement information for the year ended December 31, 2019:
The following table presents the condensed consolidating comprehensive income statement information for the year ended December 31, 2019:
The following table presents the condensed consolidating cash flow statement information for the year ended December 31, 2019:
As of December 31, 2019 and 2018, Genworth Financial had a deferred tax asset of $13 million and $14 million, respectively, primarily comprised of share-based compensation. In the fourth quarter of 2017, Genworth Financial revalued its deferred tax assets to 21
as of December 31, 2019 and our current income tax receivable was