| may be instituted against us in connection with the China Oceanwide transaction that may delay the transaction, make it more costly or ultimately preclude it; the risk that the proposed China Oceanwide transaction disrupts our current plans and operations as a result of the announcement and consummation of the transaction; certain restrictions during the pendency of the transaction that may impact our ability to pursue certain business opportunities or strategic transactions; continued availability of capital and financing to us before, or in the absence of, the consummation of the transaction; further rating agency actions and downgrades in our credit or financial strength ratings; changes in applicable laws or regulations; our ability to recognize the anticipated benefits of the transaction; the amount of the costs, fees, expenses
| and other charges related to the transaction; the risks related to diverting management’s attention from our ongoing business operations; our ability to attract, recruit, retain and motivate current and prospective employees may be adversely affected; and potential adverse reactions or changes to our business relationships with clients, employees, suppliers or other parties or other business uncertainties resulting from the announcement of the China Oceanwide transaction or during the pendency of the transaction, including but not limited to such changes that could affect our financial performance; certain restrictions during the pendency of the China Oceanwide transaction that may impact our ability to pursue certain business opportunities or strategic transactions; continued availability of capital and financing to us before, or in the absence of, the consummation of the China Oceanwide transaction; further rating agency actions and downgrades in our credit or financial strength ratings; changes in applicable laws or regulations; our ability to recognize the anticipated benefits of the China Oceanwide transaction; the amount of the costs, fees, expenses and other charges related to the China Oceanwide transaction; the risks related to diverting management’s attention from our ongoing business operations; and our ability to attract, recruit, retain and motivate current and prospective employees may be adversely affected; |
strategic risks in the event the proposed transaction with China Oceanwide is not consummated including: our inability to successfully execute alternative strategic plans to effectively address our current business challenges (including with respect to stabilizing our U.S. life insurance businesses, debt and other obligations, cost savings, ratings and capital); the risk that the impacts of or uncertainty created by COVID-19 delay or hinder alternative transactions or otherwise make alternative plans less attractive; our inability to attract buyers for any businesses or other assets we may seek to sell, or securities we may seek to issue, in each case, in a timely manner and on anticipated terms; failure to obtain any required regulatory, stockholder and/or noteholder approvals or consents for such alternative strategic plans, or our challenges changing or being more costly or difficult to successfully address than currently anticipated or the benefits achieved being less than anticipated; inability to achieve anticipated cost-savings in a timely manner; adverse tax or accounting charges; and our ability to increaseraise the capital needed in our mortgage insurance businesses in a timely manner and on anticipated terms, including through business performance, reinsurance or similar transactions, asset sales, securities offerings or otherwise, in each case as and when required; risks relating to estimates, assumptions and valuations including: inadequate reserves and the need to increase reserves (including as a result of any changes we may make in the future to our assumptions, methodologies or otherwise in connection with periodic or other reviews)reviews, including reviews we expect to complete and carry out in the fourth quarter of 2020); risks related to the impact of our annual review of assumptions and methodologies related to our long-term care insurance claim reserves and margin reviews in the fourth quarter of 2020, including risks that additional information obtained in finalizing our claim reserves and margin reviews in the futurefourth quarter of 2020 or other changes to assumptions or methodologies materially affect margins; the inability to accurately estimate the impacts of COVID-19; inaccurate models; deviations from our estimates and actuarial assumptions or other reasons in our long-term care insurance, life insurance and/or annuity businesses; accelerated amortization of deferred acquisition costs (“DAC”) and present value of future profits (“PVFP”) (including as a result of any future changes we may make to our assumptions, methodologies or otherwise in connection with periodic or other reviews)reviews, including reviews we expect to complete and carry out in the fourth quarter of 2020); adverse impact on our financial results as a result of projected profits followed by projected losses (as is currently the case with our long-term care insurance business); adverse impact on our results of operations, including the outcome of our reviews of the premium earnings pattern for our mortgage insurance businesses; and changes in valuation of fixed maturity and equity securities; risks relating to economic, market and political conditions including: downturns and volatility in global economies and equity and credit markets, including as a result of prolonged unemployment, a sustained low interest rate environment and other displacements caused by COVID-19; interest rates and changes in rates have adversely impacted, and may continue to materially adversely impact, our business and profitability; deterioration in economic conditions or a decline in home prices that adversely affect our loss experience in mortgage insurance; political and economic instability or changes in government policies; and fluctuations in foreign currency exchange rates and international securities markets;
| and changes in rates have adversely impacted, and may continue to materially adversely impact, our business and profitability; deterioration in economic conditions or a decline in home prices that adversely affect our loss experience in mortgage insurance; political and economic instability or changes in government policies; and fluctuations in foreign currency exchange rates and international securities markets; |
regulatory and legal risks including: extensive regulation of our businesses and changes in applicable laws and regulations (including changes to tax laws and regulations); litigation and regulatory investigations or other actions; dependence on dividends and other distributions from our subsidiaries (particularly our mortgage insurance subsidiaries) and the inability of any subsidiaries to pay dividends or make other distributions to us, including as a result of the performance of our subsidiaries, heightened regulatory restrictions resulting from COVID-19, and other insurance, regulatory or corporate law restrictions; the inability to successfully seek in-force rate action increases (including increased premiums and associated benefit reductions) in our long-term care insurance business, including as a result of COVID-19; adverse change in regulatory requirements, including risk-based capital; changes in regulations adversely affecting our Australian mortgage insurance business; inability to continue to maintain the private mortgage insurer eligibility requirements (“PMIERs”), including as a result of the interim conditions and applicable requirements imposed by the GSEs on our U.S. mortgage insurance subsidiary and/or after the benefit of the 0.30 multiplier applied to non-performing loans expires under the PMIERs temporary amendments; risks on our U.S. mortgage insurance subsidiary’s ability to pay our holding company dividends as a result of the GSEs’ amendments to PMIERs in response toCOVID-19; the impact on capital levels of increased delinquencies caused by COVID-19; inability of our U.S. mortgage insurance subsidiaries to meet minimum statutory capital requirements; the influence of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and a small number of large mortgage lenders on the U.S. mortgage insurance market and adverse changes to the role or structure of Fannie Mae and Freddie Mac; adverse changes in regulations affecting our mortgage insurance businesses; additional restrictions placed on our U.S. mortgage insurance business by government and government-owned and government-sponsored enterprises (“GSEs”) in connection with a new debt financing and/or sale of a percentage of our ownership interests therein; inability to continue to implement actions to mitigate the impact of statutory reserve requirements; changes in tax laws; and changes in accounting and reporting standards;
| premiums and associated benefit reductions) in our long-term care insurance business, including as a result ofCOVID-19;
adverse change in regulatory requirements, including risk-based capital; changes in regulations adversely affecting our Australian mortgage insurance business; inability to continue to maintain the private mortgage insurer eligibility requirements (“PMIERs”); the impact on capital levels of increased delinquencies caused byCOVID-19;
inability of our U.S. mortgage insurance subsidiaries to meet minimum statutory capital requirements; the influence of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and a small number of large mortgage lenders on the U.S. mortgage insurance market and adverse changes to the role or structure of Fannie Mae and Freddie Mac; adverse changes in regulations affecting our mortgage insurance businesses; inability to continue to implement actions to mitigate the impact of statutory reserve requirements; changes in tax laws; and changes in accounting and reporting standards; |
liquidity, financial strength ratings, credit and counterparty risks including: insufficient internal sources to meet liquidity needs and limited or no access to capital (including the ability to obtain further financing, either by raising capital through a debt/equity financing and/or selling a percentage of our ownership interests in our mortgage insurance businesses, or under an additionala secured term loan or credit facility); the impact on holding company liquidity caused by the inability to receive dividends or other returns of capital from our mortgage insurance businesses as a result of COVID-19; the impact of increased leverage as a result of the AXA settlement and related restrictions; continued availability of capital and financing; future adverse rating agency actions against us or our U.S. mortgage insurance subsidiary, including with respect to rating downgrades or potential downgrades or being put on review for potential downgrade, all of which could have adverse implications for us, including with respect to key business relationships, product offerings, business results of operations, financial condition and capital needs, strategic plans, collateral obligations and availability and terms of hedging, reinsurance and borrowings; defaults by counterparties to reinsurance arrangements or derivative instruments; defaults or other events impacting the value of our fixed maturity securities portfolio; and defaults on our commercial mortgage loans or the mortgage loans underlying our investments in commercial mortgage-backed securities and volatility in performance; including: inability to retain, attract and motivate qualified employees or senior management; ineffective or inadequate risk management in identifying, controlling or mitigating risks; the impact on processes caused by shelter-in-place or other governmental restrictions imposed as a result of COVID-19; reliance on, and loss of, key customer or distribution relationships; competition, including in our mortgage insurance businesses from government and government-owned and government-sponsored enterprises (“GSEs”)GSEs offering mortgage insurance; the design and effectiveness
| and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations; and failure or any compromise of the security of our computer systems, disaster recovery systems and business continuity plans and failures to safeguard, or breaches of, its confidential information; |
insurance and product-related risks including: our inability to increase premiums and reduce benefits sufficiently, and in a timely manner, on our in-force long-term care insurance policies, in each case, as currently anticipated and as may be required from time to time in the future (including as a result of a delay or failure to obtain any necessary regulatory approvals, including as a result of COVID-19, or unwillingness or inability of policyholders to pay increased premiums and/or accept reduced benefits), including to offset any negative impact on our long-term care insurance margins; availability, affordability and adequacy of reinsurance to protect us against losses; decreases in the volume of high loan-to-value mortgage originations or increases in mortgage insurance cancellations; increases in the use of alternatives to private mortgage insurance and reductions in the level of coverage selected; potential liabilities in connection with our U.S. contract underwriting services; and medical advances, such as genetic research and diagnostic imaging, and related legislation that impact policyholder behavior in ways adverse to us; including: impairments of or valuation allowances against our deferred tax assets and the occurrence of natural or man-made disasters or a pandemic, such as COVID-19, could materially adversely affect our financial condition and results of operations.
We provide additional information regarding these risks and uncertainties in the Definitive Proxy Statement, filed with the U.S. Securities and Exchange Commission (“SEC”) on January 25, 2017, and our Annual Report on Form 10-K, filed with the SEC on February 27, 2020. See also “Part II — II—Item 1A — 1A—Risk Factors.” Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Accordingly, for the foregoing reasons, we caution you against relying on any forward-looking statements. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required under applicable securities laws. We continue to focus on improving business performance, addressing financial leverage and increasing financial and strategic flexibility across the organization. Our strategy includes maximizing our opportunities in our mortgage insurance businesses and stabilizing our U.S. life insurance businesses. China Oceanwide Transaction On October 21, 2016, Genworth Financial, Inc. (“Genworth Financial”) entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as a direct, wholly-owned subsidiary of Asia Pacific Insurance (the “Merger”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement. On March 31,September 30, 2020, Genworth, Parent and Merger Sub entered into a fourteenthsixteenth waiver and agreement (“FourteenthSixteenth Waiver and Agreement”) pursuant to which Genworth and Parent each agreed to waive its right to terminate the Merger Agreement and abandon the Merger to the earliest date of: (i) JuneNovember 30, 2020,
(ii) failure by the Parent to approve final documents provided by Genworth for the sale of Genworth, its subsidiaries or a portion of its assets or (iii) in the event that after March 31,September 30, 2020 any governmental entity imposes or requires, any term, condition, obligation, restriction, requirement, limitation, qualification, remedy or other action that applies to the Merger Agreement, that is materially and adversely different, individually or in the aggregate, from the conditions set forth by the governmental entities with respect to the Merger that were in effect on the date of the FourteenthSixteenth Waiver and Agreement. In addition, as part of the conditions set forth in the Sixteenth Waiver and Agreement, China Oceanwide agreed to submit to Genworth satisfactory evidence by October 31, 2020 confirming that approximately $1.0 billion is available to China Oceanwide from sources in Mainland China and debt financing of up to $1.8 billion is available from sources outside of Mainland China through Hony Capital and/or other acceptable third parties. In aggregate, these funding sources would provide China Oceanwide the necessary funds to acquire Genworth at the agreed upon purchase price of $5.43 per share. China Oceanwide has made significant progress on the Hony Capital funding and has provided satisfactory documentation to Genworth indicating that Hony Capital expects to be able to finalize the $1.8 billion financing in November 2020, and that China Oceanwide is continuing to work diligently with the goal of closing the transaction by November 30, 2020, subject to timely receipt of outstanding regulatory re-approvals, confirmations and/or clearances. China Oceanwide is also gathering funds in Mainland China to provide the remaining amount required to pay for the total Genworth purchase price of $5.43 per share. Genworth also has the right, in connection with the conditions set forth in the Sixteenth Waiver and Agreement, to issue debt or other financing instruments, and pursue other strategic transactions, such as transactions to sell some or all of its interests in its mortgage insurance businesses, as needed to meet its short-term financial obligations, including but not limited to, the AXA promissory note and debt of approximately $1.0 billion maturing in 2021. For additional details on the AXA litigation, the associated settlement agreement and issuance of the promissory note to AXA, see notes 12 and 14 to our unaudited condensed consolidated financial statements under “Item 1—Financial Statements.” If China Oceanwide disagrees with any steps that Genworth takes to meet its financial obligations, it has the right to terminate the transaction in its sole discretion. Under the FourteenthSixteenth Waiver and Agreement, if the parties are unable to agree on a closing date following the satisfaction or waiver of the conditions to closing, each party has the right to terminate the Merger Agreement. If the parties are unable to satisfy the closing conditions by JuneNovember 30, 2020, and are unable to reach an agreement as to a further extension of the deadline, then either party may terminate the Merger Agreement pursuant to its terms. On August 12, 2019, with the approval of Genworth’s Board of Directors and China Oceanwide, Genworth, Genworth Financial International Holdings, LLC (“GFIH”) and Genworth Mortgage Insurance Corporation (“GMICO”) entered into a Share Purchase Agreement with an affiliate of Brookfield Business Partners L.P. (“Brookfield”). Under the Share Purchase Agreement, Genworth, GFIH and GMICO agreed to sell the common shares of Genworth MI Canada Inc. (“Genworth Canada”) owned by GFIH and GMICO to Brookfield. GFIH and GMICO are indirect wholly-owned subsidiaries of Genworth. Genworth sold its stake in Genworth Canada to facilitate the closing of the transaction with China Oceanwide. The sale of Genworth Canada increases
Genworth’s financial flexibility, whether or not the transaction with China Oceanwide is consummated. The sale closed on December 12, 2019 for an adjusted sale price of approximately $1.7 billion.
On March 24, 2020, the New York State Department of Financial Services (“NYDFS”)re-approved
the China Oceanwide transaction. In connection with the NYDFS’re-approval,
Genworth committed, among other items, to contribute $100 million to Genworth Life Insurance Company of New York (“GLICNY”) at the closing of the China Oceanwide transaction. On March 31, 2020, the Virginia State Corporation Commission, Bureau of Insurance, alsore-approved
the China Oceanwide transaction. In addition, as previously disclosed, the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”)re-approved
the China Oceanwide transaction in January 2020. With the Virginia regulator’sre-approval
and previouslyhas received approvals andre-approvals,
and subject to the receipt of the confirmation from the Delaware regulator of its existing approval, China Oceanwide has obtained all U.S. regulatory approvals necessaryneeded to close the transaction. China Oceanwide is currently finalizing its funding plan. China Oceanwide has secured a financing commitment for debt funding of uptransaction, subject to $1.8 billion through Hony Capital to partially finance the acquisition of Genworth, which was extended to June 30, 2020. After this funding plan is finalized, China Oceanwide will discuss the currency conversion and transfer of funds with China’s State Administration of Foreign Exchange in order to complete the transaction. China Oceanwide will also seek confirmation from the Delaware Department of Insurance that the acquisition of Genworth Life Insurance Company (“GLIC”), Genworth’s indirect wholly-owned Delaware domiciledDelaware-domiciled insurer may proceed under the existing approval. Genworth recently received confirmation from the U.S. Financial Industry Regulatory Authority (“FINRA”) that the transaction may close under FINRA rules prior to receiving its final approval. In addition, the GSEs recently re-approved the transaction, subject to certain conditions and the North Carolina Department of Insurance extended its previously granted approval through January 24, 2021. China Oceanwide needs to receive clearance for currency conversion and transfer of funds from China’s State Administration of Foreign Exchange, and the Chinese National Development and Reform Commission needs to confirm the extension of the acceptance of filing with respect to the transaction, as its prior acceptance of filing has expired. All other required approvals and clearances have been secured. In September 2020, the GSEs imposed certain conditions and restrictions on our U.S. mortgage insurance business with respect to its capital. These capital restrictions will remain committed to satisfyingin effect during the closing conditions underpendency of the Merger Agreement as soon as possible. However, given the unprecedented market disruptions due toCOVID-19,
China Oceanwide transaction, and Genworth extendedif the Merger Agreement deadline under the Fourteenth WaiverChina Oceanwide transaction is completed, thereafter until certain conditions are met. See “Item 2—U.S. Mortgage Insurance segment—trends and Agreement to provide the parties withconditions” for additional time to close the transaction. details.In connection with the Merger, China Oceanwide and Genworth have agreed on a capital investment plan under which China Oceanwide and/or its affiliates will contribute an aggregate of $1.5 billion to Genworth over
time following consummation of the Merger. This contribution is subject to the closing of the Merger and the receipt of required regulatory approvals and clearances. The $1.5 billion contribution would be used to further improve our financial stability, which could include retiring future debt obligations or enabling future growth opportunities. China Oceanwide has no future obligation and has informed us that it has no current intention, to contribute additional capital to support our legacy long-term care insurance business other than agreed in connection with the regulatory approvals for the China Oceanwide transaction. If the China Oceanwide transaction is completed, we will be a standalone subsidiary and our senior management team will continue to lead the business from our current headquarters in Richmond, Virginia. We intend to maintain our existing portfolio of businesses. Except for the specific monitoring and reporting required under the Committee on Foreign Investment in the United States data security risk mitigation plan, our day-to-day operations are not expected to change as a result of this transaction. If the China Oceanwide transaction is not completed, we will continue to explore strategic alternatives and financing options to address our ongoing challenges. Given the delay in closing the China Oceanwide transaction, we have taken and will continue to take steps to address our near-term liabilities, which include a secured promissory note issued to AXA under the settlement agreement reached on July 20, 2020 and approximately $1.0 billion in debt maturing in 2021. These steps included a debt offering from Genworth Mortgage Holdings, Inc. (“GMHI”), Genworth’s indirect wholly-owned mortgage insurance subsidiary. On August 21, 2020, GMHI issued $750 million of its 6.50% senior notes due in 2025 (“2025 Senior Notes”). A dividend of $436 million was paid to Genworth Holdings, Inc. (“Genworth Holdings) from the net cash proceeds of the offering with the remaining amount retained by GMHI to address GSE requirements. The dividend received from GMHI provides liquidity to address Genworth Holdings’ debt maturing in February 2021. Due to the uncertainty regarding the completion of the China Oceanwide transaction, we are continuing to take steps toward raising capital by preparing for a possible public offering of our U.S. mortgage insurance business, subject to market conditions. Changes to our financial projections, including changes that anticipate planned strategic transactions, may negatively impact our ability to realize certain foreign tax credits or other deferred tax assets and may impair our ability to utilize beneficial consolidated tax rules, all of which could result in a material adverse effect on our results of operations. As a result of the performance of our long-term care and life insurance businesses, as well as the resulting lack of potential dividend capacity from our U.S. life insurance subsidiaries, our financial strength ratings have been downgraded. Absent any alternative commitment of external capital, or other proactive actions to meet our closest debt maturities and other obligations, we believe there would be:be increased pressure on and potential further downgrades of our financial strength ratings, particularly for our mortgage insurance businesses, which could affect our ability to maintain our market share in the U.S. mortgage insurance industry, and other limitations on our holding company liquidity and ability to service and/or refinance our holding company debt. These challenges may be exacerbated by COVID-19.
If the China Oceanwide transaction cannot be completed, we may need to pursue additional strategic transactions to improve our financial stability and address our future debt maturities, including evaluating our alternatives with respect to our U.S. mortgage insurance business and/or our mortgage insurance business in Australia. Changes to our financial projections, including changes that anticipate planned strategic transactions, may negatively impact our ability to realize certain foreign tax credits or other deferred tax assets and have a resulting material adverse effect on our results of operations.
Stabilizing our U.S. life insurance businesses continues to be one of our long-term goals. We will continue to execute this objective primarily through our multi-year long-term care insurance in-force rate action plan. Premium rate increases and associated benefit reductions on our legacy long-term care insurance policies are critical to the business. In addition, reducing debt will remain a high priority. We believe that increased financial support and our strengthened financial foundation resulting from the China Oceanwide transaction would provide us with more options to manage our debt maturities and reduce overall indebtedness, which in turn would likely improve our credit and ratings profile over time. Finally, we also believe that the completion of the China Oceanwide transaction would allow us to place greater focus on the future of our long-term care and mortgage insurance businesses while continuing to service our existing policyholders.
COVID-19 has brought continues to bring unprecedented changes to the global economy. Although we are unsureWe have taken steps to mitigate some of the risks associated with COVID-19. However, the ultimate impact COVID-19
will have on our businesses from the pandemic remains unknown, therefore, we are actively responding to and planning for further disruption.future steps given the potential for a delayed or prolonged recovery. Below is a summary of certain of the trends, impacts and uncertainties relating to COVID-19, which are generally not reflected in thehave impacted our quarterly results under review in this report and which are expected to continue to impact our future results of operations and financial condition. Our discussion and analysis of our quarterly results should be read in conjunction with the following disclosures regarding COVID-19 and the more detailed disclosures contained elsewhere herein. COVID-19 has disrupted the global economy and financial markets, business operations, and consumer behavior and confidence. Large scale disruption in the U.S. economy is leaving several industriesnon-operational
through state and federal mandated shutdowns in an effort to contain the spread ofCOVID-19.
While all states have been impacted, certain geographies have been disproportionately impacted by COVID-19 either through the spread of the virus or the severity of the mitigation steps taken to control its spread. UnemploymentWeekly unemployment claims have increasedslowed compared to historic levels with approximately 30 million Americans filing forthe height of the pandemic; however, they remain elevated. The unemployment claims through late April 2020, reducing consumer confidence to its lowest level sincerate decreased in the 2008 financial crisis.During and following the firstthird quarter of 2020 signs have pointedcompared to a global recessionthe second quarter of 2020, as a resultthe U.S. economy continued to add jobs lost at the height of the pandemic. However, the number of unemployed Americans remains high and underemployment is likely to remain high for an extended period of time.
The U.S. economy showed signs of a potential global recession include negative monthly inflation, historically low retail salesrecovery from COVID-19 in the third quarter of 2020 but remains in recessionary conditions. U.S. gross domestic product is forecasted to contract for the full year 2020. Monthly economic indicators improved from the lows of the second quarter of 2020 and a dramatic decrease in industrial production. In responseefforts by the U.S. federal government through fiscal stimulus packages helped contribute to this recovery. However, political gridlock and the upcoming U.S. presidential election have added uncertainty to the economic headwindstiming of future stimulus measures and contributed to increased market volatility.
During the third quarter of 2020, the U.S. Federal Reserve reducedmaintained interest rates by 150 basis points duringnear zero as the first quarterU.S. economy continues to recover from the negative impact of 2020.COVID-19. The U.S. Federal Reserve’s interest rate reductions, along with expectations of negative growth drove U.S. Treasury yields down approximately 100 to 150 basis points, with the decline in short-termlatest forecast indicates that interest rates outpacingwill remain at near zero through 2023 and will be maintained until the decline in long-term interest rates. The global economic slowdown has driven other global central banks and foreign governments to take similar accommodative actions to stabilize capital markets and implement fiscal stimulus to support their respective domestic economies. Credit markets responded toCOVID-19
and the subsequent economic downturn with widening of credit spreads to recessionary levels.
Stay at home orders and partial economic shutdowns are expected to place strain on earnings and corporate balance sheets for the next two quarters and possibly for the remainder of 2020, which when combined with forced liquidations as a result of liquidity strains, further contributed to the credit spread widening.
A crude oil price war triggered by supply and demand imbalance decreased crude oil prices over 60%Credit markets continued their recovery in the firstthird quarter of 2020 with credit spreads tightening early in the quarter, however, this activity leveled off in August 2020 as recovery slowed. A resurgence of localized COVID-19 cases across Europe and contributed to additional credit spread wideningother parts of the globe has sparked new economic shutdowns and financial pressure toconcerns over future containment of the energy sector.virus which may hamper the pace of the global economic recovery.
The U.S. Federal Reserve announced newplans to continue to support credit markets through its quantitative easing programs, to help support credit markets, including a $2.3 trillion program that includes a $750 billion corporate credit facility to purchase investment grade and certain high yield corporate securities among other facilities to support the loan, municipalthat began in May 2020 and structured markets.secondary market purchases of corporate bonds that started in June 2020. As a result of COVID-19, the second quarter of 2020 financial results of our U.S. mortgage insurance business were negatively impacted primarily through increased borrower uptake of forbearance options, many of which resulted in a new delinquency. Elevated borrower forbearance continued into the third quarter of 2020, however, it slowed meaningfully compared to activity in the second quarter of 2020. Servicer reported forbearance ended the third quarter of 2020 with approximately 6.7% or 61,183 of our active policies reported in a forbearance plan, of which approximately 63% were reported as delinquent. Forbearance to date has already begun to experience declines in investment valuations and declines in persistency rates from prevailing lower interest rates. Additionally, we could experience asset impairments, increases in delinquent loans and paid claims, lowerbeen a leading indicator of future new insurance written levels, increasesdelinquencies; however, it is difficult to our capital requirements and pressure on our capital sufficiency ratios.The recently signed Coronavirus Aid, Relief, and Economic Security (“CARES”) Act along with programs announced bypredict the Federal Housing Finance Agency (“FHFA”), Fannie Mae, and Freddie Mac all include provisions to offer forbearance to borrowers facing hardship due toCOVID-19.
In addition, the CARES act, the FHFA, and many local governments announced moratoriums on foreclosures and evictions for 60 days, beginning March 18, 2020.The result of a large response to forbearance programs and an extended time to remain in forbearance or enter modification means we expect an elevatedfuture level of delinquencies reported to usforbearance and for those loans to remainhow many of the policies in a delinquent status forforbearance plan that remain current on their monthly mortgage payment will go delinquent.
Servicers continued the practice of remitting premiums during the early stages of delinquency. As a result, we did not experience an extended period. The result will likely decrease our Private Mortgage Insurer Eligibility Requirements (“PMIERs”) required asset levels with which we must complyimpact to remainearned premiums during the second and third quarters of 2020. New delinquencies continue to increase driven primarily by an eligible insurer for Fannie Mae and Freddie Mac. We and the other U.S. mortgage insurers are currently working closely with the FHFA, Fannie Mae, and Freddie Mac to determine the proper treatment of these COVID-19 delinquencies, which may cure at a higher rate than traditional delinquencies should economic activity quickly return to pre-COVID-19 levels. Severity of loss on loans that do go to claim, however, may be negatively impacted by the extendedincrease in borrower forbearance timeline, the associated elevated expenses such as accumulated interest and home price depreciation, if any. We expect our PMIERs sufficiency ratio to decrease as a result of incrementalCOVID-19. Approximately 75% of our primary new delinquencies directly or indirectly relatedin the third quarter of 2020 were subject to a forbearance plan. New delinquencies of 16,664 contributed $61 million of loss expense for the three months ended September 30, 2020.
Our U.S. mortgage insurance business third quarter of 2020 PMIERs required assets benefited from the application of a 0.30 multiplier applied to the risk-based required asset amount factor for certain non-performing loans. The application of the 0.30 multiplier to all eligible delinquencies provided an estimated $1,217 million of benefit to our September 30, 2020 PMIERs required assets. For non-performing loans that are not subject to a forbearance plan, the 0.30 multiplier is applicable for no longer than three calendar months beginning with the month in which the loan became non-performing due to having missed two monthly payments. For those non-performing loans subject to a forbearance plan, the 0.30 multiplier is applicable for the time the loan remains in the forbearance plan. Given the expectation for a decrease inmagnitude of the benefit on our PMIERs sufficiency ratio prospectively asrequired assets in applying the 0.30 multiplier, it is possible our PMIERs required assets will be adversely impacted after the expiration of the multiplier if the non-performing loans do not cure. As a result of new delinquencies stemming fromthe uncertainty regarding the impact of COVID-19 on our U.S. mortgage insurance business, among other restraints, we intend to preserve PMIERs available assets and do not expect to receive additional dividends from our U.S. mortgage insurance business may not provide dividends infor the remainder of 2020. The amount and timing of future dividends will be reevaluated later in 2020 and will depend on the economic recovery from COVID-19. COVID-19, among other factors. Australia Mortgage Insurance COVID-19
is having a significant impact on the Australian economy. To curb the spread of the virus, the Australian government restricted the movement of people within the country by implementing social distancing measures and shutting down allnon-essential
businesses. This has resulted in major disruptions to economic activity across the country.Many of our lender customers have announced initiativescreated programs that allow affected homeownersborrowers the option to defer their mortgage repayments, without penalty, for a period of up to six months. Homeowners that participateUnder regulatory guidance, borrowers participating in suchthese programs, unless previously delinquent, are reported as current during the deferral period. As of September 30, 2020, our Australia mortgage insurance business had approximately 31,000 insured loans in-force still participating in a deferral program, down from over 48,000 as of June 30, 2020. This represents approximately 3% of our Australia mortgage insurance business total insured loans in-force as of September 30, 2020. For many borrowers, the six-month deferral period expired in September 2020. Therefore, on September 22, 2020 the Australian Prudential Regulatory Authority (“APRA”) released guidance regarding treatment of loans impacted by COVID-19, including options for loans to be restructured without being treated as delinquent. Lenders have been completing serviceability assessments to determine the most appropriate solutions for borrowers experiencing hardships, including, in some cases, extension of payment deferral programs. The Australian government continued to provide support for incomes, jobs and businesses with additional measures announced in the Federal Budget in October 2020. While the government programs and lender hardshipinitiatives may lessen the effect of COVID-19 related losses to the business, uncertainties remain, and it could take a considerable amount of time for the economy to recover the lost output and employment resulting from the pandemic. Our Australia mortgage insurance business strengthened its loss reserves by $24 million in the third quarter of 2020 reflecting the economic impacts caused by COVID-19, including a provision for incurred but not reported losses on loans in payment deferral programs. As the majority of loans enrolled in payment deferral programs willare not be reported as delinquent, during this time. In addition,estimate is largely based on the Australian
73
assumption that some of these loans will ultimately become delinquent regardless of being placed in the deferral program. Due to COVID-19, our mortgage insurance business in Australia anticipates
| | Prudential Regulation Authority (“APRA”) has provided guidanceclaims and reported delinquencies to insurers asking them to limit discretionary capital distributions, including dividends,increase as we move into 2021. In addition, until the impactnormal patterns of COVID-19 is better understood to ensure that they have sufficient capital capacitydelinquency development and progression return, we expect to continue essential functions such as underwriting new insurance. Given the uncertainty, we cannot predict the ultimateto see increases in our incurred but not reported loss reserves, which could further materially impact that COVID-19 will have on our mortgage insurance business in Australia.losses. |
Given the potential economic impacts ofCOVID-19,
our mortgage insurance business in Australia could be subject to a ratings downgrade in the future. If that occurs, the business will work with its customers to demonstrate its credit strength and endeavor to avoid termination of any existing contracts.As a result of potential impacts on capital levels, we maydo not expect to receive further dividends or other returns of capital from our mortgage insurance business in Australia for the remainder of 2020. The amount and timing of future dividends will be reevaluated later in 2020 and will depend on the economic recovery from COVID-19.COVID-19, among other factors. The most significant impacts inWe have experienced some degree of higher mortality across all of our U.S. life insurance businesses fromCOVID-19
are related to the current low interest rate environment and equity market volatility/declines, and may also be impacted by future mortality and morbidity experience. Our long-term care insurance product reserves could be negatively impacted by the current low interest rate environment, particularlyproducts as it relates to loss recognition testing and asset adequacy analysis. Ina result of COVID-19. For our long-term care insurance products, we would expect some degree of higher mortality duringCOVID-19
which would havehas resulted in a favorable impact on claims. claim and active policy reserves. Although it is not our practice to track cause of death for policyholders and claimants, we believe the results of our long-term care insurance business were likely impacted by COVID-19 in the second and third quarters of 2020. In our life insurance products, overall mortality experience was also higher for the nine months ended September 30, 2020 compared to nine months ended September 30, 2019, attributable in part to COVID-19.We are not expectingCOVID-19
to drive higherhave experienced lower new claims frequencyincidence in our long-term care insurance business andbusiness; however, we may observe temporarily reduced claim incidencedo not expect this to be permanent but rather a temporary reduction while shelter-in-place and social distancing protocols are in effect. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $61 million for the nine months ended September 30, 2020, reflecting our assumption that lower new claim incidence during this period will ultimately return to normal levels. Our long-term care insurance benefit utilization will be monitored for impact; although it is too early to tell the magnitude and/or direction of that impact. Our U.S. life insurance companies are dependent on the approval of actuarially justified in-force rate actions in our long-term care insurance business, including those rate actions which were previously filed and are currently pending review and approval. We have experienced some delays and could experience additional delays in receiving approvals of these in-force rate actions during COVID-19. COVID-19, although we do not expect a significant impact on our financial results during 2020 as a result of these delays.
The low interest rate environment and declining equity markets have adversely impacted earnings in our fixed annuity products; however, if mortality is higher in future months, it could benefit earnings in these products in future quarters. Conversely, higher mortality rates could lower profitability in our life insurance products.
In ourOur U.S life insurance companies we will complyhave complied with guidance issued by certain insurance regulators, such as mandates that policies cannot be lapsed or cancelled if premiums are not paid or requirements to provide extensions of grace periods during COVID-19. We have not experienced a significant impact on our premiums in our U.S. life insurance businesses while there have been premium deferrals/grace period mandates in place in certain states, however, the extension of grace periods and reinstatements mandated by state regulators during COVID-19 outbreak. have temporarily increased the level of reserves in our term universal life insurance products in the current year. Although most of these mandates have been lifted, we continue to monitor developments related to COVID-19 such as state directives that are issued during this time and we will comply with any new guidance issued by our state insurance regulators. The most significant impacts on our variable annuity products from COVID-19 are the low interest rate environment and decliningvolatile equity markets have materially adversely impacted earnings inmarkets. During the first half of 2020, our variable annuity products; however, if mortalityproducts experienced a sharp decline in financial performance. Our third quarter of 2020 financial results experienced a modest rebound as equity markets continued their recovery. However, adjusted operating income remains depressed for the nine months ended September 30, 2020, and is higher in future months, it could benefit earnings in these products in future quarters.down 23% compared to the prior year. 88
WhileAlthough certain states currently havehad mandates in place that policies cannot be lapsed and a few still require grace period extensions, we dohave not expectexperienced a significant impact on our Runoff segment. There is no requirement to pay premiums in the majority of our variable annuity contracts and benefits would adjust contractually based on actual premiums paid in these products. We could see additional losses and declines in statutory risk-based capital driven by increases to the required capital supporting our variable annuity products, as a result of the decline in equity markets and low interest rates.
We are actively monitoring our investment portfolio, including asset valuations impacted by the spread of COVID-19 and the resulting economic disruption. Our investment portfolio is primarily comprised of investment grade fixed maturity securities, with approximately 58%55% rated “A” and above. The carrying value of our investment portfolio as of March 31,September 30, 2020 and December 31, 2019 was $70.7$76.5 billion and $71.2 billion, respectively, of which 84% and 85%, respectively, was invested in fixed maturity securities. In MarchDuring the third quarter of 2020, due in large part toCOVID-19,
we experienced significant credit spread widening, principally in our U.S.markets continued their recovery supported by strong investor inflows, improved corporate balance sheets and non-U.S.
corporate bond investments. The liquidity positions, asset/liability management measures taken by companies and minimal negative credit spread widening resulted in approximately $2.5 billion of unrealized investment losses, partially offset byrating migration. We recognized approximately $0.8 billion of unrealized investment gains in our U.S. government bond investments principally due to the dramatic decrease in interest rates.third quarter of 2020. The net unrealized investment loss of approximately $1.7 billiongains related to our fixed maturity securities wasare recorded as a part of accumulated other comprehensive income (loss) as of March 31, 2020 and hadhave no impact on earnings in the first quarter of 2020.earnings. We routinely monitor our investment portfolio for possible ratings downgrades and other signs of distress that could be indicators of impairment. Our monitoring includes identifying assets susceptible to the efforts to contain the spread of COVID-19, including close inspection of investments in industries directly impacted, such as travel, energy, leisure, lodging and auto. Our monitoring also includes inspection of other credit risk attributes, such as high leverage, supply chain interruptions and service disruptions/stoppages. Our For the nine months ended September 30, 2020, our investment portfolio is less exposedhas experienced modest impacts associated with impairments and recognized an allowance for credit losses of $5 million on our available-for-sale fixed maturity securities due in part to equity market volatility; however, we have seen a dramatic decline in the fair valueadverse effects of our equity securities and limited partnership investments which was recognized as a loss of $59 million in the first quarter of 2020.
Income Tax and Accounting
COVID-19.The CARES Act includes numerous measures to assist businesses, including temporary changes to income andnon-income-based
tax laws, permitting employers to delay contributions to defined benefit pension plans until January 1, 2021 and allowing financial institutions to suspend U.S. GAAP guidance related to loanAs of September 30, 2020, we did not have any modifications or extensions of commercial mortgage loans that were considered to be troubled debt restructurings. We are not included among the entities permitted to suspend U.S. GAAP guidanceModified loans represented 10% of our total loan portfolio as of September 30, 2020, as borrowers have sought additional relief related to loan modifications considered to be troubled debt restructurings or temporarily defer new accounting guidance on expected credit losses. Accordingly, we adopted the new guidance on January 1, 2020 as discussed further in note 2 in our unaudited condensed consolidated financial statements under “Part 1—Item 1—Financial Statements.”COVID-19. The most significant changes pertaining to temporary income andnon-income-based
tax laws include:eliminating the 80% of taxable income limitation, allowing corporate entities to fully utilize net operating loss (“NOL”) carryforwards to offset taxable income in 2018, 2019 or 2020 (the 80% limitation is reinstated for tax years after 2020);
allowing NOLs originating in 2018, 2019 or 2020 to be carried back five years;
increasing the net interest expense deduction limit from 30% to 50% of adjusted taxable income for tax years beginning January 1, 2019 and 2020; and
anon-income
tax provision, allowing payments of the employer share of social security payroll taxes that are not Medicare related and would otherwise be due from the date of enactment through December 31, 2020 to be paid in two installments at the end of 2021 and 2022.We have applied the temporary NOL changes to our current period tax provision reflecting our most likely tax return filing position.
75Operational Readiness and Business Continuity Our business continuity plans consider workforce continuity and we currently are requiring all employees to work from home through June 2021. We will continue to monitor workforce continuity and the safety of our employees as we start the process of returning to an office environment in mid 2021. Remote access capabilities have existed at Genworth for many years and are well developed. We have implemented an extensive suite of information technology security controls that are in place when personnel work from within Genworth facilities, and these controls are fully replicated and enforced when personnel work from alternate locations, including their homes. No new security controls had to be implemented as a result of COVID-19 precautions. We continue to monitor and perform analysis of our internal control environment and believe the remote work environment as a result of COVID-19 has not materially affected our ability to maintain effective controls and procedures.
Operational Readiness and Business Continuity
We are actively taking preventive measures to mitigate the risk of operational disruption, which includes identifying potential impacts on our consumers, employees and vendors. Our business continuity plans allow us to continue operations of critical functions, such as entering client orders, completing customer transactions, paying claims and providing clients access to their accounts and policy values. Our business continuity plans also consider workforce continuity.
In addition, we are in discussions with key suppliers on their business continuity status as it relates toCOVID-19.
Our most critical suppliers are reporting on their actions to keep facilities clean, limit workforce in their facilities, and moving to a remote work from home workforce. For our suppliers who interact with customers, we do have a few that are reporting limitations or the inability to service designated areas due to local and state government shelter in place or restrictions on essential activities. Currently, affected areas are primarily located in India and the Philippines, where the ability to work from home is impacted due to country-wide infrastructure and other limitations. To mitigate this, we are leveraging our business continuity plans to ensure critical activities are still being conducted by leveraging supplier remote work capabilities and redeploying internal resources.For our customers, we have employed a range of activities to share our continued commitment to serving them through this unprecedented situation, along with any process changes that have resulted from our work-from-home status or other community mandates. These communications include, but are not limited to, email communication, mailing letters and publishing a webpage on“COVID-19
Preparedness” on genworth.com. We continue to provide customer service to our policyholders during this uncertain time and will work with our policyholders if they contact us with questions or concerns regarding their policies. We have performed an analysis of our internal control environment and believe the impact of the current remote work environment as a result ofCOVID-19
has not to date materially affected our ability to maintain effective controls and procedures.Genworth Holdings maintainsHoldings’ financial obligations due one year from the issue date of the unaudited condensed consolidated financial statements, including debt maturing in 2021, exceed its current liquidity. Absent accessing additional liquidity through third party sources and/or the completion of the China Oceanwide transaction, we would not expect to have a continuous process for evaluating group-level liquidity, under normal and stressed environments. In light ofCOVID-19
emergence, we are currently developing additional stress scenariosprojected ability to evaluate potential impacts tomeet our businesses and Genworth Holdings. We are modeling various stress scenarios given the potential lack of near-term dividends from our subsidiaries.Currently, we believe Genworth Holdings has adequate liquidity and options available to address current liquidity needs, if they arise, such asfinancial obligations with existing cash on hand a potentialand through normal course expected cash inflows for one year following the issuance of debt atour unaudited condensed consolidated financial statements. Accordingly, due to the holding companyuncertainty regarding the completion of the China Oceanwide transaction, we are continuing to actively take steps toward raising capital by preparing for a possible public offering of our U.S. mortgage insurance subsidiary, or securedbusiness, subject to market conditions. Proceeds from an equity transaction along with existing cash and cash equivalents, are expected to provide Genworth Holdings sufficient liquidity to meet its obligations and maintain business operations for one year from the issue date of the unaudited condensed consolidated financial statements. See note 1 to our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional details.
During the third quarter of 2020, we successfully executed a debt atfinancing through our U.S. mortgage insurance business, a transaction we deemed probable in our previous assessment of our ability to continue as a going concern. The debt financing provided liquidity to Genworth Holdings. Genworth Holdings’ nextHoldings of $436 million which is sufficient to fully address its debt maturity ismaturing in February 2021. We also monitor the cash and highly liquid investment positions in each of our operating subsidiaries to ensure they will have the cash necessary to meet their obligations as they come due. Our businesses have liquidity options available to them, including Federal Home Loan Bank funding agreements and repurchase facilities, selling highly liquid securities and entering into new reinsurance arrangements. Given the options available, we believe Genworth Holdings and itsour operating subsidiaries will be able to meet the near-term liquidity demands given the current market impacts from COVID-19. For additional details on our overall liquidity and future dividend sources, see “—Liquidity and Capital Resources.” We employ a process to both monitor and assess the impacts of unexpected events on our businesses. While the impact of COVID-19 is very difficult to predict, the ultimate impact on our business will depend on the length of the pandemic and speed of the economic recovery. We will continue to monitor developments and the potential financial impacts on our business. For additional details on the impact COVID-19 is having on our
current results of operations and potential future impacts see “—Business Trends and Conditions” by segment. See also “Item 1A. Risk Factors — Factors—COVID-19 could materially adversely affect our financial condition and results of operations.” Executive Summary of Financial Results 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%. Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 We had a net loss available to Genworth Financial, Inc.’s common stockholders of $66 million for the three months ended March 31, 2020 compared to net income available to Genworth Financial, Inc.’s common stockholders of $174$418 million and $18 million for the three months ended March 31, 2019. AdjustedSeptember 30, 2020 and 2019, respectively. We had adjusted operating income available to Genworth Financial, Inc.’s common stockholders was $33of $132 million and $95$123 million for the three months ended March 31,September 30, 2020 and 2019, respectively. Our U.S. Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $148$141 million and $124$137 million for the three months ended March 31,September 30, 2020 and 2019, respectively. The increase was primarily from higher premiums mainly attributable to higher premiumsinsurance in-force and an increase in investment income,policy cancellations in our single premium mortgage insurance product, partially offset by lower average premium rates and higher operating costs and losses in the current year.ceded
| premiums from reinsurance transactions executed in the current year. These increases were partially offset by higher losses largely from new delinquencies driven primarily by an increase in borrower forbearance as a result of COVID-19. The third quarter of 2020 also includes favorable development on incurred but not reported delinquencies established in the second quarter of 2020. |
Our Australia Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $9$7 million and $14$12 million for the three months ended March 31,September 30, 2020 and 2019, respectively. The decrease was primarily driven by lower earned premiums largely from portfolio seasoning and lower policy cancellations partially offset byand from lower losses primarily from favorable aging of existing delinquenciesnet investment income in the current year. Our U.S. Life Insurance segment had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $70 million and $5 million for the three months ended March 31, 2020 and 2019, respectively. Our long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $1$14 million in the current year compared to an adjusted operating loss of $1 million in the prior year.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $20in our long-term care insurance business increased $38 million primarily due to an increase in the prior year. The increase to incomeclaim terminations driven mostly by higher mortality in the current year, from a loss in the prior year was primarily from $52 million of higher premiums and reduced benefits in the current year fromin-force
rate actions approved and implemented, a slightly favorable impact from benefit utilization rate updates in the current year compared to an unfavorable impact in the prior year and continued favorable development on prior year incurred but not reported claims.claims and higher net investment income. These increases were partially offset by higher frequency and severity of new claims in the current year. The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders forin our life insurance business increased $75$44 million mainly attributable to higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period, higher reserves in our 10-year term universal life insurance block enteringblocks that entered its post-level premium period during the premium grace period and from higher mortality in our universal and term universal life insurance products in the current year compared to the prior year. The prior year also included an unfavorable adjustment of $10 million related to higher ceded reinsurance rates. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased $11 million in our fixed annuities business increased $21 million predominantly from higher reserves and amortization$13 million of DAC in our fixed indexed annuities driven by unfavorable market changescharges related to loss recognition testing in the currentprior year lowerthat did not recur and higher mortality in our single premium immediate annuities and a decrease in net spreads due to the runoff of the block. These decreases wereannuity products, partially offset by $13 million of 77
lower net spreads in the current year.
| unfavorable charges in connection with loss recognition testing in our fixed immediate annuity products in the prior year that did not recur. |
Our Runoff segment had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $13 million for the three months ended March 31, 2020 compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $20$19 million and $10 million for the three months ended March 31, 2019.September 30, 2020 and 2019, respectively. The decrease to a loss in the current year from income in the prior yearincrease was predominantly from the decline infavorable equity marketsmarket performance and interest rateshigher policy loan income in the current year. Corporate and Other Activities had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $41$49 million and $58$35 million for the three months ended March 31,September 30, 2020 and 2019, respectively. The increase in the loss was primarily related to lower tax benefits, partially offset by lower interest expense in the current year. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 We had a net loss available to Genworth Financial, Inc.’s common stockholders of $89 million for the nine months ended September 30, 2020 compared to net income available to Genworth Financial, Inc.’s common stockholders of $360 million for the nine months ended September 30, 2019. We had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $144 million and $396 million for the nine months ended September 30, 2020 and 2019, respectively. Our U.S. Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $286 million and $408 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease was primarily attributable to higher losses
| largely from new delinquencies driven in large part by a significant increase in borrower forbearance as a result of COVID-19, reserve strengthening on existing delinquencies and from lower net benefits from cures and aging of existing delinquencies in the current year. These decreases were partially offset by higher premiums largely driven by higher insurance in-force and an increase in policy cancellations in our single premium mortgage insurance product primarily due to higher mortgage refinancing in the current year. |
Our Australia Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $17 million and $39 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease was primarily driven by lower earned premiums largely from portfolio seasoning and lower policy cancellations, lower net investment income and higher losses mostly associated with the economic impacts caused by COVID-19 in the current year. Our U.S. Life Insurance segment had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $61 million for the nine months ended September 30, 2020 compared to adjusting operating income of $60 million for the nine months ended September 30, 2019. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our long-term care insurance business increased $70 million primarily from an increase in claim terminations driven mostly by higher mortality in the current year, $55 million of higher premiums and reduced benefits in the current year from in-force rate actions approved and implemented and from continued favorable development on incurred but not reported claims. These increases were partially offset by higher frequency and severity of new claims in the current year. The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders in our life insurance business increased $210 million predominantly attributable to higher reserves in our 10-year term universal life insurance block entering its post-level premium period during the premium grace period, higher mortality in the current year compared to the prior year and higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our fixed annuities business increased $19 million predominantly from $31 million of unfavorable charges related to loss recognition testing in the prior year that did not recur and higher mortality in our single premium immediate annuity products, partially offset by lower net spreads in the current year. Our Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $30 million and $39 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease was predominantly from less favorable equity market performance and a decline in interest rates in the current year. Corporate and Other Activities had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $128 million and $150 million for the nine months ended September 30, 2020 and 2019, respectively. The decrease in the loss was principallyprimarily related to lower interest expense and higher investmentlower operating expenses, partially offset by a lower benefit for income taxes in the current year. Other Significant Developments The periods under review include, among others, the following significant developments. . Incurred losses were $292 million for the nine months ended September 30, 2020, of which $231 million was attributable to higher new delinquencies driven mostly by borrower
| forbearance as a result of COVID-19. The increase was also attributable to strengthening of existing reserves by $28 million in the current year primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. |
PMIERs compliancecompliance. . OurOn June 29, 2020, the GSEs issued both temporary and permanent amendments to PMIERs, which became effective on June 30, 2020. With respect to loans that becamenon-performing due to a COVID-19 hardship, PMIERs was temporarily amended with respect to each non-performing loan. As of September 30, 2020, our U.S. mortgage insurance business has been compliant withhad estimated available assets of 132% of the required assets under PMIERs compared to 143% as of June 30, 2020. The estimated sufficiency as of September 30, 2020 was $1,074 million of available assets above the PMIERs since their introduction intorequirements compared to $1,275 million as of June 30, 2020. The reduction in PMIERs sufficiency was driven in part by elevated new insurance written in the private mortgage insurance industry in 2015. These requirements set forth operational and financial requirements that mortgage insurers must meet in orderthird quarter of 2020, partially offset by elevated lapses driven by prevailing low interest rates. In September 2020, the GSEs imposed certain restrictions (“GSE Restrictions”) with respect to remain eligible to offer private mortgage insurance. On March 31, 2019, revisions to the original PMIERs became effective forcapital on our U.S. mortgage insurance business. The revisions includeaforementioned PMIERs sufficiency is based on the elimination of any credit for future premiums that had previously been allowedpublished requirements applicable to private mortgage insurers and does not give effect to the GSE Restrictions recently imposed on insurance policies written in 2008 and earlier. Ourour U.S. mortgage insurance business had available assets of approximately 142%business. In addition, elevated lapses drove an acceleration of the amortization of our existing reinsurance transactions reducing their PMIERs capital credit in the third quarter of 2020. These factors were partially offset by growth in business cash flows in the third quarter of 2020. In addition, our PMIERs required assets under PMIERs as of March 31, 2020.September 30, 2020 benefited from the application of a 0.30 multiplier applied to the risk-based required asset amount factor for certain non-performing loans. The application of the 0.30 multiplier to all eligible delinquencies provided $1,217 million of benefit to our September 30, 2020 PMIERs sufficiency ratio was in excess of $1.1 billion of available assets aboverequired assets. See “Item 2—U.S. Mortgage Insurance segment—trends and conditions” for additional details, including recently imposed conditions and restrictions applied by the requirements as of March 31, 2020. GSEs to our U.S. mortgage insurancebusiness . Estimated mortgage origination volume increased during the third quarter of 2020 compared to the third quarter of 2019 primarily from low interest rates which resulted in higher refinance origination volumes. In addition, the estimated private mortgage insurance available market increased driven by higher refinance originations and higher purchase market penetration. Given the volume to date, we expect mortgage originations to remain strong for the remainder of 2020 fueled by sustained low interest rates driving refinances and by continued strength in the purchase originations market. New insurance written.written and persistency. Our U.S. mortgage insurance business continued to grow its primary insurance in-force through higher new insurance written, which increased 86%41% in the firstthird quarter of 2020 compared to the firstthird quarter of 2019. The increase was primarily due to higher mortgage refinancing originations and oura larger private mortgage insurance market. Primary insurance in-force growth from higher estimated market sharenew insurance written was partially offset by lower persistency in the current year. We are not aware of any reported COVID-19 related delinquencies in the first quarter of 2020. In addition, we havelower persistency in our U.S. mortgage insurance business is impacting business performance in several other ways including, but not identified any deteriorationlimited to, elevating single premium policy cancellations resulting in performance trendshigher earned premiums and accelerating the amortization of our existing delinquencies within the first quarter of 2020 that would require the strengthening of existing reserves on our existing delinquencies. However, based on the surveillance of early forbearance uptake with servicers, we do expect to see elevated levels of new delinquencies in the coming months given the rise in unemployment and the availability of forbearance options driven by COVID-19.reinsurance transactions reducing their associated PMIERs capital credit.Australia Mortgage Insurance As of March 31,September 30, 2020, our Australia mortgage insurance business estimated its Prescribed Capital Amount (“PCA”) ratio was approximately 178%179%, representing a decreasean increase from 191%177% as of December 31, 2019. The decrease was largely from a DAC write-off of AUD$182 million recorded in connection with the completion of liability adequacy testing as part of the first quarter of 2020 results.June 30, 2020. Impact from bushfires.Key Customers. Certain areas of Australia have been impacted by bushfires that occurredIn May 2020, following a request-for-proposal process, our second largest customer in late 2019 and continued into the first quarter of 2020. Although we do not cover property damage and continue to monitor the effect of the bushfires, we do not believe there will be a significant impact to our Australia mortgage insurance business. We expectbusiness advised us that they will not renew their contract with us. The current contract with this customer will expire in November 2020. This customer represented 11% of our exposuregross written premiums for the nine months ended September 2020. While the termination of the contract with this customer will reduce gross premiums written in 2021, it is expected to be limited to any economic downturn that may occur in the regions impacted directly by the bushfires.
| impact future financial results of our mortgage insurance business in Australia following the expiration of the existing contract in November 2020. |
In-force rate actions in our long-term care insurance business. 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 3291 filing approvals from 1530 states induring the first quarter ofnine months ended September 30, 2020, representing a weighted-average increase of 35%29% on approximately $130$595 million in annualized in-force premiums, or approximately $45$173 million of incremental annual premiums. We also submitted 143 new filings in 30 states during the nine months ended September 30, 2020 on approximately $727 million in annualized in-force premiums.Claims reserve and assumption reviews. Profits followed by losses reserve in our long-term care insurance business. With respect to our long-term care insurance block, excluding the acquired block, our future projections indicate we have projected profits in earlier periods followed by projected losses in later periods. As a result of this pattern of projected profits followed by projected losses, we ratably accrue additional future policy benefit reserves over the profitable periods, currently expected to be through 2033, by the amounts necessary to offset estimated losses during the periods that follow. During the nine months ended September 30, 2020, we increased our long-term care insurance future policy benefit reserves by $247 million, including $110 million during the third quarter of 2020, to accrue for profits followed by losses. As of September 30, 2020, the total amount accrued for profits followed by losses was $570 million. Liquidity, Capital Resources and Intercompany Obligations On August 21, 2020, GMHI issued $750 million of its 6.50% senior notes due in 2025. A dividend of $436 million was paid to Genworth Holdings from the net cash proceeds of the offering with the remaining amount retained by GMHI. The dividend received from the offering proceeds provides liquidity to fully address Genworth Holdings’ debt maturing in February 2021. Australia mortgage insurance debt redemption. Redemption of Genworth Holdings’ June 2020 senior notesnotes. . On January 21, 2020, Genworth Holdings early redeemed $397 million of its 7.70% senior notes originally scheduled to mature in June 2020 for a pre-tax loss of $9 million. 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 $3 million and a make-whole premium of $9 million. 94
Partial RepurchasesRepurchase of Genworth Holdings’ 2021 senior notesnotes. .In MarchDuring the nine months ended September 30, 2020, Genworth Holdings repurchased $14$84 million principal amount of its senior notes with 2021 maturity dates for a pre-tax gain of $1$4 million and paid accrued interest thereon. In April 2020, Genworth Holdings repurchased an additional $36 million principal amount of its senior notes with 2021 maturity dates for apre-tax
gain of $2 million. Redemption of non-recourse funding obligations. 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 wholly-owned special purpose consolidated captive insurance 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. Intercompany note maturitymaturity. . In March 2020, Genworth Holdings repaid a $200 million intercompany note due to GLIC with a maturity date of March 31, 2020. Liquidity and contractual obligations. Financial Strength Ratings There were no changes to our solicited financial strength ratings of our insurance subsidiaries subsequent to February 27,On September 4, 2020, the date we filed our 2019 Annual Report on Form10-K.
For a discussion ofA.M. Best Company, Inc. (“A.M. Best”) affirmed the financial strength ratings of our principal life insurance subsidiaries, see “Item 1—GLIC “C++” (Marginal), Genworth Life and Annuity Insurance Company “B” (Fair) and Genworth Life Insurance Company of New York “C++” (Marginal). A.M. Best also affirmed the credit rating of Genworth Financial Strength Ratings” in our 2019 Annual Report on Form10-K.and Genworth Holdings and provided a stable outlook.
On April 18,May 15, 2020, we notifiedMoody’s Investors Service, Inc. (“Moody’s”) affirmed the “Baa3” (Adequate) financial strength rating of Genworth Mortgage Insurance Corporation (“GMICO”), our principal U.S. mortgage insurance subsidiary, but changed their outlook from positive to stable. On May 15, 2020, Standard & Poor’s Financial Services, LLC (“S&P”) affirmed the “BB+” (Marginal) financial strength rating of GMICO but modified its outlook from Creditwatch developing to Creditwatch negative. On May 12, 2020, Fitch Ratings, Inc. (“Fitch”) downgraded the financial strength rating of Genworth Financial Mortgage Insurance Pty Limited (“GFMIPL”), our principal Australian mortgage insurance subsidiary, to “A” (Strong) from “A+” (Strong) and maintained a negative outlook. The downgrade reflects the pandemic-driven economic impact on GFMIPL’s financial performance and earnings, which Fitch expects to fall outside its “A” financial strength rating guidelines. In addition, S&P affirmed its “A” (Strong) rating of GFMIPL but revised their outlook to negative from stable on May 15, 2020. On April 18, 2020, we notified S&P and Moody’s Investors Service, Inc. (“Moody’s”) of our decision to discontinue the solicitation of their financial strength ratings of our principal life insurance subsidiaries. On April 24, 2020, Moody’s downgraded all of our principal life insurance subsidiaries, which reflected Moody’s view that our life insurance subsidiaries are likely to suffer near term declines in profitability and capital generation due to COVID-19 and the related economic shock. While we do not provide non-public information to rating agencies issuing unsolicited ratings, we cannot ensure that rating agencies will not downgrade and/or discontinue their ratings of our company or our insurance subsidiaries on an unsolicited basis going forward. For a further discussion of the financial strength ratings of our insurance subsidiaries, see “Item 1—Financial Strength Ratings” in our 2019 Annual Report on Form 10-K and for the risks associated with our financial strength ratings, see “Risk Factors—Strategic Risks” and “Risk Factors—Liquidity, Financial Strength and Credit Ratings, and Counterparty and Credit Risks—Adverse rating agency actions have resulted in a loss of business and adversely affected our results of operations, financial condition and business and future adverse rating actions could have a further and more significant adverse impact on us” in our 2019 Annual Report on Form 10-K.
General Trends and Conditions 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 significantly impacted by COVID-19, see “—COVID-19 Summary” for additional details. Varied levels of economic performance, coupled with uncertain economic outlooks, changes in government policy, global trade, regulatory and tax reforms, and other changes in market conditions, 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, including as a result of COVID-19. 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 could be impacted going forward. In particular, factors such as the length of COVID-19 and the speed of the economic recovery, government responses to COVID-19 (such as government stimulus), government spending, monetary policies (such as further quantitative easing), the volatility and strength of the capital markets, 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, consumer confidence and consumer behavior moving forward. The U.S. and international governments, the U.S. Federal Reserve, other central banks and other legislative and regulatory bodies have taken certain actions in response to COVID-19 to support the global economy and capital markets. These policies and actions have been supportive to the worldwide economy, however, in spite of these supportive policies the U.S. economy contracted in both the first and second quarters of 2020 and the world economy was in a recession. During the third quarter of 2020, COVID-19 lockdown measures were eased and business activity resumed, which resulted in gross domestic product (“GDP”) growth. It is too early to determine if GDP will continue to grow in the fourth quarter of 2020 given the risk of virus re-emergence and the potential for further actions to be taken to mitigate the spread. We have experienced the effects of the recession, which has adversely impacted our businesses, particularly our mortgage insurance businesses during the second quarter of 2020. We could be further adversely affected if the U.S. or global recession is prolonged or regionalthe economic recovery is slow or global financial crisis could occur which would materially and adversely affect our business, financial condition and results of operations.
Consolidated Results of Operations The following is a discussion of our consolidated results of operations. For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”
Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 The following table sets forth the consolidated results of operations for the periods indicated: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | ) | | | | % | Net investment gains (losses) | | | | ) | | | | | | | | ) | | | | (1) | Policy fees and other income | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | ) | | | | )% | Acquisition and operating expenses, net of deferrals | | | | | | | | | | | | | | | | % | Amortization of deferred acquisition costs and intangibles | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | | ) | | | | | | | | ) | | | | )% | Provision (benefit) for income taxes | | | | ) | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | | ) | | | | | | | | ) | | | | )% | Income from discontinued operations, net of taxes | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | ) | | | | )% | Less: net income (loss) from continuing operations attributable to noncontrolling interests | | | | ) | | | | | | | | ) | | | | )% | Less: net income from discontinued operations attributable to noncontrolling interests | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | | | $ | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | | | $ | | ) | | | | )% | Income from discontinued operations available to Genworth Financial, Inc.’s common stockholders | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | | | $ | | ) | | | | )% | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,034 | | | $ | 1,015 | | | $ | 19 | | | | 2 | % | | | | 827 | | | | 816 | | | | 11 | | | | 1 | % | Net investment gains (losses) | | | 375 | | | | (2 | ) | | | 377 | | | | NM | (1) | Policy fees and other income | | | 184 | | | | 191 | | | | (7 | ) | | | (4 | )% | | | | | | | | | | | | | | | | | | | | | 2,420 | | | | 2,020 | | | | 400 | | | | 20 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 1,299 | | | | 1,284 | | | | 15 | | | | 1 | % | | | | 137 | | | | 146 | | | | (9 | ) | | | (6 | )% | Acquisition and operating expenses, net of deferrals | | | 249 | | | | 247 | | | | 2 | | | | 1 | % | Amortization of deferred acquisition costs and intangibles | | | 101 | | | | 112 | | | | (11 | ) | | | (10 | )% | | | | 49 | | | | 59 | | | | (10 | ) | | | (17 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 1,835 | | | | 1,848 | | | | (13 | ) | | | (1 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 585 | | | | 172 | | | | 413 | | | | NM | (1) | Provision for income taxes | | | 150 | | | | 34 | | | | 116 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 435 | | | | 138 | | | | 297 | | | | NM | (1) | Income (loss) from discontinued operations, net of taxes | | | 1 | | | | (80 | ) | | | 81 | | | | 101 | % | | | | | | | | | | | | | | | | | | | | | 436 | | | | 58 | | | | 378 | | | | NM | (1) | Less: net income from continuing operations attributable to noncontrolling interests | | | | | | | | | | | | | | | | | Less: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | 30 | | | | (30 | ) | | | (100 | )% | | | | | | | | | | | | | | | | | | Net income available to Genworth Financial, Inc.’s common stockholders | | $ | 418 | | | $ | 18 | | | $ | 400 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Net income available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | $ | 417 | | | $ | 128 | | | $ | 289 | | | | NM | (1) | Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders | | | 1 | | | | (110 | ) | | | 111 | | | | 101 | % | | | | | | | | | | | | | | | | | | Net income available to Genworth Financial, Inc.’s common stockholders | | $ | 418 | | | $ | 18 | | | $ | 400 | | | | NM | (1) | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Premiums are primarily earned on insurance products for mortgage, long-term care, life insurance, single premium immediate annuities and structured settlements with life contingencies. | | Our U.S. Mortgage Insurance segment increased $32 million mainly attributable to higher insurance in-force and an increase in policy cancellations in our single premium mortgage insurance product driven largely by higher mortgage refinancing, partially offset by lower average premium rates in the current year.
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Our U.S. Mortgage Insurance segment increased $32 million mainly attributable to higher insurance in-force and an increase in policy cancellations in our single premium mortgage insurance product driven largely by higher mortgage refinancing, partially offset by lower average premium rates and higher ceded premiums from reinsurance transactions executed in the current year. Our Australia Mortgage Insurance segment decreased $6 million predominantly from portfolio seasoning and lower policy cancellations in the current year.
Our U.S. Life Insurance segment increased $9decreased $6 million. Our long-term care insurance business increased $14$9 million largely from $34$25 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in the current year. Our life insurance business decreased $5$15 million mainly attributable to the continued runoff of our term and whole life insurance products in the current year. Our Australia Mortgage Insurance segment decreased $14 million predominantly from portfolio seasoning and lower policy cancellations in the current year. The three months ended March 31, 2020 included a decrease of $4 million attributable to changes in foreign exchange rates.
Net investment income represents the income earned on our investments. For discussion of the change in net investment income, see the comparison for this line item under “—Investments and Derivative Instruments.” Net investment gains (losses). Net investment gains (losses) consist primarily of realized gains and losses from the sale of or estimated future credit losses onimpairment 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.
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. The decrease was principally related to our U.S. Life Insurance segment primarily driven by our life insurance business from a decline in our universal and term universal insurancein-force
and higher ceded reinsurance costs in the current year.Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of claim costs incurred related to mortgage insurance products and benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for long-term care, life insurance, structured settlements and single premium immediate annuities with life contingencies. Our U.S. Mortgage Insurance segment increased $22 million largely from higher new delinquencies driven primarily by an increase in borrower forbearance as a result of COVID-19 and lower net benefits from cures and aging of existing delinquencies, partially offset by favorable development of $23 million on incurred but not reported delinquencies established in the second quarter of 2020. Our U.S. Life Insurance segment decreased $4 million. Our long-term care insurance business decreased $15 million primarily due to an increase in claim terminations driven mostly by higher mortality in the current year and from favorable development on incurred but not reported claims. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $24 million reflecting our assumption that new claim incidence during this period will ultimately return to normal levels, partially offsetting the favorable development on incurred but not reported claims. These decreases were partially offset by higher incremental reserves of $50 million recorded in connection with an accrual for profits followed by losses, aging of the in-force block (including higher frequency of new claims), and higher severity of new claims in the current year. The decrease was also partially offset by a $33 million less favorable impact from reduced benefits in the current year related to in-force rate actions approved and implemented. Our life insurance business increased $41 million primarily attributable to higher mortality in our universal and term universal life insurance products in the current year compared to the prior year and from higher reserves in our 10-year term universal life insurance block entering its post-level premium period during the premium grace period. Our fixed annuities business decreased $30 million principally from $17 million of unfavorable charges in the prior year that did not recur related to loss recognition testing and higher mortality in our single premium immediate annuity products in the current year. Our Australia Mortgage Insurance segment decreased $2 million primarily from favorable aging of existing delinquencies and lower new reported delinquencies, net of cures, partially offset by loss reserve strengthening of $24 million reflecting the economic impacts caused by COVID-19, including a provision for incurred but not reported losses on loans in payment deferral programs in the current year. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. The decrease was principally related to our U.S. Life Insurance segment driven by our fixed annuities business largely due to a decline in average account value in the current year.
Amortization of deferred acquisition costs and intangibles. Interest expense represents interest related to our borrowings that are incurred at Genworth Holdings or subsidiaries and interest expense related to the Tax Matters Agreement and certain reinsurance arrangements being accounted for as deposits. Our Corporate and Other activities decreased $12 million largely driven by the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020. Our U.S. Life Insurance segment decreased $4 million driven by our life insurance business principally related to the early redemption of non-recourse funding obligations in the current year. Our U.S. Mortgage Insurance segment increased $6 million related to senior notes issued by GMHI in August 2020. Provision for income taxes. Net income attributable to noncontrolling interests
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table sets forth the consolidated results of operations for the periods indicated: | | | | | | | | | | | | | | | | | | | |
| | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 3,068 | | | $ | 3,004 | | | $ | 64 | | | | 2 | % | | | | 2,406 | | | | 2,426 | | | | (20 | ) | | | (1 | )% | Net investment gains (losses) | | | 382 | | | | 27 | | | | 355 | | | | NM | (1) | Policy fees and other income | | | 539 | | | | 601 | | | | (62 | ) | | | (10 | )% | | | | | | | | | | | | | | | | | | | | | 6,395 | | | | 6,058 | | | | 337 | | | | 6 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 4,146 | | | | 3,817 | | | | 329 | | | | 9 | % | | | | 417 | | | | 439 | | | | (22 | ) | | | (5 | )% | Acquisition and operating expenses, net of deferrals | | | 721 | | | | 713 | | | | 8 | | | | 1 | % | Amortization of deferred acquisition costs and intangibles | | | 310 | | | | 277 | | | | 33 | | | | 12 | % | | | | 5 | | | | — | | | | 5 | | | | NM | (1) | | | | 145 | | | | 179 | | | | (34 | ) | | | (19 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 5,744 | | | | 5,425 | | | | 319 | | | | 6 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 651 | | | | 633 | | | | 18 | | | | 3 | % | Provision for income taxes | | | 186 | | | | 169 | | | | 17 | | | | 10 | % | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 465 | | | | 464 | | | | 1 | | | | — | % | Income (loss) from discontinued operations, net of taxes | | | (519 | ) | | | 42 | | | | (561 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | (54 | ) | | | 506 | | | | (560 | ) | | | (111 | )% | Less: net income from continuing operations attributable to noncontrolling interests | | | 35 | | | | 45 | | | | (10 | ) | | | (22 | )% | Less: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | 101 | | | | (101 | ) | | | (100 | )% | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (89 | ) | | $ | 360 | | | $ | (449 | ) | | | (125 | )% | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | $ | 430 | | | $ | 419 | | | $ | 11 | | | | 3 | % | Loss from discontinued operations available to Genworth Financial, Inc.’s common stockholders | | | (519 | ) | | | (59 | ) | | | (460 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (89 | ) | | $ | 360 | | | $ | (449 | ) | | | (125 | )% | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Our U.S. Mortgage Insurance segment increased $101 million mainly attributable to higher insurance in-force and an increase in policy cancellations in our single premium mortgage insurance product driven largely by higher mortgage refinancing, partially offset by higher ceded premiums from reinsurance transactions executed in the current year and lower average premium rates.
Our U.S. Life Insurance segment increased $61$2 million. Our long-term care insurance business increased $1$32 million principallylargely from $90 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in the current year. Our life insurance business decreased $30 million mainly attributable to the continued runoff of our term and whole life insurance products in the current year. Our Australia Mortgage Insurance segment decreased $38 million predominantly from portfolio seasoning and lower policy cancellations in the current year. The nine months ended September 30, 2020 included a decrease of $9 million attributable to changes in foreign exchange rates. 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). Policy fees and other income. Our U.S. Life Insurance segment decreased $52 million primarily driven by our life insurance business from a $21 million favorable correction related to ceded premiums on universal life insurance policies in the prior year that did not recur. The decrease was also attributable to a decline in our universal and term universal life insurance in-force and higher ceded reinsurance costs in the current year. Corporate and Other activities decreased $5 million primarily related to losses from non-functional currency remeasurement transactions in the current year compared to gains in the prior year. Benefits and other changes in policy reserves Our U.S. Mortgage Insurance segment increased $253 million largely from $231 million of losses from new delinquencies driven primarily by a significant increase in borrower forbearance as a result of COVID-19 and strengthening of existing reserves of $28 million in the current year primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. We also experienced lower net benefits from cures and aging of existing delinquencies in the current year. The prior year included a $10 million favorable reserve adjustment mostly associated with lower expected claim rates. Our U.S. Life Insurance segment increased $59 million. Our long-term care insurance business decreased $34 million primarily due to an increase in claim terminations driven mostly by higher mortality and favorable development on incurred but not reported claims. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $61 million reflecting our assumption that new claim incidence during this period will ultimately return to normal levels, partially offsetting the favorable development on incurred but not reported claims. These decreases were partially offset by aging of the in-force block (including higher frequency of new claims), higher incremental reserves of $39$132 million recorded in connection with an accrual for profits followed by losses, and higher severity of new claims in the current year. These increases were mostly offset by a higherless favorable impact of $34$14 million from reduced benefits in the current year related to in-force rate actions approved and implemented a slightly favorable impact from benefit utilization rate updatesand higher severity of new claims in the current year compared to an unfavorable impact in the prior year and favorable development on prior year incurred but not reported claims.year. Our life insurance business increased $60$146 million primarily attributable to higher reserves in our 10-year term universal life insurance block entering its post-level premium period during the premium grace period and from higher mortality in our universal and term life insurance products in the current year compared to the prior year.year attributable in part to COVID-19. Our fixed annuities business was flat as higher reserves in our fixed indexed annuities driven bydecreased $53 million principally from $39 million of unfavorable market changescharges in the currentprior year that did not recur related to loss recognition testing and lowerhigher mortality in our single premium immediate annuities were offset by $17 million of higher reserves recordedannuity products in the prior year related to loss recognition testing in our fixed immediate annuity products that did not recur.
Our Runoff segment increased $19$9 million primarily attributable to higher guaranteed minimum death benefit (“GMDB”) reserves in our variable annuity products due to unfavorableless favorable equity market performance in the current year. | | Our U.S. Mortgage Insurance segment increased $3 million largely from lower net benefits from cures and aging of existing delinquencies, partially offset by a decrease in new delinquencies and a lower average reserve on new delinquencies in the current year.
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Our Australia Mortgage Insurance segment decreased $4increased $7 million primarily from loss reserve strengthening of $42 million during the second and third quarters of 2020 reflecting the economic impacts caused by COVID-19, including provisions for incurred but not reported losses on loans in payment deferral programs. These increases were partially offset by favorable aging of existing delinquencies in the current year. The nine months ended September 30, 2020 included a decrease of $5 million attributable to changes in foreign exchange rates. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. The decrease was principally related to our U.S. Life Insurance segment driven by our fixed annuities business largely due to a decline in average account values in the current year. Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are costs and expenses that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses. Our U.S. Mortgage Insurance segment increased $10 million primarily attributable to higher operating costs driven mostly by increased sales in the current year. Our U.S. Life Insurance segment increased $8 million driven by our long-term care insurance business principally from higher commissions and premium taxes in the current year associated with our in-force rate action plan. Corporate and Other activities increased $5decreased $10 million mainly driven by lower operating expenses and a $4 million gain related to a repurchase of Genworth Holdings’ senior notes originally scheduled to mature in 2021, partially offset by a make-whole premium of $9 million related to the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020 and higher employee-related expenses partially offset by lower operating expenses in the current year. Our U.S. Mortgage Insurance segment increased $4 million primarily attributable to higher operating costs driven mostly by increased sales in the current year.
Amortization of deferred acquisition costs and intangibles.intangibles 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 $21$35 million. Our long-term care insurance business decreased $6 million driven mostly by ourprimarily related to higher persistency on policies that are not on active claim. Our life insurance business increased $44 million principally from higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period partially offset by a $10 million unfavorable model correction in our universal life insurance products in the prior year that did not recur. Our fixed annuities business increased $5 million largely related to higher DAC amortization reflecting lower net spreads and the impact of unfavorable market changes in the current year.year and higher reinsurance rates. Our Runoff segment increased $15$4 million mainly related to higher DAC amortization in our variable annuity products principally from unfavorableless favorable equity market performance in the current year. Goodwill impairment. Charges for impairment of goodwill are the result of declines in the fair value of the reporting units. Our Australia Mortgage Insurance segment recorded a goodwill impairment charge of $5 million in the current year, which represented the full amount of goodwill related to our mortgage insurance business in Australia. Interest expense represents interest related to our borrowings that are incurred at Genworth Holdings or subsidiaries and interest expense related to the Tax Matters Agreement and certain reinsurance arrangements being accounted for as deposits. Corporate and Other activities decreased $7$31 million largely driven by the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020 and from our junior subordinated notes which had a lower floating rate of interest in the current year.
Our U.S. Life Insurance segment decreased $8 million due to our life insurance business principally related to the early redemption of non-recourse funding obligations, partially offset by the write-off of $4 million in deferred borrowing costs in the current year. Our U.S. Mortgage Insurance segment increased $6 million related to senior notes issued by GMHI in August 2020. Provision (benefit) for income taxes. The effective tax rate decreasedincreased to 12.2%28.6% for the threenine months ended March 31,September 30, 2020 compared to 29.1%from 26.6% for the threenine months ended March 31,September 30, 2019. The decrease in the effective tax rateincrease was primarily attributable to unfavorable provision to return adjustments in the current year compared to favorable adjustments in the prior year. The increase was also attributable to tax expense onrelated to foreign operations and forward starting swaps settled prior to the enactment of the Tax Cuts and Jobs Act (“TCJA”),TCJA, which are tax effected at 35% as they are amortized into net investment income.Net income in relationattributable to apre-taxnoncontrolling interests
loss in the current year. . The decrease was also attributable to a lower tax expensepredominantly related to foreign operationslower premiums and lower net investment income, partially offset by higher stock-based compensation in relation to apre-tax
lossnet investment gains in the current year. Net income (loss) attributable to noncontrolling interests
. Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties. The decrease to a loss in the current year from income in the prior year was predominantly related to higher net investment losses driven largely by derivative losses in the current year.
Use of non-Generally Accepted Accounting Principles (“GAAP”) measures Reconciliation of net income (loss) to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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 estimated future credit losses, 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. Adjustments to reconcile net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) assume a 21% tax rate for our domestic segments and a 30% tax rate for our Australia Mortgage Insurance segment and are net of the portion attributable to noncontrolling interests. Net investment gains (losses) are also adjusted for DAC and other intangible amortization and certain benefit reserves.
The following table includes a reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | | Less: net income (loss) from continuing operations attributable to noncontrolling interests | | | | ) | | | | | Less: net income from discontinued operations attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | Less: income from discontinued operations, net of taxes | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | | ) | | | | | Less: net income (loss) from continuing operations attributable to noncontrolling interests | | | | ) | | | | | | | | | | | | | | | Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | | ) | | | | | Adjustments to income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | Net investment (gains) losses, net (1) | | | | | | | | ) | Losses on early extinguishment of debt | | | | | | | | | Expenses related to restructuring | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | | | | $ | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Nine months ended
September 30, | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | 418 | | | $ | 18 | | | $ | (89 | ) | | $ | 360 | | Add: net income from continuing operations attributable to noncontrolling interests | | | 18 | | | | 10 | | | | 35 | | | | 45 | | Add: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | 30 | | | | — | | | | 101 | | | | | | | | | | | | | | | | | | | | | | 436 | | | | 58 | | | | (54 | ) | | | 506 | | Less: income (loss) from discontinued operations, net of taxes | | | 1 | | | | (80 | ) | | | (519 | ) | | | 42 | | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 435 | | | | 138 | | | | 465 | | | | 464 | | Less: net income from continuing operations attributable to noncontrolling interests | | | 18 | | | | 10 | | | | 35 | | | | 45 | | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | 417 | | | | 128 | | | | 430 | | | | 419 | | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (1) | | | (362 | ) | | | (5 | ) | | | (378 | ) | | | (33 | ) | Goodwill impairment, net (2) | | | — | | | | — | | | | 3 | | | | — | | (Gains) losses on early extinguishment of debt, net | | | — | | | | — | | | | 9 | | | | — | | Expenses related to restructuring | | | — | | | | — | | | | 2 | | | | 4 | | | | | 77 | | | | — | | | | 78 | | | | 6 | | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 132 | | | $ | 123 | | | $ | 144 | | | $ | 396 | | | | | | | | | | | | | | | | | | |
| (1) | For the three months ended March 31,September 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(11)$1 million and $(2)$(3) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $(26)$12 million and $6$(4) million, respectively. For the nine months ended September 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(14) million and $(8) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $18 million and $2 million, respectively. |
| (2) | For the nine months ended September 30, 2020, goodwill impairment was adjusted for the portion attributable to noncontrolling interests of $2 million. |
During the nine months ended September 30, 2020, we repurchased $84 million principal amount of Genworth Holdings’ senior notes with 2021 maturity dates for a pre-tax gain of $4 million. In January 2020, we paid a pre-tax make-whole expense of $9 million related to the early redemption of Genworth Holdings, Inc.’sHoldings’ senior notes originally scheduled to mature in June 2020 and Rivermont I, our indirect wholly-owned special purpose consolidated captive insurance subsidiary, early redeemed all of its $315 million outstanding non-recourse funding obligations originally due in 2050 resulting in a pre-tax loss of $4 million from the write-off of deferred borrowing costs. We also repurchased $14 million principal amount of Genworth Holdings’ senior notes with 2021 maturity dates for apre-tax
gain of $1 million in the first quarter of 2020. These transactions were excluded from adjusted operating income (loss) for the first quarter of 2020periods presented as they relate to gains (losses) on the early extinguishment of debt. In the second quarter of 2020, we recorded a goodwill impairment of $3 million, net of the portion attributable to noncontrolling interests, in our Australia mortgage insurance business.
We recorded a pre-tax expense of $1$2 million and $4 million infor the first quarters ofnine months ended September 30, 2020 and 2019, respectively, related to restructuring costs as we continue to evaluate and appropriately size our organizational needs and expenses. There were no infrequent or unusual items excluded from adjusted operating income (loss) during the periods presented.
Earnings (loss) per share Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category by the weighted-average basic and diluted common shares outstanding for the periods indicated: | | | | | | | | | | | | | | | | | | (Amounts in millions, except per share amounts) | | | | | | | Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | $ | | ) | | $ | | | | | | | | �� | | | | | | | $ | | ) | | $ | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | $ | | ) | | $ | | | | | | | | | | | | | | | $ | | ) | | $ | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders per share: | | | | | | | | | | | $ | | | | $ | | | | | | | | | | | | | | | $ | | | | $ | | | | | | | | | | | | | Weighted-average common shares outstanding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | 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 March 31, 2020, we were required to use basic weighted-average common shares outstanding as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 5.4 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 March 31, 2020, dilutive potential weighted-average common shares outstanding would have been 509.7 million. |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Nine months ended
September 30, | | (Amounts in millions, except per share amounts) | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | | | | | | | | | $ | 0.83 | | | $ | 0.25 | | | $ | 0.85 | | | $ | 0.83 | | | | | | | | | | | | | | | | | | | | | $ | 0.82 | | | $ | 0.25 | | | $ | 0.84 | | | $ | 0.82 | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | | | | | | | | | $ | 0.83 | | | $ | 0.04 | | | $ | (0.18 | ) | | $ | 0.72 | | | | | | | | | | | | | | | | | | | | | $ | 0.82 | | | $ | 0.04 | | | $ | (0.17 | ) | | $ | 0.71 | | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | | | | | | | | | $ | 0.26 | | | $ | 0.25 | | | $ | 0.29 | | | $ | 0.79 | | | | | | | | | | | | | | | | | | | | | $ | 0.26 | | | $ | 0.24 | | | $ | 0.28 | | | $ | 0.78 | | | | | | | | | | | | | | | | | | | Weighted-average common shares outstanding: | | | | | | | | | | | | | | | | | | | | 505.6 | | | | 503.5 | | | | 505.1 | | | | 502.7 | | | | | | | | | | | | | | | | | | | | | | 511.5 | | | | 511.2 | | | | 511.2 | | | | 509.5 | | | | | | | | | | | | | | | | | | |
Diluted weighted-average common shares outstanding reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation. Results of Operations and Selected Financial and Operating Performance Measures by Segment 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 11 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities. We tax our international businesses at their local jurisdictional tax rates and our domestic businesses at the U.S. corporate federal income tax rate of 21%. Our segment tax methodology applies the respective jurisdictional or domestic tax rate to the pre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign withholding taxes and permanent differences between U.S. GAAP and local tax law. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities.
The annually-determined tax rates and adjustments to each segment’s provision for income taxes are estimates which are subject to review and could change from year to year.
Management’s discussion and analysis by segment contains selected operating performance measures including “sales” and “insurance in-force” or “risk in-force” which are commonly used in the insurance industry as measures of operating performance. Management regularly monitors and reports sales metrics as a measure of volume of new business generated in a period. Sales refer to new insurance written for mortgage insurance products. We consider new insurance written to be a measure of our operating performance because it represents a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period. Management regularly monitors and reports insurance in-force and risk in-force. Insurance in-force for our mortgage insurance businesses is a measure of the aggregate original loan balance for outstanding insurance policies as of the respective reporting date. Risk in-force for our U.S. mortgage insurance business is based on the coverage percentage applied to the estimated current outstanding loan balance. Risk in-force in our Australia mortgage insurance business is computed using an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents the highest expected average per-claim payment for any one underwriting year over the life of our mortgage insurance business in Australia. We also have certain risk share arrangements in Australia where we provide pro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicable pro-rata coverage amount provided is used when applying the factor. We consider insurance in-force and risk in-force to be measures of our operating performance because they represent measures of the size of our business at a specific date which will generate revenues and profits in a future period, rather than measures of our revenues or profitability during that period. 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. These operating performance measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources. U.S. Mortgage Insurance segment Results of our U.S. mortgage insurance business are affected primarily by the following factors: competitor actions; unemployment or underemployment levels; other economic and housing market trends, including interest rates, home prices, the number of first-time homebuyers, and mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies; the effect of seasonal variations, including the adverse impact of seasonality that we experience historically in the second half of the year;variations; the inventory of unsold homes; loan modification and other servicing efforts; and litigation, among other items. COVID-19
has disrupted the globalThe United States economy and financial markets, business operations, and consumer behavior and confidence. While all states have been impacted,confidence improved in the third quarter of 2020 compared to the second quarter of 2020 as state economies reopened; however, certain geographies and industries have been disproportionatelyexperienced slower recoveries because of the virus, the mitigation steps taken to control its spread or changed consumer behavior. The unemployment rate decreased to 7.9% in September 2020 after reaching a peak of 14.7% in April 2020. The economy remains weak compared to pre-COVID-19. Even after the recovery in the third quarter of 2020, the number of unemployed Americans stands at approximately 12.6 million, which is 6.8 million higher than February 2020. Among the unemployed, those on temporary layoff continued to decrease
impacted byCOVID-19
either throughto 4.6 million from a peak of 18.1 million in April 2020, but the spreadnumber of the virus or the severity of the mitigation steps taken to control its spread. Unemployment claims havepermanent job losses increased to historic levels3.8 million. In addition, the number of long term unemployed over 26 weeks increased to 2.4 million. Specific to housing, mortgage origination activity remained robust in the third quarter of 2020 fueled by refinance activity and a strong surge in home sales. Refinance activity remained robust but relatively flat as compared to the second quarter of 2020. After experiencing a slowdown in sales during the second quarter of 2020, the purchase market improved in the third quarter of 2020 with approximately 30 million Americans filing for unemployment claims through late Aprilsales of previously owned homes increasing 37% compared to the second quarter of 2020 reducing consumer confidenceand inventories declined from 4.1 months to its lowest level since3.3 months. The pandemic continued to affect our financial results in the 2008 financial crisis. Asthird quarter of 2020 but to a result, our U.S. mortgage insurance business has already begun to experience declines in investment valuationslesser extent than the second quarter of 2020 as primarily evidenced by the elevated, but declining, servicer reported forbearance and declines in persistency rates from prevailing lower interest rates. Additionally, we could experience asset impairments, increases in delinquent loans and paid claims, lower future new insurance written levels, increases to our capital requirements and pressure on our capital sufficiency ratios.delinquencies during the third quarter of 2020. While theThe impact of the developingCOVID-19 pandemic on our future business results is difficult to predict,predict. We have performed and have periodically revised our scenario planning to help us better understand and tailor our actions to help mitigate the relatedpotential adverse effects of the pandemic on our financial results. While our current financial results to date fall within the range of our current scenarios, the ultimate outcomes and impact on our U.S. mortgage insurance business will depend on the spread and length of the pandemic,pandemic. Of similar importance will be the amount, type and duration of government stimulus and its impact on borrowers, regulatory and government actions to support housing and the economy, social distancing and otherspread mitigating actions to curb the current increase in cases, the possible resurgence of the virus in the future and the shape of economic recovery, all of which are unknown at present. It is difficult to predict how long borrowers will need to use forbearance to assist them during the economic recovery.pandemic. Given that current forbearance plans may be extended up to a year, the resolution of a delinquency in a plan, whether it ultimately results in a cure or a claim, is difficult to estimate and may not be known for several quarters, if not longer. We are continuing to monitor COVID-19 developments, regulatory and government actions, including the impact of the recently passed CARES Act and programs announced by the GSEs, and the potential financial impacts on our business. However, given the specific risks to our U.S. mortgage insurance business, it is possible the pandemic could have a significant adverse impact on our U.S. mortgage insurance business, including a significant adverse effect on our financial condition and results of operations. Within the U.S. mortgage insurance business, we have actively taken preventative measures focused on effective social distancing including restricting business travel and implementing a remote work environment (substantially all employees and contractors are working from home). Most of our customers and vendors have taken similar measures with the majority of their workforce. Prior toCOVID-19,
approximately 35% of our U.S. mortgage insurance business employees worked remotely including the majority of resources involved in key business activities such as underwriting and sales. Restrictions on business travel have prevented our sales force from conductingin-person
customer visits. Through the transition to a remote work environment, we have not experienced any meaningful interruption to our operations and have successfully mitigated the risk of disruptions to our customers, vendors and employees. In addition, we have complied with all applicable directives from local, state and federal agencies.financial condition.Specific to housing finance, the CARESCoronavirus Aid, Relief, and Economic Security (“CARES”) Act requires mortgage servicers to provide up to 180 days of deferred or reduced payments (“forbearance”)(forbearance) for borrowers with a federally backed mortgage loan who assert they have experienced a financial hardship related to COVID-19. Forbearance may be extended for an additional 180 days up to a year in total or shortened at the request of the borrower. Federally backed mortgages include Federal Housing Administration (“FHA”) and U.S. Department of Veterans Affairs (“VA”) backed loans and those purchased by Fannie Mae and Freddie Mac. The CARES Act also prohibitsprohibited foreclosures on all federally backed mortgage loans, except for vacant and abandoned properties, for a 60-day period beginningthat began on March 18, 2020. Since the introduction of the CARES Act, the GSEs as well as most servicers of non-federally backed mortgage loans have announced that they will be extendingextended similar relief to their respective portfolios of loans. The Federal Housing Finance Agency (“FHFA”) extended the foreclosure moratorium until at least December 31, 2020 for mortgages that are purchased by Fannie Mae and Freddie Mac. At the conclusion of the forbearance term, a borrower may either bring their loan current, defer any missed payments until the end of their loan, or the loan can be modified through a repayment plan or extension of the mortgage term. In addition, the CARES Act provides that furnishers of credit reporting information, includingMany servicers should continue to report a loan as current to credit reporting agencies if the loan is subject to a payment accommodation, such as forbearance, so long as the borrower abides by the terms of the accommodation. Servicers are working on updatinghave updated and improved their reporting to private mortgage insurers to include whetherfor when a loan is covered by forbearance. Servicer reported forbearance slowed meaningfully beginning in June 2020 and ended the third quarter of 2020 with approximately 6.7% or 61,183 of our active primary policies reported in a forbearance plan, of which approximately 63% were reported as delinquent, compared to 7.7%, 68,937, and 61%, respectively, in the second quarter of 2020. Forbearance to date has been a leading indicator of future new delinquencies; however, it is difficult to predict the future level of reported forbearance and how many of the policies in a forbearance plan that remain current on their monthly mortgage payment will go delinquent.The level of mortgage originations requiring private mortgage insurance (“market penetration”) and eventual market size are affected in part by actions that impact housing or housing finance policy taken by the GSEs and the U.S. government, including but not limited to, the FHA and the FHFA, which impact housing or housing finance policy.FHFA. In the past, these actions have included announced changes, or potential changes, to underwriting standards, including changes to the
GSEs’ automated underwriting systems, FHA pricing, GSE guaranty fees, loan limits and alternative products, such as those offered through Freddie Mac’s Integrated Mortgage Insurance (“IMAGIN”) and Fannie Mae’s Enterprise Paid Mortgage Insurance (“EPMI”) pilot programs, as well as low down payment programs available
through the FHA or GSEs. On May 20, 2020, the FHFA re-proposed the Enterprise Regulatory Capital Framework (“Enterprise Framework”) for Fannie Mae and Freddie Mac. The comment period expired on August 31, 2020. As proposed, the Enterprise Framework would significantly increase regulatory capital requirements for the GSEs over current requirements. If the Enterprise Framework is finalized in its current form, higher capital requirements could ultimately lead to increased costs to borrowers for GSE loans, which in turn could shift the market away from the GSEs to the FHA or lender portfolios. Such a shift could result in a smaller market for private mortgage insurance. For more information about the potential future impact, see “Item 1A—Risk Factors—Changes to the role of the GSEs or to the charters or business practices of the GSEs, including actions or decisions to decrease or discontinue the use of mortgage insurance, could adversely affect our financial condition and results of operations or significantly impact our business,” and “—Risk Factors—The amount of mortgage insurance we write could decline significantly if alternatives to private mortgage insurance are used or lower coverage levels of mortgage insurance are selected” in our 2019 Annual Report on Form 10-K. COVID-19
did not have a material negative impact on our first quarter of 2020 results. Rather, estimatedEstimated mortgage origination volume increased during the firstthird quarter of 2020 compared to the firstthird quarter of 2019 primarily due toas lower interest rates resulted in higher refinance originations driven by lower interest rates.origination volumes. The estimated private mortgage insurance available market increased driven by higher refinance originations and higher purchase market penetration. Given the volume to date, we expect mortgage originations to remain strong for the remainder of 2020 fueled by sustained low interest rates driving refinances and by continued strength in the firstpurchase originations market.Our primary persistency declined to 60% during the third quarter of 2020 compared to 75% during the firstthird quarter of 2019 driven2019. Lower persistency is impacting business performance trends in large part by higher refinance originations,several ways including, higher market penetration. Our persistency of mortgagebut not limited to, offsetting insurance in-force growth from new insurance written, on prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”) was 76% duringelevating single premium policy cancellations along with single premiums earned and accelerating the first quarteramortization of 2020 compared to 86% during the first quarter of 2019, due in part to lower interest rates. Prospectively, we also expectCOVID-19
to have an impact on the level of mortgage originations, market penetration and the private mortgage insurance industry’s market size. While originations remained elevated through the first quarter of 2020, in part, as a result of prevailing low interest rates, we expect mortgage originations to declineour existing reinsurance transactions reducing their associated PMIERs capital credit in the second half of 2020 driven by the impact of and actions related tocurrent year.COVID-19.
The impact on mortgage originations may be more severe for geographies that have been disproportionately impacted byCOVID-19.
The residents of at leastforty-two
states and the District of Columbia are undershelter-in-place
orders as of April 20, 2020. These orders and concerns withCOVID-19
generally have caused a decrease in seller interest in listing their homes, buyer interest in new home purchases, restrictions on realtors’ ability to interact with buyers and sellers and a reduced ability to both visit homes for sale and close on purchase transactions, resulting in approximately 60% of realtors reporting delayed home purchase decisions among potential homebuyers. In the purchase originations market, mortgage applications have decreased by approximately 33% between the end of March 2020 and the second week of April 2020. To help facilitate the home closing process amidCOVID-19,
the GSEs have implemented policies designed to alleviate appraisal and employment verification requirements; however, certain lenders have reacted to the rising uncertainty by tightening their lending standards, through certain credit overlays and higher prices for riskier loan and borrower attributes, which will likely lower origination volume. Some of the decrease in mortgage originations may be offset by increased market penetration for mortgage insurance as credit and securitization options previously available to lenders prior to the pandemic are now constrained or no longer available such as the private label securitizations market and jumbo loan market. We expect the concentration of loans backed by the GSEs to expand and, as a result, drive incremental volume to the private mortgage insurance industry. We expect the net effect of these market dynamics will be a smaller private mortgage insurance market size in the second half of 2020.The U.S. private mortgage insurance industry is highly competitive. There are currently six active mortgage insurers, including us. The majority of the new insurance written in our U.S. mortgage insurance business is priced using our proprietary risk-based pricing engine, GenRATE, which provides lenders with a granular approach to pricing for borrowers. All active U.S. mortgage insurers utilize 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. For more information on the potential impacts due to competition, see “Item 1A—Risk Factors—Competitors could negatively affect our ability to maintain or increase our market share and profitability” in our 2019 Annual Report on Form 10-K. At the same time, we believe mortgage insurers, including us, consider many variables when pricing their new insurance written including the prevailing and future macroeconomic conditions. Given the recent disruption to economic activity, including a spike in first-time unemployment claims filed sincemid-March
2020 caused byCOVID-19,
and the potential for lower economic activity and elevated unemployment to persist into the future, we expectWe made pricing to increase across new mortgage insurance policies writtenadjustments in the immediate future.third quarter of 2020 taking into account improving market conditions, portfolio performance to date through the pandemic and competitive factors.
New insurance written of $26.6 billion increased 86%41% in the firstthird quarter of 2020 compared to the firstthird quarter of 2019 primarily due to higher mortgage refinancing originations and our highera larger private mortgage insurance market. Our U.S. mortgage insurance estimated market share. The percentage of single premium new insurance written decreased duringshare for the firstthird quarter of 2020 was lower compared to the firstsecond quarter of 2019, reflecting2020. Our market share was impacted by the execution of our go to market strategy, including but not limited to, pricing competitiveness relative to our peers and our selective participation in this market. Future volumes of these products will vary depending in part onforward commitment transactions. Our market share remains impacted by the negative ratings differential relative to our evaluation of their risk return profilecompetitors, concerns expressed about Genworth’s financial condition and their concentration in the private mortgage insurance available market.proposed transaction with China Oceanwide. We continue to manage the quality of new business through pricing and our underwriting guidelines, which we modify from time to time when circumstances warrant.
Net earned premiums increased in the firstthird quarter of 2020 compared to the firstthird quarter of 2019 primarily due to thefrom growth in our insurance-in-force
portfolio insurance in-force and from an increase in premiums earned from single premium policy cancellations driven largely by higher mortgage refinancing, partially offset by lower average premium rates and higher ceded premiums from reinsurance transactions executed in the current year. As a result of COVID-19, we continued to experience a significant increase in the number of reported delinquent loans during the third quarter of 2020 as compared to recent quarters prior to COVID-19. During this time and consistent with prior years, servicers continued the practice of remitting premium during the early stages of default. As a result, we did not experience an impact to earned premiums during the third quarter of 2020. Additionally, we have a business practice of refunding the post-delinquent premiums to the insured party if the delinquent loan goes to claim. We record a liability and a reduction to net earned premiums for the post-delinquent premiums we expect to refund. The post-delinquent premium liability recorded in the third quarter of 2020 associated with the increased number of delinquent loans was not significant to the change in earned premiums during the quarter as a result of the high concentration of new delinquencies being subject to a servicer reported forbearance plan and the lower estimated rates at which delinquencies go to claim (“roll rates”) for these loans. As a result of COVID-19, certain state insurance regulators have issued orders or provided guidance to insurers requiring or requesting as the case may be, the provision of grace periods of varying lengths to insureds in the event of non-payment of premium. Regulators differ greatly in their approaches but generally focus on the avoidance of cancellation of coverage for non-payment. We currently comply with all state regulatory requirements and requests. If timely payment is not made, future premiums could decrease and the certificate of insurance could be subject to cancellation after 60 days, or such longer time as required under applicable law. Our loss ratio was 8% for both During the three months ended March 31, 2020 and 2019. The loss ratio was flat as higher losses from lower net benefits from cures and aging of existing delinquencies was offset by a decrease in new delinquencies, a lower average reserve on new delinquencies and higher net earned premiums in the current year. We are monitoring both the delinquency reporting within the firstthird quarter of 2020, servicers also continued to remit premium on non-delinquent loans and the uptake of available forbearance options with servicers as an early indicator of future new delinquencies. We are not aware of any reportedCOVID-19
related delinquencies in the first quarter of 2020. In addition, we have not identified any deterioration in performance trends of our existing delinquencies within the first quarter of 2020 that would require the strengthening of existing reserves on our existing delinquencies. Consequently,therefore we did not strengthen reserves on existing delinquencies in the first quarter of 2020. Based on the surveillance of early forbearance uptake with servicers, we do expectexperience a significant change to see elevated levels of new delinquencies in the coming months given the rise in unemployment and the availability of forbearance options driven byCOVID-19.earned premiums.
The impact on new delinquencies may be more severe for geographies that have been disproportionately impacted byCOVID-19.
In addition, loss mitigation performance across servicers may vary materially based on the impact ofCOVID-19
on their respective servicing portfolios. We are actively engaged with the FHFA and the GSEs to mitigate the potential impact of early delinquencies on our PMIERs capital sufficiency and to support loss mitigation efforts such as forbearance and loan modification to mitigate future claims.While COVID-19 is unique in that it is a sudden, global economic disruption stemming from a health crisis, we have experience with the financial impacts of sudden, unexpected economic events on our U.S. mortgage insurance business. Prior localized natural disasters, such as hurricanes, have helped inform our view of the severity and potential duration of the economic shock caused by the efforts to contain the spread of COVID-19. Similar to our hurricane experience, we expect borrowers who have experienced a financial hardship including, but not limited to, the loss of income due to the closing of a business or the loss of a job will takehave taken advantage of available forbearance programs.programs and payment deferral options. As a result, we expect to seehave seen elevated new delinquencies, but as in past natural disasters, those delinquencies may cure at a higher rate than traditional delinquencies should economic activity quickly return to pre-COVID-19 levels. Severity of loss on loans that do go to claim, however, may be negatively impacted by the extended forbearance timeline, the associated elevated expenses such as accumulated interest, the higher loan amount of the recent new delinquencies and home price depreciation, if any. Unlike a hurricane where the natural disaster occurs at a point in time and the rebuild starts soon after, COVID-19 is an ongoing health crisis and we do not know when it will end, making it more difficult to determine the effectiveness of forbearance and the resulting roll rates for new delinquencies in forbearance plans. Given this difference, our prior hurricane experience was relied upon as one consideration, of many, in the establishment of an appropriate roll rate estimate for new delinquencies in forbearance plans that have emerged as a result of COVID-19.Our loss ratio for the three months ended September 30, 2020 was 18% as compared to 11% for the three months ended September 30, 2019. The increase was largely from higher new delinquencies driven primarily by an increase in borrower forbearance as a result of COVID-19, partially offset by favorable development on incurred but not reported delinquencies in the current year. Approximately 75% of our primary new delinquencies in the third quarter of 2020 were subject to a forbearance plan. New primary delinquencies of 16,664 contributed $61 million of loss expense for the three months ended September 30, 2020 calculated by applying a blended estimated roll rate between the estimate for existing pre-COVID-19 early stage delinquencies and our past hurricane related roll rates, which were materially lower given the effectiveness of forbearance and government assistance programs. This compares to $29 million of loss expense from 8,547 new primary delinquencies for the three months ended September 30, 2019. Prior to COVID-19, traditional measures of credit quality, such as Fair Isaac Company (“FICO”) score and whether a loan had a prior delinquency were most predictive of new delinquencies. Because the pandemic has affected a broad portion of the population, attribution
analysis of third quarter of 2020 new delinquencies revealed that additional factors such as higher debt to income, geographic regions more affected by the virus or with a higher concentration of affected industries, loan size, and servicer process differences rose in significance. As of March 31,September 30, 2020, GMICO’s risk-to-capital ratio under the current regulatory framework as established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), GMICO’s
domestic insurance regulator, was approximately 12.4:12.3:1, compared with a risk-to-capital ratio of approximately12.2:1 as of June 30, 2020 and 12.5:1 as of December 31, 2019. ThisGMICO’s risk-to-capital ratio remains below the NCDOI’s maximum risk-to-capital ratio of 25:1. North Carolina’s calculation of risk-to-capital excludes the risk-in-force for delinquent loans given the established loss reserves against all delinquencies. As a result, we do not expect any immediate, material pressure to GMICO’s risk-to-capital ratio in the short term as a result of COVID-19. GMICO’s ongoing risk-to-capital ratio will depend principally on the magnitude of future losses incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses and the amount of additional capital that is generated or distributed by the business or capital support (if any) that we provide. Under PMIERs, we are subject to operational and financial requirements that private mortgage insurers must meet in order to remain eligible.eligible to insure loans that are purchased by the GSEs. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as toevidencing its compliance with PMIERs. On June 29, 2020, the GSEs issued guidance amending PMIERs in light of COVID-19 (the “PMIERs Amendment”), which included both temporary and permanent amendments to PMIERs and became effective on June 30, 2020. The GSEs issued a revised and restated version of the PMIERs Amendment on September 11, 2020. With respect to loans that became non-performing due to a COVID-19 hardship, PMIERs was temporarily amended with respect to each non-performing loan that (i) has an initial missed payment occurring on or after March 1, 2020 and prior to January 1, 2021 or (ii) is subject to a forbearance plan granted in response to a COVID-19 hardship, the terms of which are materially consistent with terms of forbearance plans offered by the GSEs. The risk-based required asset amount factor for the non-performing loan will be the greater of (a) the applicable risk-based required asset amount factor for a performing loan were it not delinquent, and (b) the product of a 0.30 multiplier and the applicable risk-based required asset amount factor for a non-performing loan. In the case of (i), absent the loan being subject to a forbearance plan described in (ii) above, the 0.30 multiplier will be applicable for no longer than three calendar months beginning with the month in which the loan became non-performing due to having missed two monthly payments. The PMIERs Amendment also imposes temporary capital preservation provisions through March 31, 2021, that require an approved insurer to obtain prior written GSE approval before paying any dividends, pledging or transferring assets to an affiliate or entering into any new, or altering any existing, arrangements under tax sharing and intercompany expense-sharing agreements, even if such insurer has a surplus of available assets. Lastly, the PMIERs Amendment imposes permanent revisions to the risk-based required asset amount factor for non-performing loans for properties located in future Federal Emergency Management Agency (“FEMA”) Declared Major Disaster Areas eligible for individual assistance. In September 2020, certain GSE Restrictions were imposed with respect to capital on our U.S. mortgage insurance business. These restrictions will remain in effect until the later of six quarters or until the following collective (“GSE Conditions”) are met: a) approval of GMICO’s plan to secure additional capital, if needed, b) GMICO obtains “BBB+”/“Baa1” (or higher) rating from S&P, Moody’s or Fitch for two consecutive quarters and c) certain Genworth financial metrics are achieved. Prior to the satisfaction of the GSE Conditions, the GSE Restrictions require: GMICO to maintain 115% of PMIERs minimum required assets through 2021, 120% during 2022 and 125% thereafter; GMHI to retain $300 million of its holding company cash that can be drawn down exclusively for its debt service or to contribute to GMICO to meet its regulatory capital needs including PMIERs; and
written approval must be received from the GSEs prior to any additional debt issuance by either GMICO or GMHI. As of March 31,September 30, 2020, our U.S. mortgage insurance business had estimated available assets of approximately 142% of the$4,451 million against $3,377 million net required assets under PMIERs compared to approximately 138%available assets of $4,218 million against $2,943 million net required assets as of December 31, 2019.June 30, 2020. The estimated sufficiency ratio as of March 31,September 30, 2020 was in excess of $1.1 billion of available assets$1,074 million or 132% above the published PMIERs requirements, compared to $1.0 billion$1,275 million or 143% above the published PMIERs requirements as of December 31, 2019. PursuantJune 30, 2020. PMIERs sufficiency is based on the published requirements applicable to existingprivate mortgage insurers and does not give effect to the GSE Restrictions recently imposed on our U.S. mortgage insurance business. The reduction in the published PMIERs requirements and industry application, our firstsufficiency was driven in part by elevated new insurance written in the third quarter of 2020, partially offset by elevated lapses driven by prevailing low interest rates. In addition, elevated lapses drove an acceleration of the amortization of our existing reinsurance transactions reducing their PMIERs sufficiency ratio and excess availablecapital credit in the third quarter of 2020. These factors were partially offset by growth in business cash flows in the third quarter of 2020. In addition, our PMIERs required assets above PMIERs requirements bothas of September 30, 2020 benefited from the application of a 0.30 multiplier applied to the risk-based required asset amount factor for eachcertain non-performing loan backed by a property located in a FEMA Declared Major Disaster Area that either (1) is subject to a forbearance plan executed in response to a FEMA Declared Major Disaster Area eligible for Individual Assistance, the terms of which are materially consistent with terms of forbearance plans offered by Freddie Mac or Fannie Mae, or (2) has an initial default date occurring up to either (i) 30 days prior to or (ii) 90 days following March 15, 2020. As of April 11, 2020, all fifty states and the District of Columbia have been declared FEMA Major Disaster Areas. loans. The application of the 0.30 multiplier to all eligible delinquencies provided approximately three points and $54$1,217 million of benefit to our first quarter ofSeptember 30, 2020 PMIERs sufficiency ratio and excess availablerequired assets respectively. We remain actively engaged with the FHFA and the GSEs on alternative solutionscompared to mitigate the potential impact$1,057 million benefit as of early delinquencies on our PMIERs capital sufficiency. After giving effect to the reduced PMIERs risk-based required asset factors fornon-performing
loans, we expect our PMIERs sufficiency ratio to decrease as a result of incremental delinquencies directly or indirectly related toCOVID-19.
Given the expectation for a decrease in our PMIERs sufficiency ratio prospectively as a result of new delinquencies stemming fromCOVID-19,
we intend to preserve PMIERs available assets and our U.S. mortgage insurance business may not provide dividends inJune 30, 2020. The amount and timing of dividends will be reevaluated later in 2020 and will depend on the economic recovery from COVID-19.Effective January 1, 2020, 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 2020 book year. Combined with our other outstanding credit risk transfer transactions including our insurance linked note, ourOur credit risk transfer program provided an estimated aggregate of approximately $825$777 million of PMIERs capital credit as of March 31,September 30, 2020. On October 22, 2020 we obtained $350 million of fully collateralized excess of loss reinsurance coverage from Triangle Re 2020-1 Ltd. on a portfolio of existing mortgage insurance policies written from January 2020 through August 2020. For additional details see note 8 to our unaudited condensed consolidated financial statements under “Item 1—Financial Statements.” If we gave effect to this transaction in the third quarter of 2020, our PMIERs sufficiency would have increased to $1,424 million or 147% above the published PMIERs requirements. Our U.S. mortgage insurance business may execute future credit risk transfer transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements in response to potential changes in performance and PMIERs requirements over time. We believe that future credit risk transfer transactions may be more difficult The GSE Restrictions govern the period prior to execute,the close of the planned China Oceanwide transaction. The GSEs issued separate conditions and restrictions in September 2020, which place identical restrictions on our U.S. mortgage insurance business, if possible at all, and may have a higher costthe China Oceanwide transaction closes (the “Oceanwide Restrictions”). Specifically, the Oceanwide Restrictions must remain in effect until the later of: a) six quarters after the China Oceanwide transaction closes, b) the conditions in our mitigation agreement with Committee on Foreign Investment in the immediateUnited States are met and certified, or c) until the GSE Conditions imposed in connection with the GSE Restrictions are met. Prior to the satisfaction of these conditions, the Oceanwide Restrictions contain the same restrictions as the aforementioned GSE Restrictions. However, if China Oceanwide remits the $1.5 billion contribution to Genworth in connection with the capital investment plan, GMHI can distribute the $300 million of its holding company cash held for debt service and GMICO capital needs less 13.5% of GMHI’s then current outstanding debt. Until the GSE Conditions imposed in connection with the GSE Restrictions are met, GMHI’s liquidity must not fall below 13.5% of its outstanding debt. Our U.S. mortgage insurance business paid dividends of $436 million in the third quarter of 2020 generated from the net cash proceeds of GMHI’s 2025 Senior Notes offering. As a result of the uncertainty regarding the impact of COVID-19 and the recently imposed GSEs’ PMIERs Amendment and GSE Restrictions on our U.S. mortgage insurance business, we intend to preserve PMIERs available assets. Accordingly, we intend to defer the payment of additional dividends in 2020. The amount and timing of future followingdividends will depend on the economic recovery from COVID-19, among other factors. pandemic. 91As discussed under “Item 1—Business—Regulation” in our 2019 Annual Report on Form 10-K, pursuant to its authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau (“CFPB”) issued regulations (the “QM Rule”) that became effective on January 10, 2014, establishing underwriting and product feature requirements for mortgages to be deemed Qualified Mortgages
(“QM”). The regulations also include a temporary category (the “QM Patch”) for mortgages that comply with certain prohibitions and limitations and meet the GSE underwriting and product guidelines. Mortgages that meet these requirements are deemed to be QMs until the earlier of the time in which the GSEs exit FHFA conservatorship or January 10, 2021. The QM Patch permits loans that exceed a debt to income ratio of 43% to be eligible for QM status. Many of the loans that qualify under the QM Patch require credit enhancement, of which private mortgage insurance is the predominate form of coverage. On June 22, 2020, the CFPB issued two Notices of Proposed Rulemaking seeking comments on proposed amendments to its QM regulations, and they extended the QM Patch until the earlier of the effective date of the revised QM Rule (which is not expected to occur prior to April 1, 2021) or when the GSEs exit conservatorship. The comment periods ended on August 10, 2020 and September 8, 2020, respectively. On October 20, 2020 the CFPB issued a final rule extending the QM Patch until the compliance date for the final QM Rule. It is too early to determine what the final QM Rule will include, when or if it will become effective or the impact it will have on our U.S. mortgage insurance business. On August 18, 2020, the CFPB issued an additional Notice of Proposed Rulemaking adding a “seasoning” approach to the QM “safe harbor.” The proposed rule exempts lenders from liability when they make a reasonable, good faith determination of a consumer’s ability to repay any non-QM that has experienced minimal delinquencies within the first three years after origination prior to approving the underwriting. Segment results of operations Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | % | Net investment gains (losses) | | | | | | | | | | | | | | | | % | Policy fees and other income | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | | | | | | | | | | | | | | % | Acquisition and operating expenses, net of deferrals | | | | | | | | | | | | | | | | % | Amortization of deferred acquisition costs and intangibles | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | | | | | | | | | | | | | | % | Provision for income taxes | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Income from continuing operations | | | | | | | | | | | | | | | | % | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 251 | | | $ | 219 | | | $ | 32 | | | | 15 | % | | | | 34 | | | | 31 | | | | 3 | | | | 10 | % | Net investment gains (losses) | | | (2 | ) | | | — | | | | (2 | ) | | | NM | (1) | Policy fees and other income | | | 1 | | | | 1 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | | | | 284 | | | | 251 | | | | 33 | | | | 13 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 45 | | | | 23 | | | | 22 | | | | 96 | % | Acquisition and operating expenses, net of deferrals | | | 54 | | | | 51 | | | | 3 | | | | 6 | % | Amortization of deferred acquisition costs and intangibles | | | 3 | | | | 3 | | | | — | | | | — | % | | | | 6 | | | | — | | | | 6 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 108 | | | | 77 | | | | 31 | | | | 40 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 176 | | | | 174 | | | | 2 | | | | 1 | % | Provision for income taxes | | | 37 | | | | 37 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 139 | | | | 137 | | | | 2 | | | | 1 | % | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | 2 | | | | — | | | | 2 | | | | NM | (1) | | | | — | | | | — | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 141 | | | $ | 137 | | | $ | 4 | | | | 3 | % | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased primarily from higher premiums mainly attributable to higher premiumsinsurance in-force and an increase in investment income,policy cancellations in our single premium mortgage insurance product, partially offset by lower average premium rates and higher ceded premiums from reinsurance transactions executed in the current year. These increases were partially offset by higher operating costs and losses largely from new delinquencies driven primarily by an increase in borrower forbearance as a result of COVID-19. The third quarter of 2020 also includes favorable development on incurred but not reported delinquencies established in the current year.second quarter of 2020. Premiums increased mainly attributable to higher insurance in-force and an increase in policy cancellations in our single premium mortgage insurance product driven largely by higher mortgage refinancing, partially offset by lower average premium rates and higher ceded premiums from reinsurance transactions executed in the current year. Net investment income increased primarily from higher average invested assets in the current year. Benefits and other changes in policy reserves increased largely from higher new delinquencies driven primarily by an increase in borrower forbearance as a result of COVID-19 and lower net benefits from cures and aging of existing delinquencies, partially offset by a decrease in newfavorable development of $23 million on incurred but not reported delinquencies and a lower average reserve on new delinquenciesestablished in the current year.second quarter of 2020.
Acquisition and operating expenses, net of deferrals, increased primarily attributable to higher operating costs driven mostly by increased sales in the current year. Interest expense in the current year relates to the senior notes issued by GMHI in August 2020. Provision for income taxes. The effective tax rate was 21.3% and 21.2% for both the three months ended March 31,September 30, 2020 and 2019, consistent with the U.S. corporate federal income tax rate.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 720 | | | $ | 619 | | | $ | 101 | | | | 16 | % | | | | 98 | | | | 87 | | | | 11 | | | | 13 | % | Net investment gains (losses) | | | (3 | ) | | | — | | | | (3 | ) | | | NM | (1) | Policy fees and other income | | | 4 | | | | 3 | | | | 1 | | | | 33 | % | | | | | | | | | | | | | | | | | | | | | 819 | | | | 709 | | | | 110 | | | | 16 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 292 | | | | 39 | | | | 253 | | | | NM | (1) | Acquisition and operating expenses, net of deferrals | | | 151 | | | | 141 | | | | 10 | | | | 7 | % | Amortization of deferred acquisition costs and intangibles | | | 11 | | | | 11 | | | | — | | | | — | % | | | | 6 | | | | — | | | | 6 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 460 | | | | 191 | | | | 269 | | | | 141 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 359 | | | | 518 | | | | (159 | ) | | | (31 | )% | Provision for income taxes | | | 76 | | | | 110 | | | | (34 | ) | | | (31 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 283 | | | | 408 | | | | (125 | ) | | | (31 | )% | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | 3 | | | | — | | | | 3 | | | | NM | (1) | | | | — | | | | — | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 286 | | | $ | 408 | | | $ | (122 | ) | | | (30 | )% | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily attributable to higher losses largely from new delinquencies driven in large part by a significant increase in borrower forbearance as a result of COVID-19, reserve strengthening on existing delinquencies and from lower net benefits from cures and aging of existing delinquencies in the current year. These decreases were partially offset by higher premiums largely driven by higher insurance in-force and an increase in policy cancellations in our single premium mortgage insurance product primarily due to higher mortgage refinancing in the current year. Premiums increased mainly attributable to higher insurance in-force and an increase in policy cancellations in our single premium mortgage insurance product driven largely by higher mortgage refinancing, partially offset by higher ceded premiums from reinsurance transactions executed in the current year and lower average premium rates. Net investment income increased primarily from higher average invested assets in the current year.
Benefits and other changes in policy reserves increased largely from $231 million of losses from new delinquencies driven primarily by a significant increase in borrower forbearance as a result of COVID-19 and strengthening of existing reserves of $28 million in the current year primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. We also experienced lower net benefits from cures and aging of existing delinquencies in the current year. The prior year included a $10 million favorable reserve adjustment mostly associated with lower expected claim rates. Acquisition and operating expenses, net of deferrals, increased primarily attributable to higher operating costs driven mostly by increased sales in the current year. Interest expense in the current year relates to the senior notes issued by GMHI in August 2020. Provision for income taxes. 2020 and 2019, respectively, consistent with the U.S. corporate federal income tax rate. U.S. Mortgage Insurance selected operating performance measures In the third quarter of 2020, we revised the product descriptions in our U.S. Mortgage Insurance segment to conform with industry convention and certain regulatory definitions, including classifications under PMIERs. Prior year amounts have been reclassified to conform to the current year presentation. In the United States, we offer the following mortgage insurance products: Primary Mortgage Insurance Substantially all of our policies are primary mortgage insurance, which provides protection on individual loans at specified coverage percentages. Primary mortgage insurance is placed on individual loans at the time of origination and are typically delivered to us on a loan by loan basis. Primary mortgage insurance can also be delivered to us on an aggregated basis, whereby each mortgage in a given loan portfolio is insured in a single transaction after the point of origination. Pool mortgage insurance transactions provide coverage on a finite set of individual loans identified by the pool policy. Pool policies contain coverage percentages and provisions limiting the insurer’s obligation to pay claims until a threshold amount is reached (known as a “deductible”) or capping the insurer’s potential aggregate liability for claims payments (known as a “stop loss”) or a combination of both provisions. Pool mortgage insurance is typically used to provide additional credit enhancement for certain secondary market mortgage transactions. The following table setstables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | As of or for the three
months ended | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | Primary insurance in-force (1) | | $ | | | | $ | | | | $ | | | | | | % | | | $ | | | | $ | | | | $ | | | | | | % | | | $ | | | | $ | | | | $ | | | | | | % | | | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | Increase (decrease) and
percentage change | | | | | | | | | | | | Primary insurance in-force (1) | | $ | 212,400 | | | $ | 185,400 | | | $ | 27,000 | | | | 15 | % | | | $ | 51,500 | | | $ | 45,100 | | | $ | 6,400 | | | | 14 | % |
| (1) | Primary insurance in-force represents the aggregate original loan balance for outstanding insurance policies and is used to determine premiums. Original loan balances are presented for policies with level renewal premiums. Amortized loan balances are presented for policies with annual, amortizing renewal premiums. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | $ | 26,600 | | | $ | 18,900 | | | $ | 7,700 | | | | 41 | % | | $ | 72,900 | | | $ | 44,300 | | | $ | 28,600 | | | | 65 | % | | | $ | 240 | | | $ | 213 | | | $ | 27 | | | | 13 | % | | $ | 665 | | | $ | 610 | | | $ | 55 | | | | 9 | % |
Primary insurance in-force and risk in-force Primary insurance in-force and riskin-force
Primary insurancein-force
increased largely as a result of $28.3 billion in higher flow insurancein-force,
which increased from $169.3 billion as of March 31, 2019 to $197.6 billion as of March 31, 2020 as a result of new insurance written, partially offset by lapses and cancellations as we experienced lower persistency during the current year. Primary persistency was 64% and 80% for the nine months ended September 30, 2020 and 2019, respectively. This decrease in persistency resulted in elevated single premium policy cancellations in the current year. The increase in flow insuranceRisk in-force was partially offset by a decline of $0.2 billion in mortgage insurance on a bulk basis (“bulk insurance”)in-force,
which decreased from $1.1 billion as of March 31, 2019 to $0.9 billion as of March 31, 2020 from cancellations and lapses. In addition, riskin-force
increased primarily as a result of higher flow newprimary insurance written. Flow persistency was 76% and 86% for the three months ended March 31, 2020 and 2019, respectively.in-force.NewFor the three and nine months ended September 30, 2020, new insurance written increased primarily due to higher mortgage refinancing originations and our higher estimateda larger private mortgage insurance market share in the current year.
Net premiums written for the three and nine months ended September 30, 2020 increased primarily from higher average flowprimary insurance in-force, partially offset by higher ceded premiums from reinsurance transactions executed in the current year. The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the dates indicated: | | | | | | | | | | | | | | | | Three months ended
March 31, | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | Expense ratio (net earned premiums) | | | | % | | | | % | | | | )% | Expense ratio (net premiums written) | | | | % | | | | % | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | | | | Nine months ended
September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18 | % | | | 11 | % | | | 7 | % | | | 41 | % | | | 6 | % | | | 35 | % | Expense ratio (net earned premiums) | | | 23 | % | | | 24 | % | | | (1 | )% | | | 23 | % | | | 24 | % | | | (1 | )% | Expense ratio (net premiums written) | | | 24 | % | | | 25 | % | | | (1 | )% | | | 24 | % | | | 25 | % | | | (1 | )% |
The loss ratio is the ratio of benefits and other changes in policy reserves to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles. The loss ratio was flat compared toincreased for the three months ended March 31, 2019September 30, 2020 largely from higher new delinquencies driven primarily by an increase in borrower forbearance as higher losses froma result of COVID-19 and lower net benefits from cures and aging of existing delinquencies, werepartially offset by a decreasefavorable development of $23 million on incurred but not reported delinquencies established in the second quarter of 2020. The loss ratio increased for the nine months ended September 30, 2020 largely from $231 million of losses from new delinquencies driven primarily by a significant increase in borrower forbearance as a result of COVID-19 and strengthening of
existing reserves of $28 million in the current year primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. We also experienced lower averagenet benefits from cures and aging of existing delinquencies in the current year. The prior year included a $10 million favorable reserve on new delinquenciesadjustment mostly associated with lower expected claim rates. The expense ratio (net earned premiums) for the three and nine months ended September 30, 2020 decreased mainly driven by higher net earned premiums, partially offset by higher operating costs in the current year. The expense ratio (net earned premiums)premiums written) decreased slightly mainly driven byfor the three months ended September 30, 2020 largely due to higher net earned premiums mostlywritten, partially offset by higher operating costs.costs in the current year. The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of delinquent loans (delinquency rate) | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of flow delinquent loans (delinquency rate) | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of bulk delinquent loans (delinquency rate) | | | | % | | | | % | | | | % | A minus and sub-prime loans in-force | | | | | | | | | | | | | A minus and sub-prime delinquent loans | | | | | | | | | | | | | Percentage of A minus and sub-prime delinquent loans (delinquency rate) | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of delinquent loans (delinquency rate) | | | | % | | | | % | | | | % |
(1) | Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 345 as of March 31, 2020, 348 as of December 31, 2019 and 360 as of March 31, 2019. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 913,974 | | | | 851,070 | | | | 833,215 | | | | | 49,692 | | | | 16,392 | | | | 15,758 | | Percentage of delinquent loans (delinquency rate) | | | 5.44 | % | | | 1.93 | % | | | 1.89 | % | | | | | A minus and sub-prime loans in-force | | | 10,984 | | | | 12,688 | | | | 13,345 | | A minus and sub-prime delinquent loans | | | 2,342 | | | | 2,266 | | | | 2,320 | | Percentage of A minus and sub-prime delinquent loans (delinquency rate) | | | 21.32 | % | | | 17.86 | % | | | 17.38 | % | | | | | | | | | | | | | | | | | | | | | 11,888 | | | | 13,266 | | | | 13,738 | | | | | 434 | | | | 382 | | | | 415 | | Percentage of delinquent loans (delinquency rate) | | | 3.65 | % | | | 2.88 | % | | | 3.02 | % |
Delinquency rates have declinedincreased primarily as a result of the residential real estate marketrise in unemployment and the United States has continued to strengthen during recent years.significant increase in borrower forbearance driven by COVID-19.
The following tables set forth flowprimary delinquencies, direct case reserves and risk in-force by aged missed payment status in our U.S. mortgage insurance portfolio as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | (Dollar amounts in millions) | | | | | | | | | | | Reserves as % of risk in-force | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | (Dollar amounts in millions) | | | | | | | | | | | Reserves as % of risk in-force | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | (Dollar amounts in millions) | | | | | | | | | | | Reserves as % of risk in-force | | | | | | | | | | | | | | | | | | | | | | 13,904 | | | $ | 49 | | | $ | 763 | | | | 6 | % | | | | 32,366 | | | | 264 | | | | 2,014 | | | | 13 | % | | | | 3,422 | | | | 123 | | | | 168 | | | | 73 | % | | | | | | | | | | | | | | | | | | | | | 49,692 | | | $ | 436 | | | $ | 2,945 | | | | 15 | % | | | | | | | | | | | | | | | | | |
| (1) | Direct flowprimary case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves. |
| | | | | | | | | | | | | | | | | | | | | | (Dollar amounts in millions) | | | | | | | | | | | Reserves as % of risk in-force | | | | | | | | | | | | | | | | | | | | | | 8,618 | | | $ | 28 | | | $ | 386 | | | | 7 | % | | | | 4,876 | | | | 78 | | | | 225 | | | | 35 | % | | | | 2,898 | | | | 99 | | | | 146 | | | | 68 | % | | | | | | | | | | | | | | | | | | | | | 16,392 | | | $ | 205 | | | $ | 757 | | | | 27 | % | | | | | | | | | | | | | | | | | |
| (1) | Direct primary case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves. |
As of September 30, 2020, we have experienced a material increase in total missed payments and payments that are delinquent for 4-11 months due in large part to borrowers entering a forbearance plan driven by COVID-19. Forbearance plans may be extended up to a year, therefore, it is possible we could experience elevated delinquencies in this aged category for the remainder of 2020 and the first half of 2021. Resolution of a delinquency in a plan, whether it ultimately results in a cure or a claim, is difficult to estimate and may not be known for several quarters, if not longer. Primary insurance delinquency rates differ from region to region in the United States at any one time depending upon economic conditions and cyclical growth patterns. The tables below set forth our primary delinquency rates for the various regions of the United States and the 10 largest states by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender. | | | | | | | | | | | | | | | | | | | | | | | | risk in-force as of March 31, 2020 | | | Percent of total reserves as of March (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
risk in-force as of
September 30, 2020 | | |
reserves as of September 30, 2020 (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19 | % | | | 20 | % | | | 5.96 | % | | | 2.14 | % | | | 2.14 | % | | | | 18 | | | | 18 | | | | 6.86 | % | | | 1.36 | % | | | 1.28 | % | | | | 17 | | | | 15 | | | | 5.56 | % | | | 1.84 | % | | | 1.77 | % | | | | 11 | | | | 20 | | | | 6.87 | % | | | 2.69 | % | | | 2.76 | % | | | | 10 | | | | 6 | | | | 3.56 | % | | | 1.71 | % | | | 1.63 | % | | | | 10 | | | | 9 | | | | 4.79 | % | | | 1.90 | % | | | 1.84 | % | | | | 6 | | | | 5 | | | | 5.63 | % | | | 1.87 | % | | | 1.89 | % | | | | 5 | | | | 5 | | | | 4.66 | % | | | 1.90 | % | | | 1.87 | % | | | | 4 | | | | 2 | | | | 3.13 | % | | | 1.69 | % | | | 1.66 | % | | | | | | | | | | | | | | | | | | | | | | | | | 100 | % | | | 100 | % | | | 5.44 | % | | | 1.93 | % | | | 1.89 | % | | | | | | | | | | | | | | | | | | | | | |
| (1) | Total reserves were $230$474 million as of March 31,September 30, 2020. |
| (2) | Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee. |
| (3) | Alaska, California, Hawaii, Nevada, Oregon and Washington. |
| (4) | Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah. |
| (5) | New Jersey, New York and Pennsylvania. |
| (6) | Indiana, Kentucky, Michigan and Ohio. |
| (7) | Illinois, Minnesota, Missouri and Wisconsin. |
(7) | Indiana, Kentucky, Michigan and Ohio. |
| (8) | Delaware, Maryland, Virginia, Washington D.C. and West Virginia. |
| (9) | Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont. |
| (10) | Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming. |
| | | | | | | | | | | | | | | | | | | | | | | | risk in-force as of March 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % | | | | | % | | | | % | | | | % | | | | % | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | |
risk in-force as of
September 30, 2020 | | |
reserves as of September 30, 2020 (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | % | | | 11 | % | | | 7.13 | % | | | 1.42 | % | | | 1.27 | % | | | | 7 | % | | | 7 | % | | | 6.57 | % | | | 2.02 | % | | | 1.86 | % | | | | 7 | % | | | 10 | % | | | 8.04 | % | | | 2.13 | % | | | 2.18 | % | | | | 5 | % | | | 6 | % | | | 5.90 | % | | | 2.25 | % | | | 2.10 | % | | | | 5 | % | | | 11 | % | | | 7.78 | % | | | 2.98 | % | | | 3.00 | % | | | | 4 | % | | | 2 | % | | | 3.53 | % | | | 1.43 | % | | | 1.31 | % | | | | 4 | % | | | 3 | % | | | 5.60 | % | | | 1.10 | % | | | 1.08 | % | | | | 4 | % | | | 3 | % | | | 4.52 | % | | | 2.12 | % | | | 2.18 | % | | | | 3 | % | | | 3 | % | | | 4.47 | % | | | 1.79 | % | | | 1.75 | % | | | | 3 | % | | | 2 | % | | | 5.01 | % | | | 1.46 | % | | | 1.42 | % |
| (1) | Total reserves were $230$474 million as of March 31,September 30, 2020. |
The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of March 31,September 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percent of total reserves (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | $ | | | | | | % | | $ | | | | | | % | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | $ | | | | | | % | | $ | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percent of total reserves (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6.08 | % | | | 3.7 | % | | $ | 870 | | | | 0.4 | % | | $ | 212 | | | | 0.4 | % | | | | 5.43 | % | | | 27.8 | | | | 12,940 | | | | 6.1 | | | | 2,932 | | | | 5.7 | | | | | 4.20 | % | | | 1.3 | | | | 1,858 | | | | 0.9 | | | | 404 | | | | 0.8 | | | | | 4.13 | % | | | 1.3 | | | | 2,567 | | | | 1.2 | | | | 613 | | | | 1.2 | | | | | 4.45 | % | | | 3.1 | | | | 4,944 | | | | 2.3 | | | | 1,174 | | | | 2.3 | | | | | 4.15 | % | | | 5.3 | | | | 10,336 | | | | 4.9 | | | | 2,465 | | | | 4.8 | | | | | 3.88 | % | | | 9.2 | | | | 19,715 | | | | 9.3 | | | | 4,727 | | | | 9.2 | | | | | 4.24 | % | | | 11.4 | | | | 20,541 | | | | 9.7 | | | | 4,938 | | | | 9.6 | | | | | 4.75 | % | | | 13.4 | | | | 21,282 | | | | 10.0 | | | | 5,119 | | | | 9.9 | | | | | 4.20 | % | | | 18.2 | | | | 46,638 | | | | 21.9 | | | | 11,346 | | | | 22.1 | | | | | 3.42 | % | | | 5.3 | | | | 70,745 | | | | 33.3 | | | | 17,463 | | | | 34.0 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.06 | % | | | 100.0 | % | | $ | 212,436 | | | | 100.0 | % | | $ | 51,393 | | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Total reserves were $230$474 million as of March 31,September 30, 2020. |
Australia Mortgage Insurance segment 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 the firstthird quarter of 2020, the Australian dollar weakenedstrengthened against the U.S. dollar compared to the firstthird quarter of 2019, which negativelypositively 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. COVID-19
is having a significant impact on the Australian economy. To curbAustralia has made progress in containing the spread of COVID-19, and the virus,economy is in the Australian government restrictedearly stages of recovery, with the movementexception of people within the country by implementing social distancing measures and shutting down allnon-essential
businesses. This has resultedVictoria, which had been in major disruptions to economicextended lockdown since June 2020. However,
activity acrossmany of the country. The Australian Government has taken steps to support jobs, incomes and businesses by providing multiple economic stimulus packages, including wage subsidies, income support to households and cash flow support to businesses. In addition,Victoria restrictions were lifted or relaxed in late October 2020 as the number of COVID-19 cases were reduced. Early in the pandemic, many of our lender customers have announced initiativescreated programs that allow affected homeownersborrowers the option to defer their mortgage repayments, without penalty, for a period of up to six months. Homeowners that participateUnder regulatory guidance, borrowers participating in such lender hardshipthese programs, will not beunless previously delinquent, are reported as delinquentcurrent during this time. In response,the deferral period. As of September 30, 2020, the business had approximately 31,000 insured loans in-force still participating in a deferral program, down from over 48,000 as of June 30, 2020. This represents approximately 3% of our mortgage insurance businesstotal insured loans in-force as of September 30, 2020. For many borrowers, the six-month deferral period expired in Australia expanded its COVID-19 hardship policy to enable lenders to further support borrowersSeptember 2020. Therefore, on September 22, 2020, APRA released guidance regarding treatment of loans impacted by COVID-19, including options for loans to be restructured without being treated as delinquent. Lenders have been completing serviceability assessments to determine the pandemic.most appropriate solutions for borrowers experiencing hardships, including, in some cases, extension of payment deferral programs. The Australian government continued to provide support for incomes, jobs and businesses with additional measures announced in the Federal Budget in October 2020. While the government programs and lender initiatives are expected tomay lessen the effect of COVID-19 on the loss experience inrelated losses to the business, uncertainties remain, and it could take a considerable amount of time for the ultimate impact will depend oneconomy to recover the length of COVID-19lost output and employment resulting from the speed of the economic recovery.pandemic. We continue to actively consider the potential economic impacts and work closely with our lender customers to support borrowers who have been impacted by COVID-19 COVID-19.
.In addition toCOVID-19,
certain areas of Australia have been impacted by bushfires that occurred in late 2019 and continued into the first quarter of 2020. At this time, we do not believe there will be a significant impact to the business, and we expect our exposure to be limited to any economic downturn that may occur in the impacted regions.As of the FebruaryAugust 2020 release of its Statement on Monetary Policy, the Reserve Bank of Australia (“RBA”) expectednoted that the Australian gross domestic product (“GDP”)outbreak of COVID-19 has caused the largest shock to have experienced moderate growtheconomic activity in Australia since the first quarter of 2020, supported by strengthened housing activity and export growth. However,1930’s, with the impact ofCOVID-19
is expectedpeak to lead to uncertainty and material contractionstrough GDP decline over the first half of 2020. The future growth2020 expected to have been around 7%. In addition, there have been large declines in employment and approximately 30% of the Australian GDP will dependcountry’s working age population is receiving income support through government programs. Although recovery has begun, the nature and speed of recovery remains highly uncertain, and as a result, the pandemic is expected to have long-lasting effects on the time it takes to bring the virus under control and the government’s economic responses, in addition to how countries around the world progress and support economic activity. As part of a comprehensive package to support the Australian economy during this period of uncertainty,economy. In October 2020, the RBA reducedmaintained its current policy settings, including keeping its official cash rate in the first quarter of 2020 toat 0.25% , down from 0.75%. The RBA noted that it will maintain highly accommodative policy settings as of the end of 2019. According to RBA’s governor, the cash rate could potentially remain at this level for three yearslong as RBA’s Boardrequired and will not increase the cash rate target until progress is made toward full employment and it is confident that inflation will remain within a target range of two2% to three percent.3%. The MarchSeptember 2020 unemployment rate increased slightlydecreased to 5.2%6.9% from 5.1%7.4% at the end of 2019. However, the unemployment rate is expected to rise sharplysecond quarter of 2020 as the increase in the coming months as a resultnumber of employed individuals outpaced an increase in participation. According to the shut-downRBA, while labor conditions have somewhat improved, unemployment and underemployment are likely to remain high for an extended period.As of major industries across the country. MarchSeptember 30, 2020, home prices in the combined capital cities of Australia were approximately 8%5% higher than the prior year, as housing values in the majority of the capital cities continuedcompared to rise during the first quarter of 2020.September 30, 2019. The Sydney and Melbourne housing markets weremarket was the main driversdriver of growth, with annual home price increases of 13% and 12%, respectively. Although Australia’s housing values continued to climb during the first quarter ofapproximately 8%. Despite this annual growth, in September 2020, the second half of March 2020 experiencedcombined capital cities recorded a month-over-month home price decline for the fifth consecutive month, largely due to decreases in growthSydney and Melbourne. Due to COVID-19, the housing market outlook faces headwinds as social distancing policies took effectfiscal support is reduced and confidence weakened. This reversal in trend could persist as the economic impact ofCOVID-19labor markets remain weak.
continues to unfold.Our mortgage insurance business in Australia completed a review of its premium earnings pattern in the fourth quarter of 2019, which resulted in no changes to the earnings pattern adopted in the fourth quarter of 2017. The adjustment to our premium earnings pattern in the fourth quarter of 2017 was applied on a retrospective basis under U.S. GAAP, however, under local Australian Accounting Standards (“AAS”) this adjustment was applied on a prospective basis. Due to this divergence in accounting application, the financial results and certain metrics, such as the loss ratio and expense ratios, for our mortgage insurance business in Australia were different between the two accounting standards through the firstthird quarter of 2020. These differences will continue in future periods but will become less significant as time passes. Our mortgage insurance business in Australia is expected to complete its annual review of its premium earnings pattern in the fourth quarter of 2020. Given the range of possible future adverse economic scenarios resulting from COVID-19, ourOur mortgage insurance business in Australia assessed the adequacy of its unearned premium liability under local AAS as part of its first quarter of 2020 results. The liability adequacy test under AAS resulted in a
deficiency, mostly driven by higher expected future claims. Accordingly, our Australia mortgage insurance business wrote off
wrote-off AUD$182 million of its DAC balance as part of its first quarter of 2020 results. There was no deficiency adjustment under U.S. GAAP primarily due to a higher unearned premium reserve and a lower DAC balance. This further contributed to differences in results for our Australia mortgage insurance business under the two accounting standards for the nine months ended September 30, 2020. Results of liability adequacy and premium deficiency tests conducted for AAS and U.S. GAAP, respectively, in the firstthird quarter of 2020.2020 did not indicate a deficiency and therefore, no additional charges were recorded. Our mortgage insurance business in Australia had lower losses in the firstthird quarter of 2020 compared to the firstthird quarter of 2019 primarily fromas the impact of COVID-19 restrictions and government and lender support packages caused a change to the normal delinquency development and progression patterns, which resulted in favorable aging of existing delinquencies.delinquencies and lower new reported delinquencies, net of cures, in the current year. This was partially offset by a loss reserve strengthening primarily related to the economic impacts caused by COVID-19, particularly in Victoria, and to account for many aged delinquencies that are not proceeding to foreclosure at a normal pace due to court closures. Our loss reserve strengthening also included an increase in the provision for incurred but not reported losses on loans in payment deferral programs, which is largely based on the assumption that some of these loans will ultimately become delinquent regardless of being placed in the deferral program. The loss ratio infor our Australia mortgage insurance business for the three months ended March 31,September 30, 2020 was 34%37%. While we did not experience increased claims in the first quarter of 2020 dueDue to COVID-19, our mortgage insurance business in Australia anticipates future claims and reported delinquencies to increase toward the endas we move into 2021. In addition, until normal patterns of 2020,delinquency development and progression return, we expect to continue to see increases in our incurred but not reported loss reserve provision, which could negativelyfurther materially impact losses. In the first quarter of 2020,Our mortgage insurance business in Australia had higher new insurance written increased compared to the first quarter of 2019 primarily due to higher mortgage origination volume from a key customer in the current year. We also had higher gross written premiums in the firstthird quarter of 2020 compared to the firstthird quarter of 2019 from ongoing strong lender customer mortgage origination volume on prime-based, individually underwritten residential mortgage loans (“flow insurance”) supported by continued low interest rates. Gross written premiums were also higher in the third quarter of 2020 compared to the third quarter of 2019 largely as a result of higher flow new insurance written. Despite the growth trend in the first quarter of 2020, new insurance written, volumes could potentially decrease in the coming months due to economic impacts fromCOVID-19.
Netwhile net earned premiums were lower in the first quarter of 2020 compared to the first quarter of 2019 primarily from portfolio seasoning and lower policy cancellations. Our mortgage insurance business in Australia is concentrated in a small number of key customers. In October 2019, we renewed our supply and service contract with our largest customer, effective January 1, 2020, for a term of three years. In November 2018, we entered into a new contract with our second largest customer, effective November 21, 2018, with a term of two years and the option to extend for an additional year at the customer’s discretion. In May 2020, following a request-for-proposal process, this customer advised our mortgage insurance business in Australia that the contract will not be renewed and will expire in November 2020. These two customers represented 56%59% and 10%11%, respectively, of our gross written premiums infor the first quarter ofnine months ended September 30, 2020. Any termination, reduction or material change in relationship with one of them could have a material adverse effect on our future results because of our reliance on these key customers for the majority of our business. While the termination of the contract with our second largest customer will reduce gross premiums written in 2021, it is expected to modestly impact future financial results following the expiration of the existing contract in November 2020. One additional consideration related to our customer contracts is that some of our customer contracts contain provisions that allow the customer the option to terminate their contract, on a prospective basis for new business, within a specified period following a ratings downgrade. Given the potential economic impacts of COVID-19, our mortgage insurance business in Australia could be subject to aadditional ratings downgradedowngrades in the future. If that occurs, the business will work with its customers to demonstrate its credit strength and endeavor to avoid termination of any existing contracts. Our mortgage insurance business in Australia evaluates its capital position in relation to the PCA as determined by APRA and utilizes its Internal Capital Adequacy Assessment Process as the framework to ensure that our Australia group of companies as a whole, and each regulated entity, are independently capitalized to meet regulatory requirements. As of March 31,September 30, 2020, ourits estimated PCA ratio was approximately 178%179%,
representing a decreasean increase from 191%177% as of December 31, 2019 largely from a DAC write-off of AUD$182 million recorded in connection with the completion of liability adequacy testing as part of first quarter of 2020 results.June 30, 2020. Given the economic uncertainty surrounding COVID-19, APRA has provided guidance to insurers asking them to limit discretionarymaintain caution in planning capital distributions, including dividends. Given this guidance and the uncertain economic outlook, our mortgage insurance business in Australia believes it is prudent to preserve capital to sustain its capital position. As a result, we do not expect to receive further dividends untilor other returns of capital from our mortgage insurance business in Australia for the impactremainder of 2020. The amount and timing of future dividends will depend on the economic recovery from COVID-19, is better understood to ensure that they have sufficient capital capacity to continue essential functions such as underwriting new insurance.In September 2019, the Australian Government released details of the First Home Loan Deposit Scheme (“FHLDS”), which is designed to assist eligible first-time home buyers by providing a government guarantee to participating lenders on eligible loans equal to the difference between the deposit (of at least 5%) and 20% of the purchase price. Borrower income and regional property value caps apply, and the program is intended to support up to 10,000 eligible first-time home buyers each Australian Government fiscal year, which is July 1 through June 30. If the loan comes to an end or the loan principal balance reduces to below 80% of the value of the property at purchase, the government guarantee will terminate. The FHLDS became effective on January 1, 2020 with the annual limit of 10,000 loan guarantees reached for the first year of the program that ended June 30, 2020. At this time, it is too earlyAs part of the 2020-2021 Federal Budget, in October 2020, the Australian Government committed an additional 10,000 FHLDS guarantees for the July 1, 2020 to determine what impact, if any, this programJune 30, 2021 fiscal year. The additional 10,000 guarantees are limited to new home builds, and a revised set of property price caps will have on our mortgage insurance business in Australia.
Segment results of operations Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | ) | | | | )% | | | | | | | | | | | | | ) | | | | )% | Net investment gains (losses) | | | | ) | | | | | | | | ) | | | | (1) | Policy fees and other income | | | | | | | | ) | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | | | | | | | | | | ) | | | | )% | Acquisition and operating expenses, net of deferrals | | | | | | | | | | | | | | | | % | Amortization of deferred acquisition costs and intangibles | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | | ) | | | | | | | | ) | | | | )% | Provision (benefit) for income taxes | | | | ) | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | | ) | | | | | | | | ) | | | | )% | Less: net income (loss) from continuing operations attributable to noncontrolling interests | | | | ) | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | | ) | | | | | | | | ) | | | | )% | Adjustments to income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | | | | | | ) | | | | | | | | (1) | | | | | ) | | | | | | | | ) | | | | (1) | | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’scommon stockholders | | $ | | | | $ | | | | $ | | ) | | | | )% | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 71 | | | $ | 77 | | | $ | (6 | ) | | | (8) | % | | | | 7 | | | | 13 | | | | (6 | ) | | | (46) | % | Net investment gains (losses) | | | 24 | | | | (9 | ) | | | 33 | | | | NM | (1) | Policy fees and other income | | | — | | | | 1 | | | | (1 | ) | | | (100) | % | | | | | | | | | | | | | | | | | | | | | 102 | | | | 82 | | | | 20 | | | | 24 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 26 | | | | 28 | | | | (2 | ) | | | (7) | % | Acquisition and operating expenses, net of deferrals | | | 19 | | | | 17 | | | | 2 | | | | 12 | % | Amortization of deferred acquisition costs and intangibles | | | 7 | | | | 9 | | | | (2 | ) | | | (22) | % | | | | 2 | | | | 2 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 54 | | | | 56 | | | | (2 | ) | | | (4) | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 48 | | | | 26 | | | | 22 | | | | 85 | % | Provision for income taxes | | | 15 | | | | 8 | | | | 7 | | | | 88 | % | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 33 | | | | 18 | | | | 15 | | | | 83 | % | Less: net income from continuing operations attributable to noncontrolling interests | | | 18 | | | | 10 | | | | 8 | | | | 80 | % | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | 15 | | | | 8 | | | | 7 | | | | 88 | % | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (12 | ) | | | 5 | | | | (17 | ) | | | NM | (1) | | | | 4 | | | | (1 | ) | | | 5 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 7 | | | $ | 12 | | | $ | (5 | ) | | | (42) | % | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
| (2) | For the three months ended March 31,September 30, 2020 and 2019, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $(26)$12 million and $6$(4) million, respectively. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders 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 byand from lower losses primarily from favorable aging of existing delinquenciesnet investment income in the current year.
Premiums decreased predominantly from portfolio seasoning and lower policy cancellations in the current year. Net investment income decreased largely from lower yields in the current year. Net investment gains in the current year primarily related to derivative gains and net gains from the sale of investment securities. Net investment losses in the prior year were largely driven by derivative losses and changes in the fair market value of equity securities, partially offset by net gains from the sale of investment securities. Benefits and other changes in policy reserves decreased primarily from favorable aging of existing delinquencies and lower new reported delinquencies, net of cures, partially offset by loss reserve strengthening of $24 million reflecting the economic impacts caused by COVID-19, including a provision for incurred but not reported losses on loans in payment deferral programs in the current year. Provision for income taxes. Net income from continuing operations attributable to noncontrolling interests.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 202 | | | $ | 240 | | | $ | (38 | ) | | | (16) | % | | | | 25 | | | | 44 | | | | (19 | ) | | | (43) | % | Net investment gains (losses) | | | 37 | | | | 4 | | | | 33 | | | | NM | (1) | Policy fees and other income | | | 1 | | | | — | | | | 1 | | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | 265 | | | | 288 | | | | (23 | ) | | | (8) | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 89 | | | | 82 | | | | 7 | | | | 9 | % | Acquisition and operating expenses, net of deferrals | | | 54 | | | | 51 | | | | 3 | | | | 6 | % | Amortization of deferred acquisition costs and intangibles | | | 21 | | | | 27 | | | | (6 | ) | | | (22) | % | | | | 5 | | | | — | | | | 5 | | | | NM | (1) | | | | 5 | | | | 6 | | | | (1 | ) | | | (17) | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 174 | | | | 166 | | | | 8 | | | | 5 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 91 | | | | 122 | | | | (31 | ) | | | (25) | % | Provision for income taxes | | | 28 | | | | 37 | | | | (9 | ) | | | (24) | % | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 63 | | | | 85 | | | | (22 | ) | | | (26) | % | Less: net income from continuing operations attributable to noncontrolling interests | | | 35 | | | | 45 | | | | (10 | ) | | | (22) | % | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | 28 | | | | 40 | | | | (12 | ) | | | (30) | % | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (19 | ) | | | (2 | ) | | | (17 | ) | | | NM | (1) | | | | 3 | | | | — | | | | 3 | | | | NM | (1) | | | | 5 | | | | 1 | | | | 4 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 17 | | | $ | 39 | | | $ | (22 | ) | | | (56) | % | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
| (2) | For the nine months ended September 30, 2020 and 2019, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $18 million and $2 million, respectively. |
| (3) | For the nine months ended September 30, 2020, goodwill impairment was adjusted for the portion attributable to noncontrolling interests of $2 million. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders 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,
lower net investment income and higher losses mostly associated with the economic impacts caused byCOVID-19 in the current year. Premiums decreased predominantly from portfolio seasoning and lower policy cancellations in the current year. The threenine months ended March 31,September 30, 2020 included a decrease of $4$9 million attributable to changes in foreign exchange rates. Net investment income decreased largely from lower average invested assets and lower yields in the current year. Net investment losses in the current year weregains increased primarily from higher derivative lossesgains and higher net unrealized losses from a decrease in the fair value of equity securities, partially offset by net realized gains from the sale of investment securities. Net investment gains in the prior year were largely from net realized gains from the sale of investment securities and derivative gains.in the current year. The threenine months ended March 31,September 30, 2020 included an increasea decrease of $3$5 million attributable to changes in foreign exchange rates. Benefits and other changes in policy reserves decreasedincreased primarily from loss reserve strengthening of $42 million during the second and third quarters of 2020 reflecting the economic impacts caused by COVID-19, including provisions for incurred but not reported losses on loans in payment deferral programs. These increases were partially offset by favorable aging of existing delinquencies in the current year. The nine months ended September 30, 2020 included a decrease of $5 million attributable to changes in foreign exchange rates. Amortization of DAC and intangibles decreased largely from lower contract fees amortization in the current year. We recorded a goodwill impairment charge of $5 million in the current year, which represented the full amount of goodwill related to our mortgage insurance business in Australia. Provision (benefit) for income taxes. The effective tax rate was 30.0% for both the threenine months ended March 31,September 30, 2020 and 2019, consistent with our jurisdictional rate. Net income (loss) attributable to noncontrolling interestsinterests. . The decrease to a loss in the current year from income in the prior year was predominantly related to lower premiums and lower net investment income, partially offset by higher net investment losses driven largely by derivative lossesgains in the current year. Australia Mortgage Insurance selected operating performance measures As of March 31,September 30, 2020, our mortgage insurance business in Australia had structured insurance transactions with three lenders where it was in a secondary loss position. The insurance portfolio metrics associated with these transactions, which include insurance in-force, risk in-force, new insurance written, loans in-force and delinquent loans, are excluded from the following tables. These arrangements represented approximately $143$168 million and $157$152 million of risk in-force as of March 31,September 30, 2020 and 2019, respectively. The following table setstables set forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | As of or for the three
months ended | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | Primary insurance in-force | | $ | | | | $ | | | | $ | | ) | | | | )% | | | $ | | | | $ | | | | $ | | ) | | | | )% | | | $ | | | | $ | | | | $ | | | | | | % | | | $ | | | | $ | | | | $ | | | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | Increase
(decrease) and
percentage change | | | | | | | | | | | | Primary insurance in-force | | $ | 215,800 | | | $ | 206,400 | | | $ | 9,400 | | | | 5 | % | | | $ | 75,200 | | | $ | 71,900 | | | $ | 3,300 | | | | 5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | $ | 5,600 | | | $ | 4,600 | | | $ | 1,000 | | | | 22 | % | | $ | 14,400 | | | $ | 13,400 | | | $ | 1,000 | | | | 7 | % | | | $ | 91 | | | $ | 70 | | | $ | 21 | | | | 30 | % | | $ | 223 | | | $ | 180 | | | $ | 43 | | | | 24 | % |
Our mortgage insurance business in Australia currently provides 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents our highest expected average per-claim payment for any one underwriting year over the life of our business in Australia. We also have certain risk share arrangements where we provide pro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicable pro-rata coverage amount provided is used when applying the factor.
Primary insurance in-force and risk in-force Primary insurance in-force and risk in-force decreased primarily from decreases of $30.1 increased $12.5 billion and $10.5$4.4 billion, respectively, duefrom changes attributable to foreign exchange rates. Excluding the effects of changes in foreign exchange rates, primary insurance in-force and risk in-force decreased primarily driven by policy cancellations in the current year. New insurance written increased mainly attributable tofor the three and nine months ended September 30, 2020 primarily from higher lender customer flow mortgage origination volume fromsupported by ongoing low interest rates. The increase for the nine months ended September 30, 2020 was partially offset by lower mortgage insurance written on a key customerbulk basis (“bulk insurance”) in the current year. The three months ended March 31, 2020 includedyear, as well as a decrease of $200$600 million attributable to changes in foreign exchange rates. 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 March 31,September 30, 2020 and December 31, 2019, our unearned premium reserves were $0.9$1.1 billion and $1.0 billion, respectively. The three months ended March 31, 2020 included a decrease of $130 million attributable to changes in foreign exchange rates. Net premiums written increased for the three and nine months ended September 30, 2020 primarily due to higher flow new insurance written from an increase in mortgage origination volume from a key customer in the current year. The three and nine months ended March 31,September 30, 2020 included an increase of $2 million and a decrease of $3$9 million, respectively, attributable to changes in foreign exchange rates.
The following table sets forth the loss and expense ratios for our Australia Mortgage Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | Three months ended March 31, | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | Expense ratio (net earned premiums) | | | | % | | | | % | | | | % | Expense ratio (net premiums written) | | | | % | | | | % | | | | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | | | | Nine months ended
September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | 37 | % | | | 36 | % | | | 1 | % | | | 44 | % | | | 34 | % | | | 10 | % | Expense ratio (net earned premiums) | | | 37 | % | | | 34 | % | | | 3 | % | | | 40 | % | | | 32 | % | | | 8 | % | Expense ratio (net premiums written) | | | 29 | % | | | 38 | % | | | (9 | )% | | | 36 | % | | | 43 | % | | | (7 | )% |
The loss ratio is the ratio of benefits and other changes in policy reserves to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our mortgage insurance business in Australia, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of DAC and intangibles.intangibles and goodwill impairment charges. The loss ratio was flat asincreased for the decrease inthree and nine months ended September 30, 2020 primarily attributable to lower premiums from portfolio seasoning and lower policy cancellations was offset by the decrease in losses primarily from favorable aging of existing delinquencies in the current year. The expense ratio (net earned premiums) increased for the three and nine months ended September 30, 2020 primarily from lower net earned premiums as discussed above. The expense ratio (net premiums written) decreased for the three and nine months ended September 30, 2020 primarily from higher net premiums written primarily due to an increase in flow mortgage origination volume from a key customer in the current year.volume.
The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our Australia mortgage insurance portfolio as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | Primary insured loans in-force | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of delinquent loans (delinquency rate) | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of flow delinquent loans (delinquency rate) | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Percentage of bulk delinquent loans (delinquency rate) | | | | % | | | | % | | | | % |
| | | | | | | | | | | | | | | | | | | | | | | | Primary insured loans in-force | | | 1,193,072 | | | | 1,290,216 | | | | 1,293,961 | | | | | 7,422 | | | | 7,221 | | | | 7,713 | | Percentage of delinquent loans (delinquency rate) | | | 0.62 | % | | | 0.56 | % | | | 0.60 | % | | | | | | | | 1,096,679 | | | | 1,189,019 | | | | 1,192,282 | | | | | 7,171 | | | | 7,003 | | | | 7,469 | | Percentage of flow delinquent loans (delinquency rate) | | | 0.65 | % | | | 0.59 | % | | | 0.63 | % | | | | | | | | 96,393 | | | | 101,197 | | | | 101,679 | | | | | 251 | | | | 218 | | | | 244 | | Percentage of bulk delinquent loans (delinquency rate) | | | 0.26 | % | | | 0.22 | % | | | 0.24 | % |
Flow loans in-force decreased primarily from policy cancellations in the current year. Flow delinquent loans increased compared to December 31, 2019 from new delinquencies exceeding cures and claims paid in the current year. Flow delinquent loans decreased compared to September 30, 2019 driven by cures and claims paid exceeding new delinquencies.
Primary insurance delinquency rates differ by the various states and territories of Australia at any one time depending upon economic conditions and cyclical growth patterns. The table below sets forth our primary delinquency rates for the states and territories of Australia by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender. | | | | | | | | | | | | | | | | | | | | risk in-force as of March 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | | | | | | % | | | | % | | | | % | | | | | | | | | % | | | | % | | | | % | | | | | | | | | % | | | | % | | | | % | | | | | | | | | % | | | | % | | | | % | Australian Capital Territory | | | | | | | | % | | | | % | | | | % | | | | | | | | | % | | | | % | | | | % | | | | | | | | | % | | | | % | | | | % | | | | | | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | % | | | | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 28 | % | | | 0.50 | % | | | 0.42 | % | | | 0.45 | % | | | | 23 | | | | 0.77 | % | | | 0.75 | % | | | 0.80 | % | | | | 23 | | | | 0.49 | % | | | 0.41 | % | | | 0.43 | % | | | | 13 | | | | 1.04 | % | | | 1.00 | % | | | 1.06 | % | | | | 6 | | | | 0.69 | % | | | 0.65 | % | | | 0.69 | % | Australian Capital Territory | | | 3 | | | | 0.25 | % | | | 0.24 | % | | | 0.26 | % | | | | 2 | | | | 0.24 | % | | | 0.29 | % | | | 0.31 | % | | | | 1 | | | | 0.05 | % | | | 0.02 | % | | | 0.02 | % | | | | 1 | | | | 0.92 | % | | | 0.71 | % | | | 0.85 | % | | | | | | | | | | | | | | | | | | | | | 100 | % | | | 0.62 | % | | | 0.56 | % | | | 0.60 | % | | | | | | | | | | | | | | | | | |
Delinquency rates increased mainly from lower flow loans in-force as a result of policy cancellations and new delinquencies exceeding cures in the current year. U.S. Life Insurance segment The most significant impacts in our U.S. life insurance businesses from COVID-19 are related to the current low interest rate environment and equity market volatility/declines, and may also be impacted by future mortality and morbidity experience.continued elevated mortality. Our long-term care insurance products could be negatively impacted by the current low interest rate environment, particularly as it relates to loss recognition testing and asset adequacy analysis, as well as experiencing further delays in approvals for in-force rate actions. These impacts would be partially offset by higher mortality which is favorable to our long-term care insurance products. Future changes in morbidity experience may also impact our long-term care insurance business. The low interest rate environment and decliningas well as volatility in equity markets have adversely impacted earnings in our fixed annuity products; however, if mortality isproducts with limited offsetting benefit from higher in future months, it could benefit earnings in these products in future quarters.mortality. Conversely, higher mortality rates could lower profitability in our life insurance products.
In our long-term care insurance products, we would expecthave experienced some degree of higher mortality during COVID-19 which would havehas had a favorable impact on claims. We areclaim and active policy reserves. Although it is not expectingCOVID-19
our practice to drive higher claims frequency intrack cause of death for policyholders and claimants, we believe the results of our long-term care insurance business were likely impacted by COVID-19 in the second and third quarters of 2020. We have experienced lower new claims incidence; however, we may observe temporarily reduced incidencedo not expect this to be permanent but rather a temporary reduction while shelter-in-place and social distancing protocols are in effect. We have temporarily discontinued in-person assessments to assess eligibility for benefits, and are temporarily unable to perform our full intake assessment, which requires anin-person
assessment, but are relying on an abbreviated assessment form and evaluating initial claim eligibility through autilizing virtual assessment techniqueassessments in the interim, with an in-person assessment to follow once social distancing protocols are relaxed. As a result,For claimants without the technology to perform virtual assessments, we may experience temporary delays in adjudicating new claims and disruptions to our normal intake process.have alternate options for gathering information. Our long-term care insurance benefit utilization will also be affected;monitored for impact; although it is too early to tell the magnitude and/or direction of that impact. Additionally, our U.S. life insurance companies are dependent on the approval of actuarially justified in-force rate actions in our long-term care insurance business, including those rate actions which were previously
filed and are currently pending review and approval. We have experienced some delays and could experience additional delays in receiving approvals of these rate actions during COVID-19 although we do not expect a significant impact on our financial results during 2020 as a result of anythese delays. We continue to provide customer service and flexibility to our policyholders during this uncertain time and will work with them if they contact us withare available to address questions or concerns regarding their policies. For example, we have approved accommodations for certain long-term care insurance policyholders on claim given unique circumstances related toCOVID-19.
We are continually assessing our operational processes and monitoring potential impacts to morbidity due to COVID-19. In our U.S life insurance companies, we will complyhave complied with guidance issued by certain insurance regulators, such as mandates that policies cannot be lapsed or cancelled if premiums are not paid or requirements to provide extensions of grace periods during the COVID-19 outbreak. We are actively monitoring pandemic. Although most of these mandates have been lifted, we continue to monitor developments related to COVID-19 such as state directives that are issued during this time and we will continue to monitor and comply with any new guidance issued by our state insurance regulators. For statutory reporting, we were not required to non-admit premium receivables over 90 days if we were in a no lapse mandate through September 29, 2020. We may also seek permitted practices during this time to help our capital position and our ongoing risk-based capital (“RBC”) requirements if COVID-19 continues for an extended period of time. One permitted practice being considered relates to waiving the requirement tonon-admit
premium receivables over 90 days if we are in a no lapse mandate. We arehave also contactingcontacted our reinsurance counterparties to inform them of the actions we are takinghave taken in response to state bulletins on extension of grace periods and prohibition of lapsation as well as showingoffering flexibility to our policyholders who are on claim. While there are premium deferrals/grace period mandates in certain states currently in place, we doWe have not expectexperienced a significant impact on our premiums in our U.S. life insurance businesses.businesses while there have been premium deferrals/grace period mandates in place in certain states. Given our current ratings, our sales volume is low in our long-term care insurance products. In 2016, we suspended sales of our traditional life insurance and fixed annuity products. For traditional life insurance policies, where regular premiums are typically required, and universal life insurance contracts, where premiums are typically flexible but frequently require minimum premiums to be paid, subject to state mandates for additional grace periods during theCOVID-19, pandemic, policies would follow normal lapse or nonforfeiture options, if the policyholders decided not to pay their premiums. Therefore, we would not expect to experience a material financial strain in our life insurance products. There is no requirement to pay premiums in our fixed annuity contracts and benefits would adjust contractually based on actual premiums paid in these products. We actively monitor cash and highly liquid investment positions in each of our U.S. life insurance companies against operating targets that are designed to ensure that we will have the cash necessary to meet our obligations as they come due. The targets are set based on stress scenarios that have the effect of increasing our expected cash outflows and decreasing our expected cash inflows. Liquidity risk is assessed by comparing subsidiary cash to potential cash needs under a stressed liquidity scenario. The stressed scenario reflects potential policyholder surrenders, variability of normal operating cash flow and potential increase in collateral requirements under our cleared derivative program.
While the ongoing impact of COVID-19 is very difficult to predict, the related outcomes and impact on the U.S. life insurance business will depend on the length and severity of the pandemic and shape of the economic recovery. Further declines in interest rates andas well as equity marketsmarket volatility as a result of COVID-19 would increase reserves and capital requirements in our U.S. life insurance business. For sensitivities related to interest rates, lapses and mortality on our U.S. life insurance products, see “Item 7—Management’s Discussion and Analysis— Critical Accounting Estimates” in our 2019 Annual Report on Form 10-K. We will continue to monitor COVID-19 impacts and evaluate all of our assumptions that may need updating as a result of longer-term trends related to the pandemic. Results of our U.S. life insurance businesses depend significantly upon the extent to which our actual future experience is consistent with assumptions and methodologies we have used in calculating our reserves. Many factors can affect the results of our U.S. life insurance businesses. Because these factors are not known in
advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. We will continue to monitor our experience and assumptions closely and make changes to our assumptions and methodologies, as appropriate, for our U.S. life insurance products. Even small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our DAC amortization, reserve levels, results of operations and financial condition. Our liability for policy and contract claims is reviewed quarterly and we completedconduct a detailed review of our claim reserve assumptions and methodologies for our long-term care insurance business annually typically during the third or fourth quarter of each year. Our liability for future policy benefits is reviewed at least annually as a part of our loss recognition testing typically performed in the third quarter of 2019. In theor 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 oureach year. As part of loss recognition testing. Ourtesting, we also review the recoverability of assumptions, as part of our testing in the fourth quarter of 2019, included expected claim incidence, benefit utilization, mortality, persistency, interest ratesDAC and in-force
rate actions, among other assumptions. PVFP at least annually. In addition, we performedperform cash flow testing separately for each of our U.S. life insurance companies on a statutory accounting basis annually. We will complete our annual review of long-term care insurance claim reserve assumptions and complete our loss recognition and cash flow testing as well as assumption reviews in the fourth quarter of 2019.2020. Our review of assumptions, as part of our testing in the fourth quarter of 2020, will include expected claim incidence and terminations, benefit utilization, mortality, persistency, interest rates and in-force rate actions, among other assumptions. We will be specifically reviewing the basic long-term care insurance incurred but not reported reserve calculation, including the assumptions for new claim counts. While this work is ongoing, current trends do not indicate a need to strengthen the claims reserve as assumptions appear to be holding up in the aggregate.Results of our U.S. life insurance businesses are also impacted by interest rates. Low interest rates put pressure on the profitability and returns of these businesses as higher yielding investments mature and are replaced with lower yieldinglower-yielding investments. We seek to manage the impact of low interest rates through asset-liability management as well as interest rate hedging strategies for a portion of our long-term care insurance product cash flows. Additionally, certain products have implicit and explicit rate guarantees or optionality that are significantly impacted by changes in interest rates. For a further discussion of the impact of interest rates on our U.S. life insurance businesses, see “Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in our 2019 Annual Report on Form 10-K. 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. In the first quarter of 2020, low interest rates and equity market volatilitydeclines negatively impacted our variable annuity products resulting in material statutory reserve increases. However, hedge favorability, regulatory changes effective January 1,in the second and third quarters of 2020, elevated mortality in our long-term care insurance business and the repayment of the $200 million intercompany note between Genworth Holdings and GLICequity market recovery impacts on our variable annuity products favorably impacted the RBC ratio in the first quarter of 2020.our statutory capital and surplus. 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. Our assumptions are sensitive to slight variability in actual experience and small changes in assumptions could result in decreases in the margin of our long-term care insurance blocks to at/or below zero in future years. To the extent, based on reviews, the margin of our long-term care insurance block, excluding the acquired block, is negative, we would be required to recognize a loss, by amortizing more DAC and/or establishing additional benefit reserves. For our acquired block of long-term care insurance, the impacts of adverse changes in assumptions would also be reflected as a loss if our margin for this block is reduced below zero by establishing additional benefit reserves. A significant decrease in our loss recognition testing margin of our long-term care insurance blocks could have a material adverse effect on our business, results of operations and financial condition. As a result of the review of our claim reserves completed in the fourth quarter of 2018prior years, we have been establishing higher claim reserves on new claims, which has negatively impacted earnings and we expect this to continue going forward. Also, average claim reserves for new claims are trending higher over time 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. Given the ongoing challenges in our long-term care insurance business, we continue pursuing initiatives to improve the risk and profitability profile of our business including: premium rate increases and associated benefit reductions on our in-force policies; managing expense levels; executing investment strategies targeting higher returns; and enhancing our financial and actuarial analytical capabilities. Executing on our multi-year long-term care insurance in-force rate action plan with premium rate increases and associated benefit reductions on our legacy long-term care insurance policies is critical to the business. For an update on in-force rate actions, refer to “Significant Developments—U.S. Life Insurance.” As of March 31,September 30, 2020, we have suspended sales in Hawaii, Massachusetts, New Hampshire, Vermont and Montana, and will consider taking similar actions in the future in other states where we are unable to obtain satisfactory rate increases on in-force policies. We will also consider litigation against states that decline actuarially justified rate increases. As of March 31,September 30, 2020, we were in litigation with one state that has refused to approve actuarially justified rate increases. The approval process for in-force rate actions and the amount and timing of the premium rate increases and associated benefit reductions approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take a significant amount of time, and the approved amount may be phased in over time. After approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary date. As a result, the benefits of any rate increase are not fully realized until the implementation cycle is complete and are, therefore, expected to be realized over time.
We also manage risk and capital allocated to our long-term care insurance business through utilization of external reinsurance in the form of coinsurance. We executed external reinsurance agreements to reinsure 20% of all sales of our individual long-term care insurance products that have been introduced since early 2013. External new business reinsurance is dependent on a number of factors, including price, availability, risk tolerance and capital levels. Over time, there can be no assurance that affordable, or any, reinsurance will continue to be available. We also have external reinsurance on some older blocks of business which includes a treaty on a yearly renewable term basis on business that was written between 1998 and 2003. This yearly renewable term reinsurance provides coverage for claims on those policies for 15 years after the policy was written. After
15 years, reinsurance coverage ends for policies not on claim, while reinsurance coverage continues for policies on claim until the claim ends. The 15-year coverage on the policies written in 2003 expired in 2018; therefore, any new claims will not have reinsurance coverage under this treaty. Since 2013, we have seen, and may continue to see, an increase in our benefit costs as policies with reinsurance coverage exhaust their benefits or terminate and policies which are not covered by reinsurance go on claim. 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. Mortality levels may deviate each period from historical trends. Overall mortality experience was higher for the three months ended March 31,September 30, 2020 compared to three months ended March 31,September 30, 2019, and weattributable in part to COVID-19. We have experienced higher mortality than our then-current and priced-for assumptions in recent years for our universal life insurance blocks. We have also been experiencing higher mortality related charges resulting from an increase in rates charged by our reinsurance partners reflecting natural block aging and higher mortality compared to expectations. In the fourth quarter of 2019,2020, we performedwill perform our annual review of life insurance assumptions and completed our loss recognition testing.test. Our review focusedwill focus on assumptions for mortality, particularly for our conversion products,interest rates, persistency and interest rates, among other assumptions.mortality. As part of our review in the fourth quarter of 2019, we recorded $107 million of after-tax charges in our universal and term universal life insurance products primarily from assumption changes related to the lower interest rate environment. We also updated mortality assumptions for certain universal and term universal life insurance products as well as our term life insurance products in the fourth quarter of 2019. Our mortality experience for older ages and late-duration premium periods and conversion products is emerging. Assumption changes in our term life insurance products focused on mortality improvements during the post-level premium period based on observed trends in emerging experience. This change to the mortality assumption increased the loss recognition testing margin in our term life insurance products. We will continue to regularly review our mortality assumptions as well as all of our other assumptions in light of emerging experience. We may be required to make further adjustments in the future to our assumptions which could impact our universal and term universal life insurance reserves or our loss recognition testing results of our term life insurance products. Any further materially adverse changes to our assumptions, including mortality or interest rates, could have a materially negative impact on our results of operations, financial condition and business. 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 entered its
post-level period, we experienced higher lapses resulting in accelerated DAC amortization in 2019. This trend continued in the first quarter of 2020 for the 1999 block, as it reached the end of its level premium period. Additionally, we expecthave experienced a similar experiencetrend with the 20-year level premium period business written in 2000 as it entersentered its post-level period during 2020 and we expect that trend to continue in the fourth quarter of 2020 and into 2021. In the2021 albeit to a lesser extent. If lapse experience on future as additional10-, 15- and 20-year level premium period blocks enter their post-level guaranteedemerges similar to our large 20-year level premium rate period business written in 1999 and 2000, we would expect to experience volatility in DAC amortization premiums and mortality experience,if persistency is lower than original assumptions, which we expect towould reduce profitability in in our term life insurance products,products. However, going forward, given our smaller block sizes and reinsurance agreements are in amounts that couldplace, we would expect the impact to DAC amortization on policies entering
the post-level period to be material, if persistency is lower than our original assumptions as experience has emerged on earlier blocks.what we experienced in 2019 and 2020. Additionally, the extension of grace periods or no lapsation mandated by state regulators during COVID-19 may impact has impacted the timing and level of lapses for these blocks of business. We have taken actions to mitigate potentially unfavorable impacts through the use of reinsurance, particularly for certain term life insurance policies issued between 2001 and 2004. We began selling term universal life insurance in late 2009, with sales peaking in 2011 prior to discontinuing sales of the product in 2012. We priced these products assuming high lapses upon expiration of the level premium period and we continue to expect those higher lapses. As our 10-year level premium period term universal life insurance policies written in 2009 and 2010 enter their post-level premium period, we will record higher reserves during the premium grace period and will release the reserves when the policies lapse. We expect further reserve increases in these blocks through the remainder of 2020 and into 2021 until the number of policies exiting the grace period exceeds the number of policies entering the post-level guaranteed premium rate period. However, anyThe extension of grace periods orand reinstatements mandated by state regulators during COVID-19 may impact have temporarily increased the level of reserves held for these blocks of business. Results of our fixed annuities business are affected primarily by investment performance, interest rate levels, the slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, persistency and expense and commission levels. We no longer solicit sales of traditional fixed annuity products; however, we continue to service our existing retained and reinsured blocks of business. We monitor and change crediting rates on fixed annuities on a regular basis to maintain spreads and targeted returns, if applicable. However, if interest rates remain at current levels or decrease, we could see declines in spreads which impact the margins on our products, particularly our fixedsingle premium immediate annuity products. Due to the premium deficiency that existed in 2016, we continue to monitor our fixedsingle premium immediate annuity products more frequently than annually and recorded additional charges to net income during 2019. If investment performance deteriorates or interest rates decrease or remain at the current levels for an extended period of time, we could incur additional charges in the future. The impacts of future adverse changes in our assumptions could result in the establishment of additional future policy benefit reserves and would be immediately reflected as a loss if our margin for this block is again reduced below zero. Any favorable variation would result in additional margin but no immediate benefit to income and would result in higher income recognition over the remaining duration of the in-force block. block.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.
Segment results of operations Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | ) | | | | )% | Net investment gains (losses) | | | | ) | | | | | | | | ) | | | | )% | Policy fees and other income | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | ) | | | | )% | Acquisition and operating expenses, net of deferrals | | | | | | | | | | | | | | | | % | Amortization of deferred acquisition costs and intangibles | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | | ) | | | | | | | | ) | | | | (1) | Provision (benefit) for income taxes | | | | ) | | | | | | | | ) | | | | (1) | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | | ) | | | | | | | | ) | | | | (1) | Adjustments to income (loss) from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | | | | | | ) | | | | | | | | % | Losses on early extinguishment of debt | | | | | | | | | | | | | | | | (1) | Expenses related to restructuring | | | | | | | | | | | | ) | | | | )% | | | | | ) | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | ) | | $ | | ) | | | | (1) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 711 | | | $ | 717 | | | $ | (6 | ) | | | (1 | )% | | | | 726 | | | | 722 | | | | 4 | | | | 1 | % | Net investment gains (losses) | | | 348 | | | | 11 | | | | 337 | | | | NM | (1) | Policy fees and other income | | | 152 | | | | 152 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | | | | 1,937 | | | | 1,602 | | | | 335 | | | | 21 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 1,221 | | | | 1,225 | | | | (4 | ) | | | — | % | | | | 95 | | | | 106 | | | | (11 | ) | | | (10 | )% | Acquisition and operating expenses, net of deferrals | | | 158 | | | | 158 | | | | — | | | | — | % | Amortization of deferred acquisition costs and intangibles | | | 87 | | | | 89 | | | | (2 | ) | | | (2 | )% | | | | — | | | | 4 | | | | (4 | ) | | | (100 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 1,561 | | | | 1,582 | | | | (21 | ) | | | (1 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 376 | | | | 20 | | | | 356 | | | | NM | (1) | Provision for income taxes | | | 87 | | | | 10 | | | | 77 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 289 | | | | 10 | | | | 279 | | | | NM | (1) | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (348 | ) | | | (14 | ) | | | (334 | ) | | | NM | (1) | | | | 73 | | | | 3 | | | | 70 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | 14 | | | $ | (1 | ) | | $ | 15 | | | | NM | (1) | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
| (2) | For the three months ended March 31, 2020 andSeptember 30, 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(3) million and $(2) million, respectively.million. |
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: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | | | $ | | | | $ | | ) | | $ | | | | | | % | | | | | ) | | | | ) | | | | ) | | | | (1) | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Total adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | ) | | $ | | ) | | | | (1) | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | | | $ | 59 | | | $ | 21 | | | $ | 38 | | | | 181 | % | | | | (69 | ) | | | (25 | ) | | | (44 | ) | | | (176 | )% | | | | 24 | | | | 3 | | | | 21 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Total adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | 14 | | | $ | (1 | ) | | $ | 15 | | | | NM | (1) | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders Our long-term care insurance business had adjustedAdjusted operating income available to Genworth Financial, Inc.’s common stockholders of $1in our long-term care insurance business increased $38 million primarily due to an increase in claim terminations driven mostly by higher mortality in the current year, compared to anfavorable development on incurred but not reported claims and higher net investment income. These increases were partially offset by higher frequency and severity of new claims in the current year. The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders in our life insurance business increased $44 million mainly attributable to higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period, higher reserves in our 10-year term universal life insurance block entering its post-level premium period during the premium grace period and higher mortality in our universal and term universal life insurance products in the current year compared to the prior year. The prior year included an unfavorable adjustment of $20$10 million related to higher ceded reinsurance rates. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our fixed annuities business increased $21 million predominantly from $13 million of unfavorable charges related to loss recognition testing in the prior year that did not recur and higher mortality in our single premium immediate annuity products, partially offset by lower net spreads in the current year. Our long-term care insurance business increased $9 million largely from $25 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in the current year. Our life insurance business decreased $15 million mainly attributable to the continued runoff of our term and whole life insurance products in the current year. Our long-term care insurance business increased $24 million largely from an increase in average invested assets. The increase was also attributable to higher income from limited partnerships and U.S. Government Treasury Inflation Protected Securities (“TIPS”) in the current year.
Our fixed annuities business decreased $18 million largely attributable to lower average invested assets due to block runoff in the current year. Net investment gains (losses) The increase in net investment gains in our long-term care insurance business was primarily related to net gains from the sale of U.S. government securities in the current year due to portfolio rebalancing and asset exposure as a result of the prolonged low interest rate environment. The change was also attributable to higher unrealized gains from changes in the fair value of equity securities in the current year. Our life insurance business had net investment gains of $4 million in the current year compared to net investment losses of $2 million in the prior year. The increasechange to incomenet investment gains in the current year from a lossnet investment losses in the prior year was largely the result of net gains from sale of investment securities in the current year compared to net losses in the prior year. The decrease in net investment losses in our fixed annuities business was primarily driven by higher derivative gains, partially offset by higher losses on embedded derivatives related to our fixed indexed annuity products in the current year. Benefits and other changes in policy reserves Our long-term care insurance business decreased $15 million primarily due to an increase in claim terminations driven mostly by higher mortality in the current year and from favorable development on incurred but not reported claims. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $24 million reflecting our assumption that new claim incidence during this period will ultimately return to normal levels, partially offsetting the favorable development on incurred but not reported claims. These decreases were partially offset by higher incremental reserves of $50 million recorded in connection with an accrual for profits followed by losses, aging of the in-force block (including higher frequency of new claims), and higher severity of new claims in the current year. The decrease was also partially offset by a $33 million less favorable impact from reduced benefits in the current year related to in-force rate actions approved and implemented. Our life insurance business increased $41 million primarily attributable to higher mortality in our universal and term universal life insurance products in the current year compared to the prior year and from higher reserves in our 10-year term universal life insurance block entering its post-level premium period during the premium grace period. Our fixed annuities business decreased $30 million principally from $17 million of unfavorable charges in the prior year that did not recur related to loss recognition testing and higher mortality in our single premium immediate annuity products in the current year. The decrease in interest credited was related to our fixed annuities business largely driven by a decline in the average account value in the current year. The decrease in interest expense was due to our life insurance business principally related to the early redemption of non-recourse funding obligations in the current year. Provision for income taxes.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,141 | | | $ | 2,139 | | | $ | 2 | | | | — | % | | | | 2,113 | | | | 2,147 | | | | (34 | ) | | | (2) | % | Net investment gains (losses) | | | 396 | | | | 59 | | | | 337 | | | | NM | (1) | Policy fees and other income | | | 438 | | | | 490 | | | | (52 | ) | | | (11) | % | | | | | | | | | | | | | | | | | | | | | 5,088 | | | | 4,835 | | | | 253 | | | | 5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 3,731 | | | | 3,672 | | | | 59 | | | | 2 | % | | | | 292 | | | | 318 | | | | (26 | ) | | | (8) | % | Acquisition and operating expenses, net of deferrals | | | 456 | | | | 448 | | | | 8 | | | | 2 | % | Amortization of deferred acquisition costs and intangibles | | | 257 | | | | 222 | | | | 35 | | | | 16 | % | | | | 5 | | | | 13 | | | | (8 | ) | | | (62) | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 4,741 | | | | 4,673 | | | | 68 | | | | 1 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 347 | | | | 162 | | | | 185 | | | | 114 | % | Provision for income taxes | | | 93 | | | | 53 | | | | 40 | | | | 75 | % | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 254 | | | | 109 | | | | 145 | | | | 133 | % | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (402 | ) | | | (65 | ) | | | (337 | ) | | | NM | (1) | (Gains) losses on early extinguishment of debt | | | 4 | | | | — | | | | 4 | | | | NM | (1) | Expenses related to restructuring | | | — | | | | 3 | | | | (3 | ) | | | (100) | % | | | | 83 | | | | 13 | | | | 70 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (61 | ) | | $ | 60 | | | $ | (121 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
| (2) | For the nine months ended September 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(6) million for both periods. |
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: | | | | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | | | $ | 108 | | | $ | 38 | | | $ | 70 | | | | 184 | % | | | | (227 | ) | | | (17 | ) | | | (210 | ) | | | NM | (1) | | | | 58 | | | | 39 | | | | 19 | | | | 49 | % | | | | | | | | | | | | | | | | | | Total adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (61 | ) | | $ | 60 | | | $ | (121 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our long-term care insurance business increased $70 million primarily from $52an increase in claim terminations driven mostly by higher mortality in the current year, $55 million of higher premiums and reduced benefits in the current year from in-force rate actions approved and implemented a slightly favorable impactand from benefit utilization rate updates in the current year compared to an unfavorable impact in the prior year and continued favorable development on prior year incurred but not reported claims. These increases were partially offset by higher frequency and severity of new claims in the current year. The adjusted operating loss available to Genworth Financial Inc.’s common stockholders forin our life insurance business increased $75$210 million mainlypredominantly attributable to higher lapses primarily associated with our large20-year
term life insurance block entering its post-level premium period, higher reserves in our 10-year term universal life insurance block entering its post-level premium period during the premium grace period, and from higher mortality in our universal and term life insurance products in the current year compared to the prior year.year and higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period.Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased $11 million in our fixed annuities business increased $19 million predominantly from higher reserves and DAC amortization in our fixed indexed annuities driven by unfavorable market changes in the current year, lower mortality in our single premium immediate annuities and a decrease in net spreads due to the runoff of the block. These decreases were partially offset by $13$31 million of unfavorable charges in connection withrelated to loss recognition testing in our fixed immediate annuity products in the prior year that did not recur.recur and higher mortality in our single premium immediate annuity products, partially offset by lower net spreads in the current year. Our long-term care insurance business increased $14$32 million largely from $34$90 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in the current year. Our life insurance business decreased $5$30 million mainly attributable to the continued runoff of our term and whole life insurance products in the current year. Our long-term care insurance business increased $31 million largely from higher average invested assets and higher income from limited partnerships, partially offset by lower income on TIPS in the current year.
Our long-term care insurance business increased $13 million largely from higher average invested assets, higher income on U.S. government treasury inflation protected securities and an increase in bond calls, partially offset by lower gains from limited partnerships in the current year.
Our life insurance business decreased $3$8 million principally related to lower gains from limited partnershipsaverage invested assets in the current year. Our fixed annuities business decreased $16$57 million largely attributable to lower average invested assets due to block runoff in the current year due to block runoff.year. Net investment gains (losses) OurNet investment gains in our long-term care insurance business had net investment losses of $55increased $328 million in the current year comparedpredominantly related to net investment gains from the sale of $80 million inU.S. government securities due to portfolio rebalancing and asset exposure management as a result of the prior year. The change to net investment losses in the current year from net investmentprolonged low interest rate environment, partially offset by lower unrealized gains in the prior year was mainly driven by unrealized losses from changes in the fair value of equity securities in the current year compared to unrealized gains in the prior year. The change was also attributable to net gains from the sale of investment securities in the prior year that did not recur. Net investment gains in our life insurance business decreased $9increased $5 million primarily related to lowerpredominantly from higher net gains from the sale of investment securities in the current year. Net investment losses in our fixed annuities business increased $10 million primarily related to derivative losses in the current year compared to derivative gains in the prior year. The increase was partially offset by gains on embedded derivatives related to our fixed indexed annuity products in the current year compared to losses in the prior year.
Policy fees and other income. The decrease was attributable to our life insurance business primarily driven by a $21 million favorable correction related to ceded premiums on universal life insurance policies in the prior year that did not recur. The decrease was also attributable to a decline in our universal and term universal life insurance in-force and higher ceded reinsurance costs in the current year. Benefits and other changes in policy reserves Our long-term care insurance business increased $1decreased $34 million principally fromprimarily due to an increase in claim terminations driven mostly by higher mortality and favorable development on incurred but not reported claims. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $61 million reflecting our assumption that new claim incidence during this period will ultimately return to normal levels, partially offsetting the favorable development on incurred but not reported claims. These decreases were partially offset by aging of the in-force block (including higher frequency of new claims), higher incremental reserves of $39$132 million recorded in connection with an accrual for profits followed by losses, a less favorable impact of $14 million from reduced benefits in the current year related to in-force rate actions approved and implemented and higher severity of new claims in the current year. These increases were mostly offset by a higher favorable impact of $34 million from reduced benefits in the current year related toin-force
rate actions approved and implemented, a slightly favorable impact from benefit utilization rate updates in the current year compared to an unfavorable impact in the prior year and favorable development on prior year incurred but not reported claims.Our life insurance business increased $60$146 million primarily attributable to higher reserves in our 10-year term universal life insurance block entering its post-level premium period during the premium grace period and from higher mortality in our universal and term life insurance products in the current year compared to the prior year.year attributable in part to COVID-19.Our fixed annuities business was flat as higher reserves in our fixed indexed annuities driven bydecreased $53 million principally from $39 million of unfavorable market changescharges in the currentprior year that did not recur related to loss recognition testing and lowerhigher mortality in our single premium immediate annuities were offset by $17 million of higher reserves recordedannuity products in the prior year related to loss recognition testing in our fixed immediate annuity products that did not recur.current year. Interest credited.credited The decrease in interest credited was primarily related to our fixed annuities business largely driven by a decline in the average account value in the current year. 110Acquisition and operating expenses, net of deferrals
. The increase was predominantly related to our long-term care insurance business principally from higher commissions and premium taxes in the current year associated with our in-force rate action plan.
Amortization of deferred acquisition costs and intangibles Our long-term care insurance business decreased $6 million primarily related to higher persistency on policies that are not on active claim.
Our life insurance business increased $17$44 million principally from higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period partially offset by a $10 million unfavorable model correction in our universal life insurance products in the prior year that did not recur.Our fixed annuities business increased $5 million largely related to higher DAC amortization reflecting lower net spreads and the impact of unfavorable market changes in the current year.year and higher reinsurance rates.
InterestThe decrease in interest expense was flat asdue to our life insurance business principally related to the early redemption of non-recourse funding obligations, in our life insurance business waspartially offset by the write-off of $4 million in deferred borrowing costs.costs in the current year.Provision (benefit) for income taxes. The effective tax rate was 17.5%27.0% and 28.5%32.5% for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The decrease in the effective tax rate was largelyis primarily attributable to apre-tax
losshigher expense in our long-term care insurance business related to gains on forward starting swaps settled prior to the current year comparedenactment of the TCJA in relation to higher pre-tax income in the priorcurrent year. U.S. Life Insurance selected operating performance measures The following table sets forth selected operating performance measures regarding our individual and group long-term care insurance productsbusiness for the periodsdates indicated: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individual long-term care insurance | | $ | | | | $ | | | | $ | | | | | | % | Group long-term care insurance | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | % | | | | % | | | | )% | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individual long-term care insurance | | $ | 630 | | | $ | 622 | | | $ | 8 | | | | 1 | % | | $ | 1,859 | | | $ | 1,831 | | | $ | 28 | | | | 2 | % | Group long-term care insurance | | | 31 | | | | 30 | | | | 1 | | | | 3 | % | | | 93 | | | | 89 | | | | 4 | | | | 4 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 661 | | | $ | 652 | | | $ | 9 | | | | 1 | % | | $ | 1,952 | | | $ | 1,920 | | | $ | 32 | | | | 2 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 71 | % | | | 76 | % | | | (5 | )% | | | | | | | 73 | % | | | 77 | % | | | (4 | )% | | | | |
The loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums. Net earned premiums increased infor the current yearthree and nine months ended September 30, 2020 largely from $34$25 million and $90 million, respectively, of increased premiums from in-force rate actions approved and implemented, partially offset by policy terminations and policies entering paid-up status in the current year. The loss ratio decreased largely relatedfor the three and nine months ended September 30, 2020 due to the higherincrease in premiums and lower benefits and other changes in reserves as discussed above.
The following table setstables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | As of or for the three
months ended March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | Term and whole life insurance | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | | | ) | | | | )% | Life insurance in-force, net of reinsurance | | | | | | | | | | | | ) | | | | )% | Life insurance in-force before reinsurance | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Term universal life insurance | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | ) | | | | )% | Life insurance in-force, net of reinsurance | | | | | | | | | | | | ) | | | | )% | Life insurance in-force before reinsurance | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | ) | | | | )% | Life insurance in-force, net of reinsurance | | | | | | | | | | | | ) | | | | )% | Life insurance in-force before reinsurance | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net earned premiums and deposits | | $ | | | | $ | | | | $ | | ) | | | | )% | Life insurance in-force, net of reinsurance | | | | | | | | | | | | ) | | | | )% | Life insurance in-force before reinsurance | | | | | | | | | | | | ) | | | | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | Term and whole life insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 50 | | | $ | 65 | | | $ | (15 | ) | | | (23 | )% | | $ | 189 | | | $ | 219 | | | $ | (30 | ) | | | (14 | )% | Term universal life insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 53 | | | $ | 57 | | | $ | (4 | ) | | | (7 | )% | | $ | 166 | | | $ | 174 | | | $ | (8 | ) | | | (5 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 69 | | | $ | 74 | | | $ | (5 | ) | | | (7 | )% | | $ | 205 | | | $ | 291 | | | $ | (86 | ) | | | (30 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net earned premiums and deposits | | $ | 172 | | | $ | 196 | | | $ | (24 | ) | | | (12 | )% | | $ | 560 | | | $ | 684 | | | $ | (124 | ) | | | (18 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Term and whole life insurance | | | | | | | | | | | | | Life insurance in-force, net of reinsurance | | $ | 63,668 | | | $ | 86,620 | | | | (26 | )% | Life insurance in-force before reinsurance | | $ | 369,356 | | | $ | 409,640 | | | | (10 | )% | Term universal life insurance | | | | | | | | | | | | | Life insurance in-force, net of reinsurance | | $ | 108,911 | | | $ | 113,454 | | | | (4 | )% | Life insurance in-force before reinsurance | | $ | 109,665 | | | $ | 114,228 | | | | (4 | )% | | | | | | | | | | | | | | Life insurance in-force, net of reinsurance | | $ | 32,848 | | | $ | 34,230 | | | | (4 | )% | Life insurance in-force before reinsurance | | $ | 37,307 | | | $ | 38,956 | | | | (4 | )% | | | | | | | | | | | | | | Life insurance in-force, net of reinsurance | | $ | 205,427 | | | $ | 234,304 | | | | (12 | )% | Life insurance in-force before reinsurance | | $ | 516,328 | | | $ | 562,824 | | | | (8 | )% |
We no longer solicit sales of our traditional life insurance products; however, we continue to service our existing blocks of business. Term and whole life insurance Net earned premiums decreased mainly attributable to the continued runoff of our term life insurance products in the current year. Life insurance in-force also decreased as a result of the continued runoff of our term life insurance products in the current year, including higher lapses primarily associated with a large 20-year term life insurance block entering its post-level premium period. Net deposits decreased for the nine months ended September 30, 2020 principally from $50 million of funding agreements issued with the Federal Home Loan Bank (“FHLB”) of Atlanta in the prior year that did not recur, lower renewals in the current year and from the continued runoff of our in-force block.
The following table sets forth selected operating performance measures regarding our fixed annuities business as of or for the dates indicated: | | | | | | | | | | | | As of or for the three
months ended March 31, | | | | | | | | | Account value, beginning of period | | $ | | | | $ | | | | | | | | | | | | Surrenders, benefits and product charges | | | | ) | | | | ) | | | | | | | | | | | | | | | ) | | | | ) | Interest credited and investment performance | | | | | | | | | Effect of accumulated net unrealized investment gains (losses) | | | | ) | | | | | | | | | | | | | | | Account value, end of period | | $ | | | | $ | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | As of or for the three
months ended
| | | As of or for the nine
months ended
September 30, | | | | | | | | | | | | | | | Account value, beginning of period | | $ | 12,256 | | | $ | 13,875 | | | $ | 13,023 | | | $ | 14,348 | | | | | 23 | | | | 21 | | | | 62 | | | | 66 | | Surrenders, benefits and product charges | | | (489 | ) | | | (567 | ) | | | (1,331 | ) | | | (1,569 | ) | | | | | | | | | | | | | | | | | | | | | (466 | ) | | | (546 | ) | | | (1,269 | ) | | | (1,503 | ) | Interest credited and investment performance | | | 104 | | | | 113 | | | | 299 | | | | 374 | | Effect of accumulated net unrealized investment gains (losses) | | | 75 | | | | 73 | | | | (84 | ) | | | 296 | | | | | | | | | | | | | | | | | | | Account value, end of period | | $ | 11,969 | | | $ | 13,515 | | | $ | 11,969 | | | $ | 13,515 | | | | | | | | | | | | | | | | | | |
We no longer solicit sales of our traditional fixed annuity products; however, we continue to service our existing block of business. Account value decreased compared to December 31, 2019 as surrenders, benefits and net unrealized investment losses exceeded interest credited. Account value was also lower compared to June 30, 2020 as surrenders and benefits outpaced interest credited. Similar to our U.S. life insurance businesses, theThe most significant impacts from COVID-19 in our Runoff segment are related to the current low interest rate environment and volatile equity market environment.markets. The low interest rate environment and decliningvolatile equity markets have materially adversely impacted earnings in our variable annuity products; however, if mortality is higher in future months, it could benefit earnings in these products in future quarters.products. WhileAlthough certain states currently havehad mandates in place that policies cannot be lapsed and a few still require grace period extensions, we dohave not expectexperienced a significant impact on our Runoff segment. Our variable annuity, variable life insurance and corporate-owned life insurance products have not been actively sold since 2011. There is no requirement to pay premiums in the majority of our variable annuity contracts and benefits would adjust contractually based on actual premiums paid in these products.
While the ongoing impact of COVID-19 is very difficult to predict, the related outcomes and impact on our Runoff segment will depend on the length and severity of the pandemic and shape of the economic recovery. We could see additional losses and declines in statutory risk-based capital driven by increases to the required capital supporting our variable annuity products, as a result of the decline in equity markets and low interest rates. For a further discussion of the impact of interest rates, see “Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in our 2019 Annual Report on Form 10-K. Results of our Runoff segment are affected primarily by investment performance, interest rate levels, net interest spreads, equity market conditions, mortality, surrenders and scheduled maturities. In addition, the results of our Runoff segment can significantly impact our regulatory capital requirements, distributable earnings and liquidity. We use hedging strategies as well as liquidity planning and asset-liability management to help mitigate the impacts. In addition, we may consider reinsurance opportunities to further mitigate volatility in results and manage capital in the future.
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.
Segment results of operations Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 The following table sets forth the results of operations relating to our Runoff segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | | | % | Net investment gains (losses) | | | | ) | | | | | | | | ) | | | | (1) | Policy fees and other income | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | | | | | | | | | | | | | | (1) | | | | | | | | | | | | | | | | | % | Acquisition and operating expenses, net of deferrals | | | | | | | | | | | | | | | | % | Amortization of deferred acquisition costs and intangibles | | | | | | | | | | | | | | | | (1) | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | | ) | | | | | | | | ) | | | | (1) | Provision (benefit) for income taxes | | | | ) | | | | | | | | ) | | | | (1) | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | | ) | | | | | | | | ) | | | | (1) | Adjustments to income (loss) from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | | | | | | | | | | | | | | (1) | | | | | ) | | | | | | | | ) | | | | (1) | | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | | | $ | | ) | | | | )% | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 55 | | | $ | 48 | | | $ | 7 | | | | 15 | % | Net investment gains (losses) | | | 15 | | | | (9 | ) | | | 24 | | | | NM | (1) | Policy fees and other income | | | 33 | | | | 35 | | | | (2 | ) | | | (6 | )% | | | | | | | | | | | | | | | | | | | | | 103 | | | | 74 | | | | 29 | | | | 39 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 7 | | | | 8 | | | | (1 | ) | | | (13 | )% | | | | 42 | | | | 40 | | | | 2 | | | | 5 | % | Acquisition and operating expenses, net of deferrals | | | 12 | | | | 13 | | | | (1 | ) | | | (8 | )% | Amortization of deferred acquisition costs and intangibles | | | 4 | | | | 10 | | | | (6 | ) | | | (60 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 65 | | | | 71 | | | | (6 | ) | | | (8 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 38 | | | | 3 | | | | 35 | | | | NM | (1) | Provision for income taxes | | | 8 | | | | — | | | | 8 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 30 | | | | 3 | | | | 27 | | | | NM | (1) | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (14 | ) | | | 9 | | | | (23 | ) | | | NM | (1) | | | | 3 | | | | (2 | ) | | | 5 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 19 | | | $ | 10 | | | $ | 9 | | | | 90 | % | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
| (2) | For the three months ended March 31,September 30, 2020, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(8)$1 million. |
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders The decrease to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders in the current year from adjustedAdjusted operating income available to Genworth Financial, Inc.’s common stockholders in the prior year wasincreased predominantly from the decline infavorable equity marketsmarket performance and interest rateshigher policy loan income in the current year.
Net investment lossesincome increased mainly driven by higher policy loan income in our corporate-owned life insurance products in the current year.
The change to net investment gains in the current year were largely related tofrom net investment losses in the prior year was mainly driven by gains on embedded derivatives associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”), in the current year compared to losses in the prior year, partially offset by derivative gains.losses in the current year compared to derivative gains in the prior year. Amortization of deferred acquisition costs and intangibles decreased mainly related to lower DAC amortization in our variable annuity products principally due to favorable equity market performance in the current year. Provision for income taxes Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table sets forth the results of operations relating to our Runoff segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 158 | | | $ | 142 | | | $ | 16 | | | | 11 | % | Net investment gains (losses) | | | (56 | ) | | | (13 | ) | | | (43 | ) | | | NM | (1) | Policy fees and other income | | | 98 | | | | 105 | | | | (7 | ) | | | (7 | )% | | | | | | | | | | | | | | | | | | | | | 200 | | | | 234 | | | | (34 | ) | | | (15 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 31 | | | | 22 | | | | 9 | | | | 41 | % | | | | 125 | | | | 121 | | | | 4 | | | | 3 | % | Acquisition and operating expenses, net of deferrals | | | 36 | | | | 39 | | | | (3 | ) | | | (8 | )% | Amortization of deferred acquisition costs and intangibles | | | 20 | | | | 16 | | | | 4 | | | | 25 | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 212 | | | | 198 | | | | 14 | | | | 7 | % | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | (12 | ) | | | 36 | | | | (48 | ) | | | (133 | )% | Provision (benefit) for income taxes | | | (4 | ) | | | 6 | | | | (10 | ) | | | (167 | )% | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | (8 | ) | | | 30 | | | | (38 | ) | | | (127 | )% | Adjustments to income (loss) from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | 48 | | | | 11 | | | | 37 | | | | NM | (1) | | | | (10 | ) | | | (2 | ) | | | (8 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 30 | | | $ | 39 | | | $ | (9 | ) | | | (23 | )% | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
| (2) | For the nine months ended September 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(8) million and $(2) million, respectively. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased predominantly from less favorable equity market performance and a decline in interest rates in the current year. Net investment income increased primarily driven by higher policy loan income in our corporate-owned life insurance products and higher average invested assets in the variable annuity products in the current year. Net investment losses increased largely related to higher losses on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by higher derivative gains in the current year. Benefits and other changes in policy reserves increased primarily attributable to higher GMDB reserves in our variable annuity products due to unfavorableless favorable equity market performance in the current year.
Amortization of deferred acquisition costs and intangibles increased mainly related to higher DAC amortization in our variable annuity products principally from unfavorableless favorable equity market performance in the current year. Provision (benefit) for income taxes . The effective tax rate was 22.0%33.5% and 19.4%17.4% for the threenine months ended March 31,September 30, 2020 and 2019, respectively. The increase wasis primarily the result ofattributable to tax benefits from tax favored items in relation to a pre-tax loss in the current year compared topre-tax
income in the prior year. Runoff selected operating performance measures Variable annuity and variable life insurance products The following table sets forth selected operating performance measures regarding our variable annuity and variable life insurance products as of or for the dates indicated: | | | | | | | | | | | | As of or for the three
months ended March 31, | | | | | | | | | Account value, beginning of period | | $ | | | | $ | | | | | | | | | | | | Surrenders, benefits and product charges | | | | ) | | | | ) | | | | | | | | | | | | | | | ) | | | | ) | Interest credited and investment performance | | | | ) | | | | | | | | | | | | | | | Account value, end of period | | $ | | | | $ | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | As of or for the three
months ended September 30, | | | As of or for the nine
months ended September 30, | | | | | | | | | | | | | | | Account value, beginning of period | | $ | 4,782 | | | $ | 5,121 | | | $ | 5,042 | | | $ | 4,918 | | | | | 4 | | | | 7 | | | | 14 | | | | 20 | | Surrenders, benefits and product charges | | | (126 | ) | | | (161 | ) | | | (414 | ) | | | (480 | ) | | | | | | | | | | | | | | | | | | | | | (122 | ) | | | (154 | ) | | | (400 | ) | | | (460 | ) | Interest credited and investment performance | | | 185 | | | | 69 | | | | 203 | | | | 578 | | | | | | | | | | | | | | | | | | | Account value, end of period | | $ | 4,845 | | | $ | 5,036 | | | $ | 4,845 | | | $ | 5,036 | | | | | | | | | | | | | | | | | | |
We no longer solicit sales of our variable annuity or variable life insurance products;products, however, we continue to service our existing blocks of business and accept additional deposits on existing contracts and policies. Account value increased compared to June 30, 2020 primarily to favorable equity market performance and decreased compared to December 31, 2019 primarily related to unfavorable equity market performance and surrenders in the current year.
The following table sets forth selected operating performance measures regarding our institutional products as of or for the dates indicated: | | | | | | | | | | | | As of or for the three
months ended March 31, | | | | | | | | | | | | | | | | | | Account value, beginning of period | | $ | | | | $ | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | Account value, end of period | | $ | | | | $ | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | As of or for the three
months ended September 30, | | | As of or for the nine
months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Account value, beginning of period | | $ | 353 | | | $ | 305 | | | $ | 253 | | | $ | 381 | | | | | — | | | | — | | | | 150 | | | | — | | | | | (1 | ) | | | (2 | ) | | | (53 | ) | | | (82 | ) | | | | | | | | | | | | | | | | | | | | | (1 | ) | | | (2 | ) | | | 97 | | | | (82 | ) | | | | 1 | | | | 2 | | | | 3 | | | | 6 | | | | | | | | | | | | | | | | | | | Account value, end of period | | $ | 353 | | | $ | 305 | | | $ | 353 | | | $ | 305 | | | | | | | | | | | | | | | | | | |
Account value related to our institutional products decreasedincreased compared to MarchDecember 31, 2019 mainly attributable to scheduled maturities of certainhigher deposits from issuing funding agreements for asset-liability management and yield enhancement, partially offset by surrenders and benefit payments in the prior year that did not recur.current year.
Corporate and Other Activities Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated: | | | | | | | | | | | | | | | | | | | | Three months ended
March 31, | | | (decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | | | % | | | | | | | | | | | | | | | | | % | Net investment gains (losses) | | | | | | | | ) | | | | | | | | (1) | Policy fees and other income | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | | | | | | | | | | | | | | % | Acquisition and operating expenses, net of deferrals | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | | | | | | | | | | ) | | | | )% | | | | | | | | | | | | | | | | | | | Loss from continuing operations before income taxes | | | | ) | | | | ) | | | | | | | | % | Provision (benefit) for income taxes | | | | | | | | ) | | | | | | | | % | | | | | | | | | | | | | | | | | | | Loss from continuing operations | | | | ) | | | | ) | | | | | | | | % | Adjustments to loss from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | | ) | | | | | | | | ) | | | | (1) | Losses on early extinguishment of debt | | | | | | | | | | | | | | | | (1) | Expenses related to restructuring | | | | | | | | | | | | | | | | (1) | | | | | | | | | ) | | | | | | | | (1) | | | | | | | | | | | | | | | | | | | Adjusted operating loss available to Genworth Financial, Inc.’s
common stockholders | | $ | | ) | | $ | | ) | | $ | | | | | | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1 | | | $ | 2 | | | $ | (1 | ) | | | (50 | )% | | | | 5 | | | | 2 | | | | 3 | | | | 150 | % | Net investment gains (losses) | | | (10 | ) | | | 5 | | | | (15 | ) | | | NM | (1) | Policy fees and other income | | | (2 | ) | | | 2 | | | | (4 | ) | | | (200 | )% | | | | | | | | | | | | | | | | | | | | | (6 | ) | | | 11 | | | | (17 | ) | | | (155 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquisition and operating expenses, net of deferrals | | | 6 | | | | 8 | | | | (2 | ) | | | (25 | )% | Amortization of deferred acquisition costs and intangibles | | | — | | | | 1 | | | | (1 | ) | | | (100 | )% | | | | 41 | | | | 53 | | | | (12 | ) | | | (23 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 47 | | | | 62 | | | | (15 | ) | | | (24 | )% | | | | | | | | | | | | | | | | | | Loss from continuing operations before income taxes | | | (53 | ) | | | (51 | ) | | | (2 | ) | | | (4 | )% | Provision (benefit) for income taxes | | | 3 | | | | (21 | ) | | | 24 | | | | 114 | % | | | | | | | | | | | | | | | | | | Loss from continuing operations | | | (56 | ) | | | (30 | ) | | | (26 | ) | | | (87 | )% | Adjustments to loss from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | 10 | | | | (5 | ) | | | 15 | | | | NM | (1) | | | | (3 | ) | | | — | | | | (3 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | | $ | (49 | ) | | $ | (35 | ) | | $ | (14 | ) | | | (40 | )% | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders increased primarily related to lower tax benefits, partially offset by lower interest expense in the current year. Net investment losses in the current year were primarily driven by derivative losses. Net investment gains in the prior year were largely from net gains from the sale of investment securities and derivative gains. Interest expense decreased largely driven by the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020. The provision for income taxes for the three months ended September 30, 2020 was primarily driven by tax expenses from gains on forward starting swaps settled prior to the enactment of the TCJA, unfavorable provision
to return adjustments, foreign operations and other nondeductible expenses, partially offset by a tax benefit related to the pre-tax loss. The benefit for income taxes for the three months ended September 30, 2019 was primarily from a tax benefit associated with the pre-tax loss, as well as tax benefits from gains on forward starting swaps settled prior to the enactment of the TCJA, favorable provision to return adjustments, foreign operations and gains related to the Global Intangible Low Taxed Income (“GILTI”) provision of the TCJA. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated: | | | | | | | | | | | | | | | | | | | | Nine months ended
September 30, | | | Increase
(decrease) and
percentage
change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 5 | | | $ | 6 | | | $ | (1 | ) | | | (17 | )% | | | | 12 | | | | 6 | | | | 6 | | | | 100 | % | Net investment gains (losses) | | | 8 | | | | (23 | ) | | | 31 | | | | 135 | % | Policy fees and other income | | | (2 | ) | | | 3 | | | | (5 | ) | | | (167 | )% | | | | | | | | | | | | | | | | | | | | | 23 | | | | (8 | ) | | | 31 | | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 3 | | | | 2 | | | | 1 | | | | 50 | % | Acquisition and operating expenses, net of deferrals | | | 24 | | | | 34 | | | | (10 | ) | | | (29 | )% | Amortization of deferred acquisition costs and intangibles | | | 1 | | | | 1 | | | | — | | | | — | % | | | | 129 | | | | 160 | | | | (31 | ) | | | (19 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 157 | | | | 197 | | | | (40 | ) | | | (20 | )% | | | | | | | | | | | | | | | | | | Loss from continuing operations before income taxes | | | (134 | ) | | | (205 | ) | | | 71 | | | | 35 | % | | | | (7 | ) | | | (37 | ) | | | 30 | | | | 81 | % | | | | | | | | | | | | | | | | | | Loss from continuing operations | | | (127 | ) | | | (168 | ) | | | 41 | | | | 24 | % | Adjustments to loss from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | (8 | ) | | | 23 | | | | (31 | ) | | | (135 | )% | (Gains) losses on early extinguishment of debt | | | 5 | | | | — | | | | 5 | | | | NM | (1) | Expenses related to restructuring | | | 2 | | | | 1 | | | | 1 | | | | 100 | % | | | | — | | | | (6 | ) | | | 6 | | | | 100 | % | | | | | | | | | | | | | | | | | | Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | | $ | (128 | ) | | $ | (150 | ) | | $ | 22 | | | | 15 | % | | | | | | | | | | | | | | | | | |
| (1) | We define “NM” as not meaningful for increases or decreases greater than 200%. |
Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders decreased primarily related to lower interest expense and higher investmentlower operating expenses, partially offset by a lower benefit for income taxes in the current year. Net investment income increased primarily from higher average invested assetslimited partnership income in the current year.
The change to net investment gains in the current year from net investment losses in the prior year was predominantly related to derivative gains in the current year compared to derivative losses in the prior year. The decrease in policy fees and other income was primarily related to losses from non-functional currency remeasurement transactions in the current year compared to gains in the prior year. Acquisition and operating expenses, net of deferrals, increaseddecreased mainly driven by lower operating expenses and a $4 million gain related to the repurchase of Genworth Holdings’ senior notes with 2021 maturity dates, partially offset by a make-whole premium of $9 million related to the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020 and higher employee-related expenses partially offset by lower operating expenses in the current year.
Interest expense decreased largely driven by the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020.2020 and from our junior subordinated notes which had a lower floating rate of interest in the current year. The provisionbenefit for income taxes for the threenine months ended March 31,September 30, 2020 was primarily related to discrete andnon-deductible
expenses, partially offsetdriven by a tax benefit related to the pre-tax loss. The benefit for income taxes for the three months ended March 31, 2019 was principally from the tax benefit related to thepre-tax
loss, partially offset by tax expenses related to the Global Intangible Low Taxed Income provision of the TCJA andfrom gains on forward starting swaps settled prior to the enactment of the TCJA.TCJA, unfavorable provision to return adjustments, stock-based compensation, nondeductible goodwill and other nondeductible expenses. The benefit for income taxes for the nine months ended September 30, 2019 was primarily from a tax benefit related to the pre-tax loss, partially offset by tax expenses related to the GILTI provision of the TCJA, gains on forward starting swaps settled prior to the enactment of the TCJA, foreign operations and other nondeductible expenses.Investments and Derivative Instruments Investments—credit and investment markets During the firstthird quarter of 2020, the U.S. Federal Reserve decreasedmaintained interest rates 150 basis points in responsenear zero as the U.S. economy continues to recover from the negative economic impact of COVID-19. The accommodative economic policies fromU.S. Federal Reserve’s latest forecast indicates that interest rates will remain at near zero through 2023 with an inflation rate target above 2%. This forecast is expected to be maintained until the labor market recovers. The U.S. Federal Reserve and negative growth expectations drove U.S. Treasury yields down approximately 100expanded its accommodative monetary policy by implementing a new average inflation target framework, which allows for the targeted inflation rate to 150be higher than 2% on a temporary basis points, setting new record lows, withwithout prompting immediate interest rate increases. During the decline in short-term interest rates outpacing the decline in long-term interest rates. The10-year
Treasury yield fell to a low of 54 basis points during the firstthird quarter of 2020, over 80 basis points lower than the previous historic low set in July 2016, before finishing2-year, 10-year and 30-year Treasury yields remained consistent with the firstsecond quarter of 2020 at 70 basis points.but long-term yields experienced fluctuations during the quarter as expectations for a future fiscal stimulus package remained deadlocked in negotiations which drove shifts in the steepness of the Treasury curve throughout the third quarter of 2020.Preliminary economic data related toCOVID-19
indicate an upcoming recession, with record U.S. initial unemployment claims of approximately 30 million through late April 2020, negative monthly inflation and historically low retail sales and industrial production. In response to the escalating risks fromCOVID-19
and in an effort to stimulate theThe U.S. economy showed signs of recovery from COVID-19 reflecting GDP growth in the CARES Act was signed into law during the firstthird quarter of 2020, which provided approximately $2.0 trillionbut remained in recessionary conditions with a forecasted contraction for the full year 2020. Monthly economic indicators improved from the lows of relief to individuals, businessesthe second quarter of 2020 as evidenced by a decrease in the unemployment rate, indicative of a partial recovery of jobs lost at the height of the pandemic and expansion in both the manufacturing and services industries. Efforts by the U.S. federal government agencies, including government assistance and income tax benefits to businesses and enhanced unemployment and health benefits to individuals. The global economic slowdown has driven other global central banks and foreign governments to take similar accommodative actions to stabilize capital markets and implementthrough fiscal stimulus packages helped contribute to support their respective domestic economies.this recovery. However, political gridlock and the U.S. presidential election have added uncertainty to the timing of future stimulus measures.Credit markets responded toCOVID-19
andfurther recovered in the subsequent economic downturnthird quarter of 2020 with widening of credit spreads to recessionary levels. Stay at home orders and partial economic shutdowns are expected to place strain on earnings andtightening early in the quarter, supported by strong investor inflows, improved corporate balance sheets and liquidity positions, asset/
liability management measures taken by companies and minimal negative credit rating migration in the third quarter of 2020. However, this activity leveled off in August 2020 as the broader market recovery slowed. A resurgence of localized COVID-19 cases across Europe and other parts of the globe has sparked new economic shutdowns and concerns over future containment of the virus which may hamper the pace of the global economic recovery. Political gridlock on new fiscal stimulus measures and the upcoming U.S. presidential election have contributed to increased market volatility as concerns over the election results, including the potential for a contested election, and drastic policy shifts under a new administration weigh on the next two quarters and possibly formarket. Equity markets fluctuated in the remainderthird quarter of 2020, which when combined with forced liquidations as a resultthe S&P 500 ending the third quarter of liquidity strains, further contributed to2020 higher than the credit spread widening. A crude oil price war triggered by supply and demand imbalance decreased crude oil prices over 60%second quarter of 2020 but down from its all-time highs set in early September 2020. At the current year and contributed to additional credit spread widening and pressure to the energy sector. On March 23, 2020, the U.S. Federal Reserve announced new quantitative easing programs to help support credit markets, including a $2.3 trillion program that includes a $750 billion corporate credit facility to purchase investment grade and certain high yield corporate securities, amongst other facilities to support the loan, municipal and structured markets. This support from the U.S. Federal Reserve helped reverse someend of the initial credit spread widening resulting fromCOVID-19,
with credit spreads continuing to tighten during April 2020 but remaining near recessionary levels. During the firstthird quarter of 2020, we did not have any modifications or extensions of commercial mortgage loans that were considered troubled debt restructurings. As a resultModified loans represented 10% of COVID-19
, we expect the number our total loan portfolio as of modifications or extensionsSeptember 30, 2020, as borrowers have sought additional relief related to our commercial mortgage loans to increase during the remainder of 2020.COVID-19. We are working with individual borrowers impacted by COVID-19 to provide alternative forms of relief for a specified period of time. Most of our borrowers are current on payments and we do not anticipate a significant impact from troubled debt restructurings in 2020.
The United Kingdom completed its exit from the European Union (“Brexit”) on January 31, 2020. In accordance with 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. Our investment portfolio maintained approximately $2.6$3.0 billion of United Kingdom exposure, or approximately 4%5% of total fixed maturity securities as of March 31,September 30, 2020. These assets were primarily U.S. dollar-denominated fixed-income investments and we held no direct United Kingdom sovereign exposure. While the ultimate range of Brexit outcomes could lead to potential credit devaluation or rating agency downgrades of our United Kingdom related investments, at this time, we do not believe there is a material risk of investment impairments arising from the various Brexit scenarios. As of March 31,September 30, 2020, our fixed maturity securities portfolio, which was 96%95% investment grade, comprised 81% of our total invested assets and cash. Several of our master swap agreements previously contained credit downgrade provisions that allowed either party to assign or terminate the derivative transaction if the other party’s long-term unsecured credit or financial strength rating was below the limit defined in the applicable agreement. We renegotiated with many of our counterparties to remove the credit downgrade provisions from the master swap agreements entirely or replace them with a provision that allows the counterparty to terminate the derivative transaction if the RBC ratio of the applicable insurance company goes below a certain threshold and as of March 31,September 30, 2020, none of our insurance company master swap agreements havederivatives transactions were subject to credit downgrade provisions. As of March 31,September 30, 2020, the RBC ratios of the respective insurance companies were above the thresholds negotiated in the applicable master swap agreements and therefore, no counterparty had rights to take action against us under the RBC threshold provisions. As of March 31,September 30, 2020, $8.0$6.2 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 March 31,September 30, 2020, we posted initial margin of $319$132 million to our clearing agents, which represented approximately $94$39 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 March 31,September 30, 2020, $10.9$11.8 billion notional of our derivatives portfolio was in bilateral over-the-counter (“OTC”) derivative transactions pursuant to which we have posted aggregate independent amounts of $448$440 million and are holding collateral from counterparties in the amount of $1,018$636 million. In July 2017, the United Kingdom Financial Conduct Authority announced its intention to transition away from the LIBOR,London Interbank Offered Rate (“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. We employ derivatives 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 and Derivatives 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. For our other instruments and contracts, including investments, debt and reinsurance contracts, there is a wide variety in replacement language ranging from a rate freeze to silence on the matter. With respect to instruments that include a rate replacement, we will comply with the process prescribed by each instrument. For investments that do not contain such a replacement, we will generally endeavor to agree upon a replacement rate with our counterparties well in advance of LIBOR’s transition. In some cases, such as our long-term junior subordinated notes that mature in 2066 and are linked to three-month LIBOR, we may decide not to replace LIBOR which would lock-in the last published rate. We understand that the investment community is inclined to adopt SOFR as a substitute rate. Therefore, the adoption of SOFR will add certainty to the process of replacing LIBOR as the reference rate for many instruments. We do acknowledge the complications in calculating the credit spread necessary to equate SOFR to LIBOR and will monitor the potential risk. We are at different stages of assessing operational readiness for LIBOR cessation related to our various instruments. These stages range from derivatives, where we are fully operationally ready, to other products and instruments, as well as tax impacts, where we have just begun our assessment process. Our Working Group will
continue to monitor the process of elimination and replacement of LIBOR. Since the initial announcement, we have terminated a portion of our LIBOR-based swaps and entered into alternative rate swaps. In anticipation of the elimination of LIBOR, we plan to continue to convert our remaining LIBOR-based derivatives in a similar manner. In addition, our non-recourse funding obligations with interest rates based on one-month LIBOR were redeemed in January 2020. We expect to implement additional measures that we believe will ease the transition from LIBOR. Even though we have begun to take these actions, as described above, it is too early to determine the ultimate impact the elimination of LIBOR will have on our results of operations or financial condition.
The following table setstables set forth information about our investment income, excluding net investment gains (losses), for each component of our investment portfolio for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities—taxable | | | | % | | $ | | | | | | % | | $ | | | | | | % | | $ | | | Fixed maturity securities—non-taxable | | | | % | | | | | | | | % | | | | | | | | )% | | | | | | | | | % | | | | | | | | % | | | | | | | | )% | | | | ) | Commercial mortgage loans | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | | % | | | | | | | | % | | | | | | | | % | | | | | | | | | % | | | | | | | | % | | | | | | | | )% | | | | ) | Cash, cash equivalents, restricted cash and short-term investments | | | | % | | | | | | | | % | | | | | | | | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Gross investment income before expenses and fees | | | | % | | | | | | | | % | | | | | | | | )% | | | | | | | | | )% | | | | ) | | | | )% | | | | ) | | | | % | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % | | $ | | | | | | % | | $ | | | | | | )% | | $ | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Average invested assets and cash | | | | | | $ | | | | | | | | $ | | | | | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities—taxable | | | 4.6 | % | | $ | 632 | | | | 4.7 | % | | $ | 631 | | | | (0.1 | )% | | $ | 1 | | Fixed maturity securities—non-taxable | | | 6.2 | % | | | 2 | | | | 6.1 | % | | | 2 | | | | 0.1 | % | | | — | | | | | 2.9 | % | | | 3 | | | | 6.4 | % | | | 4 | | | | (3.5 | )% | | | (1 | ) | Commercial mortgage loans | | | 4.8 | % | | | 82 | | | | 5.0 | % | | | 87 | | | | (0.2 | )% | | | (5 | ) | | | | 9.4 | % | | | 51 | | | | 9.1 | % | | | 47 | | | | 0.3 | % | | | 4 | | | | | 26.0 | % | | | 79 | | | | 27.5 | % | | | 62 | | | | (1.5 | )% | | | 17 | | Cash, cash equivalents, restricted cash and short-term investments | | | 0.3 | % | | | 2 | | | | 1.7 | % | | | 8 | | | | (1.4 | )% | | | (6 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Gross investment income before expenses and fees | | | 5.0 | % | | | 851 | | | | 5.1 | % | | | 841 | | | | (0.1 | )% | | | 10 | | | | | (0.2 | )% | | | (24 | ) | | | (0.2 | )% | | | (25 | ) | | | — | % | | | 1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.8 | % | | $ | 827 | | | | 4.9 | % | | $ | 816 | | | | (0.1 | )% | | $ | 11 | | | | | | | | | | | | | | | | | | | | | | | | | | | Average invested assets and cash | | | | | | $ | 68,665 | | | | | | | $ | 66,230 | | | | | | | $ | 2,435 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Nine months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities—taxable | | | 4.6 | % | | $ | 1,855 | | | | 4.7 | % | | $ | 1,878 | | | | (0.1 | )% | | $ | (23 | ) | Fixed maturity securities—non-taxable | | | 4.7 | % | | | 5 | | | | 6.1 | % | | | 6 | | | | (1.4 | )% | | | (1 | ) | | | | 3.0 | % | | | 7 | | | | 6.8 | % | | | 13 | | | | (3.8 | )% | | | (6 | ) | Commercial mortgage loans | | | 4.8 | % | | | 251 | | | | 4.9 | % | | | 254 | | | | (0.1 | )% | | | (3 | ) | | | | 9.4 | % | | | 149 | | | | 9.2 | % | | | 138 | | | | 0.2 | % | | | 11 | | | | | 22.5 | % | | | 192 | | | | 29.9 | % | | | 180 | | | | (7.4 | )% | | | 12 | | Cash, cash equivalents, restricted cash and short-term investments | | | 0.7 | % | | | 17 | | | | 2.0 | % | | | 30 | | | | (1.3 | )% | | | (13 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Gross investment income before expenses and fees | | | 4.9 | % | | | 2,476 | | | | 5.1 | % | | | 2,499 | | | | (0.2 | )% | | | (23 | ) | | | | (0.2 | )% | | | (70 | ) | | | (0.2 | )% | | | (73 | ) | | | — | % | | | 3 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.7 | % | | $ | 2,406 | | | | 4.9 | % | | $ | 2,426 | | | | (0.2 | )% | | $ | (20 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Average invested assets and cash | | | | | | $ | 68,000 | | | | | | | $ | 65,951 | | | | | | | $ | 2,049 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Investment income for other invested assets includes amortization of terminated cash flow hedges, which have no corresponding book value within the yield calculation and includes limited partnership investments, which are primarily equity-based and do not have fixed returns by period. |
Yields are based on net investment income as reported under U.S. GAAP and are consistent with how we measure our investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability. For the three months ended March 31,September 30, 2020, annualized weighted-average investment yields decreased primarily driven byprincipally from lower investment incomeyields on higher average invested assets. Net investment income included $17 million of lower limited partnership income, mostly offset by $10 million of higher prepayment speed adjustments on structured securitiesbond calls and prepayments, $9 million of higher limited partnership income and $6 million of higher income related to inflation-driven volatility on U.S. Government Treasury Inflation Protected Securities.TIPS, partially offset by $3 million of lower prepayment speed adjustments on structured securities in the current year. 120For the nine months ended September 30, 2020, annualized weighted-average investment yields decreased primarily driven by lower yields on higher average invested assets. Net investment income also included $7 million of lower income related to inflation-driven volatility on TIPS and $6 million of lower limited partnership income. These decreases were partially offset by $21 million of higher bond calls and prepayments in the current year.
The following table sets forth net investment gains (losses) for the periods indicated: | | | | | | | | | | | | Three months ended
March 31, | | | | | | | | | Available-for-sale fixed maturity securities: | | | | | | | | | | | $ | | | | $ | | | | | | | ) | | | | ) | | | | | | | | | | | Net realized gains (losses) on available-for-sale fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other-than-temporary impairments | | | | | | | | | Portion of other-than-temporary impairments recognized in other comprehensive income | | | | | | | | | | | | | | | | | | | Net other-than-temporary impairments | | | | | | | | | | | | | | | | | | | Net change in allowance for credit losses on available-for-sale fixed maturity securities | | | | | | | | | Net realized gains (losses) on equity securities sold | | | | | | | | | Net unrealized gains (losses) on equity securities still held | | | | ) | | | | | | | | | ) | | | | | Commercial mortgage loans | | | | | | | | ) | | | | | ) | | | | ) | | | | | ) | | | | | | | | | | | | | | | Net investment gains (losses) | | $ | | ) | | $ | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Three months ended
September 30, | | | Nine months ended
September 30, | | | | | | | | | | | | | | | Available-for-sale fixed maturity securities: | | | | | | | | | | | | | | | | | | | $ | 332 | | | $ | 19 | | | $ | 465 | | | $ | 93 | | | | | (2 | ) | | | (3 | ) | | | (8 | ) | | | (30 | ) | | | | | | | | | | | | | | | | | | Net realized gains (losses) on available-for-sale fixed maturity securities | | | 330 | | | | 16 | | | | 457 | | | | 63 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other-than-temporary impairments | | | — | | | | — | | | | — | | | | — | | Portion of other-than-temporary impairments included in other comprehensive income (loss) | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net other-than-temporary impairments | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | Net change in allowance for credit losses on available-for-sale fixed maturity securities | | | 2 | | | | — | | | | (5 | ) | | | — | | Write-down of available-for-sale fixed maturity securities | | | (4 | ) | | | — | | | | (4 | ) | | | — | | Net realized gains (losses) on equity securities sold | | | (3 | ) | | | 6 | | | | (3 | ) | | | 9 | | Net unrealized gains (losses) on equity securities still held | | | 3 | | | | (4 | ) | | | (7 | ) | | | 13 | | | | | 31 | | | | 6 | | | | 28 | | | | 10 | | Commercial mortgage loans | | | (3 | ) | | | (1 | ) | | | (2 | ) | | | (1 | ) | | | | 22 | | | | (29 | ) | | | (73 | ) | | | (71 | ) | | | | (3 | ) | | | 4 | | | | (9 | ) | | | 4 | | | | | | | | | | | | | | | | | | | Net investment gains (losses) | | $ | 375 | | | $ | (2 | ) | | $ | 382 | | | $ | 27 | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019 We recorded net gains related to the sale of available-for-sale fixed maturity securities of $13$330 million during the three months ended March 31,September 30, 2020 driven primarily from the sale of U.S. government
| securities due to portfolio rebalancing and asset exposure management as a result of the prolonged low interest rate environment. We recorded net gains related to the sale of available-for-sale fixed maturity securities of $16 million during the three months ended September 30, 2019. |
We recorded a $4 million write-down of available-for-sale fixed maturity securities during the three months ended September 30, 2020 under the newly adopted current expected credit loss standard associated with the write-down of securities we intend to sell or will be required to sell prior to recovery of the amortized cost basis. We recorded $25 million of higher net gains on limited partnerships during the three months ended September 30, 2020 primarily driven by portfolio rebalancing and asset exposure management. We recorded net realizedhigher unrealized gains from favorable performance of $58private equity investments in the current year. Net investment gains related to derivatives of $22 million during the three months ended March 31, 2019September 30, 2020 were primarily associated with embedded derivatives related to cash tendersour runoff variable annuity products and gains from mergerour foreign currency hedging programs that support our Australia Mortgage Insurance segment, partially offset by losses related to derivatives used to protect statutory surplus from equity market fluctuations. Net investment losses related to derivatives of $29 million during the three months ended September 30, 2019 were primarily associated with various hedging programs that support our Australia Mortgage Insurance segment, as well as our fixed indexed annuity and acquisition activity.runoff variable annuity products. Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019 We recorded net gains related to the sale of available-for-sale fixed maturity securities of $457 million during the nine months ended September 30, 2020 driven primarily from the sale of U.S. government securities due to portfolio rebalancing and asset exposure management as a result of the prolonged low interest rate environment. We recorded net gains related to the sale of available-for-sale fixed maturity securities of $63 million during the nine months ended September 30, 2019. We recorded a $5 million credit loss and a $4 million write-down of available-for-sale fixed maturity securities, as well as credit losses related to bank loan investments and off-balance sheet credit exposures of $6 million and $3 million, respectively, during the nine months ended September 30, 2020 under the newly adopted current expected credit loss standard reflecting emerging credit distress due mostly to COVID-19. The change to net unrealized losses on equity securities and limited partnership investments during the threenine months ended March 31,September 30, 2020 from net unrealized gains during the threenine months ended March 31,September 30, 2019 was primarily from unfavorable equity market performance in the current year compared to favorable equity market performance in the prior year. We recordedhad $18 million of higher net losses related to derivatives of $105 milliongains on limited partnership investments during the threenine months ended March 31,September 30, 2020 primarily associated with hedging programs that support our runoff variable annuity products and losses from our foreign currency hedging programs that support our Australia Mortgage Insurance segment due to the declinedriven by favorable performance of private equity investments in the Australian dollar, partially offset by gains from hedging programs used to protect statutory surplus from equity market fluctuations.current year. We recorded net losses related to derivatives of $12 million during the three months ended March 31, 2019 primarily associated with losses related to hedging programs for our runoff variable annuity products and fixed indexed annuity products, partially offset by gains from hedging programs that support our long-term care insurance products and losses from derivatives used to hedge foreign currency risk associated with expected dividend payments from our Australia mortgage insurance business.
The following table sets forth our cash, cash equivalents, restricted cash and invested assets as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities, available-for-sale: | | | | | | | | | | | | | | | | | | | $ | | | | | | % | | $ | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans, net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total cash, cash equivalents, restricted cash and invested assets | | $ | | | | | | % | | $ | | | | | | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities, available-for-sale: | | | | | | | | | | | | | | | | | | | $ | 44,840 | | | | 56 | % | | $ | 42,162 | | | | 57 | % | | | | 19,576 | | | | 25 | | | | 18,177 | | | | 24 | | | | | 629 | | | | 1 | | | | 239 | | | | — | | Commercial mortgage loans, net | | | 6,880 | | | | 8 | | | | 6,963 | | | | 9 | | | | | 2,153 | | | | 3 | | | | 2,058 | | | | 3 | | | | | 2,402 | | | | 3 | | | | 1,632 | | | | 2 | | Cash, cash equivalents and restricted cash | | | 2,780 | | | | 4 | | | | 3,341 | | | | 5 | | | | | | | | | | | | | | | | | | | Total cash, cash equivalents, restricted cash and invested assets | | $ | 79,260 | | | | 100 | % | | $ | 74,572 | | | | 100 | % | | | | | | | | | | | | | | | | | |
For a discussion of the change in cash, cash equivalents, restricted cash and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.” See note 4 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to our investment portfolio. We hold fixed maturity and equity securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of March 31,September 30, 2020, approximately 7%6% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to fair value.
Fixed maturity securities As of March 31,September 30, 2020, the amortized cost or cost, gross unrealized gains (losses), allowance for credit losses and fair value of our fixed maturity securities classified as available-for-sale were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance
for credit
losses | | | | | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | U.S. government, agencies and government-sponsoredenterprises | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | State and political subdivisions | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | Technology and communications | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | �� | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | Technology and communications | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage-backed (1) | | | | | | | | | | | | ) | | | | | | | | | Commercial mortgage-backed | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total available-for-sale fixed maturity securities | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance
for credit
losses | | | | | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | U.S. government, agencies and government-sponsored enterprises | | $ | 3,318 | | | $ | 1,474 | | | $ | — | | | $ | — | | | $ | 4,792 | | State and political subdivisions | | | 2,591 | | | | 525 | | | | (1 | ) | | | — | | | | 3,115 | | | | | 1,276 | | | | 126 | | | | (7 | ) | | | — | | | | 1,395 | | | | | | | | | | | | | | | | | | | | | | | | | | 4,294 | | | | 924 | | | | (1 | ) | | | — | | | | 5,217 | | | | | 2,581 | | | | 238 | | | | (54 | ) | | | — | | | | 2,765 | | | | | 7,611 | | | | 1,135 | | | | (11 | ) | | | — | | | | 8,735 | | | | | 5,160 | | | | 1,210 | | | | (2 | ) | | | — | | | | 6,368 | | Technology and communications | | | 2,993 | | | | 537 | | | | (3 | ) | | | — | | | | 3,527 | | | | | 1,363 | | | | 189 | | | | (1 | ) | | | — | | | | 1,551 | | | | | 2,558 | | | | 503 | | | | (4 | ) | | | — | | | | 3,057 | | | | | 1,794 | | | | 252 | | | | (2 | ) | | | — | | | | 2,044 | | | | | 1,325 | | | | 271 | | | | (15 | ) | | | — | | | | 1,581 | | | | | 346 | | | | 43 | | | | — | | | | — | | | | 389 | | | | | | | | | | | | | | | | | | | | | | | | | | 30,025 | | | | 5,302 | | | | (93 | ) | | | — | | | | 35,234 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 860 | | | | 75 | | | | — | | | | — | | | | 935 | | | | | 1,192 | | | | 163 | | | | (7 | ) | | | — | | | | 1,348 | | | | | 2,319 | | | | 312 | | | | (12 | ) | | | (1 | ) | | | 2,618 | | | | | 712 | | | | 95 | | | | (1 | ) | | | — | | | | 806 | | Technology and communications | | | 1,066 | | | | 190 | | | | — | | | | — | | | | 1,256 | | | | | 935 | | | | 134 | | | | (1 | ) | | | — | | | | 1,068 | | | | | 571 | | | | 61 | | | | (6 | ) | | | — | | | | 626 | | | | | 400 | | | | 38 | | | | (2 | ) | | | — | | | | 436 | | | | | 571 | | | | 87 | | | | (9 | ) | | | (1 | ) | | | 648 | | | | | 1,562 | | | | 241 | | | | (1 | ) | | | — | | | | 1,802 | | | | | | | | | | | | | | | | | | | | | | | | | | 10,188 | | | | 1,396 | | | | (39 | ) | | | (2 | ) | | | 11,543 | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage-backed (1) | | | 1,825 | | | | 250 | | | | — | | | | — | | | | 2,075 | | Commercial mortgage-backed | | | 2,775 | | | | 228 | | | | (24 | ) | | | (3 | ) | | | 2,976 | | | | | 3,254 | | | | 48 | | | | (16 | ) | | | — | | | | 3,286 | | | | | | | | | | | | | | | | | | | | | | | Total available-for-sale fixed maturity securities | | $ | 55,252 | | | $ | 9,349 | | | $ | (180 | ) | | $ | (5 | ) | | $ | 64,416 | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Fair value included $8 million collateralized by Alt-A residential mortgage loans and $19$22 million collateralized by sub-prime residential mortgage loans. |
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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not other-than- temporarily impaired | | | Other-than- temporarily impaired | | | Not other-than- temporarily impaired | | | Other-than- temporarily impaired | | | | | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government, agencies andgovernment-sponsored enterprises | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | State and political subdivisions | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | Technology and communications | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | Technology and communications | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage-backed (1) | | | | | | | | | | | | | | | | ) | | | | | | | | | Commercial mortgage-backed | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total available-for-sale fixed maturity securities | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Not other-
than-
temporarily
impaired | | | Other-than- temporarily impaired | | | Not other-
than-
temporarily
impaired | | | Other-than- temporarily impaired | | | | | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. government, agencies and government-sponsored enterprises | | $ | 4,073 | | | $ | 952 | | | $ | — | | | $ | — | | | $ | — | | | $ | 5,025 | | State and political subdivisions | | | 2,394 | | | | 355 | | | | — | | | | (2 | ) | | | — | | | | 2,747 | | | | | 1,235 | | | | 117 | | | | — | | | | (2 | ) | | | — | | | | 1,350 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,322 | | | | 675 | | | | — | | | | — | | | | — | | | | 4,997 | | | | | 2,404 | | | | 303 | | | | — | | | | (8 | ) | | | — | | | | 2,699 | | | | | 6,977 | | | | 798 | | | | — | | | | (1 | ) | | | — | | | | 7,774 | | | | | 4,909 | | | | 796 | | | | — | | | | (4 | ) | | | — | | | | 5,701 | | Technology and communications | | | 2,883 | | | | 363 | | | | — | | | | (1 | ) | | | — | | | | 3,245 | | | | | 1,271 | | | | 125 | | | | — | | | | — | | | | — | | | | 1,396 | | | | | 2,345 | | | | 367 | | | | — | | | | (1 | ) | | | — | | | | 2,711 | | | | | 1,590 | | | | 172 | | | | — | | | | (2 | ) | | | — | | | | 1,760 | | | | | 1,320 | | | | 187 | | | | — | | | | (1 | ) | | | — | | | | 1,506 | | | | | 292 | | | | 30 | | | | — | | | | — | | | | — | | | | 322 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 28,313 | | | | 3,816 | | | | — | | | | (18 | ) | | | — | | | | 32,111 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 779 | | | | 50 | | | | — | | | | — | | | | — | | | | 829 | | | | | 1,140 | | | | 179 | | | | — | | | | — | | | | — | | | | 1,319 | | | | | 2,087 | | | | 232 | | | | — | | | | — | | | | — | | | | 2,319 | | | | | 631 | | | | 55 | | | | — | | | | (2 | ) | | | — | | | | 684 | | Technology and communications | | | 1,010 | | | | 128 | | | | — | | | | — | | | | — | | | | 1,138 | | | | | 896 | | | | 92 | | | | — | | | | — | | | | — | | | | 988 | | | | | 565 | | | | 40 | | | | — | | | | — | | | | — | | | | 605 | | | | | 373 | | | | 24 | | | | — | | | | — | | | | — | | | | 397 | | | | | 557 | | | | 73 | | | | — | | | | (1 | ) | | | — | | | | 629 | | | | | 1,431 | | | | 188 | | | | — | | | | (2 | ) | | | — | | | | 1,617 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,469 | | | | 1,061 | | | | — | | | | (5 | ) | | | — | | | | 10,525 | | | | | | | | | | | | | | | | | | | �� | | | | | | | | Residential mortgage-backed (1) | | | 2,057 | | | | 199 | | | | 15 | | | | (1 | ) | | | — | | | | 2,270 | | Commercial mortgage-backed | | | 2,897 | | | | 137 | | | | — | | | | (8 | ) | | | — | | | | 3,026 | | | | | 3,262 | | | | 30 | | | | — | | | | (7 | ) | | | — | | | | 3,285 | | | | | | | | | | | | | | | | | | | | | | | | | | | Total available-for-sale fixed maturity securities | | $ | 53,700 | | | $ | 6,667 | | | $ | 15 | | | $ | (43 | ) | | $ | — | | | $ | 60,339 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Fair value included $9 million collateralized by Alt-A residential mortgage loans and $24 million collateralized by sub-prime residential mortgage loans. |
Fixed maturity securities increased $4.1 billion compared to December 31, 2019 principally from an increase in unrealized gains related to a decrease in interest rates, as well as purchases exceeding sales, maturities and repayments in the current year.
Fixed maturity securities decreased $1.3 billion compared to December 31, 2019 principally from a decrease in net unrealized gains primarily from credit spread widening on our corporate and structured securities, partially offset by an increase in net unrealized gains on U.S. government, agencies and government-sponsored enterprises securities from a decrease in interest rates in the current year. The decrease in fixed maturity securities was also partially offset by purchases exceeding sales, maturities and repayments during the first quarter of 2020.
Commercial mortgage loans
The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | (Dollar amounts in millions) | | | | | | | | | | | Delinquent
principal balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | | | | | | | % | | $ | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | | | | | | | % | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents weighted-averagedebt-to-value
as of March 31, 2020. |
| | | | | | | | | | | | | | | | | | | | | | | | | | (Dollar amounts in millions) | | | | | | | | | | | Delinquent
principal
balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | | | | | | | % | | $ | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | | | | | | | % | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents weighted-averagedebt-to-value
as of December 31, 2019. |
The following table sets forth the carrying values of our other invested assets as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | | | % | | $ | | | | | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Securities lending collateral | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total other invested assets | | $ | | | | | | % | | $ | | | | | | % | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 844 | | | | 36 | % | | $ | 634 | | | | 39 | % | | | | 804 | | | | 33 | | | | 290 | | | | 18 | | | | | 387 | | | | 16 | | | | 383 | | | | 23 | | | | | 274 | | | | 11 | | | | 260 | | | | 16 | | Securities lending collateral | | | 75 | | | | 3 | | | | 51 | | | | 3 | | | | | 18 | | | | 1 | | | | 14 | | | | 1 | | | | | | | | | | | | | | | | | | | Total other invested assets | | $ | 2,402 | | | | 100 | % | | $ | 1,632 | | | | 100 | % | | | | | | | | | | | | | | | | | |
Derivatives increased largely from a decrease in interest rates in the current year. Limited partnerships increased primarily from additional capital investments, partially offset by net unrealized losses and return of capital in the current year. Short-term investments decreased due to maturities and unfavorable changes in foreign exchange rates. The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB embedded derivatives, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives designated as hedges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total derivatives designated as hedges | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | Other foreign currency contracts | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total derivatives not designated as hedges | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | GMWB embedded derivatives | | | | | | | | | | | | | | | | ) | | | | | Fixed index annuity embedded derivatives | | | | | | | | | | | | | | | | ) | | | | | Indexed universal life embedded derivatives | | | | | | | | | | | | | | | | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives designated as hedges | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional | | | $ | 8,968 | | | $ | 1,844 | | | $ | (2,616 | ) | | $ | 8,196 | | | | | Notional | | | | 110 | | | | — | | | | — | | | | 110 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,078 | | | | 1,844 | | | | (2,616 | ) | | | 8,306 | | | | | | | | | | | | | | | | | | | | | | | Total derivatives designated as hedges | | | | | | | 9,078 | | | | 1,844 | | | | (2,616 | ) | | | 8,306 | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | | | | Notional | | | | 4,674 | | | | — | | | | — | | | | 4,674 | | | | | Notional | | | | 2,451 | | | | 1,527 | | | | (1,849 | ) | | | 2,129 | | | | | Notional | | | | 1,182 | | | | 4,362 | | | | (4,275 | ) | | | 1,269 | | Other foreign currency contracts | | | Notional | | | | 628 | | | | 5,689 | | | | (4,687 | ) | | | 1,630 | | | | | | | | | | | | | | | | | | | | | | | Total derivatives not designated as hedges | | | | | | | 8,935 | | | | 11,578 | | | | (10,811 | ) | | | 9,702 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 18,013 | | | $ | 13,422 | | | $ | (13,427 | ) | | $ | 18,008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | GMWB embedded derivatives | | | Policies | | | | 25,623 | | | | — | | | | (1,452 | ) | | | 24,171 | | Fixed index annuity embedded derivatives | | | Policies | | | | 15,441 | | | | — | | | | (1,511 | ) | | | 13,930 | | Indexed universal life embedded derivatives | | | Policies | | | | 884 | | | | — | | | | (37 | ) | | | 847 | |
The increasedecrease in the notional value of derivatives was primarily attributable to terminations of interest rate swaps that support our long-term care insurance business and terminations of equity index options that support our fixed indexed annuity products, mostly offset by an increase in foreign currency derivatives entered into to hedge a potential adverse legal settlement relatedpayments to asserted claimsAXA under the promissory note denominated in a foreign currency and an increase in financial futures to hedge the GMWB liability associated with our runoff variable annuity products.currency. The number of policies related to our embedded derivatives decreased as these products are no longer being offered and continue to runoff. Consolidated Balance Sheets . Total assets decreased $2,498increased $3,583 million from $101,342 million as of December 31, 2019 to $98,844$104,925 million as of March 31,September 30, 2020. Cash, cash equivalents, restricted cash and invested assets decreased $1,418increased $4,688 million primarily from decreasesincreases of $1,288$4,077 million, $858$770 million and $51$390 million in fixed maturity securities, cash, cash equivalents and restricted cashother invested assets and equity securities, respectively. The decreaseincrease in fixed maturity securities was predominantly related to lowerhigher unrealized gains principally from credit spread widening, largely in our U.S. andnon-U.S.
corporate bond investments, partially offset bymostly associated with a decrease in interest rates favorably impacting our U.S. government bond investments and from net purchases in the current year. The increase in other invested assets was principally from higher derivative assets driven mostly by lower interest rates and additional capital investments in limited partnerships in the current year. These increases were partially offset by a decrease in cash, cash equivalents and restricted cash wasof $561 million, largely related to the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020, the early repayment of Rivermont I’s non-recourse funding obligations originally due in 2050, and net purchases of fixed maturity securities and payments of $263 million to AXA in the current year. Equity securities decreased principally from unfavorable equity market performance driven in large part byCOVID-19.
These decreases to cash were partially offset by proceeds received from debt offerings in GMHI and our Australia mortgage insurance business during the third quarter of 2020.DAC decreased $213 million principally associated with higher amortization largely driven by an increase of $833 million in other invested assets primarily from lower interest rates increasing derivative assetslapses mostly attributable to our large 20-year term life insurance block entering its post-level premium period and amortization outpacing deferrals reflecting the low sales in our long-term care insurance business in the current year. Reinsurance recoverable decreased $315 million mainly attributable to the runoff of our structured settlement products ceded to Union Fidelity Life Insurance Company, an affiliate of our former parent, General Electric Company (“GE”). We also recorded $44 million of expected credit losses in the current year associated with adopting the new accounting guidance. Deferred tax asset decreased $106$175 million primarilylargely due to the utilization of net operating losses and foreign tax credits and from higher unrealized gains on derivatives and investments, partially offset by lower unrealized gains on investmentsa deferred tax asset recorded in connection with the AXA settlement agreement. Separate account assets decreased $408 million primarily due to surrenders, partially offset by favorable equity market performance in the current year. Separate account assets decreased $1,141 million primarily due to unfavorable equity market performance and surrenders in the current year.
. Total liabilities decreased $2,700increased $2,983 million from $86,710 million as of December 31, 2019 to $84,010$89,693 million as of March 31,September 30, 2020. Future policy benefits decreased $1,045increased $1,611 million primarily driven by shadow accounting adjustments associated with the recognition of lowerhigher unrealized gains. The shadow accounting adjustments decreasedincreased future policy benefits by approximately $1,110$1,313 million, mostly in our long-term care insurance business, with an offsetting amount recorded in other comprehensive income (loss). This decreaseThe increase was partially offset byalso attributable to aging of our long-term care insurance in-force block and an increase inhigher incremental reserves of $41$247 million recorded in connection with an accrual for profits followed by losses in the current year. These increases were partially offset by our fixed annuities business principally from net outflows driven by surrenders and benefits in the current year.
Policyholder account balances increased $96$514 million largely attributable to shadow accounting adjustments in connection with the recognition of higher unrealized gains mostly in our universal life insurance products and from the low interest rate environment impacting GMDB reserves in our variable annuity business from unfavorable equity market performance,products, partially offset by surrenders and benefits in our fixed annuities business in the current year. Liability for policy and contract claims increased $174$415 million due principallymostly related to our U.S. mortgage insurance business primarily attributable to a significant increase in the number of new delinquencies driven largely by borrower forbearance resulting from COVID-19. In addition, existing reserves were strengthened by $28 million in the current year primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. The increase was also attributable to our long-term care insurance business primarily attributable to new claims, which includes higher new claims frequency as a result of the aging of the in-force block, as well as higher severity, partially offset by an increase in claim terminations driven mostly by higher mortality and favorable development on prior year incurred but not reported claims in the current year. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $61 million reflecting our assumption that new claim incidence during this period will ultimately return to normal levels, partially offsetting the favorable development on incurred but not reported claims.Unearned premiums decreased $171Other liabilities increased $485 million principally relateddue to our Australia mortgage insurance businesshigher counterparty collateral driven mostly by lower interest rates increasing derivative valuations and higher amounts due primarily to changes in foreign exchange rates, asbroker associated with the U.S. dollar strengthened againsttiming of investment trades near the end of the third quarter of 2020.
| Australian dollar as compared to the December 31, 2019 balance sheet rate. The decrease was also attributable to earned premiums outpacing written premiums in our U.S. mortgage insurance business and from policy terminations and policies enteringpaid-up
status in our long-term care insurance business. |
Non-recourse funding obligations decreased $311 million due to the early redemption of Rivermont I’s outstanding non-recourse funding obligations originally due in 2050. Long-term borrowings decreased $426increased $293 million mainly attributable to $750 million of senior notes issued by GMHI and AUD$43 million floating rate subordinated notes issued by our Australia mortgage insurance business, partially offset by the early redemption of Genworth Holdings’ 7.70% senior notes originally scheduled to mature in June 2020. In addition, Genworth Holdings repurchased $142020 and the repurchase of $84 million principal amount of its senior notes with 2021 maturity dates in March 2020.the current year. Liabilities related to discontinued operations increased $389 million predominantly from a promissory note issued in the current year associated with the settlement agreement reached with AXA. See note 14 in our unaudited condensed consolidated financial statements under “Item 1 — Financial Statements” for additional details. . Total equity increased $202$600 million from $14,632 million as of December 31, 2019 to $14,834$15,232 million as of March 31,September 30, 2020. We reported a net loss available to Genworth Financial, Inc.’s common stockholders of $66$89 million for the threenine months ended March 31,September 30, 2020. We also adopted new accounting guidance on January 1, 2020 related to estimating expected credit losses that was applied on a modified retrospective basis, resulting in a $55 million decrease to retained earnings in the current year. Derivatives qualifying as hedges and unrealized gains on investments increased $753$449 million and $255 million, respectively, primarily from a decrease in interest rates, partially offset by a decrease in net unrealized gains of $316 million driven largely by credit spread widening, mostly in our U.S. andnon-U.S.rates.
corporate bond investments in the current year.Liquidity and Capital Resources 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.
Genworth and subsidiaries The following table sets forth our unaudited condensed consolidated cash flows for the threenine months ended March 31:September 30: | | | | | | | | | | | | | | | | | Net cash from operating activities | | $ | | | | $ | | | Net cash from (used by) investing activities | | | | ) | | | | | Net cash used by financing activities | | | | ) | | | | ) | | | | | | | | | | | Net increase (decrease) in cash before foreign exchange effect | | $ | | ) | | $ | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Net cash from operating activities | | $ | 1,452 | | | $ | 1,608 | | Net cash used by investing activities | | | (1,279 | ) | | | (548 | ) | Net cash used by financing activities | | | (734 | ) | | | (1,242 | ) | | | | | | | | | | Net decrease in cash before foreign exchange effect | | $ | (561 | ) | | $ | (182 | ) | | | | | | | | | |
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 Federal Home Loan Banks; 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 higherlower cash inflows from operating activities in the current year mainly attributable to posting lowerpayments of $263 million to AXA, as discussed below, partially offset by higher collateral withreceived from counterparties related to our derivative positions and a lower amount of policy loans issued in our corporate-owned life insurance product partially offset by a $134 million interim litigation payment to AXA in the current year. We had higher cash outflows from investing activities in the current year primarily driven by higher net purchases of fixed maturity securities, and capital calls related to limited partnership investments, partially offset by net sales of short-term investments. We had cash inflows from investing activities in the prior year mainly driven by net sales of fixed maturity and equity securities, partially offset bylower commercial mortgage loan originations outpacing repayments.in the current year. We had higherlower cash outflows from financing activities in the current year principally from $739 million of net proceeds from GMHI’s issuance of its 2025 Senior Notes, net proceeds of $28 million from the issuance of GFMIPL’s floating rate subordinated notes due in July 2030 and lower net withdrawals from our investment contracts. These decreases were partially offset by the early redemption of $397 million of Genworth Holdings’ senior notes originally scheduled to mature in June 2020, the early repaymentredemption of $315 million of Rivermont I’s non-recourse funding obligations originally due in 2050 and the repurchase of $14$84 million principal amount of Genworth Holdings’ senior notes with 2021 maturity dates, partially offset by lower net withdrawals from our investment contracts.dates.We engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary. Genworth Financial and Genworth Holdings each act as a holding company for their respective subsidiaries and do not have any significant operations of their own. Dividends from their respective subsidiaries, payments to them under tax sharing and expense reimbursement arrangements with their subsidiaries and proceeds from borrowings or securities issuances are their principal sources of cash to meet their obligations. Insurance laws
and regulations regulate the payment of dividends and other distributions to Genworth Financial and Genworth Holdings by their insurance subsidiaries. We expect dividends paid by the insurance subsidiaries will vary depending on strategic objectives, capital levels, regulatory requirements and business performance, including the expected adverse impacts from COVID-19. The primary uses of funds at Genworth Financial and Genworth Holdings include payment of holding company general operating expenses (including taxes and litigation expenses related to discontinued operations)taxes), payment of principal, interest and other expenses on current and any future borrowings or other obligations (including payments to AXA under a secured promissory note related to discontinued operations), 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. Genworth Holdings had $525$814 million and $1,461 million of cash, cash equivalents and restricted cash as of March 31,September 30, 2020 and December 31, 2019.2019, respectively, which included $74 million of restricted cash equivalents as of September 30, 2020. Genworth Holdings also held $50 million and $70 million in U.S. government securities as of March 31, 2020 and December 31, 2019, respectively, which included approximately $50 million and $48 million respectively, of restricted assets. The decrease in Genworth HoldingsHoldings’ cash, cash equivalents and restricted cash was principally driven by the repayment of long-term debt and intercompany notes and payments to AXA of $263 million, partially offset by a $134dividend of $436 million received from our U.S. mortgage insurance business in the current year. On July 20, 2020, we reached a settlement agreement with AXA regarding a dispute over payment protection insurance mis-selling claims sold by our former lifestyle protection insurance business that was acquired by AXA in December 2015. In January 2020, we made an interim litigation payment to AXA.of $134 million and on July 21, 2020 we paid an initial amount under the settlement agreement of £100 million ($125 million), along with accrued interest. For additional details on the decrease in cash, cash equivalents and restricted cash, see below under “—Capital resources and financing activities.” During the threenine months ended March 31,September 30, 2020 and 2019, Genworth Holdings received cash dividends from its international subsidiaries of $11 million and $47$167 million, respectively. Our U.S. mortgage insurance business paid a $436 million dividend in the third quarter of 2020 from net proceeds received from GMHI’s issuance of its 2025 Senior Notes. This dividend provides liquidity to address Genworth Holdings’ senior notes due in February 2021. Due to the macroeconomic uncertainty resulting from COVID-19, we maydo not expect to receive further dividends from our mortgage insurance businesses in 2020. Future dividends and the timing of their distribution will be reevaluated later in 2020 and will depend on the economic recovery from COVID-19.COVID-19 and prepayment obligations under the secured promissory note issued in connection with the AXA settlement agreement, among other factors.
Regulated insurance subsidiaries The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to us, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements. Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets. Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of March 31,September 30, 2020, our total cash, cash equivalents, restricted cash and invested assets were $73.2$79.3 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership investments and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 37% of the carrying value of our total cash, cash equivalents, restricted cash and invested assets as of March 31,September 30, 2020. As of March 31,September 30, 2020, our U.S. mortgage insurance business was compliant with the PMIERs capital requirements, with a prudent buffer.requirements. Credit risk transfer transactions provided an estimated aggregate of approximately
$825$777 million of PMIERs capital credit as of March 31,September 30, 2020. Our U.S. mortgage insurance business may execute future capitalcredit risk transfer transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements given the dynamic nature of asset valuationsin response to potential changes in performance and requirement changesPMIERs requirements over time, including additional reinsurance and othertime. We believe that future credit risk transfer transactions.transactions may be more difficult to execute, if possible at all, and may have a higher cost during and following COVID-19.
Capital resources and financing activities On August 21, 2020, GMHI issued $750 million of its 6.50% senior notes due in 2025. Interest on the notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2021. These notes mature on August 15, 2025. GMHI may redeem the notes, in whole or in part, at any time prior to February 15, 2025 at its option, by paying a make-whole premium, plus accrued and unpaid interest, if any. At any time on or after February 15, 2025, GMHI may redeem the notes, in whole or in part, at its option, at 100% of the principal amount, plus accrued and unpaid interest. The notes contain customary events of default, which subject to certain notice and cure conditions, can result in the acceleration of the principal and accrued interest on the outstanding notes if GMHI breaches the terms of the indenture. On July 3, 2020, GFMIPL issued AUD$147 million floating rate subordinated notes due in July 2030 in exchange for AUD$147 million of its floating rate subordinated notes due in July 2025 and issued an additional
AUD$43 million floating rate subordinated notes due in July 2030. These notes will pay interest quarterly at a floating rate equal to the three-month bank bill swap reference rate plus a margin of a minimum of 5.0% per annum. GFMIPL has an option to redeem the notes at face value on July 3, 2025 and every interest payment date thereafter up to and excluding the maturity date, and for certain tax and regulatory events (in each case subject to APRA’s prior written approval). Following the settlement of these transactions, GFMIPL had outstanding floating rate subordinated notes of AUD$53 million due in July 2025 and AUD$190 million due in July 2030. On August 24, 2020, GFMIPL redeemed AUD$5 million of its floating rate subordinated notes due in July 2025 and paid accrued interest thereon. GFMIPL redeemed the remaining AUD$48 million of its floating rate subordinated notes due in July 2025 on October 6, 2020. During the nine months ended September 30, 2020, Genworth Holdings repurchased $84 million principal amount of its senior notes with 2021 maturity dates for a pre-tax gain of $4 million. In March 2020, Genworth Holdings repaid a $200 million intercompany note due to GLIC with a maturity date of March 31, 2020. In March 2020, Genworth Holdings repurchased $14 million principal amount of its senior notes with 2021 maturity dates for apre-tax
gain of $1 million and paid accrued interest thereon. In April 2020, Genworth Holdings repurchased an additional $36 million principal amount of its senior notes with 2021 maturity dates for apre-tax
gain of $2 million.On January 21, 2020, Genworth Holdings early redeemed $397 million of its 7.70% senior notes originally scheduled to mature in June 2020 for a pre-tax loss of $9 million. 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 $3 million and a make-whole premium of $9 million. In January 2020, upon receipt of approval from the Director of Insurance of the State of South Carolina, Rivermont I, our indirect wholly-owned special purpose consolidated captive insurance 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. In January 2020, we made an interimaddition to the initial settlement payment to AXA for approximately $134 million, which was accrued as a contingent liability as of December 31, 2019. Additional amounts may be due following the damages hearing scheduled for June 2020. To date, AXA has submitted invoices to us claiming aggregate losses of approximately £489 million, of which £100 million ($134125 million) was paid to AXA on July 21, 2020, we also issued a secured promissory note to AXA that is due in January 2020.2022. Under the settlement, certain cash flows to Genworth Holdings, including dividends and capital raises, above defined thresholds must be paid to AXA until the promissory note is also seeking a tax gross-upfully repaid. In addition, over the next year, we expect to pay AXA approximately $45 million consisting of interest on the amount invoiced forpromissory note, assuming we do not make any pre-payments, and a one-time payment on an additional £115 million. AXA may also claim and seek additionalunrelated liability associated with underwriting losses aton a product sold by a distributor in our former lifestyle protection insurance business. Our evaluation of our ability to meet our obligations include the damages hearing scheduled for June 2020. See note 12 tofollowing contractual obligations due within one year from the issue date of our unaudited condensed consolidated financial statements, under “Item 1—Financial Statements” for additional details.along with other certain conditions and events: Genworth Holdings has $338 million of its 7.20% senior notes maturing in February 2021 and $659 million of its 7.625% senior notes maturing in September 2021, excluding deferred costs; interest payments on our senior notes are forecasted to be $144 million for the next twelve months; we do not expect to receive further dividends in 2020 from our mortgage insurance subsidiaries due to higher delinquencies and the impact to capital levels resulting from COVID-19; beginning in 2021, until the secured promissory note to AXA is paid, dividends above $50 million from our U.S. mortgage insurance subsidiaries are subject to mandatory prepayment conditions; the receipt of dividends and sale proceeds above certain thresholds from our Australian mortgage insurance business are also subject to mandatory prepayment conditions; and due to the uncertain macroeconomic conditions surrounding COVID-19, on September 30, 2020, Genworth and China Oceanwide agreed to a sixteenth waiver and agreement extending the merger
| deadline to no later than November 30, 2020. However, the consummation of this transaction is dependent on steps outside of our control; accordingly, the associated post-closing capital contributions from China Oceanwide cannot be included as a potential source of liquidity. |
Absent accessing additional liquidity through third party sources and/or the completion of the China Oceanwide transaction, Genworth Holdings expects to have a cash shortfall of approximately $215 million which raises doubt about our ability to meet our financial obligations for the next year. While conditions and events occurring and expected to occur raise doubt about our ability to meet our financial obligations for the next year, we believe management’s plans alleviate this doubt. During the quarter ended September 30, 2020, we successfully executed a debt financing through our U.S. mortgage insurance business, a transaction we deemed probable in our previous assessment of our ability to continue as a going concern. Because of the uncertainty regarding the completion of the China Oceanwide transaction, we are actively taking steps toward raising capital by preparing for a possible public offering of our U.S. mortgage insurance business, subject to market conditions. In addition to a partial sale of our U.S. mortgage insurance business through a public offering, we are also evaluating the possibility of the issuance of convertible, equity-linked securities or another transaction, prior to our senior notes maturing in September 2021. We believe existingan equity transaction involving our U.S. mortgage insurance business, if needed, is probable of being effectively executed given the value of the U.S. mortgage insurance business, the healthy conditions of the relevant markets, historical investor interest and our successful history of similar transactions, among other factors. Our outside financial advisors agree with our assessment based on current conditions. In addition to management’s plans, we believe additional sources of cash held at Genworth Holdings combined with dividendscoming 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, willwould provide us with sufficient capital flexibility and liquidity to meet our projected future operating and financing requirements.requirements for one year from the issue date of the unaudited condensed consolidated financial statements. For example, Genworth Holdings expects to receive intercompany tax payments generated from realized gains in the third quarter of 2020 and we expect to receive additional intercompany tax payments in future periods. Until the secured promissory note issued to AXA is repaid, certain prepayment obligations thereunder place significant constraints on our ability to repay debt (other than the 2021 debt maturities) with the proceeds of new debt financing, equity offerings, asset sales or dividends from subsidiaries. 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 company debt. In the absenceThe availability of theadditional funding, including an equity transaction with China Oceanwide, we may need to pursue financing transactions or potential asset sales to address our debt maturities, including a potential transaction with respect tothrough our U.S. mortgage insurance business and/or our mortgage insurance business in Australia. The timing and feasibilitythe issuance of such potential transactions may adversely be affected by COVID-19. The availability of additional fundingconvertible, equity-linked securities, will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurance, our credit ratings and credit capacity and the performance of and outlook for our U.S. mortgage insurance business. For a discussion of certain risks associated with
our liquidity, see “Item 1A—Risk Factors—Our internal sources of liquidity may be insufficient to meet our needs and our access to capital may be limited or unavailable. Under such conditions, we may seek additional capital but may be unable to obtain it” and “Litigation and regulatory investigations or other actions are common in the insurance business and may result in financial losses and harm our reputation” in our 2019 Annual Report on Form 10-K. In addition, see note 12 to our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” regarding the case captioned “AXA S.A. v. Genworth Financial International Holdings, LLC et al
.,” for additional details on litigation, including potential further contingent liabilities. These risks may be exacerbated by the economic impact of COVID-19. No references herein to any potential equity transaction constitutes an offering of securities.
Contractual obligations and commercial commitments ExceptWe have experienced a significant increase in loss reserves in our U.S. mortgage insurance business during the nine months ended September 30, 2020 driven mostly by higher new delinquencies from borrower forbearance due to COVID-19. We expect a large portion of these delinquencies to cure before becoming an active claim; however, reserves recorded related to borrower forbearance have a high degree of estimation. Therefore, it is possible we could have higher contractual obligations related to these loss reserves if they do not cure as we expect. In addition, as disclosed above, therewe have contractual amounts due to AXA related to the promissory note issued under the settlement agreement (recorded as discontinued operations) and amounts due under GMHI and GFMIPL’s senior notes and floating rate subordinated notes, respectively. There have been no other material additions or changes to our contractual obligations as compared to the amounts disclosed within our 2019 Annual Report on Form 10-K filed on February 27, 2020. For additional details related to our commitments, see note 12 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements.” Supplemental Condensed Consolidating Financial Information Genworth Financial provides a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior and subordinated notes and the holders of the senior and subordinated notes, on an unsecured unsubordinated and subordinated basis, respectively, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes and outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior and subordinated notes indentures in respect of such senior and subordinated notes. Genworth Holdings is a direct, 100% owned subsidiary of Genworth Financial. The following supplemental condensed consolidating financial information of Genworth Financial and its direct and indirect subsidiaries has been prepared pursuant to rules regarding the preparation of consolidating financial information of Regulation S-X, as amended by the SEC on March 2, 2020. In the first quarter of 2020, we early applied new rules issued by the SEC by removing comparative prior year condensed consolidating financial information herein and presenting the supplemental condensed consolidating financial information outside the footnotes of our interim unaudited condensed consolidated financial statements. We continue to provide prior year annual period condensed consolidating financial information in accordance with the new amended rules. The supplemental condensed consolidating financial information presents the condensed consolidating balance sheet information as of March 31,September 30, 2020 and December 31, 2019, the condensed consolidating income statement information, the condensed consolidating comprehensive income statement information and the condensed consolidating cash flow statement information for the threenine months ended March 31,September 30, 2020 and for the year ended December 31, 2019. The supplemental condensed consolidating financial information reflects Genworth Financial (“Parent Guarantor”), Genworth Holdings (“Issuer”) and each of Genworth Financial’s other direct and indirect subsidiaries (the “All Other Subsidiaries”) on a combined basis, none of which guarantee the senior notes or subordinated notes, as well as the eliminations necessary to present Genworth Financial’s financial information on a consolidated basis and total consolidated amounts. The accompanying supplemental condensed consolidating financial information is presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries and intercompany activity.
The following table presents the condensed consolidating balance sheet information as of March 31,September 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities available-for-sale, at fair value (amortized cost of $54,136 and allowance for credit losses of $—) | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | Equity securities, at fair value | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4) | | | | | | | | | | | | | | | | | | | | | Less: Allowance for credit losses | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans, net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Investments in subsidiaries | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | Cash, cash equivalents and restricted cash | | | | | | | | | | | | | | | | | | | | | Accrued investment income | | | | | | | | | | | | | | | | | | | | | Deferred acquisition costs | | | | | | | | | | | | | | | | | | | | | Intangible assets and goodwill | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: Allowance for credit losses | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Reinsurance recoverable, net | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | Intercompany notes receivable | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | Policyholder account balances | | | | | | | | | | | | | | | | | | | | | Liability for policy and contract claims | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Intercompany notes payable | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Separate account liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | Accumulated other comprehensive income (loss) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Total Genworth Financial, Inc.’s stockholders’ equity | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and equity | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities available-for-sale, at fair value (amortized cost of $55,252 and allowance for credit losses of $5) | | $ | — | | | $ | — | | | $ | 64,416 | | | $ | — | | | $ | 64,416 | | Equity securities, at fair value | | | — | | | | — | | | | 629 | | | | — | | | | 629 | | Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4) | | | — | | | | — | | | | 6,911 | | | | — | | | | 6,911 | | Less: Allowance for credit losses | | | — | | | | — | | | | (31 | ) | | | — | | | | (31 | ) | | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans, net | | | — | | | | — | | | | 6,880 | | | | — | | | | 6,880 | | | | | — | | | | — | | | | 2,153 | | | | — | | | | 2,153 | | | | | — | | | | 16 | | | | 2,386 | | | | — | | | | 2,402 | | Investments in subsidiaries | | | 14,690 | | | | 15,959 | | | | — | | | | (30,649 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | 14,690 | | | | 15,975 | | | | 76,464 | | | | (30,649 | ) | | | 76,480 | | Cash, cash equivalents and restricted cash | | | — | | | | 814 | | | | 1,966 | | | | — | | | | 2,780 | | Accrued investment income | | | — | | | | — | | | | 650 | | | | — | | | | 650 | | Deferred acquisition costs | | | — | | | | — | | | | 1,623 | | | | — | | | | 1,623 | | Intangible assets and goodwill | | | — | | | | — | | | | 209 | | | | — | | | | 209 | | | | | — | | | | — | | | | 16,832 | | | | — | | | | 16,832 | | Less: Allowance for credit losses | | | — | | | | — | | | | (44 | ) | | | — | | | | (44 | ) | | | | | | | | | | | | | | | | | | | | | | Reinsurance recoverable, net | | | — | | | | — | | | | 16,788 | | | | — | | | | 16,788 | | | | | 5 | | | | 326 | | | | 114 | | | | — | | | | 445 | | Intercompany notes receivable | | | 99 | | | | 189 | | | | — | | | | (288 | ) | | | — | | | | | (19 | ) | | | 779 | | | | (510 | ) | | | — | | | | 250 | | | | | — | | | | — | | | | 5,700 | | | | — | | | | 5,700 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 14,775 | | | $ | 18,083 | | | $ | 103,004 | | | $ | (30,937 | ) | | $ | 104,925 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 41,995 | | | $ | — | | | $ | 41,995 | | Policyholder account balances | | | — | | | | — | | | | 22,731 | | | | — | | | | 22,731 | | Liability for policy and contract claims | | | — | | | | — | | | | 11,373 | | | | — | | | | 11,373 | | | | | — | | | | — | | | | 1,846 | | | | — | | | | 1,846 | | | | | 19 | | | | 92 | | | | 1,802 | | | | — | | | | 1,913 | | Intercompany notes payable | | | — | | | | 99 | | | | 189 | | | | (288 | ) | | | — | | | | | — | | | | 2,663 | | | | 907 | | | | — | | | | 3,570 | | Separate account liabilities | | | — | | | | — | | | | 5,700 | | | | — | | | | 5,700 | | Liabilities related to discontinued operations | | | — | | | | 549 | | | | 16 | | | | — | | | | 565 | | | | | | | | | | | | | | | | | | | | | | | | | | 19 | | | | 3,403 | | | | 86,559 | | | | (288 | ) | | | 89,693 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 | | | | — | | | | 3 | | | | (3 | ) | | | 1 | | Additional paid-in capital | | | 11,997 | | | | 12,761 | | | | 18,432 | | | | (31,193 | ) | | | 11,997 | | Accumulated other comprehensive income (loss) | | | 4,141 | | | | 4,141 | | | | 4,226 | | | | (8,367 | ) | | | 4,141 | | | | | 1,317 | | | | (2,222 | ) | | | (6,992 | ) | | | 9,214 | | | | 1,317 | | | | | (2,700 | ) | | | — | | | | — | | | | — | | | | (2,700 | ) | | | | | | | | | | | | | | | | | | | | | | Total Genworth Financial, Inc.’s stockholders’ equity | | | 14,756 | | | | 14,680 | | | | 15,669 | | | | (30,349 | ) | | | 14,756 | | | | | — | | | | — | | | | 776 | | | | (300 | ) | | | 476 | | | | | | | | | | | | | | | | | | | | | | | | | | 14,756 | | | | 14,680 | | | | 16,445 | | | | (30,649 | ) | | | 15,232 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and equity | | $ | 14,775 | | | $ | 18,083 | | | $ | 103,004 | | | $ | (30,937 | ) | | $ | 104,925 | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the condensed consolidating balance sheet information as of December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities available-for-sale, at fair value | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | Equity securities, at fair value | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans ($47 are restricted related to a securitization entity) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Investments in subsidiaries | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | Cash, cash equivalents and restricted cash | | | | | | | | | | | | | | | | | | | | | Accrued investment income | | | | | | | | | | | | | | | | ) | | | | | Deferred acquisition costs | | | | | | | | | | | | | | | | | | | | | Intangible assets and goodwill | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | Intercompany notes receivable | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | Policyholder account balances | | | | | | | | | | | | | | | | | | | | | Liability for policy and contract claims | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | Intercompany notes payable | | | | | | | | | | | | | | | | ) | | | | | Non-recourse funding obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Separate account liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | Accumulated other comprehensive income (loss) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Total Genworth Financial, Inc.’s stockholders’ equity | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and equity | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities available-for-sale, at fair value | | $ | — | | | $ | — | | | $ | 60,539 | | | $ | (200 | ) | | $ | 60,339 | | Equity securities, at fair value | | | — | | | | — | | | | 239 | | | | — | | | | 239 | | Commercial mortgage loans ($47 are restricted related to a securitization entity) | | | — | | | | — | | | | 6,963 | | | | — | | | | 6,963 | | | | | — | | | | — | | | | 2,058 | | | | — | | | | 2,058 | | | | | — | | | | 71 | | | | 1,561 | | | | — | | | | 1,632 | | Investments in subsidiaries | | | 14,079 | | | | 15,090 | | | | — | | | | (29,169 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | 14,079 | | | | 15,161 | | | | 71,360 | | | | (29,369 | ) | | | 71,231 | | Cash, cash equivalents and restricted cash | | | — | | | | 1,461 | | | | 1,880 | | | | — | | | | 3,341 | | Accrued investment income | | | — | | | | — | | | | 657 | | | | (3 | ) | | | 654 | | Deferred acquisition costs | | | — | | | | — | | | | 1,836 | | | | — | | | | 1,836 | | Intangible assets and goodwill | | | — | | | | — | | | | 201 | | | | — | | | | 201 | | | | | — | | | | — | | | | 17,103 | | | | — | | | | 17,103 | | | | | 4 | | | | 201 | | | | 239 | | | | (1 | ) | | | 443 | | Intercompany notes receivable | | | 119 | | | | 132 | | | | — | | | | (251 | ) | | | — | | | | | 13 | | | | 821 | | | | (409 | ) | | | — | | | | 425 | | | | | — | | | | — | | | | 6,108 | | | | — | | | | 6,108 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 14,215 | | | $ | 17,776 | | | $ | 98,975 | | | $ | (29,624 | ) | | $ | 101,342 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 40,384 | | | $ | — | | | $ | 40,384 | | Policyholder account balances | | | — | | | | — | | | | 22,217 | | | | — | | | | 22,217 | | Liability for policy and contract claims | | | — | | | | — | | | | 10,958 | | | | — | | | | 10,958 | | | | | — | | | | — | | | | 1,893 | | | | — | | | | 1,893 | | | | | 30 | | | | 118 | | | | 1,243 | | | | (5 | ) | | | 1,386 | | Intercompany notes payable | | | — | | | | 319 | | | | 132 | | | | (451 | ) | | | — | | Non-recourse funding obligations | | | — | | | | — | | | | 311 | | | | — | | | | 311 | | | | | — | | | | 3,137 | | | | 140 | | | | — | | | | 3,277 | | Separate account liabilities | | | — | | | | — | | | | 6,108 | | | | — | | | | 6,108 | | Liabilities related to discontinued operations | | | — | | | | 134 | | | | 42 | | | | — | | | | 176 | | | | | | | | | | | | | | | | | | | | | | | | | | 30 | | | | 3,708 | | | | 83,428 | | | | (456 | ) | | | 86,710 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 | | | | — | | | | 3 | | | | (3 | ) | | | 1 | | Additional paid-in capital | | | 11,990 | | | | 12,761 | | | | 18,431 | | | | (31,192 | ) | | | 11,990 | | Accumulated other comprehensive income (loss) | | | 3,433 | | | | 3,433 | | | | 3,474 | | | | (6,907 | ) | | | 3,433 | | | | | 1,461 | | | | (2,126 | ) | | | (7,108 | ) | | | 9,234 | | | | 1,461 | | | | | (2,700 | ) | | | — | | | | — | | | | — | | | | (2,700 | ) | | | | | | | | | | | | | | | | | | | | | | Total Genworth Financial, Inc.’s stockholders’ equity | | | 14,185 | | | | 14,068 | | | | 14,800 | | | | (28,868 | ) | | | 14,185 | | | | | — | | | | — | | | | 747 | | | | (300 | ) | | | 447 | | | | | | | | | | | | | | | | | | | | | | | | | | 14,185 | | | | 14,068 | | | | 15,547 | | | | (29,168 | ) | | | 14,632 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and equity | | $ | 14,215 | | | $ | 17,776 | | | $ | 98,975 | | | $ | (29,624 | ) | | $ | 101,342 | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the condensed consolidating income statement information for the threenine months ended March 31,September 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | ) | | | | | | | | | | | | ) | | | | | Net investment gains (losses) | | | | | | | | | | | | ) | | | | | | | | ) | Policy fees and other income | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Acquisition and operating expenses, net of deferrals | | | | | | | | | | | | | | | | | | | | | Amortization of deferred acquisition costs and intangibles | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Loss from continuing operations before income taxes and equity in loss of subsidiaries | | | | ) | | | | ) | | | | ) | | | | | | | | ) | Provision (benefit) for income taxes | | | | | | | | ) | | | | ) | | | | | | | | ) | Equity in loss of subsidiaries | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loss from continuing operations | | | | ) | | | | ) | | | | ) | | | | | | | | ) | Income from discontinued operations, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | ) | | | | | | | | ) | Less: net loss from continuing operations attributable to noncontrolling interests | | | | | | | | | | | | ) | | | | | | | | ) | Less: net income from discontinued operations attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net loss available to Genworth Financial, Inc.’s common stockholders | | $ | | ) | | $ | | ) | | $ | | ) | | $ | | | | $ | | ) | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 3,068 | | | $ | — | | | $ | 3,068 | | | | | (2 | ) | | | 5 | | | | 2,405 | | | | (2 | ) | | | 2,406 | | Net investment gains (losses) | | | — | | | | 7 | | | | 375 | | | | — | | | | 382 | | Policy fees and other income | | | — | | | | 2 | | | | 541 | | | | (4 | ) | | | 539 | | | | | | | | | | | | | | | | | | | | | | | | | | (2 | ) | | | 14 | | | | 6,389 | | | | (6 | ) | | | 6,395 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | — | | | | — | | | | 4,146 | | | | — | | | | 4,146 | | | | | — | | | | — | | | | 417 | | | | — | | | | 417 | | Acquisition and operating expenses, net of deferrals | | | 17 | | | | 6 | | | | 698 | | | | — | | | | 721 | | Amortization of deferred acquisition costs and intangibles | | | — | | | | — | | | | 310 | | | | — | | | | 310 | | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | — | | | | 133 | | | | 18 | | | | (6 | ) | | | 145 | | | | | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 17 | | | | 139 | | | | 5,594 | | | | (6 | ) | | | 5,744 | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes and equity in income (loss) of subsidiaries | | | (19 | ) | | | (125 | ) | | | 795 | | | | — | | | | 651 | | Provision (benefit) for income taxes | | | 28 | | | | (23 | ) | | | 181 | | | | — | | | | 186 | | Equity in income (loss) of subsidiaries | | | (43 | ) | | | 604 | | | | — | | | | (561 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | (90 | ) | | | 502 | | | | 614 | | | | (561 | ) | | | 465 | | Income (loss) from discontinued operations, net of taxes | | | 1 | | | | (543 | ) | | | 23 | | | | — | | | | (519 | ) | | | | | | | | | | | | | | | | | | | | | | | | | (89 | ) | | | (41 | ) | | | 637 | | | | (561 | ) | | | (54 | ) | Less: net income from continuing operations attributable to noncontrolling interests | | | — | | | | — | | | | 35 | | | | — | | | | 35 | | Less: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (89 | ) | | $ | (41 | ) | | $ | 602 | | | $ | (561 | ) | | $ | (89 | ) | | | | | | | | | | | | | | | | | | | | | |
The following table presents the condensed consolidating income statement information for the year ended December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 4,037 | | | $ | — | | | $ | 4,037 | | | | | (3 | ) | | | 10 | | | | 3,228 | | | | (15 | ) | | | 3,220 | | Net investment gains (losses) | | | — | | | | (5 | ) | | | 55 | | | | — | | | | 50 | | Policy fees and other income | | | — | | | | 2 | | | | 792 | | | | (5 | ) | | | 789 | | | | | | | | | | | | | | | | | | | | | | | | | | (3 | ) | | | 7 | | | | 8,112 | | | | (20 | ) | | | 8,096 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | — | | | | — | | | | 5,163 | | | | — | | | | 5,163 | | | | | — | | | | — | | | | 577 | | | | — | | | | 577 | | Acquisition and operating expenses, net of deferrals | | | 20 | | | | — | | | | 942 | | | | — | | | | 962 | | Amortization of deferred acquisition costs and intangibles | | | — | | | | — | | | | 441 | | | | — | | | | 441 | | | | | 3 | | | | 231 | | | | 25 | | | | (20 | ) | | | 239 | | | | | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 23 | | | | 231 | | | | 7,148 | | | | (20 | ) | | | 7,382 | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes and equity in income of subsidiaries | | | (26 | ) | | | (224 | ) | | | 964 | | | | — | | | | 714 | | Provision (benefit) for income taxes | | | (3 | ) | | | (45 | ) | | | 243 | | | | — | | | | 195 | | Equity in income of subsidiaries | | | 366 | | | | 177 | | | | — | | | | (543 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | 343 | | | | (2 | ) | | | 721 | | | | (543 | ) | | | 519 | | Income (loss) from discontinued operations, net of taxes | | | — | | | | (140 | ) | | | 151 | | | | — | | | | 11 | | | | | | | | | | | | | | | | | | | | | | | | | | 343 | | | | (142 | ) | | | 872 | | | | (543 | ) | | | 530 | | Less: net income from continuing operations attributable to noncontrolling interests | | | — | | | | — | | | | 64 | | | | — | | | | 64 | | Less: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | — | | | | 123 | | | | — | | | | 123 | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | 343 | | | $ | (142 | ) | | $ | 685 | | | $ | (543 | ) | | $ | 343 | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the condensed consolidating comprehensive income statement information for the threenine months ended March 31,September 30, 2020: | | | | | | | | | | | | | | | | | | | �� | | | | | | | | | | | | | | | | | | | | | $ | | ) | | $ | | ) | | $ | | ) | | $ | | | | $ | | ) | Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | | | | | | | | | | Net unrealized gains (losses) on securities without an allowance for credit losses | | | | ) | | | | ) | | | | ) | | | | | | | | ) | Net unrealized gains (losses) on securities with an allowance for credit losses | | | | | | | | | | | | | | | | | | | | | Derivatives qualifying as hedges | | | | | | | | | | | | | | | | ) | | | | | Foreign currency translation and other adjustments | | | | ) | | | | ) | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Total other comprehensive income (loss) | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | | | | | | | | | | | | | | ) | | | | | Less: comprehensive loss attributable to noncontrolling interests | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income available to Genworth Financial, Inc.’s common stockholders | | $ | | | | $ | | | | $ | | | | $ | | ) | | $ | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (89 | ) | | $ | (41 | ) | | $ | 637 | | | $ | (561 | ) | | $ | (54 | ) | Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | | | | | | | | | | Net unrealized gains (losses) on securities without an allowance for credit losses | | | 265 | | | | 265 | | | | 264 | | | | (530 | ) | | | 264 | | Net unrealized gains (losses) on securities with an allowance for credit losses | | | (10 | ) | | | (10 | ) | | | (10 | ) | | | 20 | | | | (10 | ) | Derivatives qualifying as hedges | | | 449 | | | | 449 | | | | 493 | | | | (942 | ) | | | 449 | | Foreign currency translation and other adjustments | | | 4 | | | | 4 | | | | 8 | | | | (8 | ) | | | 8 | | | | | | | | | | | | | | | | | | | | | | | Total other comprehensive income (loss) | | | 708 | | | | 708 | | | | 755 | | | | (1,460 | ) | | | 711 | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | 619 | | | | 667 | | | | 1,392 | | | | (2,021 | ) | | | 657 | | Less: comprehensive income attributable to noncontrolling interests | | | — | | | | — | | | | 38 | | | | — | | | | 38 | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income available to Genworth Financial, Inc.’s common stockholders | | $ | 619 | | | $ | 667 | | | $ | 1,354 | | | $ | (2,021 | ) | | $ | 619 | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the condensed consolidating comprehensive income statement information for the year ended December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 343 | | | $ | (142 | ) | | $ | 872 | | | $ | (543 | ) | | $ | 530 | | Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | | | | | | | | | | Net unrealized gains (losses) on securities not other-than-temporarily impaired | | | 859 | | | | 842 | | | | 846 | | | | (1,701 | ) | | | 846 | | Net unrealized gains (losses) on other-than-temporarily impaired securities | | | 2 | | | | 2 | | | | 2 | | | | (4 | ) | | | 2 | | Derivatives qualifying as hedges | | | 221 | | | | 221 | | | | 247 | | | | (468 | ) | | | 221 | | Foreign currency translation and other adjustments | | | 307 | | | | 224 | | | | 486 | | | | (530 | ) | | | 487 | | | | | | | | | | | | | | | | | | | | | | | Total other comprehensive income (loss) | | | 1,389 | | | | 1,289 | | | | 1,581 | | | | (2,703 | ) | | | 1,556 | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | 1,732 | | | | 1,147 | | | | 2,453 | | | | (3,246 | ) | | | 2,086 | | Less: comprehensive income attributable to noncontrolling interests | | | — | | | | — | | | | 354 | | | | — | | | | 354 | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income available to Genworth Financial, Inc.’s common stockholders | | $ | 1,732 | | | $ | 1,147 | | | $ | 2,099 | | | $ | (3,246 | ) | | $ | 1,732 | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the condensed consolidating cash flow statement information for the threenine months ended March 31,September 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used by) operating activities: | | | | | | | | | | | | | | | | | | | | | | | $ | | ) | | $ | | ) | | $ | | ) | | $ | | | | $ | | ) | Adjustments to reconcile net loss to net cash from (used by)operating activities: | | | | | | | | | | | | | | | | | | | | | Equity in loss from subsidiaries | | | | | | | | | | | | | | | | ) | | | | | Dividends from subsidiaries | | | | | | | | | | | | ) | | | | | | | | | Amortization of fixed maturity securities discounts and premiums | | | | | | | | | | | | ) | | | | | | | | ) | Net investment (gains) losses | | | | | | | | ) | | | | | | | | | | | | | Charges assessed to policyholders | | | | | | | | | | | | ) | | | | | | | | ) | Acquisition costs deferred | | | | | | | | | | | | ) | | | | | | | | ) | Amortization of deferred acquisition costs and intangibles | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | ) | Derivative instruments, limited partnerships and other | | | | | | | | ) | | | | | | | | | | | | | Stock-based compensation expense | | | | | | | | | | | | | | | | | | | | | Change in certain assets and liabilities: | | | | | | | | | | | | | | | | | | | | | Accrued investment income and other assets | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | ) | | | | ) | | | | | | | | | | | | ) | Other liabilities, policy and contract claims and otherpolicy-related balances | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash from (used by) operating activities | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used by) investing activities: | | | | | | | | | | | | | | | | | | | | | Proceeds from maturities and repayments of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Proceeds from sales of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | | | | | | | | | | | | | | | | | | | Purchases and originations of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | | | | | | | | | | ) | | | | | | | | ) | Commercial mortgage loans | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | ) | | | | | | | | ) | Short-term investments, net | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Intercompany notes receivable | | | | | | | | ) | | | | | | | | ) | | | | | Capital contributions to subsidiaries | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash from (used by) investing activities | | | | | | | | ) | | | | ) | | | | ) | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Cash flows used by financing activities: | | | | | | | | | | | | | | | | | | | | | Deposits to universal life and investment contracts | | | | | | | | | | | | | | | | | | | | | Withdrawals from universal life and investment contracts | | | | | | | | | | | | ) | | | | | | | | ) | Redemption of non-recourse funding obligations | | | | | | | | | | | | ) | | | | | | | | ) | Repayment and repurchase of long-term debt | | | | | | | | ) | | | | | | | | | | | | ) | Dividends paid to noncontrolling interests | | | | | | | | | | | | ) | | | | | | | | ) | Intercompany notes payable | | | | | | | | ) | | | | | | | | | | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net cash used by financing activities | | | | ) | | | | ) | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | | | | | | | | | | ) | | | | | | | | ) | | | | | | | | | | | | | | | | | | | | | | | Net change in cash, cash equivalents and restricted cash | | | | | | | | ) | | | | | | | | | | | | ) | Cash, cash equivalents and restricted cash at beginning of period | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of period | | | | | | | | | | | | | | | | | | | | | Less cash, cash equivalents and restricted cash of discontinued operations at end of period | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash of continuing operations at end of period | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used by) operating activities: | | | | | | | | | | | | | | | | | | | | | | | $ | (89 | ) | | $ | (41 | ) | | $ | 637 | | | $ | (561 | ) | | $ | (54 | ) | Less (income) loss from discontinued operations, net of taxes | | | (1 | ) | | | 543 | | | | (23 | ) | | | — | | | | 519 | | Adjustments to reconcile net income (loss) to net cash from (used by) operating activities: | | | | | | | | | | | | | | | | | | | | | Equity in income (loss) from subsidiaries | | | 43 | | | | (604 | ) | | | — | | | | 561 | | | | — | | Dividends from subsidiaries | | | — | | | | 447 | | | | (447 | ) | | | — | | | | — | | Amortization of fixed maturity securities discounts and premiums | | | — | | | | 4 | | | | (101 | ) | | | — | | | | (97 | ) | | | | — | | | | (7 | ) | | | (375 | ) | | | — | | | | (382 | ) | Charges assessed to policyholders | | | — | | | | — | | | | (479 | ) | | | — | | | | (479 | ) | Acquisition costs deferred | | | — | | | | — | | | | (9 | ) | | | — | | | | (9 | ) | Amortization of deferred acquisition costs and intangibles | | | — | | | | — | | | | 310 | | | | — | | | | 310 | | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | 31 | | | | 196 | | | | (61 | ) | | | — | | | | 166 | | Derivative instruments, limited partnerships and other | | | — | | | | (60 | ) | | | 148 | | | | — | | | | 88 | | Stock-based compensation expense | | | 22 | | | | — | | | | — | | | | — | | | | 22 | | Change in certain assets and liabilities: | | | | | | | | | | | | | | | | | | | | | Accrued investment income and other assets | | | (1 | ) | | | (21 | ) | | | (156 | ) | | | (5 | ) | | | (183 | ) | | | | — | | | | — | | | | 1,034 | | | | — | | | | 1,034 | | | | | (3 | ) | | | (121 | ) | | | 130 | | | | — | | | | 6 | | Other liabilities, policy and contract claims and other policy-related balances | | | (15 | ) | | | (12 | ) | | | 791 | | | | 5 | | | | 769 | | Cash used by operating activities—discontinued operations | | | — | | | | (263 | ) | | | — | | | | — | | | | (263 | ) | | | | | | | | | | | | | | | | | | | | | | Net cash from (used by) operating activities | | | (13 | ) | | | 61 | | | | 1,404 | | | | — | | | | 1,452 | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used by) investing activities: | | | | | | | | | | | | | | | | | | | | | Proceeds from maturities and repayments of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities | | | — | | | | — | | | | 2,760 | | | | — | | | | 2,760 | | Commercial mortgage loans | | | — | | | | — | | | | 479 | | | | — | | | | 479 | | | | | — | | | | — | | | | 108 | | | | — | | | | 108 | | Proceeds from sales of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | — | | | | — | | | | 3,270 | | | | — | | | | 3,270 | | Purchases and originations of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | — | | | | — | | | | (7,179 | ) | | | — | | | | (7,179 | ) | Commercial mortgage loans | | | — | | | | — | | | | (414 | ) | | | — | | | | (414 | ) | | | | — | | | | — | | | | (318 | ) | | | — | | | | (318 | ) | Short-term investments, net | | | — | | | | 70 | | | | (82 | ) | | | — | | | | (12 | ) | | | | — | | | | — | | | | 27 | | | | — | | | | 27 | | Intercompany notes receivable | | | 20 | | | | (57 | ) | | | 200 | | | | (163 | ) | | | — | | Capital contributions to subsidiaries | | | (2 | ) | | | — | | | | 2 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Net cash from (used by) investing activities | | | 18 | | | | 13 | | | | (1,147 | ) | | | (163 | ) | | | (1,279 | ) | | | | | | | | | | | | | | | | | | | | | | Cash flows used by financing activities: | | | | | | | | | | | | | | | | | | | | | Deposits to universal life and investment contracts | | | — | | | | — | | | | 693 | | | | — | | | | 693 | | Withdrawals from universal life and investment contracts | | | — | | | | — | | | | (1,408 | ) | | | — | | | | (1,408 | ) | Redemption of non-recourse funding obligations | | | — | | | | — | | | | (315 | ) | | | — | | | | (315 | ) | Proceeds from the issuance of long-term debt | | | — | | | | — | | | | 767 | | | | — | | | | 767 | | Repayment and repurchase of long-term debt | | | — | | | | (490 | ) | | | (3 | ) | | | — | | | | (493 | ) | Dividends paid to noncontrolling interests | | | — | | | | — | | | | (9 | ) | | | — | | | | (9 | ) | Intercompany notes payable | | | — | | | | (220 | ) | | | 57 | | | | 163 | | | | — | | | | | (5 | ) | | | (11 | ) | | | 47 | | | | — | | | | 31 | | | | | | | | | | | | | | | | | | | | | | | Net cash used by financing activities | | | (5 | ) | | | (721 | ) | | | (171 | ) | | | 163 | | | | (734 | ) | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Net change in cash, cash equivalents and restricted cash | | | — | | | | (647 | ) | | | 86 | | | | — | | | | (561 | ) | Cash, cash equivalents and restricted cash at beginning of period | | | — | | | | 1,461 | | | | 1,880 | | | | — | | | | 3,341 | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of period | | | — | | | | 814 | | | | 1,966 | | | | — | | | | 2,780 | | Less cash, cash equivalents and restricted cash of discontinued operations at end of period | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash of continuing operations at end of period | | $ | — | | | $ | 814 | | | $ | 1,966 | | | $ | — | | | $ | 2,780 | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the condensed consolidating cash flow statement information for the year ended December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from operating activities: | | | | | | | | | | | | | | | | | | | | | | | $ | 343 | | | $ | (142 | ) | | $ | 872 | | | $ | (543 | ) | | $ | 530 | | Less (income) loss from discontinued operations, net of taxes | | | — | | | | 140 | | | | (151 | ) | | | — | | | | (11 | ) | Adjustments to reconcile net income (loss) to net cash from operating activities: | | | | | | | | | | | | | | | | | | | | | Equity in income from subsidiaries | | | (366 | ) | | | (177 | ) | | | — | | | | 543 | | | | — | | Dividends from subsidiaries | | | 250 | | | | 1,352 | | | | (1,602 | ) | | | — | | | | — | | Amortization of fixed maturity securities discounts and premiums | | | — | | | | 8 | | | | (126 | ) | | | — | | | | (118 | ) | Net investment (gains) losses | | | — | | | | 5 | | | | (55 | ) | | | — | | | | (50 | ) | Charges assessed to policyholders | | | — | | | | — | | | | (699 | ) | | | — | | | | (699 | ) | Acquisition costs deferred | | | — | | | | — | | | | (27 | ) | | | — | | | | (27 | ) | Amortization of deferred acquisition costs and intangibles | | | — | | | | — | | | | 441 | | | | — | | | | 441 | | | | | 1 | | | | 132 | | | | 6 | | | | — | | | | 139 | | Derivative instruments and limited partnerships | | | — | | | | (35 | ) | | | (63 | ) | | | — | | | | (98 | ) | Stock-based compensation expense | | | 26 | | | | — | | | | 1 | | | | — | | | | 27 | | Change in certain assets and liabilities: | | | | | | | | | | | | | | | | | | | | | Accrued investment income and other assets | | | — | | | | 7 | | | | (365 | ) | | | — | | | | (358 | ) | | | | — | | | | — | | | | 1,259 | | | | — | | | | 1,259 | | | | | 16 | | | | (43 | ) | | | 53 | | | | — | | | | 26 | | Other liabilities, policy and contract claims and other policy-related balances | | | (17 | ) | | | (44 | ) | | | 668 | | | | 2 | | | | 609 | | Cash from operating activities—discontinued operations | | | — | | | | 134 | | | | 275 | | | | — | | | | 409 | | | | | | | | | | | | | | | | | | | | | | | Net cash from operating activities | | | 253 | | | | 1,337 | | | | 487 | | | | 2 | | | | 2,079 | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used by) investing activities: | | | | | | | | | | | | | | | | | | | | | Proceeds from maturities and repayments of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities | | | — | | | | — | | | | 3,436 | | | | — | | | | 3,436 | | Commercial mortgage loans | | | — | | | | — | | | | 582 | | | | — | | | | 582 | | Restricted commercial mortgage loans related to a securitization entity | | | — | | | | — | | | | 15 | | | | — | | | | 15 | | Proceeds from sales of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | — | | | | — | | | | 3,883 | | | | — | | | | 3,883 | | Purchases and originations of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | — | | | | — | | | | (6,899 | ) | | | — | | | | (6,899 | ) | Commercial mortgage loans | | | — | | | | — | | | | (813 | ) | | | — | | | | (813 | ) | Other invested assets, net | | | — | | | | 5 | | | | (392 | ) | | | (2 | ) | | | (389 | ) | | | | — | | | | — | | | | 62 | | | | — | | | | 62 | | Intercompany notes receivable | | | (119 | ) | | | 48 | | | | 6 | | | | 65 | | | | — | | Capital contributions to subsidiaries | | | (5 | ) | | | — | | | | 5 | | | | — | | | | — | | Proceeds from sale of business, net of cash transferred | | | — | | | | — | | | | 1,398 | | | | — | | | | 1,398 | | Cash from investing activities—discontinued operations | | | — | | | | — | | | | 26 | | | | — | | | | 26 | | | | | | | | | | | | | | | | | | | | | | | Net cash from (used by) investing activities | | | (124 | ) | | | 53 | | | | 1,309 | | | | 63 | | | | 1,301 | | | | | | | | | | | | | | | | | | | | | | | Cash flows used by financing activities: | | | | | | | | | | | | | | | | | | | | | Deposits to universal life and investment contracts | | | — | | | | — | | | | 824 | | | | — | | | | 824 | | Withdrawals from universal life and investment contracts | | | — | | | | — | | | | (2,319 | ) | | | — | | | | (2,319 | ) | Repayment and repurchase of long-term debt | | | — | | | | (446 | ) | | | — | | | | — | | | | (446 | ) | Intercompany notes payable | | | (122 | ) | | | 112 | | | | 75 | | | | (65 | ) | | | — | | Repurchase of subsidiary shares | | | — | | | | — | | | | (22 | ) | | | — | | | | (22 | ) | Dividends paid to noncontrolling interests | | | — | | | | — | | | | (87 | ) | | | — | | | | (87 | ) | | | | (7 | ) | | | (24 | ) | | | (4 | ) | | | — | | | | (35 | ) | Cash used by financing activities—discontinued operations | | | — | | | | — | | | | (132 | ) | | | — | | | | (132 | ) | | | | | | | | | | | | | | | | | | | | | | Net cash used by financing activities | | | (129 | ) | | | (358 | ) | | | (1,665 | ) | | | (65 | ) | | | (2,217 | ) | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $6 related to discontinued operations) | | | — | | | | — | | | | 1 | | | | — | | | | 1 | | | | | | | | | | | | | | | | | | | | | | | Net change in cash, cash equivalents and restricted cash | | | — | | | | 1,032 | | | | 132 | | | | — | | | | 1,164 | | Cash, cash equivalents and restricted cash at beginning of period | | | — | | | | 429 | | | | 1,748 | | | | — | | | | 2,177 | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash at end of period | | | — | | | | 1,461 | | | | 1,880 | | | | — | | | | 3,341 | | Less cash, cash equivalents and restricted cash of discontinued operations at end of period | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Cash, cash equivalents and restricted cash of continuing operations at end of period | | $ | — | | | $ | 1,461 | | | $ | 1,880 | | | $ | — | | | $ | 3,341 | | | | | | | | | | | | | | | | | | | | | | |
Our insurance company subsidiaries are restricted by state and foreign laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders and contractholders, not stockholders. Any dividends in excess of limits are deemed “extraordinary” and require approval. Based on 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, and the remaining net assets are considered restricted. While the $300 million is considered unrestricted, our insurance subsidiaries most likely will not pay dividends to us in 2020 at this level as they need to retain capital to meet regulatory requirements and preserve desired capital thresholds. As of March 31,September 30, 2020, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $14.0$14.4 billion and $15.1$15.7 billion, respectively. In September 2020, certain GSE Restrictions were imposed with respect to capital on our U.S. mortgage insurance business. These restrictions will remain in effect until the later of six quarters or until the following collective GSE Conditions are met: a) approval of GMICO’s plan to secure additional capital, if needed, b) GMICO obtains “BBB+”/“Baa1” (or higher) rating from S&P, Moody’s or Fitch for two consecutive quarters and c) certain Genworth financial metrics are achieved. Prior to the satisfaction of these conditions, the GSE Restrictions require: GMICO to maintain 115% of PMIERs minimum required assets through 2021, 120% during 2022 and 125% thereafter; GMHI to retain $300 million of its holding company cash that can be drawn down exclusively for its debt service or to contribute to GMICO to meet its regulatory capital needs including PMIERs; and written approval must be received from the GSEs prior to any additional debt issuance by either GMICO or GMHI. The GSE Restrictions govern the period prior to the close of the planned China Oceanwide transaction. The GSEs issued separate conditions and restrictions in September 2020, which place identical restrictions on our U.S. mortgage insurance business, if the China Oceanwide transaction closes. See “Item 2—U.S. Mortgage Insurance segment—trends and conditions” for additional details. There were no off-balance sheet securitization transactions during the threenine months ended March 31,September 30, 2020 or 2019. For a discussion of recently adopted accounting standards, see note 2 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements.” Item 3. | Item 3. Quantitative and Qualitative Disclosures About Market Risk |
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. Except as disclosed below and in our executive summary under “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—COVID-19 Summary,” there were no other material changes in our market risks since December 31, 2019. See “—Business trends and conditions” and “—Investments and Derivative Instruments” in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of recent market conditions, including changes in interest rates.
We are exposed to foreign currency exchange risks associated with fluctuations in foreign currency exchange rates against the U.S. dollar resulting from our international operations and non-U.S.-denominated securities. Our primary international operations are located in Australia.Australia, although we are also exposed to the British Pound due to the settlement agreement reached with AXA. However, foreign currency exchange related to AXA is not part of continuing operations. The assets and liabilities of our international operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, while revenues and expenses of our international operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. In general, the weakening of the U.S. dollar results in higher levels of reported assets, liabilities, revenues and net income (loss). As of March 31,September 30, 2020, the U.S. dollar strengthenedweakened against the Australian dollar compared to the respective balance sheet rate as of December 31, 2019. In the firstthird quarter of 2020, the U.S. dollar strengthenedweakened against the Australian dollar compared to the respective average rate in the firstthird quarter of 2019. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of changes in foreign currency exchange rates. Item 4. | Item 4. Controls and Procedures |
Evaluation of Disclosure Controls and Procedures As of March 31,September 30, 2020, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31,September 30, 2020.
Changes in Internal Control Over Financial Reporting During the Quarter Ended March 31,September 30, 2020 On January 1,During the three months ended September 30, 2020, we adopted new accounting guidance related to accounting for credit losses on financial instruments. The new guidance requirements resulted in us implementing a new analytical model that estimates lifetime credit losses based on model inputs that consider reasonable and supportable forecasts disaggregated by asset class. In addition, as part of our adoption of the guidance, we implemented new internal controls to address risks associated with applying the new standard, including risks related to judgmental estimates made in determining the allowance for credit losses for our commercial mortgage loans, reinsurance recoverables and bank loan investments, as well as estimating the allowance for credit losses related toavailable-for-sale
fixed maturity securities. The new internal controls implemented include the review of the model data for completeness and accuracy, review controls that support the compilation of new disclosure requirements and updates to our accounting policies and procedures. There werethere have been no other changes in our internal control over financial reporting during the three months ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION Item 1. | Item 1. Legal Proceedings |
See note 12 in our unaudited condensed consolidated financial statements under “Part 1—Item 1—Financial Statements” for a description of material pending litigation and regulatory matters affecting us. The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our 2019 Annual Report on Form 10-K, which together describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. Except as disclosed below, there have been no material changes to the risk factors set forth in the above-referenced filing as of March 31,September 30, 2020. COVID-19 could materially adversely affect our financial condition and results of operations. COVID-19 has brought unprecedented changes to the global economy. Large scale disruption in the U.S. economy is leaving several industries non-operational through state and federal mandated shutdowns in an effort to contain the spread of COVID-19. Unemployment claims have increased to historic levels,significantly, reducing consumer confidence to its lowest level since the 2008 financial crisis. The level of uncertainty created by COVID-19 is far-reaching and difficult to estimate. We are unsure of the ultimate impact COVID-19 will have on our business, and conditions, including economic and operational, are evolving rapidly. COVID-19 exposes our business to
significant risks, including interest rate declines, significantly higher levels of unemployment, liquidity pressures, credit risk on our investment portfolio, equity market volatility, and operational, information technology and personnel risks. We could experience significant declines in asset valuations and potential material asset impairments, as well as unexpected changes in persistency rates, as policyholders and contractholders who are affected by the pandemic may not be able to meet their contractual obligations, such as premium payments on their insurance policies, deposits to their investment products, or mortgage payments on their loans insured by our mortgage insurance policies. The pandemic has decreased historically low interest rates further and could also significantly increase our mortality and morbidity experience and/or impact our ability to successfully implement in-force rate actions (including increased premiums and associated benefit reductions), all of which could result in higher reserve charges and an adverse impact to our financial results in our U.S. life insurance businesses. Regarding our mortgage insurance businesses, COVID-19 has resulted in significantly higher levels of unemployment, which most likely willhas and may continue to increase delinquencies, and could reduce mortgage originations, the
need for mortgage insurance and have an adverse effect on home prices, all of which would result in a significant adverse impact to our financial condition and results of operations in our mortgage insurance businesses. Losses in our mortgage insurance businesses could lead to lower credit ratings and impaired capital, which could hinder our mortgage insurance businesses from offering their products, preclude them from returning capital to our holding company for prolonged periods of time, and thereby harm our liquidity. COVID-19 could also disrupt medical and financial services and has resulted in us practicing social distancing with our employees through office closures, all of which could disrupt our normal business operations. The level of disruption, the economic downturn, the potential global recession, and the far-reaching effects of COVID-19 could negatively affect our investment portfolio and cause the harms to our business to persist for long periods of time. As a result of the foregoing, any of the risks identified above or other related COVID-19 risks may have a material adverse impact on us, including a material adverse effect on our financial condition and results of operations.
| | | | | | | | | | | | 2.1 | | | | | | | | | FourteenthSixteenth Waiver and Agreement, dated as of March 31,September 30, 2020, by and among Genworth Financial, Inc., Asia Pacific Global Capital Co., Ltd., and Asia Pacific Global Capital USA Corporation (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on March 31,October 1, 2020) | | | | 31.1 | | | | | | | | | | | | | 31.2 | | Certification of Daniel J. Sheehan, IV (filed herewith) | | | | 32.1 | | | | | | | | | | | | | | | | | | | | | 32.2 | | | | | | | | | | | | | 101.INS | | XBRL Instance Document | | | | 101.SCH | | | | | | | | | | | | | | | | | XBRL Taxonomy Extension Schema Document | | | | 101.CAL | | | | | | | | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | 101.LAB | | | | | | | | | XBRL Taxonomy Extension Label Linkbase Document | | | | 101.PRE | | | | | | | | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | 101.DEF | | | | | | | | | XBRL Taxonomy Extension Definition Linkbase Document | | | | 104 | | | | | | | | | The cover page for the Company’s Quarterly Report on Form 10-Q for the three months ended March 31,September 30, 2020, has been formatted in Inline XBRL |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | | | | | | | | | Date: May 6,November 5, 2020 | | | | | | | | | | | | | | | | | | | | Vice President and Controller (Principal Accounting Officer) |
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