(2) | Subordinated floating rate notes issued by Genworth Financial Mortgage Insurance Pty Limited (“GFMIPL”), our indirect majority-owned subsidiary, who currently has the option to redeem the notes due in 2025 at face value beginning on July 3, 2020,at any time, subject to the Australian Prudential Regulation Authority’s (“APRA”) prior written approval. |
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS During the second quarter ofnine months ended September 30, 2020, Genworth Holdings repurchased $52$84 million principal amount of its senior notes with 2021 maturity dates for a pre-tax gain of $3$4 million and paid accrued interest thereon. In MarchOn August 21, 2020, Genworth Mortgage Holdings, also repurchased $14Inc. (“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 its senior notes with 2021 maturity dates for apre-tax
gaindefault, which subject to certain notice and cure conditions, can result in the acceleration of $1 millionthe principal and paid accrued interest thereon.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. In addition, on July 3, 2020, GFMIPL2025 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%5.0 % per annum. GFMIPL has an option to redeem the notes at face value on July 3, 2025 and every
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 hashad 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. (b) 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”) 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. The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, | | | | | | | | | | | | | | | | | | | | | Statutory U.S. federal income tax rate | | | | | | | | | | | | | | | | | | | | | | | | | | | Increase (reduction) in rate resulting from: | | | | | | | | | | | | | | | | | Swaps terminated prior to the TCJA | | | | | | | | | | | | | | | | | | | | | | | | | | | Provision to return adjustments | | | | | | | | | | | | | | | Effect of foreign operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The increase in the effective tax rate for the three and sixnine months ended JuneSeptember 30, 2020 was primarily attributable to unfavorable provision to return adjustments in the current year compared to favorable adjustments in the prior year and tax expense on forward starting swaps settled prior to the enactment of the Tax Cuts and Jobs Act (“TCJA”), which are tax effected at 35% as they are amortized into net investment income, in relation to lowerpre-tax
income in the current year.income. The increase was also attributable to a higher tax expense related to foreign operations non-deductible
goodwill recorded in the current year and higher stock-based compensation for the sixthree months ended JuneSeptember 30, 2020. U.S. GAAP generally requires an annualized effective tax rate to be used for interim reporting periods, utilizing projections of full year results. However, in certain circumstances it is appropriate to record the actual effective tax rate for the period if a reliable full year estimate cannot be made. For the three and six months ended June 30, 2020, we have elected to record the actual effective tax rate for the period, primarily due to the sensitivity of the full year annualized effective rate
in relation tosmall changes in projected
pre-taxincome
.We have the following 4 operating business segments: U.S. Mortgage Insurance; Australia Mortgage Insurance; U.S. Life Insurance (which includes our long-term care insurance, life insurance and fixed annuities
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
businesses); and Runoff (which includes the results of non-strategic products which have not been actively sold since 2011). In addition to our four operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations. 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. We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income and assets. 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)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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, 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
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies. 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. 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.
During the second and first quarters ofnine months ended September 30, 2020, we repurchased $52$84 million and $14 million, respectively, principal amount of Genworth Holdings’ senior notes with 2021 maturity dates for a pre-tax gain of $3 million and $1 million, respectively.$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. These transactions were excluded from adjusted operating income (loss) for the periods 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 million and $2 million for the three and six months ended June 30, 2020, respectively, and $4 million for the sixnine months ended JuneSeptember 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated: | | | | | | | | | | | | | | | | | | | Three months ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Mortgage Insurance segment | | $ | 274 | | | $ | 235 | | | $ | 535 | | | $ | 458 | | | | | | | | | | | | | | | | | | | Australia Mortgage Insurance segment | | | 136 | | | | 96 | | | | 163 | | | | 206 | | | | | | | | | | | | | | | | | | | U.S. Life Insurance segment: | | | | | | | | | | | | | | | | | | | | 1,200 | | | | 1,055 | | | | 2,206 | | | | 2,169 | | | | | 335 | | | | 382 | | | | 683 | | | | 754 | | | | | 129 | | | | 151 | | | | 262 | | | | 310 | | | | | | | | | | | | | | | | | | | U.S. Life Insurance segment | | | 1,664 | | | | 1,588 | | | | 3,151 | | | | 3,233 | | | | | | | | | | | | | | | | | | | | | | 90 | | | | 78 | | | | 97 | | | | 160 | | | | | | | | | | | | | | | | | | | Corporate and Other activities | | | (26 | ) | | | (3 | ) | | | 29 | | | | (19 | ) | | | | | | | | | | | | | | | | | | | | $ | 2,138 | | | $ | 1,994 | | | $ | 3,975 | | | $ | 4,038 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Mortgage Insurance segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Australia Mortgage Insurance segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Life Insurance segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Life Insurance segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate and Other activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following tables present the reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and a summary of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for our segments and Corporate and Other activities for the periods indicated: | | | | | | | | | | | | | | | | | | | Three months ended June 30, | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (441 | ) | | $ | 168 | | | $ | (507 | ) | | $ | 342 | | Add: net income from continuing operations attributable to noncontrolling interests | | | 23 | | | | 15 | | | | 17 | | | | 35 | | Add: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | 35 | | | | — | | | | 71 | | | | | | | | | | | | | | | | | | | | | | (418 | ) | | | 218 | | | | (490 | ) | | | 448 | | Less: income (loss) from discontinued operations, net of taxes | | | (520 | ) | | | 60 | | | | (520 | ) | | | 122 | | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 102 | | | | 158 | | | | 30 | | | | 326 | | Less: net income from continuing operations attributable to noncontrolling interests | | | 23 | | | | 15 | | | | 17 | | | | 35 | | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | 79 | | | | 143 | | | | 13 | | | | 291 | | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (1) | | | (131 | ) | | | 43 | | | | (16 | ) | | | (28 | ) | Goodwill impairment, net (2) | | | 3 | | | | — | | | | 3 | | | | — | | (Gains) losses on early extinguishment of debt | | | (3 | ) | | | — | | | | 9 | | | | — | | Expenses related to restructuring | | | 1 | | | | — | | | | 2 | | | | 4 | | | | | 30 | | | | (8 | ) | | | 1 | | | | 6 | | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (21 | ) | | $ | 178 | | | $ | 12 | | | $ | 273 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | | | | | | | | | | | | | | | | Add: net income from continuing operations attributable to noncontrolling interests | | | | | | | | | | | | | | | | | Add: net income from discontinued operations attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: income (loss) from discontinued operations, net of taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations | | | | | | | | | | | | | | | | | Less: net income from continuing operations attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | | | | | | | | | | | | | | | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (1) | | | | | | | | | | | | | | | | | Goodwill impairment, net (2) | | | | | | | | | | | | | | | | | (Gains) losses on early extinguishment of debt | | | | | | | | | | | | | | | | | Expenses related to restructuring | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended JuneSeptember 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(4)$1 and $(3) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $32$12 million and $—,$(4) million, respectively. For the sixnine months ended JuneSeptember 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(15)$(14) million and $(5)$(8) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $6$18 million in both periods.and $2 million, respectively. |
(2) | For the three and sixnine months ended JuneSeptember 30, 2020, goodwill impairment was adjusted for the portion attributable to noncontrolling interests of $2 million. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | U.S. Mortgage Insurance segment | | $ | (3 | ) | | $ | 147 | | | $ | 145 | | | $ | 271 | | Australia Mortgage Insurance segment | | | 1 | | | | 13 | | | | 10 | | | | 27 | | U.S. Life Insurance segment: | | | | | | | | | | | | | | | | | | | | 48 | | | | 37 | | | | 49 | | | | 17 | | | | | (81 | ) | | | 10 | | | | (158 | ) | | | 8 | | | | | 28 | | | | 19 | | | | 34 | | | | 36 | | | | | | | | | | | | | | | | | | | U.S. Life Insurance segment | | | (5 | ) | | | 66 | | | | (75 | ) | | | 61 | | | | | | | | | | | | | | | | | | | | | | 24 | | | | 9 | | | | 11 | | | | 29 | | Corporate and Other activities | | | (38 | ) | | | (57 | ) | | | (79 | ) | | | (115 | ) | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (21 | ) | | $ | 178 | | | $ | 12 | | | $ | 273 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | U.S. Mortgage Insurance segment | | | | | | | | | | | | | | | | | Australia Mortgage Insurance segment | | | | | | | | | | | | | | | | | U.S. Life Insurance segment: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Life Insurance segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Corporate and Other activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Mortgage Insurance segment | | $ | 4,944 | | | $ | 4,504 | | Australia Mortgage Insurance segment | | | 2,439 | | | | 2,406 | | U.S. Life Insurance segment | | | 83,829 | | | | 81,640 | | | | | 9,783 | | | | 9,953 | | Corporate and Other activities | | | 2,642 | | | | 2,839 | | | | | | | | | | | | | $ | 103,637 | | | $ | 101,342 | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | U.S. Mortgage Insurance segment | | | | | | | | | Australia Mortgage Insurance segment | | | | | | | | | U.S. Life Insurance segment | | | | | | | | | | | | | | | | | | Corporate and Other activities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(12) Commitments and Contingencies (a) Litigation and Regulatory Matters We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, product administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees oon products, , recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS customers, including but not limited to breach of customer information. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships, post-closing obligations associated with previous dispositions and securities lawsuits. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations. In January 2016, Genworth Financial, its current chief executive officer, its former chief executive officer, its then former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by International Union of Operating Engineers Local No. 478 Pension Fund, Richard L. Salberg and David Pinkoski in the Court of Chancery of the State of Delaware. The case was captioned Int’l Union of Operating Engineers Local No. 478 Pension Fund, et al v. McInerney, et al. In February 2016, Genworth Financial, its current chief executive officer, its former chief executive officer, its then former chief financial officer and current and former members of its board of directors were named in a second shareholder derivative suit filed by Martin Cohen in the Court of Chancery of the State of Delaware. The case was captioned Cohen v. McInerney, et al . On February 23, 2016, the Court of Chancery of the State of Delaware consolidated these derivative suits under the caption Genworth Financial, Inc. Consolidated Derivative Litigation . On March 28, 2016, plaintiffs in the consolidated action filed an amended complaint. The amended complaint alleges breaches of fiduciary duties concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an IPO of the business and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the Court may deem proper. The amended consolidated complaint also addsadded Genworth’s then current chief financial officer as a defendant, based on the current chief financial officer’s alleged conduct in her former capacity as Genworth’s controller and principal accounting officer. We moved to dismiss the consolidated action on May 27, 2016. Thereafter, plaintiffs filed a substantially similar second amended complaint which we moved to dismiss on September 16, 2016. The motion is fully briefed and awaiting disposition by the Court. The action is stayed pending the completion of the proposed China Oceanwide transaction. In October 2016, Genworth Financial, its current chief executive officer, its former chief executive officer, its then current chief financial officer, its then former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by Esther Chopp in the Court of Chancery of the State of Delaware. The case is captioned Chopp v. McInerney, et al. The complaint alleges that Genworth’s board of directors wrongfully refused plaintiff’s demand to commence litigation on behalf of Genworth and asserts claims for breaches of fiduciary duties, waste, contribution and indemnification, and unjust enrichment concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an IPO of the business, and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the Court may deem proper. We filed a motion to dismiss on November 14, 2016. The action is stayed pending the completion of the proposed China Oceanwide transaction. In December 2017, Genworth Financial International Holdings, LLC (“GFIH”) and Genworth Financial were named as defendants in an action captioned AXA S.A. v. Genworth Financial International Holdings, LLC et al., al.,in the High Court of Justice, Business and Property Courts of England and Wales. In the action, AXA
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS in the High Court of Justice, Business and Property Courts of England and Wales. In the action, AXA initially sought in excess of £28 million on an indemnity provided for in the 2015 agreement pursuant to which Genworth sold to AXA 2 insurance companies, Financial Insurance Company Limited (“FICL”) and Financial Assurance Company Limited (“FACL”), relating to alleged remediation it has paid to customers who purchased payment protection insurance (“PPI”). In February 2018, we served a Particulars of Defence and counterclaim against AXA, and also served other counterclaims against various parties, including Santander Cards UK Limited (“Santander”), alleging that Santander is responsible for any remediation paid to PPI customers. AXA and Santander applied to the Court for orders dismissing or staying the counterclaims. A hearing on those applications was held in October 2018, and the Court dismissed our counterclaims. On November 15, 2018, AXA amended its claim and updated its demand to £237 million. We filed our amended Particulars of Defence and amended counterclaim on December 13, 2018, seeking, among other forms of relief, a declaration that in the event we make any payment to AXA pursuant to the indemnity, we are subrogated to FICL’s and FACL’s rights against Santander with respect to those amounts. On February 25, 2019, AXA amended its claim and updated its demand to £265 million. The Court held a case management conference and hearing on February 26, 2019. Santander, FICL and FACL consented to be joined as parties to the proceedings and consented to allow Genworth to amend its pleadings to include the subrogation declarations to reflect the additional parties. On March 29, 2019, AXA, FICL, FACL and Santander filed their respective responses to our amended counterclaim. On June 21, 2019, we filed an application to address certain deficiencies in AXA’s discovery production. On July 18, 2019, we reached an agreement with AXA and Santander regarding our discovery application. The hearing on liability and subrogation matters commenced on November 4, 2019 and concluded on November 12, 2019. On December 6, 2019, the Court issued its judgment, ruling in AXA’s favor with respect to its claim against Genworth for 90% of AXA’s payment of PPI mis-selling losses. The Court further ruled, among other matters, that Genworth is not entitled to be subrogated to the rights of FICL/FACL against Santander Cards UK Limited or require AXA to assert reasonable defenses with respect to PPI mis-selling claims. In January 2020, we made an interim payment to AXA for approximately $134 million, which was previously accrued in December 2019 in connection with the aforementioned Court ruling. On January 10,June 8, 2020, Genworth appliedAXA amended its claim and updated its demand to the English Court of Appeal (Civil Division)£499 million, excluding an alleged claim for permission to appeal certain aspects of the December 6, 2019 judgment including, among other matters, the Court’s determination that Genworth is not entitled to be subrogated to the rights of FICL/FACL against Santander or require AXA to assert reasonable defenses with respect to PPImis-selling
claims. On March 16, 2020, the English Court of Appeal (Civil Division) denied permission for Genworth to appeal the December 6, 2019 judgment.On June 8
, 2020,AXA
amendedits claim
and updated its
demandto
£499 million antax gross up for a possible additional of £117 million or more. The damages hearing took place from June 15, 2020 through June 23, 2020.
O
n2020. On July 20, 2020, Genworth and GFIH entered into a settlement agreement with AXA pursuant to pursuant to which the parties
have agreed, pending satisfaction of certain conditions, not to enforce, appeal or set aside the liability judgment of December 6, 2019 and the subsequently issued damages judgment of July 27, 2020. See note 14 f or
for additional details on the terms of the settlement with AXA, , the
sale of our former lifestyle protection insurance business and amounts recorded relatedamounts recorded related to loss from discontindiscontinued operations.
ued.In September 2018, Genworth Life and Annuity Insurance Company (“GLAIC”), our indirect wholly-owned subsidiary, was named as a defendant in a putative class action lawsuit pending in the United States District Court for the Eastern District of Virginia captioned TVPX ARX INC., as Securities Intermediary for Consolidated Wealth Management, LTD. on behalf of itself and all others similarly situated v. Genworth Life and Annuity . Plaintiff alleges unlawful and excessive cost of insurance charges were imposed on policyholders. The complaint asserts claims for breach of contract, alleging that Genworth improperly considered non-mortality factors when calculating cost of insurance rates and failed to decrease cost of insurance charges in light of improved expectations of future mortality, and seeks unspecified compensatory damages, costs, , and
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
equitable relief. On October 29, 2018, we filed a motion to enjoin the case in the Middle District of Georgia, and a motion to dismiss and motion to stay in the Eastern District of Virginia. We moved to enjoin the prosecution of the Eastern District of Virginia action on the basis that it involves claims released in a prior nationwide class action settlement (the “McBride settlement”) that was approved by the Middle District of Georgia. Plaintiff filed an amended complaint on November 13, 2018. On December 6, 2018, we moved the Middle District of Georgia for leave to file our counterclaim, which alleges that plaintiff breached the covenant not to sue contained in the prior settlement agreement by filing its current action. On March 15, 2019, the Middle District of Georgia granted our motion to enjoin and denied our motion for leave to file our counterclaim. As such, plaintiff is enjoined from pursuing its class action in the Eastern District of Virginia. On March 29, 2019, plaintiff filed a notice of appeal in the Middle District of Georgia, notifying the Court of its appeal to the United States Court of Appeals for the Eleventh Circuit from the order granting our motion to enjoin. On March 29, 2019, we filed our notice of cross-appeal in the Middle District of Georgia, notifying the Court of our cross-appeal to the Eleventh Circuit from the portion of the order denying our motion for leave to file our counterclaim. On April 8, 2019, the Eastern District of Virginia dismissed the case without prejudice, with leave for plaintiff to refile an amended complaint only if a final appellate Court decision vacates the injunction and reverses the Middle District of Georgia’s opinion. On May 21, 2019, plaintiff filed its appeal and memorandum in support in the Eleventh Circuit. We filed our response to plaintiff’s appeal memorandum on July 3, 2019. The Eleventh Circuit Court of Appeals heard oral argument on plaintiff’s appeal and our cross-appeal on April 21, 2020. On May 26, 2020, the Eleventh Circuit Court of Appeals vacated the Middle District of Georgia’s order enjoining Plaintiff’s class action and remanded the case back to the Middle District of Georgia for further factual development as to
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS whether Genworth has altered how it calculates or charges cost of insurance since the McBride settlement. The Eleventh Circuit Court of Appeals did not reach a decision on Genworth’s counterclaim. We intend to continue to vigorously defend the dismissal of this action. In September 2018, Genworth Financial, Genworth Holdings, Genworth North America Corporation, GFIH and Genworth Life Insurance Company (“GLIC”) were named as defendants in a putative class action lawsuit pending in the Court of Chancery of the State of Delaware captioned R. Pratt, Gerald Green, individually and on behalf of all other persons similarly situated v. Genworth et . Plaintiffs allege that GLIC paid dividends to its parent and engaged in certain reinsurance transactions causing it to maintain inadequate capital capable of meeting its obligations to GLIC policyholders and agents. The complaint alleges causes of action for intentional fraudulent transfer and constructive fraudulent transfer, and seeks injunctive relief. We moved to dismiss this action in December 2018. On January 29, 2019, plaintiffs exercised their right to amend their complaint. On March 12, 2019, we moved to dismiss plaintiffs’ amended complaint. On April 26, 2019, plaintiffs filed a memorandum in opposition to our motion to dismiss, which we replied to on June 14, 2019. On August 7, 2019, plaintiffs filed a motion seeking to prevent proceeds that GFIH expected to receive from the then planned sale of its shares in Genworth MI Canada Inc. (“Genworth Canada”) from being transferred out of GFIH. On September 11, 2019, plaintiffs filed a renewed motion seeking the same relief from their August 7, 2019 motion with an exception that allowed GFIH to transfer $450 million of expected proceeds from the sale of Genworth Canada through a dividend to Genworth Holdings to allow the pay offpay-off of a senior secured term loan facility dated March 7, 2018 among Genworth Holdings as the borrower, GFIH as the limited guarantor and the lending parties thereto. Oral arguments on our motion to dismiss and plaintiffs’ motion occurred on October 21, 2019, and plaintiffs’ motion was denied. On January 31, 2020, the Court granted in part our motion to dismiss, dismissing claims relating to $395 million in dividends GLIC paid to its parent from 2012 to 2014 (out of the $410 million in total dividends subject to plaintiffs’ claims). The Court denied the balance of the motion to dismiss leaving a claim relating to $15 million in dividends and unquantified claims relating to the 2016 termination of a reinsurance transaction. On March 27, 2020, we filed our answer to plaintiffs’ amended complaint. We intend to continue to vigorously defend this action.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January 2019, Genworth Financial and GLIC were named as defendants in a putative class action lawsuit pending in the United States District Court for the Eastern District of Virginia captioned Jerome Skochin, Susan Skochin, and Larry Huber, individually and on behalf of all other persons similarly situated v. Genworth Financial, Inc. and Genworth Life Insurance Company . Plaintiffs seek to represent long-term care insurance policyholders, alleging that Genworth made misleading and inadequate disclosures regarding premium increases for long-term care insurance policies. The complaint asserts claims for breach of contract, fraud, fraudulent inducement and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (on behalf of the two named plaintiffs who are Pennsylvania residents), and seeks damages (including statutory treble damages under Pennsylvania law) in excess of $5 million. On March 12, 2019, we moved to dismiss plaintiffs’ complaint. On March 26, 2019, plaintiffs filed a memorandum in opposition to our motion to dismiss, which we replied to on April 1, 2019. In July 2019, the Court heard oral arguments on our motion to dismiss. On August 29, 2019, the Court issued an order granting our motion to dismiss the claim with regard to breach of contract, but denied our motion with regard to fraudulent omission, fraudulent inducement and violation of the Pennsylvania Unfair Trade Practices and Consumer Protection law. On September 20, 2019, plaintiffs filed an amended complaint, dropping Genworth Financial as a defendant and reducing their causes of action from four counts to two: fraudulent inducement by omission and violation of Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (on behalf of the two named plaintiffs who are Pennsylvania residents). The parties engaged in a mediation process and, on October 22, 2019, reached an agreement in principle to settle this matter on a
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS nationwide basis. On November 22, 2019, plaintiffs filed an amended complaint, adding Genworth Life Insurance Company of New York as a defendant and expanding the class to all fifty states and the District of Columbia. On January 15, 2020, the Court preliminarily approved the settlement and set the final approval hearing for July 10, 2020. On March 26, 2020, the parties filed a Joint Motion for Leave to Amend certain aspects of the settlement, which was approved by the Court on March 31, 2020. On April 10, 2020, the Indiana Department of Insurance filed a Motion to Intervene and Motion to Stay, seeking to stay the current schedule for class settlement and delay the date of the final approval hearing in light of disruptions caused by COVID-19. On April 14, 2020, the class administrator sent out class notices to potential settlement class members. On April 17, 2020, plaintiffs filed their opposition to the Indiana Department of Insurance’s motion to stay. The Court conducted final approval hearings on July 10, 2020, and July 14, 2020 and has continued the final approval hearing to September 11, 2020. Based on the Court’s preliminary approval of the settlement, we do not anticipate the outcome of this matter to have a material adverse impact on our results of operations or financial position. If the court does not approve the final settlement, we intend to continue to vigorously defend this action. On April 6, 2020, GLAIC, our indirect wholly-owned subsidiary, was named as a defendant in a putative class action lawsuit filed in the United States District Court for the Eastern District of Virginia, captioned Brighton Trustees, LLC, on behalf of and as trustee for Diamond LS Trust; and Bank of Utah, solely as securities intermediary for Diamond LS Trust; on behalf of themselves and all others similarly situated v. Genworth Life and Annuity Insurance Company. On May 13, 2020, GLAIC was also named as a defendant in a putative class action lawsuit filed in the United States District Court for the Eastern District of Virginia, captioned Ronald L. Daubenmier, individually and on behalf of himself and all others similarly situated v. Genworth Life and Annuity Insurance Company . On June 26, 2020, Plaintiffsplaintiffs filed a consent motion to consolidate the two cases. On June 30, 2020, the United States District Court for the Eastern District of Virginia issued an order consolidating the Brighton Trustees and Daubenmier cases. On July 17, 2020, the Brighton Trustees and Daubenmier Plaintiffsplaintiffs filed a consolidated complaint, alleging that GLAIC subjected policyholders to an unlawful and excessive cost of insurance increase. The consolidated complaint asserts claims for breach of contract and injunctive relief, and seeks damages in excess of $5 million. Our responsive pleading deadline isOn August 31, 2020.2020, we filed an answer to plaintiffs’ consolidated complaint. The trial is scheduled to commence on April 1, 2022. We intend to vigorously defend this action.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At this time we cannot determine or predict the ultimate outcome of any of the pending legal and regulatory matters specifically identified above or the likelihood of potential future legal and regulatory matters against us. Except as disclosed above, we are not able to provide an estimate or range of reasonably possible losses related to these matters. Therefore, we cannot ensure that the current investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. In addition, it is possible that related investigations and proceedings may be commenced in the future, and we could become subject to additional unrelated investigations and lawsuits. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of operations. As of JuneSeptember 30, 2020, we were committed to fund $1,135$1,112 million in limited partnership investments, $84$11 million in U.S. commercial mortgage loan investments and $32$115 million in private placement investments. As of JuneSeptember 30, 2020, we were also committed to fund $35 million of bank loan investments which had not yet been drawn. Amounts disclosed are net of an allowance for credit losses, see note 2 for additional information related to credit losses on off-balance sheet credit exposures.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (13) Changes in Accumulated Other Comprehensive Income (Loss) The following tables show the changes in accumulated other comprehensive income (loss), net of taxes, by component as of and for the periods indicated: | | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) | | | Derivatives qualifying as hedges | | | Foreign currency translation and other adjustments | | | | | Balances as of April 1, 2020 | | $ | 1,140 | | | $ | 2,755 | | | $ | (80 | ) | | $ | 3,815 | | OCI before reclassifications | | | 762 | | | | (48 | ) | | | 73 | | | | 787 | | Amounts reclassified from (to) OCI | | | (88 | ) | | | (30 | ) | | | — | | | | (118 | ) | | | | | | | | | | | | | | | | | | | | | 674 | | | | (78 | ) | | | 73 | | | | 669 | | | | | | | | | | | | | | | | | | | Balances as of June 30, 2020 before noncontrolling interests | | | 1,814 | | | | 2,677 | | | | (7 | ) | | | 4,484 | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | 3 | | | | — | | | | 34 | | | | 37 | | | | | | | | | | | | | | | | | | | Balances as of June 30, 2020 | | $ | 1,811 | | | $ | 2,677 | | | $ | (41 | ) | | $ | 4,447 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) (1) | | | Derivatives qualifying as hedges (2) | | | Foreign currency translation and other adjustments | | | | | Balances as of July 1, 2020 | | | | | | | | | | | | | | | | | OCI before reclassifications | | | | | | | | | | | | | | | | | Amounts reclassified from (to) OCI | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2020 before noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
| See note 5 for additional information. |
| | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) (1) | | | Derivatives qualifying as hedges (2) | | | Foreign currency translation and other adjustments | | | | | Balances as of July 1, 2019 | | | | | | | | | | | | | | | | | OCI before reclassifications | | | | | | | | | | | | | | | | | Amounts reclassified from (to) OCI | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2019 before noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
| See note 5 for additional information. |
73GENWORTH FINANCIAL, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) (1) | | | Derivatives qualifying as hedges (2) | | | Foreign currency translation and other adjustments | | | | | Balances as of January 1, 2020 | | | | | | | | | | | | | | | | | OCI before reclassifications | | | | | | | | | | | | | | | | | Amounts reclassified from (to) OCI | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2020 before noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
| See note 5 for additional information. |
| | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) (1) | | | Derivatives qualifying as hedges (2) | | | Foreign currency translation and other adjustments | | | | | Balances as of January 1, 2019 | | | | | | | | | | | | | | | | | OCI before reclassifications | | | | | | | | | | | | | | | | | Amounts reclassified from (to) OCI | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2019 before noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balances as of September 30, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information. |
| See note 5 for additional information. |
The foreign currency translation and other adjustments balance in the charts above included $(2) million, net of taxes of $1 million, related to a net unrecognized postretirement benefit obligation as of September 30, 2019. The balance also included taxes of $22 million and $(44) million, respectively, related to foreign currency translation adjustments as of September 30, 2020 and 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, for the periods presented: | | | | | | | | | | | | | | | | | | | | | accumulated other comprehensive income (loss) | | | Affected line item in the | | | Three months ended September 30, | | | Nine months ended September 30, | | | | | | | | | | | | | | | Net unrealized investment (gains) losses: | | | | | | | | | | | | | | | | | | | Unrealized (gains) losses on investments (1) | | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | | | | | | | | | | | | | | | | | Provision for income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Derivatives qualifying as hedges: | | | | | | | | | | | | | | | | | | | Interest rate swaps hedging assets | | | | | | | | | | | | | | | | | | | Interest rate swaps hedging assets | | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Provision for income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amounts exclude adjustments to DAC, present value of future profits, sales inducements and benefit reserves. |
(14) Discontinued Operations On December 1, 2015, we completed the sale of our lifestyle protection insurance business to AXA. In 2017, AXA sued us for damages on an indemnity in the 2015 agreement related to alleged remediation it paid to customers who purchased PPI. On July 20, 2020, we reached a settlement agreement with AXA for losses incurred from mis-selling complaints on policies sold from 1970 through 2004 and paid an initial amount of £100 million ($125 million) to AXA. An after-tax loss of $21 million and $537 million related to the settlement is included in income (loss) from discontinued operations for the three and nine months ended September 30, 2020, respectively. We also recorded other after-tax legal fees and expenses of $1 million and $5 million for the three and nine months ended September 30, 2020, respectively. See note 12 fora dditional details related to the case regarding the sale of our lifestyle protection insurance business. As part of the settlement agreement, we agreed to make payments for certain PPI mis-selling claims, along with a significant portion of future claims that are still being processed. Under the settlement agreement, we issued a secured promissory note to AXA, in which we agreed to make deferred cash payments in two installmentsi n June 2022 and September 2022. Future claims that are still being processed will be added to the September 2022 installment payment.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) | | | Derivatives qualifying as hedges | | | Foreign currency translation and other adjustments | | | | | Balances as of April 1, 2019 | | $ | 943 | | | $ | 1,850 | | | $ | (301 | ) | | $ | 2,492 | | OCI before reclassifications | | | 375 | | | | 157 | | | | 43 | | | | 575 | | Amounts reclassified from (to) OCI | | | 1 | | | | (24 | ) | | | — | | | | (23 | ) | | | | | | | | | | | | | | | | | | | | | 376 | | | | 133 | | | | 43 | | | | 552 | | | | | | | | | | | | | | | | | | | Balances as of June 30, 2019 before noncontrolling interests | | | 1,319 | | | | 1,983 | | | | (258 | ) | | | 3,044 | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | 14 | | | | — | | | | 17 | | | | 31 | | | | | | | | | | | | | | | | | | | Balances as of June 30, 2019 | | $ | 1,305 | | | $ | 1,983 | | | $ | (275 | ) | | $ | 3,013 | | | | | | | | | | | | | | | | | | |
(1) | Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
|
(2) | See note 5 for additional information.
|
| | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) | | | Derivatives qualifying as hedges | | | Foreign currency translation and other adjustments | | | | | Balances as of January 1, 2020 | | $ | 1,456 | | | $ | 2,002 | | | $ | (25 | ) | | $ | 3,433 | | OCI before reclassifications | | | 448 | | | | 735 | | | | (25 | ) | | | 1,158 | | Amounts reclassified from (to) OCI | | | (94 | ) | | | (60 | ) | | | — | | | | (154 | ) | | | | | | | | | | | | | | | | | | | | | 354 | | | | 675 | | | | (25 | ) | | | 1,004 | | | | | | | | | | | | | | | | | | | Balances as of June 30, 2020 before noncontrolling interests | | | 1,810 | | | | 2,677 | | | | (50 | ) | | | 4,437 | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | (1 | ) | | | — | | | | (9 | ) | | | (10 | ) | | | | | | | | | | | | | | | | | | Balances as of June 30, 2020 | | $ | 1,811 | | | $ | 2,677 | | | $ | (41 | ) | | $ | 4,447 | | | | | | | | | | | | | | | | | | |
(1) | Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
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(2) | See note 5 for additional information.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | Net unrealized investment gains (losses) | | | Derivatives qualifying as hedges | | | Foreign currency translation and other adjustments | | | | | Balances as of January 1, 2019 | | $ | 595 | | | $ | 1,781 | | | $ | (332 | ) | | $ | 2,044 | | OCI before reclassifications | | | 802 | | | | 254 | | | | 97 | | | | 1,153 | | Amounts reclassified from (to) OCI | | | (46 | ) | | | (52 | ) | | | — | | | | (98 | ) | | | | | | | | | | | | | | | | | | | | | 756 | | | | 202 | | | | 97 | | | | 1,055 | | | | | | | | | | | | | | | | | | | Balances as of June 30, 2019 before noncontrolling interests | | | 1,351 | | | | 1,983 | | | | (235 | ) | | | 3,099 | | | | | | | | | | | | | | | | | | | Less: change in OCI attributable to noncontrolling interests | | | 46 | | | | — | | | | 40 | | | | 86 | | | | | | | | | | | | | | | | | | | Balances as of June 30, 2019 | | $ | 1,305 | | | $ | 1,983 | | | $ | (275 | ) | | $ | 3,013 | | | | | | | | | | | | | | | | | | |
(1) | Net of adjustments to DAC, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
|
(2) | See note 5 for additional information.
|
The foreign currency translation and other adjustments balance in the charts above included $(2) million, net of taxes of $1 million, related to a net unrecognized postretirement benefit obligation as of June 30, 2019. The balance also included taxes of $22 million and $(45) million, respectively, related to foreign currency translation adjustments as of June 30, 2020 and 2019.
The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, forpresents the periods presented: | | | | | | | | | | | | | | | | | | | | | Amount reclassified from accumulated | | | | | | other comprehensive income (loss) | | | Affected line item in the | | | Three months ended June 30, | | | Six months ended June 30, | | | | | | | | | | | | | | | Net unrealized investment (gains) losses: | | | | | | | | | | | | | | | | | | | Unrealized (gains) losses on investments (1) | | $ | (112 | ) | | $ | 2 | | | $ | (119 | ) | | $ | (58 | ) | | Net investment (gains) losses | | | | 24 | | | | (1 | ) | | | 25 | | | | 12 | | | Provision for income taxes | | | | | | | | | | | | | | | | | | | | | | $ | (88 | ) | | $ | 1 | | | $ | (94 | ) | | $ | (46 | ) | | | | | | | | | | | | | | | | | | | | | | Derivatives qualifying as hedges: | | | | | | | | | | | | | | | | | | | Interest rate swaps hedging assets | | $ | (46 | ) | | $ | (42 | ) | | $ | (89 | ) | | $ | (80 | ) | | Net investment income | Interest rate swaps hedging assets | | | — | | | | 4 | | | | (4 | ) | | | (2 | ) | | Net investment (gains) losses | | | | — | | | | 1 | | | | — | | | | 1 | | | Net investment income | | | | 16 | | | | 13 | | | | 33 | | | | 29 | | | Provision for income taxes | | | | | | | | | | | | | | | | | | | | | | $ | (30 | ) | | $ | (24 | ) | | $ | (60 | ) | | $ | (52 | ) | | | | | | | | | | | | | | | | | | | | | |
(1) | Amounts exclude adjustments to DAC, present value of future profits, sales inducements and benefit reserves.
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(14) Discontinued Operations
Canada mortgage insurance business
On December 12, 2019, we completedamounts owed to AXA under the sale of Genworth Canada, our former Canada mortgage insurance business and received approximately $1.7 billion in net cash proceeds. Prior to its sale, in the third quarter of 2019, Genworth Canada was reported as discontinued operations; accordingly, its results of operations were separately reported for the three and six months ended June 30, 2019.
A summary of operating results related to Genworth Canada reported as discontinued operations were as follows for the three and six months ended June 30, 2019:
| | | | | | | | | | | Three months ended June 30, 2019 | | | Six months ended June 30, 2019 | | | | | | | | | | | | | $ | 125 | | | $ | 251 | | | | | 36 | | | | 71 | | Net investment gains (losses) | | | 1 | | | | — | | | | | | | | | | | | | | 162 | | | | 322 | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 19 | | | | 38 | | Acquisition and operating expenses, net of deferrals | | | 18 | | | | 32 | | Amortization of deferred acquisition costs and intangibles | | | 11 | | | | 21 | | | | | 13 | | | | 25 | | | | | | | | | | | Total benefits and expenses | | | 61 | | | | 116 | | | | | | | | | | | Income before income taxes (2) | | | 101 | | | | 206 | | Provision for income taxes | | | 41 | | | | 84 | | | | | | | | | | | Income from discontinued operations, net of taxes | | | 60 | | | | 122 | | | | | | | | | | | Less: net income from discontinued operations attributable to noncontrolling interests | | | 35 | | | | 71 | | | | | | | | | | | Income from discontinued operations available to Genworth Financial, Inc.’s common stockholders | | $ | 25 | | | $ | 51 | | | | | | | | | | |
(1) | Interest on debt assumed by Brookfield and interest on debt that was repaid as a result of the sale of Genworth Canada was allocated and reported in discontinued operations. A senior secured term loan facility (“Term Loan”), owed by Genworth Holdings and secured by GFIH’s ownership interest in Genworth Canada’s outstanding common shares, was repaid in connection with the close of the Genworth Canada sale. Accordingly, interest expense related to the Term Loan of $8 million and $16 million for the three and six months ended June 30, 2019, respectively, was allocated and reported in discontinued operations.
|
(2) | The three and six months ended June 30, 2019 includespre-tax
income from discontinued operations available to Genworth Financial, Inc.’s common stockholders of $55 million and $111 million, respectively. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lifestyle protection insurance
On December 1, 2015, we completed the sale of our lifestyle protection insurance business to AXA. In June 2020, we accrued a contingent liability of $653 million that wassettlement agreement, which are reflected as liabilities related to discontinued operations in our unaudited condensed consolidated balance sheet asfor the period presented:
| | | | | | | | | | | | | | | | | | | Installment payments due to AXA: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts billed as future losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total amounts due under the promissory note | | | | | | | | | | | | | | | | | | | | | | | | | | | Estimated beginning balance | | | | | | | | | Less: Amounts billed to date | | | | ) | | | | ) | | | | | | | | | | Estimated future billings | | | | | | | | | | | | | | | | | | Total amounts due to AXA under the settlement agreement | | | | | | | | | | | | | | | | | |
The three months ended September 30, 2020 includes an after-tax expense of June 30, 2020. The contingent liability was recorded in connection with a settlement agreement reached with AXA on July 20, 2020$18 million attributable to foreign currency f or losses incurred from mis-selling complaints on policies sold from 1970 through 2004. Anafter-tax
loss
of $516 millionwas alsois included in lossincome (loss) from discontinued operations for the three and six months ended June 30, 2020, along with otherafter-tax
legal fees and expenses of $4 million. See note 12 for additional details related to the case regarding the sale of our lifestyle protection insurance business.As part of the settlement agreement, we agreed tocertain payment protection insuranceclaims, along withfuture claims that are still being processed. On July 21, 2020, under the settlement agreement, we paid an initial amount of £100 million ($125 million) to AXA. In addition, we issued a secured promissory note to AXA, under which we agreed to make deferred cash payments totaling approximately £317 million in two installment payments on June 2022 and September 2022. Future claims that are still being processed will be added to the promissory note as part of the September 2022 payment.operations. The promissory note will accrue interest at a fixed rate of 5.25% due quarterly, with a potential for an interest rate decrease to 2.75% following certain prepayment trigger events. Income (loss) from discontinued operations for the three and nine months ended September 30, 2020 includes after-tax interest expense of $3 million attributable to the promissory note.To secure our obligation under the promissory note, we granted a 19.9% security interest held by us through our subsidiaries, in both ourthe outstanding common stock of Genworth Mortgage Holdings, Inc. (“GMHI”)GMHI and Genworth Mortgage Insurance Australia Limited to AXA. AXA does not have the right to sell or repledge the collateral and is not entitled to any voting rights. The collateral will be released back to us upon full repayment of the promissory note. Accordingly, the collateral arrangement has no impact on our unaudited condensed consolidated financial statements. In the event AXA recovers amounts from third parties related to the mis-selling losses, including from the distributor responsible for the sale of the policies, we have certain rights to share in those recoveries to recoup payments for the underlying mis-selling losses. As of JuneSeptember 30, 2020, we have not recorded any amounts associated with recoveries from third parties. The promissory note is also subject to certain mandatory prepayments upon the occurrence of: | | | the consummation of certain qualifying debt transactions in which total gross proceeds of at least $750 million are raised; |
| | | the consummation of certain qualifying equity issuances or dispositions with respect to GMHI, or any of our subsidiaries, in which total net cash proceeds of at least $475 million are raised; |
| | | certain dispositions of our U.S. mortgage insurance business; |
| | | the consummation of the China Oceanwide merger and the funding of the contemplated capital investment plan; |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) | | | transactions involving a change of control of Genworth, other than the China Oceanwide transaction; and |
| | | receipt of dividends and sale proceeds from certain Genworth subsidiaries above certain threshold amounts. |
The promissory note also contains certain negative and affirmative covenants, restrictions imposed on the collateral, representations and warranties and customary events of default. In addition to the promissory note, we also have an unrelated liability that is owed to AXA associated with underwriting losses on a product sold by a distributor in our former lifestyle protection insurance business. The balance of the liability as of September 30, 2020 and December 31, 2019 is $16 million and $42 million, respectively, and is included as liabilities related to discontinued operations in our unaudited condensed consolidated balance sheets. During the third quarter of 2020, based on an updated estimate, we reduced the liability by $28 million which was recognized as an after-tax benefit to earnings of $23 million and is included in income (loss) from discontinued operations for the three months ended September 30, 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January 2020, we made an interim payment to AXA for £100 million ($134 million), which was accrued as a contingent liability and reflected as liabilities related to discontinued operations as of December 31, 2019. This amount was included in income (loss) from discontinued operations for the year ended December 31, 2019. We have established our current best estimates for future claims that are still being processed under the settlement agreement, as well as for anthe unrelated liability related to certain claimsunderwriting losses and other expenses; however, there may be future adjustments to these estimates. If amounts are different from our estimates, it could result in an adjustment to our liabilities and an additional amount reflected in income (loss) from discontinued operations.
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included herein and with our 2019 Annual Report on Form 10-K. References to “Genworth Financial,” “Genworth,” the “Company,” “we” or “our” herein are, unless the context otherwise requires, to Genworth Financial, Inc. on a consolidated basis. Cautionary note regarding forward-looking statements This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Examples of forward-looking statements include statements we make relating to the closing of the transaction with China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”), China Oceanwide’s funding plans and transactions we are pursuingmight pursue to address our near-term liabilities and financial obligations, which may include raising debtcapital through our mortgage insurance subsidiaries and/or transactions to sell a percentage of our ownership interests in our mortgage insurance businesses, as well as statements we make regarding the potential impacts of the coronavirus pandemic (“COVID-19”). Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially from those in the forward-looking statements due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following: risks related to the proposed transaction with China Oceanwide
including: the risk that China Oceanwide will be unable to raise funding and our inability to complete the China Oceanwide transaction on the agreed terms, in a timely manner or at all, which may adversely affect our business and the price of our common stock; the risk that we will be unable to address our near-term liabilities and financial obligations, including the risks that we will be unable to raise new debt financing and/or sell a percentage of our ownership interest in our U.S. mortgage insurance business to repay the promissory note to AXA or refinance our debt maturing in 2021 or beyond; the parties’ inability to obtain regulatory approvals, clearances or extensions, or the possibility that such regulatory approvals or clearances may further delay the China Oceanwide transaction or may not be received prior to September 30, 2020 (and either or both of the parties may not be willing to further waive their end date termination rights beyond September 30, 2020) or that materially burdensome or adverse regulatory conditions may be imposed or undesirable measures may be required in connection with any such regulatory approvals, clearances or extensions (including those conditions or measures that either or both of the parties may be unwilling to accept or undertake, as applicable) or that with continuing delays, circumstances may arise that make one or more previously obtained regulatory approvals or clearances no longer valid, one or both parties unwilling to proceed with the China Oceanwide transaction or unable to comply with the conditions to existing regulatory approvals, or one or both of the parties may be unwilling to accept any new condition under a regulatory approval; the risk that the parties will not be able to obtain other regulatory approvals, clearances or extensions, including in connection with a potential alternative funding structure or the currentgeo-political
environment, or that one or more regulators may rescind or fail to extend existing approvals, or that the revocation by one regulator of approvals will lead to the revocation of approvals by other regulators; the parties’ inability to obtain any necessary regulatory approvals, clearances or extensions for the post-closing capital plan; the risk that a condition to the closing of the China Oceanwide transaction may not be satisfied or that a condition to closing that is currently satisfied may not remain satisfied due to the delay in closing the China Oceanwide transaction or that the parties will be unable to agree upon a closing date following receipt of all regulatory approvals and clearances; the risk regarding the ongoing availability of any required financing; the risk that existing and potential legal proceedings may be instituted against us in connection with the China Oceanwide transaction that may | | | risks related to the proposed transaction with China Oceanwide including: the risk that China Oceanwide will be unable to raise funding and our inability to complete the China Oceanwide transaction on the agreed terms, in a timely manner or at all, which may adversely affect our business and the price of our common stock; the risk that we will be unable to address our near-term liabilities and financial obligations, including the risks that we will be unable to raise additional capital and/or sell a percentage of our ownership interest in our U.S. mortgage insurance business to repay the promissory note to AXA S.A. (“AXA”) and repay and/or refinance our debt maturing in 2021 or beyond; the parties’ inability to obtain regulatory approvals, clearances or extensions, or the possibility that such regulatory approvals or clearances may further delay the China Oceanwide transaction or may not be received prior to November 30, 2020 (and either or both of the parties may not be willing to further waive their end date termination rights beyond November 30, 2020) or that materially burdensome or adverse regulatory conditions may be imposed or undesirable measures may be required in connection with any such regulatory approvals, clearances or extensions (including those conditions or measures that either or both of the parties may be unwilling to accept or undertake, as applicable) or that with continuing delays, circumstances may arise that make one or more previously obtained regulatory approvals or clearances no longer valid, one or both parties unwilling to proceed with the China Oceanwide transaction or unable to comply with the conditions to existing regulatory approvals, or one or both of the parties may be unwilling to accept any new condition under a regulatory approval; the risk that the parties will not be able to obtain other regulatory approvals, clearances or extensions, including in connection with a potential alternative funding structure or the current geo-political environment, or that one or more regulators may rescind or fail to extend existing approvals, or that the revocation by one regulator of approvals will lead to the revocation of approvals by other regulators; the parties’ inability to obtain any necessary regulatory approvals, clearances or extensions for the post-closing capital plan; the risk that a condition to the closing of the China Oceanwide transaction may not be satisfied or that a condition to closing that is currently satisfied may not remain satisfied due to the delay in closing the China Oceanwide transaction or that the parties will be unable to agree upon a closing date following receipt of all regulatory approvals and clearances; the risk regarding the ongoing availability of any required financing; the risk that existing and potential legal proceedings |
| 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; 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 raise 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 to our assumptions, methodologies or otherwise in connection with periodic or other 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 fourth 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 changes we may make to our assumptions, methodologies or otherwise in connection with periodic or other 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
| 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; 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 raising new debta debt/equity financing and/or selling a percentage of our ownership interests in our mortgage insurance businesses, or under a 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 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 GSEs offering mortgage insurance; the design 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;
| 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 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—Item 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 JuneSeptember 30, 2020, Genworth, Parent and Merger Sub entered into a fifteenthsixteenth waiver and agreement (“FifteenthSixteenth 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) SeptemberNovember 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 JuneSeptember 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 FifteenthSixteenth Waiver and Agreement. In addition, as part of the conditions set forth in the FifteenthSixteenth Waiver and Agreement, China Oceanwide has agreed to submit to Genworth satisfactory evidence by AugustOctober 31, 2020 confirming that approximately $1.0 billion is available to China Oceanwide from sources in mainlandMainland China and debt financing of up to fund the acquisition$1.8 billion is available from sources outside of Genworth, along with an additional $1.0 billion or more of executed binding commitment letters fromMainland China through Hony Capital and/or other acceptable third parties providingparties. 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 sources outsideand 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 fundprovide the acquisition. If these conditions are met,remaining amount required to pay for the Merger Agreement will remain in place until September 30, 2020. If the conditions are not met,total Genworth has the right, in its sole discretion, to terminate the Merger Agreement aspurchase price of August 31, 2020. $5.43 per share. Genworth also has the right, to resolvein connection with the AXA litigation,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 secured 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 FifteenthSixteenth 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 SeptemberNovember 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. The China Oceanwide transaction had previouslyhas received all U.S. regulatory approvals needed to close the transaction. Genworth has withdrawn and will refile its U.S. Financial Industry Regulatory Authority (“FINRA”) continuing membership application duetransaction, subject to the passage of time. The FINRA membership is necessary for Genworth because it indirectly wholly-owns a subsidiary that is a broker-dealer with a runoff variable annuity block. China Oceanwide is working to secure the necessary funding to complete the transaction. 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 remain committedneeds to satisfyingreceive clearance for currency conversion and transfer of funds from China’s State Administration of Foreign Exchange, and the closing conditions under the Merger Agreement as soon as possibleChinese National Development and extended the Merger Agreement deadline through the Fifteenth Waiver and AgreementReform Commission needs to provide the parties with additional time to close the transaction. Notwithstandingconfirm the extension of the Merger Agreement deadline,acceptance of filing with respect to the unprecedented market disruption due to COVID-19, includingtransaction, as its impactprior 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 the high yield financing markets and on the performance and outlook of Genworth’our U.S. mortgage insurance businesses, as well as other factors such asbusiness with respect to its capital. These capital restrictions will remain in effect during the recent AXA judgment and related settlement, have resulted in increased uncertainty as whetherpendency of the China Oceanwide transaction, will be able to be consummated atand if the agreedChina Oceanwide transaction value of approximately $2.7 billion.is completed, thereafter until certain conditions are met. See “Item 2—U.S. Mortgage Insurance segment—trends and conditions” for additional 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 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 are takinghave 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. We expect these These steps to includeincluded a debt financing through our U.S.offering from Genworth Mortgage Holdings, Inc. (“GMHI”), Genworth’s indirect wholly-owned mortgage insurance business latersubsidiary. On August 21, 2020, GMHI issued $750 million of its 6.50% senior notes due in 2020 and, should our pending transaction2025 (“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 not close,transaction, we are continuing to take steps toward raising capital by preparing for a 19.9%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 havemay impair our ability to utilize beneficial consolidated tax rules, all of which could result in a resulting 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. 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 have impacted our quarterly results under review in this report and are expected to continue to impact our 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. 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 50 million Americans filing for unemployment claims since the startheight of the pandemic. However, duringpandemic; however, they remain elevated. The unemployment rate decreased in the third quarter of 2020 compared to the second quarter of 2020, as the U.S. economy has added a significantcontinued to add jobs lost at the height of the pandemic. However, the number of jobs reversing someunemployed Americans remains high and underemployment is likely to remain high for an extended period of the initial jobless claims. Consumer confidence continues to be suppressed but has rebounded from where it was since the start of the pandemic.time.The U.S. economy contracted in both the first and second quarters of 2020 as a result ofCOVID-19.
During the second quarter of 2020, the global economy experienced high unemployment, historically low retail sales and a dramatic decrease in industrial production, all signs of a deep global recession and prolonged recovery.Stay at home orders and partialThe U.S. economy showed signs of recovery 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 shutdowns depressed earnings and corporate balance sheets duringindicators improved from the lows of the second quarter of 2020 and could potentially strain business operations forefforts by the remainderU.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 timing of 2020.future stimulus measures and contributed to increased market volatility.
During the second quarter of 2020, credit spreads tightened, reversing most of the widening experienced in the first quarter of 2020. This favorably impacted our corporate bond portfolio and resulted in higher unrealized gains recognized in other comprehensive income. Although we experienced a significant reversal in the second quarter of 2020 of the credit spread widening experienced in the firstthird quarter of 2020, the volatilityU.S. Federal Reserve maintained interest rates near zero as the U.S. economy continues to recover from the negative impact of corporate earningsCOVID-19. The U.S. Federal Reserve’s latest forecast indicates that interest rates will remain at near zero through 2023 and will be maintained until the impact on balance sheets due toCOVID-19labor market recovers.
could result in future losses, some of which could result in investment credit losses that would be reflected in earnings.Credit markets continued their recovery in the third 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 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. The U.S. Federal Reserve plans to continue to support credit markets through its quantitative easing programs, including a corporate credit facility to purchase investment grade and certain high yield corporate securities beginningthat began in May 2020 and secondary market purchases of corporate bonds startingthat started in June 2020. As a result of COVID-19, the second quarter of 2020 financial results of our U.S. mortgage insurance business waswere negatively impacted primarily through increased borrower uptake of forbearance options, many of which resulted in a new delinquency, increased overall new delinquencies, emerging performance deteriorationdelinquency. Elevated borrower forbearance continued into the third quarter of existing delinquencies, higher losses and loss reserves and incremental PMIERs capital requirements as2020, however, it slowed meaningfully compared to activity in the firstsecond quarter of 2020. Servicer reported forbearance ended the secondthird quarter of 2020 with approximately 7.7%6.7% or 68,80061,183 of our active policies reported in a forbearance plan, of which approximately 62%63% were reported as delinquent. 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.
Servicers continued the practice of remitting premiums during the early stages of delinquency. As a result, we did not experience an impact to earned premiums during the second quarterand third quarters of 2020. 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 effortsNew delinquencies continue to contain the spread ofCOVID-19.
Similar to our hurricane experience, borrowers who have experienced a financial hardship have taken advantage of available forbearance programs and payment deferral options. As a result, we have 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 tolevels. 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.
New flow delinquencies increased materially in the second quarter of 2020 to 48,249increase driven primarily by a significantan increase in borrower forbearance as a result of COVID-19. Approximately 87%75% of our flowprimary new delinquencies in the secondthird 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 secondthird 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 $1,057$1,217 million of benefit to our second quarter ofSeptember 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 magnitude of the benefit on our PMIERs required 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 the 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 for the remainder of 2020. The amount and timing of future dividends will depend on the economic recovery from COVID-19, among other factors. Australia Mortgage Insurance Many of our lender customers created programs that allow affected homeownersborrowers the option to defer their mortgage repayments, without penalty, for a period of up to six months. Under regulatory guidance, homeownersborrowers participating in these programs, unless previously delinquent, are reported as current during the deferral period. As of JuneSeptember 30, 2020, our Australia mortgage insurance business had been notified thatapproximately 31,000 insured loans in-force still participating in a deferral program, down from over 48,000 policies were participating in the deferral programs, which represents approximately 4% of our insured loansin-force
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.TheFor many borrowers, the six-month deferral period will expireexpired in September 2020; therefore,2020. Therefore, on September 22, 2020 the Australian government and lender customers extendedPrudential 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 deferment programs to affectedmost appropriate solutions for borrowers for up to an additional four months (January 2021). Homeowners that participateexperiencing hardships, including, in such lender hardship programs, unless previously delinquent, will be reported as current during this time.some cases, extension of payment deferral programs.The Australian government continuescontinued to provide support its local economy through variousfor incomes, jobs and businesses with additional measures announced in the Federal Budget in October 2020. While the government programs focused on supporting employment, liquidity and homebuying, among other initiatives. The Australian government recently announcedlender initiatives may lessen the effect of COVID-19 related losses to the business, uncertainties remain, and it could take a new homebuilder program that provides eligible homeowners with grants to build a new home or renovate an existing home. The long-term outlookconsiderable amount of time for the Australian housing market is largely dependent oneconomy to recover the length ofCOVID-19 lost output and the speed of the economic recovery, along with how effective the various economic stimulus packages implemented by the Australian Government are in response toemployment resulting from the pandemic. Our Australia mortgage insurance business strengthened its loss reserves by $18$24 million in the secondthird 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 are not reported as delinquent, this estimate is largely based on the 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 claims and reported delinquencies to increase toward the end of 2020 and possibly into 2021, which could further impact losses.
| claims and reported delinquencies to increase as we move into 2021. In addition, until normal patterns of delinquency development and progression return, we expect to continue to see increases in our incurred but not reported loss reserves, which could further materially impact losses. |
As a result of potential impacts on capital levels, we do 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 depend on the economic recovery from COVID-19, among other factors. We have experienced some degree of higher mortality across all of our U.S. life insurance products as a result of COVID-19. For our long-term care insurance products, higher mortality has resulted in a favorable impact on 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 quarterand 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.
| overall mortality experience was also higher for the three months ended June 30, 2020 compared to three months ended June 30, 2019, attributable in part toCOVID-19.
|
We have experienced lower new claims incidence in our long-term care insurance business; however, we do not expect this to be permanent but rather a temporary reduction while and social distancing protocols are in effect. We have temporarily discontinuedin-person
assessmentsGiven 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 assess eligibility for benefits and are utilizing virtual assessments in the interim, with anin-person
assessment to follow once social distancing protocols are relaxed.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, although we do not expect a significant impact on our financial results during 2020 as a result of these delays. Our U.S life insurance companies have 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.states, however, the extension of grace periods and reinstatements mandated by state regulators during COVID-19 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 volatile equity markets have adversely impacted earnings inmarkets. During the first half of 2020, our variable annuity products. Adjustedproducts 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 sixnine months ended JuneSeptember 30, 2020, and is down 62% in the current year23% compared to the prior year almost entirely due to the decline in equity markets and the low interest rate environment. However, in the second quarter of 2020, a partial equity market recovery favorably impacted our variable annuity products.year. While
Although certain states currently havehad mandates in place that policies cannot be lapsed and a few still require grace period extensions, we have not experienced 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 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 56%55% rated “A” and above. The carrying value of our investment portfolio as of JuneSeptember 30, 2020 and December 31, 2019 was $75.3$76.5 billion and $71.2 billion, respectively, of which 84% and 85%, respectively, was invested in fixed maturity securities. During the secondthird quarter of 2020, credit migration was more favorable than we had anticipated driven in partmarkets continued their recovery supported by government stimulus. Credit spread widening experienced in the first quarter of 2020 reversed in the second quarter of 2020strong investor inflows, improved corporate balance sheets and weliquidity positions, asset/liability management measures taken by companies and minimal negative credit rating migration. We recognized approximately $3.9$0.8 billion of unrealized investment gains.gains in the third quarter of 2020. The net unrealized investment gains related to our fixed maturity securities are recorded as a part of accumulated other comprehensive income (loss) and have no impact on 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. For the nine months ended September 30, 2020, our investment portfolio has 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 the adverse effects of COVID-19.
| September 30, 2020, we did not have any modifications or extensions of commercial mortgage loans that were considered troubled debt restructurings. Modified loans represented 10% of our total loan portfolio as of September 30, 2020, as borrowers have sought additional relief related to the efforts to contain the spread ofCOVID-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. We recognized a $7 million credit loss on ourinvestment securities during the second quarter of 2020 due in part to the adverse effects ofCOVID-19. |
Our investment portfolio is less exposed to equity market volatility; however, we have seen a decline in the fair value of our equity securities and limited partnership investments which was recognized as a loss of $13 million for the six months ended June 30, 2020. The majority of the losses recorded in the first quarter of 2020 were recovered during the second quarter of 2020 as equity markets rebounded.
Operational Readiness and Business Continuity We continue to take 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 operation 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 and we recently extended ourcurrently are requiring all employees to work from home requirement for all employees through JanuaryJune 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 earlymid 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.
Genworth Holdings maintains a continuous process for evaluating group-level liquidity, under normal and stressed environments. In light ofCOVID-19
emergence, we are currently developing additional stress scenarios to evaluate potential impacts to our businesses and Genworth Holdings. We are modeling various stress scenarios given the potential lack of near-term dividends from our subsidiaries.The AXA settlement agreement, which included issuing a secured promissory note to AXA, and Genworth Holdings’ financial obligations due one year from the issue date of the unaudited condensed consolidated financial statements, including debt maturing in 2021, exceed ourits current holding company liquidity. Furthermore, absent our plans,Absent accessing additional liquidity through third party sources and/or the completion of the China Oceanwide transaction, we would not expect to have a projected ability to meet our financial obligations with existing cash on hand and through normal course expected cash inflows for one year following the issuance of our unaudited condensed consolidated financial statements. Accordingly, due to the uncertainty regarding the completion of the China Oceanwide transaction, we are takingcontinuing to actively take steps to raisetoward raising capital through a debt financing, and should our pending transaction with China Oceanwide not close,by preparing for a 19.9%possible public offering of our U.S. mortgage insurance business. We expectbusiness, subject to engage in a debt financing through our U.S. mortgage insurance business later in 2020 which,market conditions. Proceeds from an equity transaction along with existing cash and cash equivalents, wouldare 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 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. The debt financing provided liquidity to Genworth Holdings of $436 million which is sufficient to fully address its debt maturing 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 our 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.”
| Given the options available, we believe our operating subsidiaries will be able to meet the near-term liquidity demands given the current market impacts fromCOVID-19.
For additional details on our overall liquidity and future dividend sources, see “—Liquidity and Capital Resources.” |
Genworth Financial Mortgage Insurance Pty Limited (“GFMIPL”), our indirect majority-owned subsidiary and issuer of subordinated floating rate notes in our Australian mortgage insurance business, successfully completed an exchange offer on July 3, 2020. The exchange offer resulted in an extension of the maturity date of the majority of the subordinated notes thereby reducing near-term contractual obligations.
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—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 JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 30, 2019 We had a net loss available to Genworth Financial, Inc.’s common stockholders of $441 million for the three months ended June 30, 2020 compared to net income available to Genworth Financial, Inc.’s common stockholders of $168$418 million and $18 million for the three months ended JuneSeptember 30, 2019.2020 and 2019, respectively. We had an adjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders of $21$132 million and $123 million for the three months ended JuneSeptember 30, 2020 compared to adjusted operating income of $178 million for the three months ended June 30, 2019.and 2019, respectively. Our U.S. Mortgage Insurance segment had an adjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders of $3$141 million and $137 million for the three months ended JuneSeptember 30, 2020 compared to adjusted operating income of $147 million for the three months ended June 30, 2019.and 2019, respectively. The decrease to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders in the current yearincrease was primarily from adjusted operating income in the prior year was primarilyhigher premiums mainly attributable to higher losses largely from new delinquencies driven in large part by a significantinsurance in-force and an increase in borrower forbearance and unfavorable reserve adjustments as a result ofCOVID-19.
These decreases werepolicy cancellations in our single premium mortgage insurance product, partially offset by lower average premium rates and higher premiums 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 $1$7 million and $13$12 million for the three months ended JuneSeptember 30, 2020 and 2019, respectively. The decrease was primarily driven by lower earned premiums largely from portfolio seasoning and lower policy cancellations and from lower net investment income in the current year. Our U.S. Life Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $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 in 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, favorable 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 blocks that entered 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 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 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 Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $19 million and $10 million for the three months ended September 30, 2020 and 2019, respectively. The increase was predominantly from favorable equity market performance and higher 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 $49 million and $35 million for the three months ended 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 partially offset by favorable aging of existing delinquencies in the current year. Our U.S. Life Insurance segment had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $5$61 million for the threenine months ended JuneSeptember 30, 2020 compared to adjusting operating income of $66$60 million for the threenine months ended JuneSeptember 30, 2019. Our long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $48 million and $37 million for the three months ended
| June 30, 2020 and 2019, respectively. The increase was primarily due to an increase in claim and policy terminations driven mostly by higher mortality in the current year and from favorable development on prior year incurred but not reported claims. The increase was also attributable to higher premiums in the current year fromin-force
rate actions approved and implemented. These increases were partially offset by higher frequency and severity of new claims in the current year. |
Our life insurance business had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $81 million in the current year compared to adjusting operating income of $10 million in the prior year. The decrease from income in the prior year to a loss in the current year was mainly attributable to higher lapses primarily associated with our large20-year
term life insurance block entering its post-level premium period, higher reserves in our10-year
term universal life insurance block entering its post-level premium period during the premium grace period and higher mortality in our universal life insurance products in the current year. The prior year also included a reinsurance correction and refinement resulting in a net favorable impact of $17 million.Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our fixed annuities business increased $9 million predominantly from favorable reserve changes and DAC amortization in fixed annuities products driven by favorable equity market changes in the current year and higher mortality in our single premium immediate annuity products. These increases were partially offset by lower net spreads and higher lapses in the current year. The prior year also included $4 million of unfavorable charges in connection with loss recognition testing in our single premium immediate annuity products that did not recur.
Our Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $24 million and $9 million for the three months ended June 30, 2020 and 2019, respectively. The increase was predominantly from favorable equity market performance in the current year.
Corporate and Other Activities had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $38 million and $57 million for the three months ended June 30, 2020 and 2019, respectively. The decrease in the loss was primarily related to lower operating expenses and lower interest expense in the current year.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
We had a net loss available to Genworth Financial, Inc.’s common stockholders of $507 million for the six months ended June 30, 2020 compared to net income available to Genworth Financial, Inc.’s common stockholders of $342 million for the six months ended June 30, 2019. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders were $12 million and $273 million for the six months ended June 30, 2020 and 2019, respectively.
Our U.S. Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $145 million and $271 million for the six months ended June 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 and unfavorable reserve adjustments as a result ofCOVID-19.
These decreases were partially offset by higher premiums in the current year.Our Australia Mortgage Insurance segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $10 million and $27 million for the six months ended June 30, 2020 and 2019, respectively. The decrease was primarily driven by lower earned premiums largely from portfolio seasoning and lower policy cancellations, higher losses mostly associated with the economic impacts caused byCOVID-19
and lower net 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 $75 million for the six months ended June 30, 2020 compared to adjusting operating income of $61 million for the six months ended June 30, 2019.
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our long-term care insurance business increased $32$70 million primarily from an increase in claim and policy terminations driven mostly by higher mortality in the current year, $63$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 prior year incurred but not reported claims. These increases were partially offset by higher frequency and severity of new claims in the current year. Our life insurance business had anThe adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $158in our life insurance business increased $210 million in the current year compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $8 million in the prior year. The decrease to a loss in the current year from income in the prior year was 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 our universal and term life insurance products 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. The prior year also included a reinsurance correction and refinement resulting in a net favorable impact of $17 million. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our fixed annuities business decreased $2increased $19 million predominantly from a decrease in net spreads due to the runoff of the block, partially offset by $17$31 million of unfavorable charges in connection withrelated 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 prior year that did not recur.current year. Our Runoff segment had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $11$30 million and $29$39 million for the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively. The decrease was predominantly from theless favorable equity market performance and a decline in equity markets and interest rates in the current year. Corporate and Other Activities had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $79$128 million and $115$150 million for the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively. The decrease in the loss was primarily related to lower interest expense and lower 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 was $228were $292 million infor the second quarter ofnine months ended September 30, 2020, of which $170$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 $28 million for incurred but not reported delinquencies that are expected to be reported in the future and 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.
| 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. |
On 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 became non-performing due to a COVID-19 hardship, PMIERs was temporarily amended with respect to each non-performing loan. As of JuneSeptember 30, 2020, our U.S. mortgage insurance business had 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 requirements 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 third 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 capital on our U.S. mortgage insurance business. The aforementioned PMIERs sufficiency is based on the published requirements applicable to private mortgage insurers and does not give effect to the GSE Restrictions recently imposed on our U.S. mortgage insurance 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 as of 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 required assets. See “Item 2—U.S. Mortgage Insurance segment—trends and conditions” for additional details, including recently imposed conditions and restrictions applied by the GSEs to our U.S. mortgage insurancebusiness .
TableEstimated mortgage origination volume increased during the third quarter of Contents2020 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. | assets of 143% of the required assets under PMIERs compared to 142% as of March 31, 2020. The estimated sufficiency as of June 30, 2020 was $1,275 million of available assets above the PMIERs requirements compared to $1,171 million as of March 31, 2020. The improvement in PMIERs sufficiency as compared to March 31, 2020 was driven in part by business cash flows increasing PMIERs available assets, elevated lapse of existing business driven by low prevailing interest rates and an increase in reinsurance credit. In addition, our second 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. These factors were partially offset by incremental new delinquencies driving higher PMIERs required assets and capital consumed by new insurance written in the second quarter of 2020. See “Item 2—U.S. Mortgage Insurance segment—trends and conditions” for additional details.
|
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 80%41% in the secondthird quarter of 2020 compared to the secondthird quarter of 2019. The increase was primarily due to higher mortgage refinancing originations and a larger private mortgage insurance market as overall housing fundamentals remain strongmarket. Primary insurance in-force growth from higher new insurance written was partially offset by lower persistency in the current year. In addition, lower persistency in our U.S. mortgage insurance business is impacting business performance in several other ways including, but not limited to, elevating single premium policy cancellations resulting in higher earned premiums and accelerating the amortization of our higher estimated market share.existing reinsurance transactions reducing their associated PMIERs capital credit.Australia Mortgage Insurance As of JuneSeptember 30, 2020, our Australia mortgage insurance business estimated its Prescribed Capital Amount (“PCA”) ratio was approximately 177%179%, representing a slight decreasean increase from 178%177% as of March 31,June 30, 2020. In May 2020, following a process, our second largest customer in our Australia mortgage insurance business advised us that they will not renew their contract with us. The current contract with this customer will expire in November 2020. As of June 30, 2020, thisThis customer represented 10%11% of our gross written premiums infor the first half ofnine months ended September 2020. TheWhile the termination of the contract with this customer will reduce gross premiums written in 2021, it is expected to modestly impact the financial results of our Australia mortgage insurance business following the expiration of the existing contract.
| 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 4691 filing approvals from 1930 states during the sixnine months ended JuneSeptember 30, 2020, representing a weighted-average increase of 30%29% on approximately $257$595 million in annualized in-force premiums, or approximately $77$173 million of incremental annual premiums. We also submitted 37143 new filings in 1030 states during the sixnine months ended JuneSeptember 30, 2020 on approximately $191$727 million in annualized in-force premiums. Claims reserve and assumption reviews. Our U.S. life insurance business will complete its annual review of long-term care insurance claim reserve assumptions and complete its loss recognition and cash flow testing as well as assumption reviews in the fourth quarter of 2020. The review of assumptions in our long-term care insurance business 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. The review of assumptions in our life insurance business will focus on assumptions for interest rates, persistency and mortality.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. On August 24, 2020, Genworth Financial Mortgage Insurance Pty Limited redeemed AUD$5 million of its floating rate subordinated notes due in July 2025 and paid accrued interest thereon. On October 6, 2020, the remaining floating rate subordinated notes due in July 2025 of AUD$48 million were redeemed.Redemption of Genworth Holdings’ June 2020 senior notes. 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.
Repurchase of Genworth Holdings’ 2021 senior notes. During the second quarter ofnine months ended September 30, 2020, Genworth Holdings repurchased $52$84 million principal amount of its senior notes with 2021 maturity dates for a
| pre-tax
gain of $3 million. In March 2020, Genworth Holdings also repurchased $14 million principal amount of its senior notes with 2021 maturity dates for apre-tax
gain of $1 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 maturity. 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. For additional details related to Genworth Holdings’ liquidity in relation to its contractual obligations, see note 1 to our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” and “Item 2—Liquidity and Capital Resources.” Financial Strength Ratings On September 4, 2020, A.M. Best Company, Inc. (“A.M. Best”) affirmed the financial strength ratings of our principal life insurance subsidiaries, 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 and Genworth Holdings and provided a stable outlook. On May 15, 2020, Moody’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 (“Genworth Australia”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 Genworth Australia’sGFMIPL’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 Genworth AustraliaGFMIPL but revised their outlook to negative from stable on May 15, 2020. On April 18, 2020, we notified S&P and 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 (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 iswas in a current staterecession. During the third quarter of recession.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 global 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 the economic recovery is slow or delayed. 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 JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 30, 2019 The following table sets forth the consolidated results of operations for the periods indicated: | | | | | | | | | | | | | | | | | | | Three months ended June 30, | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,019 | | | $ | 1,001 | | | $ | 18 | | | | 2 | % | | | | 786 | | | | 816 | | | | (30 | ) | | | (4 | )% | Net investment gains (losses) | | | 159 | | | | (46 | ) | | | 205 | | | | NM | (1) | Policy fees and other income | | | 174 | | | | 223 | | | | (49 | ) | | | (22 | )% | | | | | | | | | | | | | | | | | | | | | 2,138 | | | | 1,994 | | | | 144 | | | | 7 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 1,486 | | | | 1,251 | | | | 235 | | | | 19 | % | | | | 139 | | | | 146 | | | | (7 | ) | | | (5 | )% | Acquisition and operating expenses, net of deferrals | | | 223 | | | | 229 | | | | (6 | ) | | | (3 | )% | Amortization of deferred acquisition costs and intangibles | | | 93 | | | | 84 | | | | 9 | | | | 11 | % | | | | 5 | | | | — | | | | 5 | | | | NM | (1) | | | | 44 | | | | 60 | | | | (16 | ) | | | (27 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 1,990 | | | | 1,770 | | | | 220 | | | | 12 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 148 | | | | 224 | | | | (76 | ) | | | (34 | )% | Provision for income taxes | | | 46 | | | | 66 | | | | (20 | ) | | | (30 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 102 | | | | 158 | | | | (56 | ) | | | (35 | )% | Income (loss) from discontinued operations, net of taxes | | | (520 | ) | | | 60 | | | | (580 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | (418 | ) | | | 218 | | | | (636 | ) | | | NM | (1) | Less: net income from continuing operations attributable to noncontrolling interests | | | 23 | | | | 15 | | | | 8 | | | | 53 | % | Less: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | 35 | | | | (35 | ) | | | (100 | )% | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (441 | ) | | $ | 168 | | | $ | (609 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | $ | 79 | | | $ | 143 | | | $ | (64 | ) | | | (45 | )% | Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders | | | (520 | ) | | | 25 | | | | (545 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (441 | ) | | $ | 168 | | | $ | (609 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 $37$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. 95Our 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 decreased $1$6 million. Our long-term care insurance business increased $9 million largely from $31$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 $10$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 $18 million predominantly from portfolio seasoning and lower policy cancellations in the current year. The three months ended June 30, 2020 included a decrease of $7 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 or impairment of our investments, unrealized and realized gains and losses from our equity and trading securities and derivative instruments. For discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.” Policy fees and other income.
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 $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 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 $228$22 million largely from $170higher 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. Amortization of DAC and intangibles consists primarily of the amortization of acquisition costs that are capitalized, PVFP and capitalized software. The decrease was predominantly related to our Runoff segment largely related to lower DAC amortization in our variable annuity products principally due to favorable equity market performance in the current year.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. The effective tax rate increased to 25.6% for the three months ended September 30, 2020 from 19.9% for the three months ended September 30, 2019. The increase 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 related to foreign operations and forward starting swaps settled prior to the enactment of the Tax Cuts and Jobs Act (“TCJA”), which are tax effected at 35% as they are amortized into net investment income.Net income attributable to noncontrolling interests . Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties. The increase was predominantly related to net investment gains in the current year compared to net investment losses in the prior year.
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 $2 million. Our long-term care insurance business increased $32 million largely 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). 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.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.
The current year also included additional COVID-19 and strengthening of existing reserves of $28 million for incurred but not reported delinquencies that are expected to be reported in the future. 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 current yearWe also reflectedexperienced lower net benefits from cures and aging of existing delinquencies.delinquencies in the current year. The prior year included a $10 million favorable reserve adjustment mostly associated with lower expected claim rates. Our Australia Mortgage Insurance segment increased $13 million primarily from loss reserve strengthening of $18 million reflecting the economic impacts caused byCOVID-19,
including a provision for incurred but not reported losses on loans in payment deferral programs, partially offset by favorable aging of existing delinquencies in the current year. The three months ended June 30, 2020 included a decrease of $4 million attributable to changes in foreign exchange rates.Our U.S. Life Insurance segment increased $2$59 million. Our long-term care insurance business decreased $20$34 million primarily due to an increase in claim and policy terminations driven mostly by higher mortality in the current year and from favorable development on prior year incurred but not reported claims. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $37$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 $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. Our life insurance business increased $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 the current year compared to the prior year attributable in part to COVID-19. Our fixed annuities business decreased $53 million principally from $39 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.
| 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 thein-force
block (including higher frequency of new claims), higher incremental reserves of $43 million recorded in connection with an accrual for profits followed by losses and higher severity of new claims in the current year. The decrease was also partially offset by $15 million of a less favorable impact from reduced benefits in the current year related toin-force
rate actions approved and implemented. Our life insurance business increased $45Our Runoff segment increased $9 million primarily attributable to higher reserves in our10-year
term universal life insurance block entering its post-level premium period during the premium grace period and from higher mortality in our universal life insurance products in the current year compared to the prior year attributable in part toCOVID-19.
Our fixed annuities business decreased $23 million principally from favorable reserve changes in fixed indexed annuities driven by favorable equity market changes in the current year and higher mortality in our single premium immediate annuity products. The prior year also included $5 million of higher reserves associated with loss recognition testing in our single premium immediate annuity products that did not recur. |
Our Runoff segment decreased $9 million primarily attributable to lower guaranteed minimum death benefit (“GMDB”) reserves in our variable annuity products due to less favorable equity market performance in the current year.
Our Australia Mortgage Insurance segment increased $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. Corporate and Other activities decreased $13 million mainly driven by lower employee-related and operating expenses, as well as a $3 million gain related to a repurchase of Genworth Holdings’ senior notes originally scheduled to mature in 2021.
Our U.S. Mortgage Insurance segment increased $3$10 million primarily attributable to higher operating costs driven mostly by increased sales in the current year. Amortization of deferred acquisition costs and 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 $16 million. Our long-term care insurance business decreased $5 million primarily related to higher persistency on policies that are not on active claim. Our life insurance business increased $25 million principally from higher lapses primarily associated with our large20-year
term life insurance block entering its post-level premium period, higher amortization primarily reflecting our updated assumptions from our annual review completed in the fourth quarter of 2019 and higher reinsurance rates. Our fixed annuities business decreased $4 million largely related to favorable equity market changes, partially offset by higher lapses in the current year.Our Runoff segment decreased $5 million mainly related to lower DAC amortization in our variable annuity products principally due to favorable equity market performance in the current year.
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 remaining 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 $12 million largely driven by the early redemption of Genworth Holdings’ senior notes originally scheduled to mature in June 2020.Provision for income taxes.
The effective tax rate increased to 31.1% for the three months ended June 30, 2020 from 29.5% for the three months ended June 30, 2019. The increase in the effective tax rate was primarily attributable to tax expense on forward starting swaps settled prior to the enactment of the Tax Cuts and Jobs Act (“TCJA”), which are tax effected at 35% as they are amortized into net investment income, in relation to lowerpre-tax
income in the current year. The increase was also attributable to a higher tax expense related to foreign operations andnon-deductible
goodwill recorded in the current year.Net income attributable to noncontrolling interests
. Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties. The increase was predominantly related to higher net investment gains in the current year.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table sets forth the consolidated results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | Increase (decrease) and percentage change | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2,034 | | | $ | 1,989 | | | $ | 45 | | | | 2 | % | | | | 1,579 | | | | 1,610 | | | | (31 | ) | | | (2 | )% | Net investment gains (losses) | | | 7 | | | | 29 | | | | (22 | ) | | | (76 | )% | Policy fees and other income | | | 355 | | | | 410 | | | | (55 | ) | | | (13 | )% | | | | | | | | | | | | | | | | | | | | | 3,975 | | | | 4,038 | | | | (63 | ) | | | (2 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 2,847 | | | | 2,533 | | | | 314 | | | | 12 | % | | | | 280 | | | | 293 | | | | (13 | ) | | | (4 | )% | Acquisition and operating expenses, net of deferrals | | | 472 | | | | 466 | | | | 6 | | | | 1 | % | Amortization of deferred acquisition costs and intangibles | | | 209 | | | | 165 | | | | 44 | | | | 27 | % | | | | 5 | | | | — | | | | 5 | | | | NM | (1) | | | | 96 | | | | 120 | | | | (24 | ) | | | (20 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 3,909 | | | | 3,577 | | | | 332 | | | | 9 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 66 | | | | 461 | | | | (395 | ) | | | (86 | )% | Provision for income taxes | | | 36 | | | | 135 | | | | (99 | ) | | | (73 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 30 | | | | 326 | | | | (296 | ) | | | (91 | )% | Income (loss) from discontinued operations, net of taxes | | | (520 | ) | | | 122 | | | | (642 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | (490 | ) | | | 448 | | | | (938 | ) | | | NM | (1) | Less: net income from continuing operations attributable to noncontrolling interests | | | 17 | | | | 35 | | | | (18 | ) | | | (51 | )% | Less: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | 71 | | | | (71 | ) | | | (100 | )% | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (507 | ) | | $ | 342 | | | $ | (849 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | $ | 13 | | | $ | 291 | | | $ | (278 | ) | | | (96 | )% | Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders | | | (520 | ) | | | 51 | | | | (571 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (507 | ) | | $ | 342 | | | $ | (849 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | |
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%.
|
Our U.S. Mortgage Insurance segment increased $69 million mainly attributable to higher insurancein-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.
Our U.S. Life Insurance segment increased $8 million. Ourmillion driven by our long-term care insurance business increased $23 million largelyprincipally from $65 million of increased premiumshigher commissions and premium taxes in the current year fromin-force
rate actions approved and implemented, partially offset by policy terminations and policies enteringpaid-up
status in the current year. Our life insurance business decreased $15 million mainly attributable to the continued runoff of our term life insurance products in the current year.Our Australia Mortgage Insurance segment decreased $32 million predominantly from portfolio seasoning and lower policy cancellations in the current year. The six months ended June 30, 2020 included a decrease of $11 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).
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.
The decrease was principally related to our U.S. Life Insurance segment 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 insurancein-force
and higher ceded reinsurance costs in the current year.Benefits and other changes in policy reserves
Our U.S. Mortgage Insurance segment increased $231 million largely from $170 million of losses from new delinquencies driven primarily by a significant increase in borrower forbearance as a result ofCOVID-19.
The current year also included additional reserves of $28 million for incurred but not reported delinquencies that are expected to be reported in the future. 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 current year also reflected lower net benefits from cures and aging of existing delinquencies. The prior year included a $10 million favorable reserve adjustment mostly associated with lower expected claim rates.our in-force rate action plan.Our U.S. Life Insurance segment increased $63 million. Our long-term care insurance business decreased $19 million primarily due to an increase in claim and policy terminations driven mostly by higher mortality, a higher favorable impact of $19 million from reduced benefits in the current year related toin-force
rate actions approved and implemented, a 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. Given the lower new claim counts submitted duringCOVID-19,
incurred but not reported reserves were strengthened by $37 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 thein-force
block (including higher frequency of new claims), higher incremental reserves of $82 million recorded in connection with an accrual for profits followed by losses and higher severity of new claims in the current year. Our life insurance business increased $105 million primarily attributable to higher reserves in our10-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 attributable in part toCOVID-19.
Our fixed annuities business decreased $23 million principally from $22 million of unfavorable charges in connection with loss recognition testing in our single premium immediate annuity products in the prior year that did not recur.
Our Runoff segment increased $10 million primarily attributable to higher GMDB reserves in our variable annuity products due to unfavorable equity market performance in the current year.
Our Australia Mortgage Insurance segment increased $9 million primarily from loss reserve strengthening of $18 million in the second quarter of 2020 reflecting the economic impacts caused byCOVID-19,
including a provision for incurred but not reported losses on loans in payment deferral programs, partially offset by favorable aging of existing delinquencies in the current year. The six months ended June 30, 2020 included a decrease of $5 million attributable to changes in foreign exchange rates.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
Our U.S. Mortgage Insurance segment increased $7 million primarily attributable to higher operating costs driven mostly by increased sales in the current year.
Corporate and Other activities decreased $8$10 million mainly driven by lower operating expenses and a $3$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 in the current year. Amortization of deferred acquisition costs and intangibles Our U.S. Life Insurance segment increased $37$35 million. 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 $42$44 million principally from higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period in the current year and higher reinsurance rates. Our Runoff segment increased $10$4 million mainly related to higher DAC amortization in our variable annuity products principally from unfavorableless favorable equity market performance in the current year. 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 remainingfull amount of goodwill related to our mortgage insurance business in Australia. Corporate and Other activities decreased $19$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 for income taxes. The effective tax rate increased to 54.5%28.6% for the sixnine months ended JuneSeptember 30, 2020 from 29.3%26.6% for the sixnine months ended JuneSeptember 30, 2019. The increase in the effective tax rate 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 TCJA, which are tax effected at 35% as they are amortized into net investment income, in relation to lowerpre-tax
income in the current year. The increase was also attributable to a higher tax expense related to foreign operations,non-deductible
goodwill and higher stock-based compensation in the current year.income.Net income attributable to noncontrolling interests . The decrease was predominantly related to lower premiums higher losses and lower net investment income, partially offset by higher net investment gains 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: | | | | | | | | | | | | | | | | | | | Three months ended June 30, | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (441 | ) | | $ | 168 | | | $ | (507 | ) | | $ | 342 | | Add: net income from continuing operations attributable to noncontrolling interests | | | 23 | | | | 15 | | | | 17 | | | | 35 | | Add: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | 35 | | | | — | | | | 71 | | | | | | | | | | | | | | | | | | | | | | (418 | ) | | | 218 | | | | (490 | ) | | | 448 | | Less: income (loss) from discontinued operations, net of taxes | | | (520 | ) | | | 60 | | | | (520 | ) | | | 122 | | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 102 | | | | 158 | | | | 30 | | | | 326 | | Less: net income from continuing operations attributable to noncontrolling interests | | | 23 | | | | 15 | | | | 17 | | | | 35 | | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | 79 | | | | 143 | | | | 13 | | | | 291 | | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (1) | | | (131 | ) | | | 43 | | | | (16 | ) | | | (28 | ) | Goodwill impairment, net (2) | | | 3 | | | | — | | | | 3 | | | | — | | (Gains) losses on early extinguishment of debt, net | | | (3 | ) | | | — | | | | 9 | | | | — | | Expenses related to restructuring | | | 1 | | | | — | | | | 2 | | | | 4 | | | | | 30 | | | | (8 | ) | | | 1 | | | | 6 | | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (21 | ) | | $ | 178 | | | $ | 12 | | | $ | 273 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 JuneSeptember 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(4)$1 million and $(3) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $32$12 million and $—,$(4) million, respectively. For the sixnine months ended JuneSeptember 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(15)$(14) million and $(5)$(8) million, respectively, and adjusted for net investment gains (losses) attributable to noncontrolling interests of $6$18 million in both periods.and $2 million, respectively. |
(2) | For the three and sixnine months ended JuneSeptember 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’ 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. These transactions were excluded from adjusted operating income (loss) for the periods 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. During the second and first quarters of 2020, we repurchased $52 million and $14 million, respectively, principal amount of Genworth Holdings’ senior notes with 2021 maturity dates for apre-tax
gain of $3 million and $1 million, respectively. In January 2020, we paid apre-tax
make-whole expense of $9 million related to the early redemption of Genworth Holdings, Inc.’s 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 outstandingnon-recourse
funding obligations originally due in 2050 resulting in
apre-tax
loss of $4 million from thewrite-off
of deferred borrowing costs. These transactions were excluded from adjusted operating income (loss) for the periods presented as they relate to gains (losses) on the early extinguishment of debt.We recorded a pre-tax expense of $1 million and $2 million for the three and six months ended June 30, 2020, respectively, and $4 million for the sixnine months ended JuneSeptember 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: | | | | | | | | | | | | | | | | | | | Three months ended June 30, | | | | | (Amounts in millions, except per share amounts) | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | | | | | | | | | $ | 0.16 | | | $ | 0.29 | | | $ | 0.03 | | | $ | 0.58 | | | | | | | | | | | | | | | | | | | | | $ | 0.15 | | | $ | 0.28 | | | $ | 0.03 | | | $ | 0.57 | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | | | | | | | | | $ | (0.87 | ) | | $ | 0.33 | | | $ | (1.00 | ) | | $ | 0.68 | | | | | | | | | | | | | | | | | | | | | $ | (0.86 | ) | | $ | 0.33 | | | $ | (0.99 | ) | | $ | 0.67 | | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share: | | | | | | | | | | | | | | | | | | | $ | (0.04 | ) | | $ | 0.35 | | | $ | 0.02 | | | $ | 0.54 | | | | | | | | | | | | | | | | | | | | | $ | (0.04 | ) | | $ | 0.35 | | | $ | 0.02 | | | $ | 0.54 | | | | | | | | | | | | | | | | | | | Weighted-average common shares outstanding: | | | | | | | | | | | | | | | | | | | | 505.4 | | | | 503.4 | | | | 504.8 | | | | 502.3 | | | | | | | | | | | | | | | | | | | | | | 512.5 | | | | 508.7 | | | | 511.1 | | | | 508.7 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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; the inventory of unsold homes; loan modification and other servicing efforts; and litigation, among other items. The United States economy and consumer 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 experienced 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
COVID-19
has continued to disrupt4.6 million from a peak of 18.1 million in April 2020, but the global economy, financial markets, business operations and consumer behavior and confidence acrossnumber of permanent job losses increased to 3.8 million. In addition, the globe. In the U.S., while all states have been impacted byCOVID-19,
certain geographies have been disproportionately impacted either through the spreadnumber of the virus or the severity of the mitigation steps takenlong term unemployed over 26 weeks increased to control its spread. Economic activity in the U.S. slowed further in the second quarter of 2020 and unemployment remains elevated. Gross domestic product reflected a material decrease in the second quarter of 2020 as over 17 million American workers were unemployed through July 2020.2.4 million. Specific to housing, mortgage origination activity remained resilientrobust in the secondthird quarter of 2020 fueled by refinance activity given prevailing low interest rates.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 fromduring the onsetsecond quarter of the crisis through May 2020, the purchase market improved in Junethe third quarter of 2020 with sales of previously owned homes increasing 21% month-over-month and inventories declining from 4.8 months to 4 months. The pandemic has affected our second quarter of 2020 financial results primarily through increased borrower uptake of forbearance options, as discussed below, many of which resulted in a new delinquency, increased overall new delinquencies, emerging performance deterioration of existing delinquencies, higher losses and loss reserves and incremental PMIERs capital requirements as37% compared to the first quarter of 2020. In addition, we experienced a material decline in persistency in the second quarter of 2020 and inventories declined from low interest rates.4.1 months to 3.3 months. The pandemic continued to affect our financial results in the third quarter of 2020 but to a lesser extent than the second quarter of 2020 as primarily evidenced by the elevated, but declining, servicer reported forbearance and new delinquencies during the third quarter of 2020.The impact of the developingCOVID-19 pandemic on our future business results is difficult to predict. We have performed extensiveand have periodically revised our scenario planning to help us better understand and tailor our actions to help mitigate the potential 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. Equally importantOf 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, spread 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 pandemic. Given the potential forthat current forbearance plans to extendmay be extended up to a year, the ultimate resolution as a cure or claim forof a delinquency in a forbearance 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, and is difficult to estimate.longer. We are continuing to monitor COVID-19 developments, regulatory and government actions, 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 business, including our results of operations and financial condition. Specific to housing finance, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act requires mortgage servicers to provide up to 180 days of deferred or reduced payments (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 that 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 extended similar relief to their respective portfolios of loans. The Federal Housing Finance Agency (“FHFA”) extended the foreclosure moratorium until Augustat 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. Many servicers have updated and improved their reporting to private mortgage insurers for when a loan is covered by forbearance. Servicer reported forbearance slowed meaningfully during the current quarterbeginning in June 2020 and ended the secondthird quarter of 2020 with approximately 7.7%6.7% or 68,80061,183 of our active primary policies on mortgage insurance written on prime-based, individually underwritten residential mortgage loans (“flow insurance”) reported in a forbearance plan, of which approximately 62%63% were reported as delinquent.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. 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 expiresexpired 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. Estimated mortgage origination volume increased during the secondthird quarter of 2020 compared to the secondthird quarter of 2019 primarily as lower interest rates resulted in higher refinance origination volumes. The estimated private mortgage insurance available market increased driven by higher refinance originations and higher purchase market penetration. Our flow persistency declined to 60% during the second quarter of 2020 compared to 82% during the second quarter of 2019. Given the volume to date, we now expect mortgage originations to remain strong for the second halfremainder of 2020 fueled by sustained low interest rates driving refinances and by continued strength in the purchase originations market. Our primary persistency declined to 60% during the third quarter of 2020 compared to 75% during the third quarter of 2019. Lower persistency is impacting business performance trends in several ways including, but not limited to, offsetting insurance in-force growth from new insurance written, elevating single premium policy cancellations along with single premiums earned and accelerating the amortization of our existing reinsurance transactions reducing their associated PMIERs capital credit in the current year. 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. 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. As a result, we raised prices duringWe made pricing adjustments in the secondthird quarter of 2020 taking into account improving market conditions, portfolio performance to align with our updated view of risk indate through the prevailing market conditions. We believe our pricing remains competitive. pandemic and competitive factors.New insurance written of $28.4$26.6 billion increased 80%41% in the secondthird quarter of 2020 compared to the secondthird quarter of 2019 primarily due to higher mortgage refinancing originations and a larger private mortgage insurance market as overall housing fundamentals remain strong and our higher estimated market share.market. Our U.S. mortgage insurance estimated market share for the secondthird quarter of 2020 was modestly lower compared to the firstsecond quarter of 2020. Our market share is influencedwas impacted by the execution of our go to market strategy, including but not limited to, the market adoption of GenRATEpricing competitiveness relative to our peers and our selective participation in forward commitment transactions. Our market share remains impacted by the negative ratings differential relative to our competitors, concerns expressed about Genworth’s financial condition and the proposed transaction with China Oceanwide and pricing competition.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 secondthird quarter of 2020 compared to the secondthird quarter of 2019 primarily from growth in our insurance in-force and from an increase in 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 experiencedcontinued to experience a significant increase in the number of reported delinquent loans during the secondthird quarter of 2020.2020 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 secondthird 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 secondthird quarter of 2020 forassociated with the increased number of delinquent loans was not significant to the change in earned premiums during the quarter.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. During the secondthird quarter of 2020, servicers also continued to remit premium on non-delinquent loans and therefore we did not experience a significant change to earned premiums. 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, 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 have taken advantage of available forbearance programs and payment deferral options. As a result, we have 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 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 rate at which delinquencies go to claim (“roll rate”)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 lossesloss ratio for the three months ended JuneSeptember 30, 2020 were $228 million with an associated loss ratio of 94%was 18% as compared to zero losses and a loss ratio of zero11% for the three months ended JuneSeptember 30, 2019. The increase in losses was driven by several factors. New flowlargely from higher new delinquencies increased materially in the second quarter of 2020 to 48,249 driven primarily by a significantan increase in borrower forbearance as a result of COVID-19. COVID-19, partially offset by favorable development on incurred but not reported delinquencies in the current year. Approximately 87%75% of our flowprimary new delinquencies in the secondthird quarter of 2020 were subject to a forbearance plan. New primary delinquencies of 16,664 contributed $170$61 million of loss expense for the three months ended JuneSeptember 30, 2020 calculated by applying a blended estimated roll rate between the estimate for existing early stage delinquencies and our past hurricane related roll rates, which were materially lower given the prior effectiveness of forbearance and government assistance programs. This compares to $28$29 million of loss expense from 7,5398,547 new flowprimary delinquencies for the three months ended JuneSeptember 30, 2019. Prior to COVID-19, traditional measures of credit quality, such as FICOFair 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 secondthird quarter of 2020 new delinquencies revealed that additional factors such as higher debt to income, geographiesgeographic regions more affected by the virus or with a higher concentration of affected industries, loan size, and servicer process differences rose in significance.
In addition to new delinquencies, losses in the second quarter of 2020 included a $28 million loss expense associated with incurred but not reported delinquencies, which are expected to be reported at a future date. We also strengthened reserves on existing delinquencies by an additional $28 million during the second quarter of 2020 driven primarily by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. This reserve strengthening compares to a favorable reserve adjustment of $10 million in the second quarter of 2019 mostly associated with lower expected claim rates. Lastly, the second quarter of 2020 loss expense reflects lower net benefits from cures and aging of existing delinquencies compared to the prior year.
As of JuneSeptember 30, 2020, GMICO’s 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 12.2:12.3:1, compared with a ratio of approximately 12.4:12.2:1 as of March 31,June 30, 2020 and 12.5:1 as of December 31, 2019. Thisratio remains below the NCDOI’s maximum ratio of 25:1. North Carolina’s calculation of excludes the 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 ratio in the short term as a result of COVID-19. GMICO’s ongoing 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 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 whichand 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 up to fourno longer than three calendar months frombeginning with the date ofmonth in which the initialloan became non-performing due to having missed payment absent a forbearance plan described in (ii) above.two monthly payments. The PMIERs amendmentsAmendment also imposeimposes 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 amendments imposePMIERs 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.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 JuneSeptember 30, 2020, our U.S. mortgage insurance business had estimated available assets of 143% of the$4,451 million against $3,377 million net required assets under PMIERs compared to 142%available assets of $4,218 million against $2,943 million net required assets as of March 31, 2020 and 138% as of December 31, 2019.June 30, 2020. The estimated sufficiency as of JuneSeptember 30, 2020 was $1,275$1,074 million of available assetsor 132% above the published PMIERs requirements, compared to $1,171$1,275 million or 143% above the published PMIERs requirements as of March 31, 2020 and $1,057 million as of December 31, 2019. The improvement inJune 30, 2020. PMIERs sufficiency as comparedis based on the published requirements applicable to March 31, 2020private 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 sufficiency was driven in part by business cash flows increasing PMIERs available assets, elevated lapsenew insurance written in the third quarter of existing business2020, partially offset by elevated lapses driven by prevailing low prevailing interest rates andrates. In addition, elevated lapses drove an increaseacceleration of the amortization of our existing reinsurance transactions reducing their PMIERs capital credit in reinsurance credit.the third quarter of 2020. These factors were partially offset by incremental new delinquencies driving higher PMIERs required assets and capital consumed by new insurance writtengrowth in business cash flows in the secondthird quarter of 2020. In addition, our second quarter of 2020 PMIERs required assets as of 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 an estimated $1,057$1,217 million of benefit to our second quarter ofSeptember 30, 2020 PMIERs required assets. As a resultassets compared to $1,057 million benefit as of the uncertainty regarding the impact ofJune 30, 2020. COVID-19
on our U.S. mortgage insurance business, we intend to preserve PMIERs available assets and defer the payment of dividends in 2020. The amount and timing of future dividends will depend on the economic recovery fromCOVID-19,
among other factors.Our credit risk transfer program provided an estimated aggregate of $1,043$777 million of PMIERs capital credit as of JuneSeptember 30, 2020. In the second quarter ofOn October 22, 2020 we completed an aggregateobtained $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 providing up to $300 million of reinsurance coverage on our 2009 to 2019 book years that is intended to provide PMIERs capital credit for elevated delinquencies as result ofCOVID-19.
Our secondin the third quarter of 2020, our PMIERs sufficiency includes an estimated $180would have increased to $1,424 million of capital credit from this transaction.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 thatThe 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 (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 United 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 credit risk transfer transactions may be more difficult to execute, if possible at all, and may have a higher cost during and followingdividends will depend on the pandemic.economic recovery from COVID-19, among other factors. As 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 provide thatalso include a temporary category (the “QM Patch”) for mortgages that comply with certain prohibitions and limitations and meet the GSE underwriting and product guidelinesguidelines. Mortgages that meet these requirements are deemed to be QMs (the “GSE Patch”) until the earlier of whenthe time in which the GSEs exit FHFA conservatorship or January 10, 2021. The GSEQM 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 GSEQM 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 GSEQM 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 proposed amendmentsfinal QM Rule will include, when/when or if theyit 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 JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 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 June 30, | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 243 | | | $ | 206 | | | $ | 37 | | | | 18 | % | | | | 31 | | | | 28 | | | | 3 | | | | 11 | % | Net investment gains (losses) | | | (1 | ) | | | — | | | | (1 | ) | | | NM | (1) | Policy fees and other income | | | 1 | | | | 1 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | | | | 274 | | | | 235 | | | | 39 | | | | 17 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 228 | | | | — | | | | 228 | | | | NM | (1) | Acquisition and operating expenses, net of deferrals | | | 47 | | | | 44 | | | | 3 | | | | 7 | % | Amortization of deferred acquisition costs and intangibles | | | 4 | | | | 4 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 279 | | | | 48 | | | | 231 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | (5 | ) | | | 187 | | | | (192 | ) | | | (103 | )% | Provision (benefit) for income taxes | | | (1 | ) | | | 40 | | | | (41 | ) | | | (103 | )% | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | (4 | ) | | | 147 | | | | (151 | ) | | | (103 | )% | Adjustments to income (loss) from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | 1 | | | | — | | | | 1 | | | | NM | (1) | | | | — | | | | — | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (3 | ) | | $ | 147 | | | $ | (150 | ) | | | (102 | )% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 (loss) available to Genworth Financial, Inc.’s common stockholders The decrease to an adjustedAdjusted operating lossincome available to Genworth Financial, Inc.’s common stockholders increased primarily from higher premiums mainly attributable to higher insurance in-force and an increase in 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 from adjusted operating income in the prior year was primarily attributable toyear. These increases were partially offset by higher losses largely from new delinquencies driven in large partprimarily by a significantan increase in borrower forbearance and unfavorable reserve adjustments as a result of COVID-19. These decreases were partially offset by higher premiums 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 $170 million of losses fromhigher new delinquencies driven primarily by a significantan increase in borrower forbearance as a result of COVID-19.
The current year also included additional reserves of $28 million for incurred but not reported delinquencies that are expected to be reported in the future. 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 current year also reflected COVID-19 and lower net benefits from cures and aging of existing delinquencies. The prior year included a $10delinquencies, partially offset by favorable development of $23 million favorable reserve adjustment mostly associated with lower expected claim rates.on incurred but not reported delinquencies established in the 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 (benefit) for income taxes. The effective tax rate was 26.6% and 21.3% for both the three months ended JuneSeptember 30, 2020 and 2019, respectively. The increase was driven by apre-tax
loss inconsistent with the current year compared topre-tax U.S. corporate federal income in the prior year.tax rate.
SixNine Months Ended JuneSeptember 30, 2020 Compared to SixNine Months Ended JuneSeptember 30, 2019 The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 469 | | | $ | 400 | | | $ | 69 | | | | 17 | % | | | | 64 | | | | 56 | | | | 8 | | | | 14 | % | Net investment gains (losses) | | | (1 | ) | | | — | | | | (1 | ) | | | NM | (1) | Policy fees and other income | | | 3 | | | | 2 | | | | 1 | | | | 50 | % | | | | | | | | | | | | | | | | | | | | | 535 | | | | 458 | | | | 77 | | | | 17 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 247 | | | | 16 | | | | 231 | | | | NM | (1) | Acquisition and operating expenses, net of deferrals | | | 97 | | | | 90 | | | | 7 | | | | 8 | % | Amortization of deferred acquisition costs and intangibles | | | 8 | | | | 8 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 352 | | | | 114 | | | | 238 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 183 | | | | 344 | | | | (161 | ) | | | (47 | )% | Provision for income taxes | | | 39 | | | | 73 | | | | (34 | ) | | | (47 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 144 | | | | 271 | | | | (127 | ) | | | (47 | )% | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | 1 | | | | — | | | | 1 | | | | NM | (1) | | | | — | | | | — | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 145 | | | $ | 271 | | | $ | (126 | ) | | | (46 | )% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 and unfavorable reserve adjustments as a result of COVID-19. 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 in the current year.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 $170$231 million of losses from new delinquencies driven primarily by a significant increase in borrower forbearance as a result of COVID-19.
The current year also included additional COVID-19 and strengthening of existing reserves of $28 million for incurred but not reported delinquencies that are expected to be reported in the future. 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 current yearWe also reflectedexperienced lower net benefits from cures and aging of existing delinquencies.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. The effective tax rate was 21.1% and 21.3% for the sixnine months ended JuneSeptember 30, 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 tables set forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Primary insurance in-force (1) | | $ | 207,400 | | | $ | 178,500 | | | $ | 28,900 | | | | 16 | % | | | $ | 50,000 | | | $ | 43,100 | | | $ | 6,900 | | | | 16 | % |
| | | | | | | | | | | | | | | | | | | | | | 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 28,400 | | | $ | 15,800 | | | $ | 12,600 | | | | 80 | % | | $ | 46,300 | | | $ | 25,400 | | | $ | 20,900 | | | | 82 | % | | | $ | 217 | | | $ | 204 | | | $ | 13 | | | | 6 | % | | $ | 425 | | | $ | 397 | | | $ | 28 | | | | 7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 increased largely from $29.1 billion in higher flow insurancein-force,
which increased from $177.4 billion as of June 30, 2019 to $206.5 billion as of June 30, 2020 as a result of new insurance written, partially offset by lapses and cancellations as we experienced lower persistency during the current year. The increase in flow insurancein-force Primary persistency 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 June 30, 2019 to $0.9 billion as of June64% and 80% for the nine months ended September 30, 2020 fromand 2019, respectively. This decrease in persistency resulted in elevated single premium policy cancellations and lapses. In addition, riskin the current year. Risk in-force increased primarily as a result of higher flowprimary insurance in-force. Flow persistency was 67% and 84% for the six months ended June 30, 2020 and 2019, respectively.For the three and sixnine months ended JuneSeptember 30, 2020, new insurance written increased primarily due to higher mortgage refinancing originations and a larger private mortgage insurance market as overall housing fundamentals remain strong and our higher estimated market share.in the current year. Net premiums written for the three and sixnine months ended JuneSeptember 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 94 | % | | | — | % | | | 94 | % | | | 53 | % | | | 4 | % | | | 49 | % | Expense ratio (net earned premiums) | | | 21 | % | | | 24 | % | | | (3 | )% | | | 22 | % | | | 25 | % | | | (3 | )% | Expense ratio (net premiums written) | | | 23 | % | | | 24 | % | | | (1 | )% | | | 25 | % | | | 25 | % | | | — | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 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 increased for the three and six months ended JuneSeptember 30, 2020 largely from $170higher 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. 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 COVID-19.The current year also included additional
existing reserves of $28 million for incurred but not reported delinquencies that are expected to be reported in the future. 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 current yearWe also reflectedexperienced lower net benefits from cures and aging of existing delinquencies compared toin the priorcurrent year. The prior year included a $10 million favorable reserve adjustment mostly associated with lower expected claim rates, which reduced the loss ratio by five percentage points for the three months ended June 30, 2019.rates. The expense ratio (net earned premiums) for the three and sixnine months ended JuneSeptember 30, 2020 decreased mainly driven by higher net earned premiums, partially offset by higher operating costs in the current year.
The expense ratio (net premiums written) decreased for the three months ended JuneSeptember 30, 2020 largely due to higher net premiums written, partially offset by higher operating 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 904,753 | | | | 860,214 | | | | 818,358 | | | | | 53,894 | | | | 16,607 | | | | 15,482 | | Percentage of delinquent loans (delinquency rate) | | | 5.96 | % | | | 1.93 | % | | | 1.89 | % | | | | | | | | 894,715 | | | | 846,472 | | | | 806,739 | | | | | 53,372 | | | | 16,209 | | | | 15,070 | | Percentage of flow delinquent loans (delinquency rate) | | | 5.97 | % | | | 1.91 | % | | | 1.87 | % | | | | | | | | 10,038 | | | | 10,742 | | | | 11,619 | | | | | 522 | | | | 398 | | | | 412 | | Percentage of bulk delinquent loans (delinquency rate) | | | 5.20 | % | | | 3.71 | % | | | 3.55 | % | | | | | A minus and sub-prime loans in-force | | | 11,712 | | | | 12,792 | | | | 14,180 | | A minus and sub-prime delinquent loans | | | 2,470 | | | | 2,283 | | | | 2,367 | | Percentage of A minus and sub-prime delinquent loans (delinquency rate) | | | 21.09 | % | | | 17.85 | % | | | 16.69 | % | | | | | | | | | | | | | | | | | | | | | 3,818 | | | | 4,122 | | | | 4,331 | | | | | 151 | | | | 167 | | | | 177 | | Percentage of delinquent loans (delinquency rate) | | | 3.95 | % | | | 4.05 | % | | | 4.09 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | % |
(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 422 as of June 30, 2020, 348 as of December 31, 2019 and 347 as of June 30, 2019.
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Delinquency rates have increased primarily as a result of the rise in unemployment and the 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) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 43,044 | | | $ | 162 | | | $ | 2,687 | | | | 6 | % | | | | 7,404 | | | | 111 | | | | 388 | | | | 29 | % | | | | 2,924 | | | | 105 | | | | 147 | | | | 71 | % | | | | | | | | | | | | | | | | | | | | | 53,372 | | | $ | 378 | | | $ | 3,222 | | | | 12 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | (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) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,524 | | | $ | 27 | | | $ | 386 | | | | 7 | % | | | | 4,836 | | | | 78 | | | | 224 | | | | 35 | % | | | | 2,849 | | | | 99 | | | | 145 | | | | 68 | % | | | | | | | | | | | | | | | | | | | | | 16,209 | | | $ | 204 | | | $ | 755 | | | | 27 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | (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 flowprimary 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. | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 19 | % | | | 21 | % | | | 6.68 | % | | | 2.15 | % | | | 2.18 | % | | | | 18 | | | | 17 | | | | 7.24 | % | | | 1.36 | % | | | 1.22 | % | | | | 17 | | | | 14 | | | | 6.02 | % | | | 1.84 | % | | | 1.79 | % | | | | 12 | | | | 21 | | | | 8.01 | % | | | 2.72 | % | | | 2.87 | % | | | | 10 | | | | 6 | | | | 3.81 | % | | | 1.69 | % | | | 1.56 | % | | | | 10 | | | | 9 | | | | 4.97 | % | | | 1.91 | % | | | 1.79 | % | | | | 6 | | | | 5 | | | | 6.31 | % | | | 1.90 | % | | | 1.81 | % | | | | 5 | | | | 5 | | | | 5.22 | % | | | 1.92 | % | | | 1.95 | % | | | | 3 | | | | 2 | | | | 3.31 | % | | | 1.69 | % | | | 1.67 | % | | | | | | | | | | | | | | | | | | | | | | | | | 100 | % | | | 100 | % | | | 5.96 | % | | | 1.93 | % | | | 1.89 | % | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
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 $439$474 million as of JuneSeptember 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. |
(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. |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11 | % | | | 10 | % | | | 7.63 | % | | | 1.42 | % | | | 1.26 | % | | | | 7 | % | | | 7 | % | | | 7.30 | % | | | 2.02 | % | | | 1.86 | % | | | | 7 | % | | | 11 | % | | | 9.04 | % | | | 2.13 | % | | | 2.26 | % | | | | 5 | % | | | 12 | % | | | 8.90 | % | | | 3.00 | % | | | 3.12 | % | | | | 5 | % | | | 6 | % | | | 6.12 | % | | | 2.27 | % | | | 2.10 | % | | | | 4 | % | | | 3 | % | | | 5.59 | % | | | 1.10 | % | | | 0.90 | % | | | | 4 | % | | | 2 | % | | | 4.08 | % | | | 1.44 | % | | | 1.28 | % | | | | 4 | % | | | 3 | % | | | 5.46 | % | | | 2.15 | % | | | 2.24 | % | | | | 4 | % | | | 3 | % | | | 4.99 | % | | | 1.79 | % | | | 1.82 | % | | | | 3 | % | | | 2 | % | | | 4.01 | % | | | 1.84 | % | | | 1.69 | % |
| | | | | | | | | | | | | | | | | | | | | | |
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 $439$474 million as of JuneSeptember 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 JuneSeptember 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6.15 | % | | | 4.2 | % | | $ | 1,241 | | | | 0.6 | % | | $ | 231 | | | | 0.5 | % | | | | 5.47 | % | | | 30.2 | | | | 14,017 | | | | 6.8 | | | | 3,193 | | | | 6.4 | | | | | 4.23 | % | | | 2.7 | | | | 5,461 | | | | 2.6 | | | | 1,267 | | | | 2.5 | | | | | 4.46 | % | | | 3.1 | | | | 5,719 | | | | 2.8 | | | | 1,367 | | | | 2.7 | | | | | 4.16 | % | | | 5.1 | | | | 11,858 | | | | 5.7 | | | | 2,843 | | | | 5.7 | | | | | 3.89 | % | | | 9.2 | | | | 22,566 | | | | 10.9 | | | | 5,415 | | | | 10.8 | | | | | 4.25 | % | | | 11.5 | | | | 23,845 | | | | 11.5 | | | | 5,752 | | | | 11.5 | | | | | 4.77 | % | | | 12.9 | | | | 24,767 | | | | 11.9 | | | | 5,975 | | | | 12.0 | | | | | 4.25 | % | | | 18.4 | | | | 52,068 | | | | 25.1 | | | | 12,690 | | | | 25.4 | | | | | 3.58 | % | | | 2.7 | | | | 45,816 | | | | 22.1 | | | | 11,253 | | | | 22.5 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.29 | % | | | 100.0 | % | | $ | 207,358 | | | | 100.0 | % | | $ | 49,986 | | | | 100.0 | % | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 $439$474 million as of JuneSeptember 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 secondthird quarter of 2020, the Australian dollar weakenedstrengthened against the U.S. dollar compared to the secondthird 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. Australia continued to face the challenges ofhas made progress in containing the spread of COVID-19, and the resulting reduction of economic activityeconomy is in the second quarterearly stages of recovery, with the exception of Victoria, which had been in extended lockdown since June 2020. However,
many of the 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 created programs that allow affected homeownersborrowers the option to defer their mortgage repayments, without penalty, for a
period of up to six months. Under regulatory guidance, homeownersborrowers participating in these programs, unless previously delinquent, are reported as current during the deferral period. As of JuneSeptember 30, 2020, the business had been notified thatapproximately 31,000 insured loans in-force still participating in a deferral program, down from over 48,000 policies were participating in the deferral programs, whichas of June 30, 2020. This represents approximately 4%3% of our total policiesinsured loans in-force as of JuneSeptember 30, 2020. For many borrowers, the initialsix-month deferral period expiresexpired in September 2020; therefore, lender customers announced2020. Therefore, on July 8,September 22, 2020, a new phaseAPRA released guidance regarding treatment of support, allowing homeowners who are still impacted byCOVID-19
to extend their repayment deferrals for up to an additional four months. In response, our mortgage insurance business in Australia expanded itsCOVID-19
hardship policy to enable lenders to further support borrowersloans 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 has continued to expand its income support programs, broadening eligibility and allowing for continuedprovide support for those impacted byCOVID-19.
Additionally,incomes, jobs and businesses with additional measures announced in the government announced a new homebuilder program to provide eligible homeowners with grants for home builds and renovations to help drive economic activity.Federal Budget in October 2020. While the government programs and lender initiatives may lessen the effect of COVID-19 related losses to the business, uncertainties remain, as concerns aroundand it could take a resurgenceconsiderable amount of newCOVID-19
casestime for the economy to recover the lost output and recently reinstated business and social restrictions take effect.employment resulting from the 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. As of the MayAugust 2020 release of its Statement on Monetary Policy, the Reserve Bank of Australia (“RBA”) expectednoted that the Australian gross domestic productoutbreak of COVID-19 has caused the largest shock to economic activity in Australia since the 1930’s, with the peak to trough GDP decline over the first half of 2020 expected to have contracted considerablybeen around 7%. In addition, there have been large declines in employment and approximately 30% of the second quarter of 2020 as a result of significantly reduced domestic activity sincemid-March
2020 due toCOVID-19.
Thecountry’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 couldis expected to have long-lasting effects. Acknowledging in its Juneeffects on the economy. In October 2020, monetary policy release that its fiscal and monetary support will be required to help the economy for some time, the RBA maintained its current policy settings, including keeping its official cash rate at 0.25%. RBA’s governorThe RBA noted that itsit will maintain highly accommodative approach will be maintainedpolicy settings as long as required and that RBA’s Board 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 JuneSeptember 2020 unemployment rate increaseddecreased to 7.4%6.9% from 5.2%7.4% at the end of the firstsecond quarter of 2020 as the increase in the number of employed individuals were affected by job loss or reductionoutpaced an increase in hours dueparticipation. According to the impact ofCOVID-19.
This has been partially mitigated by government support programs, whichRBA, while labor conditions have reduced the participation rate. We expect thesomewhat improved, unemployment rateand underemployment are likely to remain high for the remainder of 2020 as a result ofCOVID-19.an extended period.
In the second quarterAs of September 30, 2020, home prices in the combined capital cities of Australia were approximately 9%5% higher compared to JuneSeptember 30, 2019. The Sydney and Melbourne housing markets weremarket was the main driversdriver of growth, with annual home price increases of 13% and 10%, respectively. Although home values climbed as compared to the prior year,approximately 8%. Despite this annual growth, in September 2020, the combined capital cities recorded a month-over-month home price decline in the month of June 2020 and July 2020 of approximately 1%. The long-term outlook for the Australianfifth consecutive month, largely due to decreases in Sydney and Melbourne. Due to COVID-19, the housing market outlook faces headwinds as fiscal support is largely dependent on the length ofCOVID-19 reduced and the speed of the economic recovery, along with how effective the various economic stimulus packages implemented by the Australian Government are in response to the pandemic. labor markets remain weak.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 secondthird 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 fromCOVID-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 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 infor the first halfnine months ended September 30, 2020. Results of 2020. The business conducted both its liability adequacy and premium deficiency tests conducted for AAS and U.S. GAAP, respectively, again in the secondthird quarter of 2020 with both resulting in nodid not indicate a deficiency and therefore, no further impact to its results.additional charges were recorded. Our mortgage insurance business in Australia had higherlower losses in the secondthird quarter of 2020 compared to the secondthird quarter of 2019 as 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 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, including 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. This estimateprograms, 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 increase in losses was partially offset by favorable aging of existing delinquencies in the current year. The loss ratio for our Australia mortgage insurance business for the three months ended JuneSeptember 30, 2020 was 63%37%. Due to COVID-19, our mortgage insurance business in Australia anticipates claims and reported delinquencies to increase toward the endas we move into 2021. In addition, until normal patterns of 2020delinquency development and possibly into 2021,progression return, we expect to continue to see increases in our incurred but not reported loss reserve provision, which could further materially impact losses. Despite the pandemic, ourOur mortgage insurance business in Australia continued to see higher mortgage origination volume from continued low interest rates and improving consumer confidence in the second quarter of 2020, resulting inhad higher new insurance written in the third quarter of 2020 compared to the secondthird quarter of 2019.2019 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 secondthird quarter of 2020 compared to the secondthird quarter of 2019 largely as a result of higher flow new insurance written. Conversely,written, while net earned premiums were lower in the second quarter of 2020 compared to the second 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 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 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 half 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. As such,While the termination of the contract with our second largest customer will reduce gross premiums written in 2021, it is expected to modestly impact ourfuture financial results following the expiration of the existing contract.contract in November 2020. One additional consideration related to our customer contracts is that some 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 additional ratings downgrades 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 Australian Prudential Regulation Authority (“APRA”)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 June��September 30, 2020, ourits estimated PCA ratio was approximately 177%179%,
representing a slight decreasean increase from 178%177% as of March 31,June 30, 2020. Given the economic uncertainty surrounding COVID-19, APRA has provided guidance to insurers asking them to maintain 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 or other returns of capital from our mortgage insurance business in Australia for the remainder of 2020. FutureThe amount and timing of future dividends will be subject todepend on the economic conditions and retaining a strong capital buffer,recovery from COVID-19, among other factors, and may require APRA approval. 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. As 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 June 30, 2021 fiscal year. The additional 10,000 guarantees are limited to new home builds, and a revised set of property price caps will apply.
Segment results of operations Three Months Ended JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 30, 2019 The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 62 | | | $ | 80 | | | $ | (18 | ) | | | (23 | )% | | | | 8 | | | | 15 | | | | (7 | ) | | | (47 | )% | Net investment gains (losses) | | | 66 | | | | 1 | | | | 65 | | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | 136 | | | | 96 | | | | 40 | | | | 42 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 39 | | | | 26 | | | | 13 | | | | 50 | % | Acquisition and operating expenses, net of deferrals | | | 18 | | | | 17 | | | | 1 | | | | 6 | % | Amortization of deferred acquisition costs and intangibles | | | 6 | | | | 9 | | | | (3 | ) | | | (33 | )% | | | | 5 | | | | — | | | | 5 | | | | NM | (1) | | | | 2 | | | | 2 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 70 | | | | 54 | | | | 16 | | | | 30 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 66 | | | | 42 | | | | 24 | | | | 57 | % | Provision for income taxes | | | 20 | | | | 13 | | | | 7 | | | | 54 | % | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 46 | | | | 29 | | | | 17 | | | | 59 | % | Less: net income from continuing operations attributable to noncontrolling interests | | | 23 | | | | 15 | | | | 8 | | | | 53 | % | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | 23 | | | | 14 | | | | 9 | | | | 64 | % | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (34 | ) | | | (1 | ) | | | (33 | ) | | | NM | (1) | | | | 3 | | | | — | | | | 3 | | | | NM | (1) | | | | 9 | | | | — | | | | 9 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 1 | | | $ | 13 | | | $ | (12 | ) | | | (92 | )% | | | | | | | | | | | | | | | | | |
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| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 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 JuneSeptember 30, 2020 and 2019, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $32 million.$12 million and $(4) million, respectively. |
(3) | For the three months ended June 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 and from lower net 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. The effective tax rate was 30.0% for the three months ended September 30, 2020 and 2019, consistent with our jurisdictional rate.Net income from continuing operations attributable to noncontrolling interests. The increase was predominantly related to net investment gains in the current year compared to net investment losses in the prior year.
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 by COVID-19 partially offset by favorable aging of existing delinquencies in the current year. Premiums decreased predominantly from portfolio seasoning and lower policy cancellations in the current year. The threenine months ended JuneSeptember 30, 2020 included a decrease of $7$9 million attributable to changes in foreign exchange rates. Net investment income decreased largely from lower yields in the current year. Net investment gains increased primarily from higher derivative gains in the current year compared to derivative losses in the prior year, as well asand higher net realized gains from the sale of investment securities in the current year. The threenine months ended JuneSeptember 30, 2020 included a decrease of $7$5 million attributable to changes in foreign exchange rates. Benefits and other changes in policy reserves increased primarily from loss reserve strengthening of $18$42 million during the second and third quarters of 2020 reflecting the economic impacts caused by COVID-19, including a provisionprovisions for incurred but not reported losses on loans in payment deferral programs,programs. These increases were partially offset by favorable aging of existing delinquencies in the current year. The threenine months ended JuneSeptember 30, 2020 included a decrease of $4$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 remainingfull amount of goodwill related to our mortgage insurance business in Australia. Provision for income taxes. The effective tax rate was 30.0% for the threenine months ended June 30, 2020 and 2019, consistent with our jurisdictional rate.Net income from continuing operations attributable to noncontrolling interests.
The increase was predominantly related to higher net investment gains in the current year.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 131 | | | $ | 163 | | | $ | (32 | ) | | | (20 | )% | | | | 18 | | | | 31 | | | | (13 | ) | | | (42 | )% | Net investment gains (losses) | | | 13 | | | | 13 | | | | — | | | | — | % | Policy fees and other income | | | 1 | | | | (1 | ) | | | 2 | | | | 200 | % | | | | | | | | | | | | | | | | | | | | | 163 | | | | 206 | | | | (43 | ) | | | (21 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 63 | | | | 54 | | | | 9 | | | | 17 | % | Acquisition and operating expenses, net of deferrals | | | 35 | | | | 34 | | | | 1 | | | | 3 | % | Amortization of deferred acquisition costs and intangibles | | | 14 | | | | 18 | | | | (4 | ) | | | (22 | )% | | | | 5 | | | | — | | | | 5 | | | | NM | (1) | | | | 3 | | | | 4 | | | | (1 | ) | | | (25 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 120 | | | | 110 | | | | 10 | | | | 9 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 43 | | | | 96 | | | | (53 | ) | | | (55 | )% | Provision for income taxes | | | 13 | | | | 29 | | | | (16 | ) | | | (55 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 30 | | | | 67 | | | | (37 | ) | | | (55 | )% | Less: net income from continuing operations attributable to noncontrolling interests | | | 17 | | | | 35 | | | | (18 | ) | | | (51 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations available to Genworth Financial, Inc.’s common stockholders | | | 13 | | | | 32 | | | | (19 | ) | | | (59 | )% | Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (7 | ) | | | (7 | ) | | | — | | | | — | % | | | | 3 | | | | — | | | | 3 | | | | NM | (1) | | | | 1 | | | | 2 | | | | (1 | ) | | | (50 | )% | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 10 | | | $ | 27 | | | $ | (17 | ) | | | (63 | )% | | | | | | | | | | | | | | | | | |
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%.
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(2) | For the six months ended June 30, 2020 and 2019, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $6 million in both periods.
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(3) | For the six months ended June 30, 2020, goodwill impairment was adjusted for the portion attributable to noncontrolling interests of $2 million.
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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, higher losses mostly associated with the economic impacts caused byCOVID-19
and lower net investment income in the current year.
Premiums decreased predominantly from portfolio seasoning and lower policy cancellations in the current year. The six months ended June 30, 2020 included a decrease of $11 million attributable to changes in foreign exchange rates.
Net investment income decreased largely from lower yields in the current year.
Benefits and other changes in policy reserves increased primarily from loss reserve strengthening of $18 million in the second quarter of 2020 reflecting the economic impacts caused byCOVID-19,
including a provision for incurred but not reported losses on loans in payment deferral programs, partially offset by favorable aging of existing delinquencies in the current year. The six months ended June 30, 2020 included a decrease of $5 million attributable to changes in foreign exchange rates.We recorded a goodwill impairment charge of $5 million in the current year, which represented the remaining amount of goodwill related to our mortgage insurance business in Australia.
Provision for income taxes.
The effective tax rate was 30.0% for the six months ended JuneSeptember 30, 2020 and 2019, consistent with our jurisdictional rate. Net income attributable to noncontrolling interests. The decrease was predominantly related to lower premiums higher losses and lower net investment income, partially offset by higher net investment gains in the current year. Australia Mortgage Insurance selected operating performance measures As of JuneSeptember 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 $162$168 million and $157$152 million of risk in-force as of JuneSeptember 30, 2020 and 2019, respectively. The following tables set forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Primary insurance in-force | | $ | 210,200 | | | $ | 215,600 | | | $ | (5,400 | ) | | | (3 | )% | | | $ | 73,200 | | | $ | 75,100 | | | $ | (1,900 | ) | | | (3 | )% |
| | | | | | | | | | | | | | | | | | | | | | Increase (decrease) and percentage change | | | | | | | | | | | | Primary insurance in-force | | $ | 215,800 | | | $ | 206,400 | | | $ | 9,400 | | | | 5 | % | | | $ | 75,200 | | | $ | 71,900 | | | $ | 3,300 | | | | 5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 4,500 | | | $ | 4,900 | | | $ | (400) | | | | (8) | % | | $ | 8,800 | | | $ | 8,800 | | | $ | — | | | | — | % | | | $ | 70 | | | $ | 58 | | | $ | 12 | | | | 21 | % | | $ | 132 | | | $ | 110 | | | $ | 22 | | | | 20 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 due to changes in foreign exchange rates and policy cancellations in the current year. Primary insurancein-force
and riskin-force
included decreases of $3.7 increased $12.5 billion and $1.3$4.4 billion, respectively, from changes inattributable to foreign exchange rates. Excluding the effects of changes in foreign exchange rates, newprimary insurance in-force and risk in-force decreased primarily driven by policy cancellations in the current year. New insurance written increased for the three and sixnine months ended JuneSeptember 30, 2020 primarily from higher lender customer flow mortgage origination volume from continuedsupported by ongoing low interest rates and improving consumer confidence,rates. The increase for the nine months ended September 30, 2020 was partially offset by lower bulkmortgage insurance written on a bulk basis (“bulk insurance”) in the current year. The three and six months ended June 30, 2020 included decreasesyear, as well as a decrease of $500$600 million and $700 million, respectively, 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 JuneSeptember 30, 2020 and December 31, 2019, our unearned premium reserves were $1.1 billion and $1.0 billion.billion, respectively. Net premiums written increased for the three and sixnine months ended JuneSeptember 30, 2020 primarily due to higher flow new insurance written from an increase in mortgage origination volume in the current year. The three and sixnine months ended JuneSeptember 30, 2020 included decreasesan increase of $8$2 million and $11a decrease of $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 June 30, | | | | | | Six months ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | 63 | % | | | 34 | % | | | 29 | % | | | 48 | % | | | 34 | % | | | 14 | % | Expense ratio (net earned premiums) | | | 47 | % | | | 33 | % | | | 14 | % | | | 41 | % | | | 32 | % | | | 9 | % | Expense ratio (net premiums written) | | | 41 | % | | | 44 | % | | | (3 | )% | | | 41 | % | | | 47 | % | | | (6 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 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, amortization of DAC and intangibles and goodwill impairment charges.
The loss ratio increased for the three and sixnine months ended JuneSeptember 30, 2020 primarily from loss reserve strengthening of $18 million in the second quarter of 2020 reflecting the economic impacts caused byCOVID-19,
including a provision for incurred but not reported losses on loans in payment deferral programs, partially offset by favorable aging of existing delinquencies in the current year. The increase was also attributable to lower premiums from portfolio seasoning and lower policy cancellations in the current year. The expense ratio (net earned premiums) increased for the three and sixnine months ended JuneSeptember 30, 2020 primarily from a goodwill impairment charge of $5 million in the current year and lower net earned premiums as discussed above. The expense ratio (net premiums written) decreased for the three and sixnine months ended JuneSeptember 30, 2020 primarily from higher net premiums written primarily due to an increase in flow mortgage origination volume, partially offset by a goodwill impairment charge of $5 million 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 | | 1,236,657 | | | 1,290,216 | | | 1,308,811 | | | | 1,193,072 | | | 1,290,216 | | | 1,293,961 | | | | 7,614 | | | 7,221 | | | 7,891 | | | | 7,422 | | | 7,221 | | | 7,713 | | Percentage of delinquent loans (delinquency rate) | | 0.62 | % | | 0.56 | % | | 0.60 | % | | | 0.62 | % | | 0.56 | % | | 0.60 | % | | | | 1,137,784 | | | 1,189,019 | | | 1,200,603 | | | | 1,096,679 | | | 1,189,019 | | | 1,192,282 | | | | 7,380 | | | 7,003 | | | 7,642 | | | | 7,171 | | | 7,003 | | | 7,469 | | Percentage of flow delinquent loans (delinquency rate) | | 0.65 | % | | 0.59 | % | | 0.64 | % | | | 0.65 | % | | 0.59 | % | | 0.63 | % | | | | 98,873 | | | 101,197 | | | 108,208 | | | | 96,393 | | | 101,197 | | | 101,679 | | | | 234 | | | 218 | | | 249 | | | | 251 | | | 218 | | | 244 | | Percentage of bulk delinquent loans (delinquency rate) | | 0.24 | % | | 0.22 | % | | 0.23 | % | | | 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 JuneSeptember 30, 2019 driven by cures and claims paid partially offset byexceeding new delinquencies exceeding cures.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. | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 27 | % | | 0.51 | % | | 0.42 | % | | 0.45 | % | | | 28 | % | | 0.50 | % | | 0.42 | % | | 0.45 | % | | | | 23 | | | 0.78 | % | | 0.75 | % | | 0.81 | % | | | 23 | | | 0.77 | % | | 0.75 | % | | 0.80 | % | | | | 23 | | | 0.46 | % | | 0.41 | % | | 0.45 | % | | | 23 | | | 0.49 | % | | 0.41 | % | | 0.43 | % | | | | 13 | | | 1.06 | % | | 1.00 | % | | 1.10 | % | | | 13 | | | 1.04 | % | | 1.00 | % | | 1.06 | % | | | | 6 | | | 0.70 | % | | 0.65 | % | | 0.68 | % | | | 6 | | | 0.69 | % | | 0.65 | % | | 0.69 | % | Australian Capital Territory | | | 3 | | | 0.27 | % | | 0.24 | % | | 0.25 | % | | | 3 | | | 0.25 | % | | 0.24 | % | | 0.26 | % | | | | 2 | | | 0.27 | % | | 0.29 | % | | 0.31 | % | | | 2 | | | 0.24 | % | | 0.29 | % | | 0.31 | % | | | | 2 | | | 0.03 | % | | 0.02 | % | | 0.02 | % | | | 1 | | | 0.05 | % | | 0.02 | % | | 0.02 | % | | | | 1 | | | 0.87 | % | | 0.71 | % | | 0.83 | % | | | 1 | | | 0.92 | % | | 0.71 | % | | 0.85 | % | | | | | | | | | | | | | | | | | | | | | | | 100 | % | | 0.62 | % | | 0.56 | % | | 0.60 | % | | | 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. Our U.S. life insurance businesses may also be impacted by continued elevated mortality or future changes in morbidity experience.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 andas well as volatility in equity markets have adversely impacted earnings in our fixed annuity products with limited offsetting benefit from higher mortality. Conversely, higher mortality rates could lower profitability in our life insurance products. In our long-term care insurance products, we have experienced some degree of higher mortality during COVID-19 which has had a favorable impact on 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 quarterand third quarters of 2020. We have experienced lower new claims incidence; however, we do not expect this to be permanent but rather a temporary reduction while and social distancing protocols are in effect. We have temporarily discontinued in-person assessments to assess eligibility for benefits, and are utilizing virtual assessments in the interim, with an in-person assessment to follow once social distancing protocols are relaxed. For claimants without the technology to perform virtual assessments, we have alternate options for gathering information. 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. 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 130
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 these delays. We continue to provide customer service to our policyholders during this uncertain time and are available to address questions or concerns regarding their policies. 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 have 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 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 comply with any new guidance issued by our state insurance regulators. For statutory reporting, we are currentlywere not required to non-admit premium receivables over 90 days if we arewere 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. We have also contacted our reinsurance counterparties to inform them of the actions we have taken in response to state bulletins on extension of grace periods and prohibition of lapsation as well as offering flexibility to our policyholders who are on claim. 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. 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 COVID-19, policies follow normal lapse or nonforfeiture options, if the policyholders decided not to pay their premiums. 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 131
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 conduct a detailed review of our claim reserve assumptions 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 or fourth quarter of each year. As part of loss recognition testing, we also review the recoverability of DAC and PVFP at least annually. In addition, we perform cash flow testing separately for each of our U.S. life insurance companies on a statutory accounting basis annually. We expect towill 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 2020. Our review of assumptions, as part of our testing in the fourth quarter of 2020, couldwill 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, against which we have consistently experienced favorable development overcounts. While this work is ongoing, current trends do not indicate a need to strengthen the last two years.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-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, in the second quarterand third quarters of 2020, elevated mortality in our long-term care insurance business and partial equity market recovery impacts on our variable annuity products favorably impacted 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 132
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 prior 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 JuneSeptember 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 JuneSeptember 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 JuneSeptember 30, 2020 compared to three months ended JuneSeptember 30, 2019, attributable 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 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. The extension of grace periods and reinstatements mandated by state regulators during COVID-19 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 JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 30, 2019 The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 712 | | | $ | 713 | | | $ | (1 | ) | | | — | % | | | | 692 | | | | 724 | | | | (32 | ) | | | (4 | )% | Net investment gains (losses) | | | 118 | | | | (36 | ) | | | 154 | | | | NM | (1) | Policy fees and other income | | | 142 | | | | 187 | | | | (45 | ) | | | (24 | )% | | | | | | | | | | | | | | | | | | | | | 1,664 | | | | 1,588 | | | | 76 | | | | 5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 1,213 | | | | 1,211 | | | | 2 | | | | — | % | | | | 97 | | | | 106 | | | | (9 | ) | | | (8 | )% | Acquisition and operating expenses, net of deferrals | | | 147 | | | | 142 | | | | 5 | | | | 4 | % | Amortization of deferred acquisition costs and intangibles | | | 83 | | | | 67 | | | | 16 | | | | 24 | % | | | | — | | | | 4 | | | | (4 | ) | | | (100 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 1,540 | | | | 1,530 | | | | 10 | | | | 1 | % | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 124 | | | | 58 | | | | 66 | | | | 114 | % | Provision for income taxes | | | 33 | | | | 19 | | | | 14 | | | | 74 | % | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 91 | | | | 39 | | | | 52 | | | | 133 | % | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (121 | ) | | | 35 | | | | (156 | ) | | | NM | (1) | Expenses related to restructuring | | | — | | | | (1 | ) | | | 1 | | | | 100 | % | | | | 25 | | | | (7 | ) | | | 32 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (5 | ) | | $ | 66 | | | $ | (71 | ) | | | (108 | )% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 JuneSeptember 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(3) million and $(1) 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | | | $ | 48 | | | $ | 37 | | | $ | 11 | | | | 30 | % | | | | (81 | ) | | | 10 | | | | (91 | ) | | | NM | (1) | | | | 28 | | | | 19 | | | | 9 | | | | 47 | % | | | | | | | | | | | | | | | | | | Total adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (5 | ) | | $ | 66 | | | $ | (71 | ) | | | (108 | )% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our long-term care insurance business increased $11$38 million primarily due to an increase in claim and policy terminations driven mostly by higher mortality in the current year, and from favorable development on prior year incurred but not reported claims. The increase was also attributable toclaims and higher premiums in the current year fromin-force
rate actions approved and implemented.net investment income. These increases were partially offset by higher frequency and severity of new claims in the current year. Our life insurance business had anThe adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $81in our life insurance business increased $44 million in the current year compared to adjusting operating income of $10 million in the prior year. The decrease from income in the prior year to a loss in the current year was 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 also included aan unfavorable adjustment of $10 million related to higher ceded reinsurance correction and refinement resulting in a net favorable impact of $17 million.rates. Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our fixed annuities business increased $9$21 million predominantly from favorable reserve changes and DAC amortization in fixed annuities products driven by favorable equity market changes$13 million of unfavorable charges related to loss recognition testing in the currentprior year that did not recur and higher mortality in our single premium immediate annuity products. These increases wereproducts, partially offset by lower net spreads and higher lapses in the current year. The prior year also included $4 million of unfavorable charges in connection with loss recognition testing in our single premium immediate annuity products that did not recur. Our long-term care insurance business increased $9 million largely from $31$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 $10$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 decreased $6increased $24 million largely from a loss onan increase in average invested assets. The increase was also attributable to higher income from limited partnerships and U.S. Government Treasury Inflation Protected securities in the current year compared to income in the prior year, partially offset by an increase in average invested assets and higher limited partnership incomeSecurities (“TIPS”) in the current year.
Our fixed annuities business decreased $23$18 million largely attributable to lower average invested assets due to block runoff and lower limited partnership income in the current year. Net investment gains (losses) The change toincrease in net investment gains in the current year in our long-term care insurance business from net investment losses in the prior year was primarily related to net gains from the sale of investmentU.S. government securities in the current year compareddue to net losses inportfolio rebalancing and asset exposure as a result of the prior year.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 compared to unrealized losses in the prior year. Our life insurance business had net investment gains of $5$4 million in the current year compared to net investment losses of $3$2 million in the prior year. The change to net investment gains in the current year from net 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. The effective tax rate was 23.3% and 51.4% for the three months ended September 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to higher expense in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA in relation to higher pre-tax income in the current year.
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 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 long-term care insurance business increased $32 million largely 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 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 life insurance business decreased $8 million principally related to lower average invested assets in the current year. Our fixed annuities business decreased $57 million largely attributable to lower average invested assets due to block runoff in the current year. Net investment gains (losses) Net investment gains in our long-term care insurance business increased $328 million predominantly related to net gains 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, partially offset by lower unrealized gains from changes in the fair value of equity securities in the current year. Net investment gains in our life insurance business increased $5 million predominantly from higher net gains from sale of investment securities in the current 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 decreased $20$34 million primarily due to an increase in claim and policy terminations driven mostly by higher mortality in the current year and from favorable development on prior year incurred but not reported claims. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $37$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 $43$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. The decrease was also partially offset by $15 million of a less favorable impact from reduced benefits in the current year related toin-force
rate actions approved and implemented.Our life insurance business increased $45$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 life insurance products in the current year compared to the prior year attributable in part to COVID-19. Our fixed annuities business decreased $23$53 million principally from favorable reserve changes in fixed indexed annuities driven by favorable equity market changes$39 million of unfavorable charges in the currentprior year that did not recur related to loss recognition testing and higher mortality in our single premium immediate annuity products. The prior year also included $5 million of higher reserves associated with loss recognition testingproducts in our single premium immediate annuity products that did not recur.the current year.
Interest credited.credited . 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. Acquisition 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 $5$6 million primarily related to higher persistency on policies that are not on active claim.
Our life insurance business increased $25$44 million principally from higher lapses primarily associated with our large 20-year term life insurance block entering its post-level premium period higher amortization primarily reflecting our updated assumptions from our annual review completed in the fourth quarter of 2019current year and higher reinsurance rates. Our fixed annuities business decreased $4 million largely related to favorable equity market changes, partially offset by higher lapses 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, partially offset by the write-off of $4 million in deferred borrowing costs in the current year. Provision for income taxes. The effective tax rate was 26.7%27.0% and 31.9%32.5% for the threenine months ended JuneSeptember 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to higher expense in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA in relation to higher pre-tax income in the current year.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,430 | | | $ | 1,422 | | | $ | 8 | | | | 1 | % | | | | 1,387 | | | | 1,425 | | | | (38 | ) | | | (3 | )% | Net investment gains (losses) | | | 48 | | | | 48 | | | | — | | | | — | % | Policy fees and other income | | | 286 | | | | 338 | | | | (52 | ) | | | (15 | )% | | | | | | | | | | | | | | | | | | | | | 3,151 | | | | 3,233 | | | | (82 | ) | | | (3 | )%�� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 2,510 | | | | 2,447 | | | | 63 | | | | 3 | % | | | | 197 | | | | 212 | | | | (15 | ) | | | (7 | )% | Acquisition and operating expenses, net of deferrals | | | 298 | | | | 290 | | | | 8 | | | | 3 | % | Amortization of deferred acquisition costs and intangibles | | | 170 | | | | 133 | | | | 37 | | | | 28 | % | | | | 5 | | | | 9 | | | | (4 | ) | | | (44 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 3,180 | | | | 3,091 | | | | 89 | | | | 3 | % | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | (29 | ) | | | 142 | | | | (171 | ) | | | (120 | )% | Provision for income taxes | | | 6 | | | | 43 | | | | (37 | ) | | | (86 | )% | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | (35 | ) | | | 99 | | | | (134 | ) | | | (135 | )% | Adjustments to income (loss) from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (54 | ) | | | (51 | ) | | | (3 | ) | | | (6 | )% | (Gains) losses on early extinguishment of debt | | | 4 | | | | — | | | | 4 | | | | NM | (1) | Expenses related to restructuring | | | — | | | | 3 | | | | (3 | ) | | | (100 | )% | | | | 10 | | | | 10 | | | | — | | | | — | % | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (75 | ) | | $ | 61 | | | $ | (136 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | |
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%.
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(2) | For the six months ended June 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(6) million and $(3) million, respectively.
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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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders: | | | | | | | | | | | | | | | | | | | $ | 49 | | | $ | 17 | | | $ | 32 | | | | 188 | % | | | | (158 | ) | | | 8 | | | | (166 | ) | | | NM | (1) | | | | 34 | | | | 36 | | | | (2 | ) | | | (6 | )% | | | | | | | | | | | | | | | | | | Total adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (75 | ) | | $ | 61 | | | $ | (136 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | |
(1) | We define “NM” as not meaningful for increases or decreases greater than 200%.
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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 $32 million primarily from an increase in claim and policy terminations driven mostly by higher mortality in the current year, $63 million of higher premiums and reduced benefits in the current year fromin-force
rate actions approved and implemented and from 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.Our life insurance business had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $158 million in the current year compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $8 million in the prior year. The decrease to a loss in the current year from income in the prior year was predominantly attributable to higher reserves in our10-year
term universal life insurance block entering its post-level premium period during the premium grace period, higher mortality in our universal and term life insurance products in the current year compared to the prior year and higher lapses primarily associated with our large20-year
term life insurance block entering its post-level premium period. The prior year also included a reinsurance correction and refinement resulting in a net favorable impact of $17 million.Adjusted operating income available to Genworth Financial, Inc.’s common stockholders in our fixed annuities business decreased $2 million predominantly from a decrease in net spreads due to the runoff of the block, partially offset by $17 million of unfavorable charges in connection with loss recognition testing in our single premium immediate annuity products in the prior year that did not recur.
Our long-term care insurance business increased $23 million largely from $65 million of increased premiums in the current year fromin-force
rate actions approved and implemented, partially offset by policy terminations and policies enteringpaid-up
status in the current year.Our life insurance business decreased $15 million mainly attributable to the continued runoff of our term life insurance products in the current year.
Our long-term care insurance business increased $7 million largely from higher average invested assets, partially offset by lower income on U.S. Government Treasury Inflation Protected securities and limited partnerships in the current year.
Our life insurance business decreased $6 million principally related to lower average invested assets in the current year.
Our fixed annuities business decreased $39 million largely attributable to lower average invested assets due to block runoff and lower limited partnership income in the current year.
Net investment gains (losses)
Net investment gains in our long-term care insurance business increased $9 million predominantly from higher net gains from the sale of investment securities, partially offset by unrealized losses from changes in the fair value of equity securities in the current year compared to unrealized gains in the prior year.
Net investment losses in our fixed annuities business increased $8 million primarily related derivative losses in the current year compared to derivative gains in the prior year. The increase was partially offset by lower losses on embedded derivatives related to our fixed indexed annuity products in the current 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 insurancein-force
and higher ceded reinsurance costs in the current year.Benefits and other changes in policy reserves
Our long-term care insurance business decreased $19 million primarily due to an increase in claim and policy terminations driven mostly by higher mortality, a higher favorable impact of $19 million from reduced benefits in the current year related toin-force
rate actions approved and implemented, a 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. Given the lower new claim counts submitted duringCOVID-19,
incurred but not reported reserves were strengthened by $37 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 thein-force
block (including higher frequency of new claims), higher incremental reserves of $82 million recorded in connection with an accrual for profits followed by losses and higher severity of new claims in the current year.Our life insurance business increased $105 million primarily attributable to higher reserves in our10-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 attributable in part toCOVID-19.
Our fixed annuities business decreased $23 million principally from $22 million of unfavorable charges in connection with loss recognition testing in our single premium immediate annuity products in the prior year that did not recur.
. 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.
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 $42 million principally from higher lapses primarily associated with our large20-year
term life insurance block entering its post-level premium period in the current year and higher reinsurance rates.The decrease in interest expense was due to our life insurance business principally related to the early redemption ofnon-recourse
funding obligations, partially offset by thewrite-off
of $4 million in deferred borrowing costs in the current year.Provision for income taxes.
The effective tax rate was (20.4)% and 29.9% for the six months ended June 30, 2020 and 2019, respectively. The decrease in the effective tax rate is primarily attributable to higher expense in our long-term care insurance business related to gains on forward starting swaps settled prior to the enactment of the TCJA in relation to apre-tax
loss in the current year. U.S. Life Insurance selected operating performance measures The following table sets forth selected operating performance measures regarding our long-term care insurance business for the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Individual long-term care insurance | | $ | 618 | | | $ | 610 | | | $ | 8 | | | | 1 | % | | $ | 1,229 | | | $ | 1,209 | | | $ | 20 | | | | 2 | % | Group long-term care insurance | | | 31 | | | | 30 | | | | 1 | | | | 3 | % | | | 62 | | | | 59 | | | | 3 | | | | 5 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 649 | | | $ | 640 | | | $ | 9 | | | | 1 | % | | $ | 1,291 | | | $ | 1,268 | | | $ | 23 | | | | 2 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 69 | % | | | 74 | % | | | (5 | )% | | | | | | | 74 | % | | | 78 | % | | | (4 | )% | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 for the three and sixnine months ended JuneSeptember 30, 2020 largely from $31$25 million and $65$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 for the three and sixnine months ended JuneSeptember 30, 2020 due to the increase in premiums and lower benefits and other changes in reserves as discussed above. 142
The following tables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Term and whole life insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 63 | | | $ | 73 | | | $ | (10 | ) | | | (14 | )% | | $ | 139 | | | $ | 154 | | | $ | (15 | ) | | | (10 | )% | Term universal life insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 57 | | | $ | 59 | | | $ | (2 | ) | | | (3 | )% | | $ | 113 | | | $ | 117 | | | $ | (4 | ) | | | (3 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 65 | | | $ | 141 | | | $ | (76 | ) | | | (54 | )% | | $ | 136 | | | $ | 217 | | | $ | (81 | ) | | | (37 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net earned premiums and deposits | | $ | 185 | | | $ | 273 | | | $ | (88 | ) | | | (32 | )% | | $ | 388 | | | $ | 488 | | | $ | (100 | ) | | | (20 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | $ | 69,969 | | | $ | 91,386 | | | | (23 | )% | Life insurance in-force before reinsurance | | $ | 379,972 | | | $ | 419,246 | | | | (9 | )% | Term universal life insurance | | | | | | | | | | | | | Life insurance in-force, net of reinsurance | | $ | 110,705 | | | $ | 114,214 | | | | (3 | )% | Life insurance in-force before reinsurance | | $ | 111,465 | | | $ | 114,999 | | | | (3 | )% | | | | | | | | | | | | | | Life insurance in-force, net of reinsurance | | $ | 33,212 | | | $ | 34,581 | | | | (4 | )% | Life insurance in-force before reinsurance | | $ | 37,753 | | | $ | 39,357 | | | | (4 | )% | | | | | | | | | | | | | | Life insurance in-force, net of reinsurance | | $ | 213,886 | | | $ | 240,181 | | | | (11 | )% | Life insurance in-force before reinsurance | | $ | 529,190 | | | $ | 573,602 | | | | (8 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 three and sixnine months ended JuneSeptember 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. block. 143
The following table sets forth selected operating performance measures regarding our fixed annuities business as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Account value, beginning of period | | $ | 12,487 | | | $ | 14,109 | | | $ | 13,023 | | | $ | 14,348 | | | | | 17 | | | | 16 | | | | 39 | | | | 45 | | Surrenders, benefits and product charges | | | (375 | ) | | | (486 | ) | | | (842 | ) | | | (1,002 | ) | | | | | | | | | | | | | | | | | | | | | (358 | ) | | | (470 | ) | | | (803 | ) | | | (957 | ) | Interest credited and investment performance | | | 134 | | | | 119 | | | | 195 | | | | 261 | | Effect of accumulated net unrealized investment gains (losses) | | | (7 | ) | | | 117 | | | | (159 | ) | | | 223 | | | | | | | | | | | | | | | | | | | Account value, end of period | | $ | 12,256 | | | $ | 13,875 | | | $ | 12,256 | | | $ | 13,875 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 March 31, 2020 and 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 markets. The low interest rate environment and volatile equity markets have adversely impacted earnings in our variable annuity products. WhileAlthough certain states currently havehad mandates in place that policies cannot be lapsed and a few still require grace period extensions, we have not experienced 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 JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 30, 2019 The following table sets forth the results of operations relating to our Runoff segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 54 | | | $ | 47 | | | $ | 7 | | | | 15 | % | Net investment gains (losses) | | | 4 | | | | (4 | ) | | | 8 | | | | 200 | % | Policy fees and other income | | | 32 | | | | 35 | | | | (3 | ) | | | (9 | )% | | | | | | | | | | | | | | | | | | | | | 90 | | | | 78 | | | | 12 | | | | 15 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 4 | | | | 13 | | | | (9 | ) | | | (69 | )% | | | | 42 | | | | 40 | | | | 2 | | | | 5 | % | Acquisition and operating expenses, net of deferrals | | | 11 | | | | 13 | | | | (2 | ) | | | (15 | )% | Amortization of deferred acquisition costs and intangibles | | | (1 | ) | | | 4 | | | | (5 | ) | | | (125 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 56 | | | | 70 | | | | (14 | ) | | | (20 | )% | | | | | | | | | | | | | | | | | | Income from continuing operations before income taxes | | | 34 | | | | 8 | | | | 26 | | | | NM | (1) | Provision for income taxes | | | 6 | | | | 1 | | | | 5 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Income from continuing operations | | | 28 | | | | 7 | | | | 21 | | | | NM | (1) | Adjustments to income from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | (5 | ) | | | 2 | | | | (7 | ) | | | NM | (1) | | | | 1 | | | | — | | | | 1 | | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 24 | | | $ | 9 | | | $ | 15 | | | | 167 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 JuneSeptember 30, 2020, and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(1) million and $(2) million, respectively.$1 million. |
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased predominantly from favorable equity market performance and higher policy loan income in the current year. Net investment income increased mainly 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.
The change to net investment gains in the current year from 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 losses in the current year compared to derivative gains in the prior year. Benefits and other changes in policy reserves decreased primarily attributable to lower GMDB reserves in our variable annuity products due to favorable equity market performance in the current 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 . The effective tax rate was 19.9%20.0% and 15.8%6.8% for the three months ended JuneSeptember 30, 2020 and 2019, respectively. The increase was primarily due to tax benefits onfrom tax favored items in relation to higher pre-tax income in the current year. SixNine Months Ended JuneSeptember 30, 2020 Compared to SixNine Months Ended JuneSeptember 30, 2019
The following table sets forth the results of operations relating to our Runoff segment for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 103 | | | $ | 94 | | | $ | 9 | | | | 10 | % | Net investment gains (losses) | | | (71 | ) | | | (4 | ) | | | (67 | ) | | | NM | (1) | Policy fees and other income | | | 65 | | | | 70 | | | | (5 | ) | | | (7 | )% | | | | | | | | | | | | | | | | | | | | | 97 | | | | 160 | | | | (63 | ) | | | (39 | )% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 24 | | | | 14 | | | | 10 | | | | 71 | % | | | | 83 | | | | 81 | | | | 2 | | | | 2 | % | Acquisition and operating expenses, net of deferrals | | | 24 | | | | 26 | | | | (2 | ) | | | (8 | )% | Amortization of deferred acquisition costs and intangibles | | | 16 | | | | 6 | | | | 10 | | | | 167 | % | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 147 | | | | 127 | | | | 20 | | | | 16 | % | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes | | | (50 | ) | | | 33 | | | | (83 | ) | | | NM | (1) | Provision (benefit) for income taxes | | | (12 | ) | | | 6 | | | | (18 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | (38 | ) | | | 27 | | | | (65 | ) | | | NM | (1) | Adjustments to income (loss) from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses, net (2) | | | 62 | | | | 2 | | | | 60 | | | | NM | (1) | | | | (13 | ) | | | — | | | | (13 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating income available to Genworth Financial, Inc.’s common stockholders | | $ | 11 | | | $ | 29 | | | $ | (18 | ) | | | (62 | )% | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 sixnine months ended JuneSeptember 30, 2020 and 2019, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(9)$(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 theless favorable equity market performance and a decline in equity markets and 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, in the current year compared to gains in the prior year, partially offset by higher derivative gains in the current year compared to derivative losses in the prior 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 23.4%33.5% and 18.4%17.4% for the sixnine months ended JuneSeptember 30, 2020 and 2019, respectively. The increase is primarily attributable to tax benefits onfrom tax favored items in relation to a pre-tax loss in the current 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: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Account value, beginning of period | | $ | 4,521 | | | $ | 5,113 | | | $ | 5,042 | | | $ | 4,918 | | | | | 6 | | | | 6 | | | | 10 | | | | 13 | | Surrenders, benefits and product charges | | | (122 | ) | | | (158 | ) | | | (288 | ) | | | (319 | ) | | | | | | | | | | | | | | | | | | | | | (116 | ) | | | (152 | ) | | | (278 | ) | | | (306 | ) | Interest credited and investment performance | | | 377 | | | | 160 | | | | 18 | | | | 509 | | | | | | | | | | | | | | | | | | | Account value, end of period | | $ | 4,782 | | | $ | 5,121 | | | $ | 4,782 | | | $ | 5,121 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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, however, we continue to service our existing blocks of business and accept additional deposits on existing contracts and policies. Account value increased compared to March 31,June 30, 2020 primarily related 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. 147
The following table sets forth selected operating performance measures regarding our institutional products as of or for the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Account value, beginning of period | | $ | 253 | | | $ | 305 | | | $ | 253 | | | $ | 381 | | | | | 150 | | | | — | | | | 150 | | | | — | | | | | (51 | ) | | | (2 | ) | | | (52 | ) | | | (80 | ) | | | | | | | | | | | | | | | | | | | | | 99 | | | | (2 | ) | | | 98 | | | | (80 | ) | | | | 1 | | | | 2 | | | | 2 | | | | 4 | | | | | | | | | | | | | | | | | | | Account value, end of period | | $ | 353 | | | $ | 305 | | | $ | 353 | | | $ | 305 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 increased compared to March 31, 2020 and December 31, 2019 mainly attributable to higher deposits from issuing funding agreements for asset-liability management and yield enhancement, partially offset by surrenders and benefit payments in the current year.
Corporate and Other Activities Three Months Ended JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 30, 2019 The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 2 | | | $ | 2 | | | $ | — | | | | — | % | | | | 1 | | | | 2 | | | | (1 | ) | | | (50 | )% | Net investment gains (losses) | | | (28 | ) | | | (7 | ) | | | (21 | ) | | | NM | (1) | Policy fees and other income | | | (1 | ) | | | — | | | | (1 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | (26 | ) | | | (3 | ) | | | (23 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 2 | | | | 1 | | | | 1 | | | | 100 | % | Acquisition and operating expenses, net of deferrals | | | — | | | | 13 | | | | (13 | ) | | | (100 | )% | Amortization of deferred acquisition costs and intangibles | | | 1 | | | | — | | | | 1 | | | | NM | (1) | | | | 42 | | | | 54 | | | | (12 | ) | | | (22 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 45 | | | | 68 | | | | (23 | ) | | | (34 | )% | | | | | | | | | | | | | | | | | | Loss from continuing operations before income taxes | | | (71 | ) | | | (71 | ) | | | — | | | | — | % | | | | (12 | ) | | | (7 | ) | | | (5 | ) | | | (71 | )% | | | | | | | | | | | | | | | | | | Loss from continuing operations | | | (59 | ) | | | (64 | ) | | | 5 | | | | 8 | % | Adjustments to loss from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | 28 | | | | 7 | | | | 21 | | | | NM | (1) | (Gains) losses on early extinguishment of debt | | | (3 | ) | | | — | | | | (3 | ) | | | NM | (1) | Expenses related to restructuring | | | 1 | | | | 1 | | | | — | | | | — | % | | | | (5 | ) | | | (1 | ) | | | (4 | ) | | | NM | (1) | | | | | | | | | | | | | | | | | | Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | | $ | (38 | ) | | $ | (57 | ) | | $ | 19 | | | | 33 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 decreasedincreased primarily related to lower operating expenses andtax benefits, partially offset by lower interest expense in the current year. Net investment losses increased primarily from higher derivative losses in the current year.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. Acquisition and operating expenses, net of deferrals, decreased mainly driven by lower employee-related and operating expenses, as well as a $3 million gain related to a repurchase of Genworth Holdings’ senior notes originally scheduled to mature in 2021.
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 June 30, 2020 was primarily driven by a tax benefit related to thepre-tax
loss, partially offset by tax expenses from the impairment of nondeductible goodwill and other nondeductible expenses. The benefit for income taxes for the three months ended JuneSeptember 30, 2019 was primarily from a tax benefit relatedassociated with the pre-tax loss, as well as tax benefits from gains on forward starting swaps settled prior to the pre-tax
loss, partially offset by tax expenses 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, foreign operations and gains on forward starting swaps settled prior to the enactment of the TCJA.
SixNine Months Ended JuneSeptember 30, 2020 Compared to SixNine Months Ended JuneSeptember 30, 2019
The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 4 | | | $ | 4 | | | $ | — | | | | — | % | | | | 7 | | | | 4 | | | | 3 | | | | 75 | % | Net investment gains (losses) | | | 18 | | | | (28 | ) | | | 46 | | | | 164 | % | Policy fees and other income | | | — | | | | 1 | | | | (1 | ) | | | (100 | )% | | | | | | | | | | | | | | | | | | | | | 29 | | | | (19 | ) | | | 48 | | | | NM | (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | 3 | | | | 2 | | | | 1 | | | | 50 | % | Acquisition and operating expenses, net of deferrals | | | 18 | | | | 26 | | | | (8 | ) | | | (31 | )% | Amortization of deferred acquisition costs and intangibles | | | 1 | | | | — | | | | 1 | | | | NM | (1) | | | | 88 | | | | 107 | | | | (19 | ) | | | (18 | )% | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 110 | | | | 135 | | | | (25 | ) | | | (19 | )% | | | | | | | | | | | | | | | | | | Loss from continuing operations before income taxes | | | (81 | ) | | | (154 | ) | | | 73 | | | | 47 | % | | | | (10 | ) | | | (16 | ) | | | 6 | | | | 38 | % | | | | | | | | | | | | | | | | | | Loss from continuing operations | | | (71 | ) | | | (138 | ) | | | 67 | | | | 49 | % | Adjustments to loss from continuing operations: | | | | | | | | | | | | | | | | | Net investment (gains) losses | | | (18 | ) | | | 28 | | | | (46 | ) | | | (164 | )% | (Gains) losses on early extinguishment of debt | | | 5 | | | | — | | | | 5 | | | | NM | (1) | Expenses related to restructuring | | | 2 | | | | 1 | | | | 1 | | | | 100 | % | | | | 3 | | | | (6 | ) | | | 9 | | | | 150 | % | | | | | | | | | | | | | | | | | | Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders | | $ | (79 | ) | | $ | (115 | ) | | $ | 36 | | | | 31 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 lower operating expenses, partially offset by a lower benefit for income taxes in the current year. Net investment income increased from higher limited 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, decreased mainly driven by lower operating expenses and a $3$4 million gain related to athe repurchase of Genworth Holdings’ senior notes originally scheduled to mature inwith 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 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 benefit for income taxes for the sixnine months ended JuneSeptember 30, 2020 was primarily driven by a tax benefit related to the pre-tax loss, partially offset by tax expenses from the impairment of nondeductible goodwill,stock-based
compensation and other nondeductible expenses. The benefit for income taxes for the six months ended June 30, 2019 was primarily from a tax benefit related to thepre-tax
loss, partially offset by tax expenses related to gains on forward starting swaps settled prior to the enactment of the 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 secondthird quarter of 2020, the U.S. Federal Reserve maintained interest rates near zero in responseas the U.S. economy continues to recover from the continued negative economic impact of COVID-19
and forecasts COVID-19. The U.S. Federal Reserve’s latest forecast indicates that interest rates will remain at current levelsnear zero through 2022. After 1002023 with an inflation rate target above 2%. This forecast is expected to 150be maintained until the labor market recovers. The U.S. Federal Reserve expanded its accommodative monetary policy by implementing a new average inflation target framework, which allows for the targeted inflation rate to be higher than 2% on a temporary basis point declines in U.S. Treasury yields acrosswithout prompting immediate interest rate increases. During the curve in the firstthird quarter of 2020, the accommodative economic policies from the U.S. Federal Reserve2-year, 10-year and negative growth expectations have held U.S.30-year Treasury yields near those record lows through the second quarter of 2020. The10-year
Treasury yield fell to a low of 54 basis points in first quarter of 2020, over 80 basis points lower than the previously historic low set in July 2016, and finishedremained consistent with the second quarter of 2020 at 66 basis points, down four basis pointsbut 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.The U.S. economy showed signs of recovery from COVID-19 reflecting GDP growth in the third quarter of 2020, but remained in recessionary conditions with a forecasted contraction for the full year 2020. Monthly economic indicators improved from the endlows of the first quarter of 2020. The U.S. Treasury yield curve steepened in the second quarter of 2020 as 2-year
through5-year
interest rates fell approximately 10 basis points while evidenced by a decrease in the 30-year
interest unemployment rate, increased six basis points. Economic data showsindicative of a partial recovery of jobs lost at the U.S. economy contractedheight of the pandemic and expansion in both the firstmanufacturing and second quartersservices industries. Efforts by the U.S. federal government through fiscal stimulus packages helped contribute to this recovery. However, political gridlock and the U.S. presidential election have added uncertainty to the timing of future stimulus measures.
Credit markets further recovered in the third quarter of 2020 due toCOVID-19.
Monthly economic indicators, including unemployment rates, retail saleswith credit spreads tightening early in the quarter, supported by strong investor inflows, improved corporate balance sheets and industrial production, reached post-crisis levelsliquidity positions, asset/
liability management measures taken by companies and minimal negative credit rating migration in April 2020 but have shown some signs of partial recovery at the end of the secondthird quarter of 2020. These negativeHowever, 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 indicatorsshutdowns 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 uncertainty surrounding the pace and extent of the economic recoveryupcoming U.S. presidential election have contributed to increased market volatility as concerns over the election results, including the potential for a forecasted contractioncontested election, and drastic policy shifts under a new administration weigh on the market. Equity markets fluctuated in U.S. gross domestic product for the full year 2020. In response to the escalating risks fromCOVID-19
and in an effort to stimulate the U.S. economy, the CARES Act was signed into law during the firstthird quarter of 2020, and supplementary stimulus packages were provided inwith the S&P 500 ending the third quarter of 2020 higher than the second quarter of 2020 whichbut down from its all-time highs set in total provided approximately $2.8 trillion of relief to individuals, businesses and government agencies, including government assistance and income tax benefits to businesses and enhanced unemployment and health benefits to individuals.early September 2020. Credit markets responded toCOVID-19
and the subsequent economic downturn with widening of credit spreads to recessionary levels in the first quarter of 2020. Stay at home orders and partial economic shutdowns are expected to place a strain on corporate earnings and balance sheets, particularly in the hardest impacted sectors, which include airlines, lodging, gaming and portions of retail. A crude oil price war triggered by supply and demand imbalance drove crude oil price volatility and contributed to additional credit spread widening and pressure to the energy sector. The expanded U.S. Federal Reserve quantitative easing program included a $750 billion corporate credit facility to purchase investment grade and certain high yield corporate securities beginning in May 2020 and secondary market purchases of corporate bonds starting in June 2020. This support from the U.S. Federal Reserve helped reverse credit spread widening resulting fromCOVID-19,
with credit spreads tightening throughout the second quarter of 2020 back tonon-recessionary
levels.At the end of the secondthird quarter of 2020, we did not have any modifications or extensions of commercial mortgage loans that were considered troubled debt restructurings. Modified loans represented 20%10% of our total loan portfolio as of September 30, 2020, as borrowers have sought additional relief related to COVID-19. As a result ofCOVID-19,
we expect the number of modifications or extensions related to our commercial mortgage loans to increase during the
remainder of 2020. 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 $2.8$3.0 billion of United Kingdom exposure, or approximately 4%5% of total fixed maturity securities as of JuneSeptember 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 JuneSeptember 30, 2020, our fixed maturity securities portfolio, which was 96%95% investment grade, comprised 82%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 JuneSeptember 30, 2020, none of our insurance company master swap agreements havederivatives transactions were subject to credit downgrade provisions. As of JuneSeptember 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 JuneSeptember 30, 2020, $7.0$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 JuneSeptember 30, 2020, we posted initial margin of $228$132 million to our clearing agents, which represented approximately $68$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 JuneSeptember 30, 2020, $10.6$11.8 billion notional of our derivatives portfolio was in bilateral (“OTC”) derivative transactions pursuant to which we have posted aggregate independent amounts of $437$440 million and are holding collateral from counterparties in the amount of $868$636 million. In July 2017, the United Kingdom Financial Conduct Authority announced its intention to transition away from the 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 tables 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 June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities—taxable | | | 4.4 | % | | $ | 601 | | | | 4.7 | % | | $ | 634 | | | | (0.3 | )% | | $ | (33 | ) | Fixed maturity securities—non-taxable | | | 2.6 | % | | | 1 | | | | 6.1 | % | | | 2 | | | | (3.5 | )% | | | (1 | ) | | | | 4.1 | % | | | 2 | | | | 7.8 | % | | | 5 | | | | (3.7 | )% | | | (3 | ) | Commercial mortgage loans | | | 4.9 | % | | | 84 | | | | 4.9 | % | | | 85 | | | | — | % | | | (1 | ) | | | | 9.3 | % | | | 49 | | | | 8.8 | % | | | 45 | | | | 0.5 | % | | | 4 | | | | | 23.3 | % | | | 66 | | | | 28.7 | % | | | 59 | | | | (5.4 | )% | | | 7 | | Cash, cash equivalents, restricted cash and short-term investments | | | 0.6 | % | | | 4 | | | | 2.2 | % | | | 11 | | | | (1.6 | )% | | | (7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Gross investment income before expenses and fees | | | 4.8 | % | | | 807 | | | | 5.1 | % | | | 841 | | | | (0.3 | )% | | | (34 | ) | | | | (0.1 | )% | | | (21 | ) | | | (0.1 | )% | | | (25 | ) | | | — | % | | | 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.7 | % | | $ | 786 | | | | 5.0 | % | | $ | 816 | | | | (0.3 | )% | | $ | (30 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Average invested assets and cash | | | | | | $ | 67,598 | | | | | | | $ | 65,954 | | | | | | | $ | 1,644 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Six months ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities—taxable | | | 4.5 | % | | $ | 1,223 | | | | 4.6 | % | | $ | 1,247 | | | | (0.1 | )% | | $ | (24 | ) | Fixed maturity securities—non-taxable | | | 4.1 | % | | | 3 | | | | 6.1 | % | | | 4 | | | | (2.0 | )% | | | (1 | ) | | | | 3.8 | % | | | 4 | | | | 6.8 | % | | | 9 | | | | (3.0 | )% | | | (5 | ) | Commercial mortgage loans | | | 4.9 | % | | | 169 | | | | 4.8 | % | | | 167 | | | | 0.1 | % | | | 2 | | | | | 9.3 | % | | | 98 | | | | 9.2 | % | | | 91 | | | | 0.1 | % | | | 7 | | | | | 20.5 | % | | | 113 | | | | 31.1 | % | | | 118 | | | | (10.6 | )% | | | (5 | ) | Cash, cash equivalents, restricted cash and short-term investments | | | 1.0 | % | | | 15 | | | | 2.1 | % | | | 22 | | | | (1.1 | )% | | | (7 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Gross investment income before expenses and fees | | | 4.8 | % | | | 1,625 | | | | 5.0 | % | | | 1,658 | | | | (0.2 | )% | | | (33 | ) | | | | (0.1 | )% | | | (46 | ) | | | (0.1 | )% | | | (48 | ) | | | — | % | | | 2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4.7 | % | | $ | 1,579 | | | | 4.9 | % | | $ | 1,610 | | | | (0.2 | )% | | $ | (31 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | Average invested assets and cash | | | | | | $ | 67,596 | | | | | | | $ | 65,840 | | | | | | | $ | 1,756 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | 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 JuneSeptember 30, 2020, annualized weighted-average investment yields decreased principally from lower yields on higher average invested assets. Net investment income included $19$10 million of lowerhigher bond 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”)TIPS, partially offset by $3 million of lower prepayment speed adjustments on structured securities in the current year.
For the sixnine months ended JuneSeptember 30, 2020, annualized weighted-average investment yields decreased primarily driven by lower yields on higher average invested assets. Net investment income also included $15 million of lower limited partnership income and $12$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 $11$21 million of higher prepayment speed adjustments on structured securitiesbond calls and prepayments in the current year. The following table sets forth net investment gains (losses) for the periods indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | fixed maturity securities: | | | | | | | | | | | | | | | | | | | $ | 119 | | | $ | 10 | | | $ | 133 | | | $ | 74 | | | | | (5 | ) | | | (21 | ) | | | (6 | ) | | | (27 | ) | | | | | | | | | | | | | | | | | | Net realized gains (losses) on fixed maturity securities | | | 114 | | | | (11 | ) | | | 127 | | | | 47 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 fixed maturity securities | | | (7 | ) | | | — | | | | (7 | ) | | | — | | Net realized gains (losses) on equity securities sold | | | — | | | | — | | | | — | | | | 3 | | Net unrealized gains (losses) on equity securities still held | | | 9 | | | | 5 | | | | (10 | ) | | | 17 | | | | | 37 | | | | (11 | ) | | | (3 | ) | | | 4 | | Commercial mortgage loans | | | 1 | | | | 1 | | | | 1 | | | | — | | | | | 10 | | | | (30 | ) | | | (95 | ) | | | (42 | ) | | | | (5 | ) | | | — | | | | (6 | ) | | | — | | | | | | | | | | | | | | | | | | | Net investment gains (losses) | | $ | 159 | | | $ | (46 | ) | | $ | 7 | | | $ | 29 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | 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 JuneSeptember 30, 2020 Compared to Three Months Ended JuneSeptember 30, 2019 We recorded net gains related to the sale of available-for-sale fixed maturity securities of $114$330 million during the three months ended JuneSeptember 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 higher unrealized gains from favorable performance of private equity investments in the current year. Net investment gains related to derivatives of $22 million during the three months ended September 30, 2020 were primarily associated with embedded derivatives related to our runoff variable annuity products and gains from our 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 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 comparedas a result of the prolonged low interest rate environment. We recorded net gains related to net lossesthe sale of $11available-for-sale fixed maturity securities of $63 million during the threenine months ended JuneSeptember 30, 2019. We recorded a $7$5 million credit loss onand 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 threenine months ended JuneSeptember 30, 2020 under the newly adopted current expected credit loss standard reflecting emerging credit distress due mostly to COVID-19. We recorded net gains on limited partnerships of $37 million during the three months ended June 30, 2020 driven largely by the recovery of equity markets in the second quarter of 2020 after the losses suffered in the first quarter of 2020 due toCOVID-19.
The three months ended June 30, 2019 included net losses of $11 million on limited partnerships mostly associated with mark to market adjustments.Net investment gains related to derivatives of $10 million during the three months ended June 30, 2020 were primarily associated with gains from our foreign currency hedging programs that support our Australia Mortgage Insurance segment due to changes in the Australian dollar, partially offset by losses related to derivatives used to protect statutory surplus from equity market fluctuations as well as hedging programs for our fixed indexed annuities products.
Net investment losses related to derivatives of $30 million during the three months ended June 30, 2019 were primarily associated with hedging programs for our runoff variable annuity products and fixed indexed annuity products, as well as losses from derivatives used to hedge foreign currency risk associated with expected dividend payments from our Australia mortgage insurance business.
Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
We recorded $80 million of higher net gains related to the sale of fixed maturity securities during the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily from higher gains on the sale of U.S. government securities.
The change to net unrealized losses on equity securities and limited partnership investments during the sixnine months ended JuneSeptember 30, 2020 from net unrealized gains during the sixnine months ended JuneSeptember 30, 2019 was primarily from unfavorable equity market performance in the current year compared to favorable equity market performance in the prior year. We had $18 million of higher net gains on limited partnership investments during the nine months ended September 30, 2020 primarily driven by favorable performance of private equity investments in the current year. Net investment losses related to derivatives of $95 million during the six months ended June 30, 2020 were primarily associated with hedging programs that support our runoff variable annuity products and fixed indexed annuity products, as well as losses from our foreign currency hedging programs that support our Australia Mortgage Insurance segment due to changes in the Australian dollar, partially offset by gains from derivatives used to hedge foreign currency risk associated with expected dividend payments from our Australia mortgage insurance business.156
Net investment losses related to derivatives of $42 million during the six months ended June 30, 2019 were primarily associated with hedging programs for our runoff variable annuity products, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuations. We also had losses related to hedging programs for our fixed indexed annuity products.
The following table sets forth our cash, cash equivalents, restricted cash and invested assets as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities, | | | | | | | | | | | | | | | | | | | $ | 44,794 | | | | 58 | % | | $ | 42,162 | | | | 57 | % | | | | 18,750 | | | | 24 | | | | 18,177 | | | | 24 | | | | | 206 | | | | — | | | | 239 | | | | — | | Commercial mortgage loans, net | | | 6,917 | | | | 9 | | | | 6,963 | | | | 9 | | | | | 2,182 | | | | 3 | | | | 2,058 | | | | 3 | | | | | 2,473 | | | | 3 | | | | 1,632 | | | | 2 | | Cash, cash equivalents and restricted cash | | | 2,597 | | | | 3 | | | | 3,341 | | | | 5 | | | | | | | | | | | | | | | | | | | Total cash, cash equivalents, restricted cash and invested assets | | $ | 77,919 | | | | 100 | % | | $ | 74,572 | | | | 100 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 JuneSeptember 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. 157
Fixed maturity securities As of JuneSeptember 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 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for credit losses | | | | | Fixed maturity securities: | | | | | | | | | | | | | | | | | | | | | U.S. government, agencies and government-sponsored enterprises | | $ | 3,877 | | | $ | 1,725 | | | $ | — | | | $ | — | | | $ | 5,602 | | State and political subdivisions | | | 2,503 | | | | 496 | | | | (1 | ) | | | — | | | | 2,998 | | | | | 1,424 | | | | 125 | | | | (7 | ) | | | — | | | | 1,542 | | | | | | | | | | | | | | | | | | | | | | | | | | 4,392 | | | | 879 | | | | (1 | ) | | | — | | | | 5,270 | | | | | 2,454 | | | | 203 | | | | (63 | ) | | | — | | | | 2,594 | | | | | 7,400 | | | | 1,017 | | | | (14 | ) | | | — | | | | 8,403 | | | | | 5,132 | | | | 1,147 | | | | (2 | ) | | | — | | | | 6,277 | | Technology and communications | | | 2,912 | | | | 503 | | | | (4 | ) | | | — | | | | 3,411 | | | | | 1,350 | | | | 157 | | | | (4 | ) | | | — | | | | 1,503 | | | | | 2,580 | | | | 454 | | | | (6 | ) | | | — | | | | 3,028 | | | | | 1,748 | | | | 224 | | | | (6 | ) | | | — | | | | 1,966 | | | | | 1,335 | | | | 254 | | | | (24 | ) | | | — | | | | 1,565 | | | | | 340 | | | | 38 | | | | — | | | | — | | | | 378 | | | | | | | | | | | | | | | | | | | | | | | | | | 29,643 | | | | 4,876 | | | | (124 | ) | | | — | | | | 34,395 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 811 | | | | 68 | | | | — | | | | — | | | | 879 | | | | | 1,141 | | | | 148 | | | | (14 | ) | | | — | | | | 1,275 | | | | | 2,199 | | | | 284 | | | | (16 | ) | | | (1 | ) | | | 2,466 | | | | | 692 | | | | 86 | | | | (1 | ) | | | — | | | | 777 | | Technology and communications | | | 1,066 | | | | 182 | | | | (1 | ) | | | — | | | | 1,247 | | | | | 883 | | | | 116 | | | | (4 | ) | | | — | | | | 995 | | | | | 565 | | | | 50 | | | | (2 | ) | | | — | | | | 613 | | | | | 380 | | | | 27 | | | | — | | | | — | | | | 407 | | | | | 560 | | | | 84 | | | | (6 | ) | | | (3 | ) | | | 635 | | | | | 1,376 | | | | 218 | | | | (3 | ) | | | — | | | | 1,591 | | | | | | | | | | | | | | | | | | | | | | | | | | 9,673 | | | | 1,263 | | | | (47 | ) | | | (4 | ) | | | 10,885 | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage-backed (1) | | | 1,927 | | | | 259 | | | | (2 | ) | | | — | | | | 2,184 | | Commercial mortgage-backed | | | 2,800 | | | | 225 | | | | (52 | ) | | | (3 | ) | | | 2,970 | | | | | 2,987 | | | | 30 | | | | (49 | ) | | | — | | | | 2,968 | | | | | | | | | | | | | | | | | | | | | | | Total fixed maturity securities | | $ | 54,834 | | | $ | 8,999 | | | $ | (282 | ) | | $ | (7 | ) | | $ | 63,544 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 $21$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 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 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 fixed maturity securities | | $ | 53,700 | | | $ | 6,667 | | | $ | 15 | | | $ | (43 | ) | | $ | — | | | $ | 60,339 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 $3.2$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. 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,069 | | | | 381 | | | | 36 | % | | $ | — | | | | — | | | | | 161 | | | | 41 | | | | 37 | % | | | — | | | | — | | | | | 400 | | | | 74 | | | | 41 | % | | | — | | | | — | | | | | 549 | | | | 112 | | | | 46 | % | | | — | | | | — | | | | | 685 | | | | 122 | | | | 49 | % | | | 10 | | | | 1 | | | | | 786 | | | | 129 | | | | 55 | % | | | — | | | | — | | | �� | | 499 | | | | 91 | | | | 58 | % | | | — | | | | — | | | | | 731 | | | | 141 | | | | 60 | % | | | — | | | | — | | | | | 1,000 | | | | 164 | | | | 66 | % | | | — | | | | — | | | | | 796 | | | | 110 | | | | 70 | % | | | — | | | | — | | | | | 269 | | | | 42 | | | | 70 | % | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | $ | 6,945 | | | | 1,407 | | | | 54 | % | | $ | 10 | | | | 1 | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents weighted-averageas of June 30, 2020. |
| | | | | | | | | | | | | | | | | | | | | | | | | (Dollar amounts in millions) | | | | | | | | | | | Delinquent principal balance | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,182 | | | | 419 | | | | 37 | % | | $ | — | | | | — | | | | | 168 | | | | 42 | | | | 38 | % | | | — | | | | — | | | | | 415 | | | | 75 | | | | 42 | % | | | — | | | | — | | | | | 579 | | | | 114 | | | | 47 | % | | | — | | | | — | | | | | 720 | | | | 129 | | | | 50 | % | | | — | | | | — | | | | | 833 | | | | 136 | | | | 56 | % | | | — | | | | — | | | | | 517 | | | | 93 | | | | 59 | % | | | — | | | | — | | | | | 740 | | | | 141 | | | | 61 | % | | | — | | | | — | | | | | 1,019 | | | | 165 | | | | 66 | % | | | — | | | | — | | | | | 807 | | | | 111 | | | | 71 | % | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | | | $ | 6,980 | | | | 1,425 | | | | 54 | % | | $ | — | | | | — | | | | | | | | | | | | | | | | | | | | | | |
(1) | Represents weighted-averageas of December 31, 2019. |
The following table sets forth the carrying values of our other invested assets as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 1,024 | | | | 41 | % | | $ | 290 | | | | 18 | % | | | | 764 | | | | 31 | | | | 634 | | | | 39 | | | | | 396 | | | | 16 | | | | 383 | | | | 23 | | | | | 212 | | | | 9 | | | | 260 | | | | 16 | | Securities lending collateral | | | 59 | | | | 2 | | | | 51 | | | | 3 | | | | | 18 | | | | 1 | | | | 14 | | | | 1 | | | | | | | | | | | | | | | | | | | Total other invested assets | | $ | 2,473 | | | | 100 | % | | $ | 1,632 | | | | 100 | % | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 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 return of capital in the current year. 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Notional | | $ | 8,968 | | | $ | 1,158 | | | $ | (1,880 | ) | | $ | 8,246 | | | | Notional | | | 110 | | | | — | | | | — | | | | 110 | | | | | | | | | | | | | | | | | | | | | | | | | | 9,078 | | | | 1,158 | | | | (1,880 | ) | | | 8,356 | | | | | | | | | | | | | | | | | | | | | Total derivatives designated as hedges | | | | | 9,078 | | | | 1,158 | | | | (1,880 | ) | | | 8,356 | | | | | | | | | | | | | | | | | | | | | Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | | | Notional | | | 4,674 | | | | — | | | | — | | | | 4,674 | | | | Notional | | | 2,451 | | | | 883 | | | | (1,126 | ) | | | 2,208 | | | | Notional | | | 1,182 | | | | 3,082 | | | | (2,914 | ) | | | 1,350 | | Other foreign currency contracts | | Notional | | | 628 | | | | 3,009 | | | | (2,618 | ) | | | 1,019 | | | | | | | | | | | | | | | | | | | | | Total derivatives not designated as hedges | | | | | 8,935 | | | | 6,974 | | | | (6,658 | ) | | | 9,251 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 18,013 | | | $ | 8,132 | | | $ | (8,538 | ) | | $ | 17,607 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Derivatives not designated as hedges | | | | | | | | | | | | | | | | | | | GMWB embedded derivatives | | Policies | | | 25,623 | | | | — | | | | (992 | ) | | | 24,631 | | Fixed index annuity embedded derivatives | | Policies | | | 15,441 | | | | — | | | | (668 | ) | | | 14,773 | | Indexed universal life embedded derivatives | | Policies | | | 884 | | | | — | | | | (28 | ) | | | 856 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 decrease in the notional value of derivatives was primarily attributable to terminations of interest rate swaps that support our long-term care insurance business partiallyand 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 an adverse legal settlement relatedpayments to disputed claimsAXA under the promissory note denominated in a foreign 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 increased $2,295$3,583 million from $101,342 million as of December 31, 2019 to $103,637$104,925 million as of JuneSeptember 30, 2020. Cash, cash equivalents, restricted cash and invested assets increased $3,347$4,688 million primarily from increases of $3,205$4,077 million, $770 million and $841$390 million in fixed maturity securities, and other invested assets and equity securities, respectively. The increase in fixed maturity securities was predominantly related to higher unrealized gains mostly associated with a decrease in interest rates and from net purchases in the current year. The increase in other invested assets was principally from higher derivative assets driven mostly beby 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 of $744$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, net purchases of fixed maturity securities and a $134payments of $263 million interim litigation payment to AXA in the current yearyear. 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 $118$213 million principally associated with higher amortization largely driven by an increase in lapses mostly attributable to our large 20-year term life insurance block entering its post-level premium partially offset by shadow accounting adjustments driven byperiod and amortization outpacing deferrals reflecting the recognition of higher unrealized gains in the current year. The shadow accounting adjustments increased DAC by approximately $57 million, mostlylow sales in our long-term care insurance business with an offsetting amount recorded in other comprehensive income (loss).the current year.Reinsurance recoverable decreased $203$315 million mainly attributable to the runoff of our structured settlement products ceded to UFLIC,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 $139$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 a deferred tax asset recorded in connection with the current year.AXA settlement agreement. Separate account assets decreased $572$408 million primarily due to surrenders, and unfavorablepartially offset by favorable equity market performance in the current year. . Total liabilities increased $1,839$2,983 million from $86,710 million as of December 31, 2019 to $88,549$89,693 million as of JuneSeptember 30, 2020. Future policy benefits increased $1,079$1,611 million primarily driven by shadow accounting adjustments associated with the recognition of higher unrealized gains. The shadow accounting adjustments increased future policy benefits by approximately $913$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 $137$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 $704$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 unfavorable equity market performancethe low interest rate environment impacting GMDB reserves in our variable annuity products, partially offset by surrenders and benefits in our fixed annuities business in the current year. Liability for policy and contract claims increased $322$415 million mostly 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 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.
| driven largely by borrower forbearance resulting fromCOVID-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 thein-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 duringCOVID-19,
incurred but not reported reserves were strengthened by $37 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. |
Other liabilities increased $647$485 million principally due to higher counterparty collateral driven mostly by lower interest rates increasing derivative valuations inand higher amounts due to broker associated with the current year.timing of investment trades near the end of the third quarter of 2020. 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 $460increased $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 $662020 and the repurchase of $84 million principal amount of its senior notes with 2021 maturity dates in the current year. Liabilities related to discontinued operations increased $519$389 million predominantly from a higher accrual recordedpromissory note issued in the current year associated with athe 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 $456$600 million from $14,632 million as of December 31, 2019 to $15,088$15,232 million as of JuneSeptember 30, 2020. We reported a net loss available to Genworth Financial, Inc.’s common stockholders of $507$89 million for the sixnine months ended JuneSeptember 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 $675$449 million and $355$255 million, respectively, primarily from a decrease in interest rates. The increase in unrealized gains on investments was also attributable to the tightening of credit spreads on our corporate bond investments during the second quarter of 2020, reversing much of the widening experienced in the first quarter of 2020 due toCOVID-19.
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 sixnine months ended JuneSeptember 30: | | | | | | | | | | | | | | | | Net cash from operating activities | | $ | 1,299 | | | $ | 795 | | Net cash used by investing activities | | | (887 | ) | | | (351 | ) | Net cash used by financing activities | | | (1,144 | ) | | | (695 | ) | | | | | | | | | | Net decrease in cash before foreign exchange effect | | $ | (732 | ) | | $ | (251 | ) | | | | | | | | | |
| | | | | | | | | | | | | | | | 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 payments of $263 million to AXA, as discussed below, partially offset by higher collateral posted byreceived 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 primarily driven by higher net purchases of fixed maturity securities, in the current year compared to net sales in the prior year, partially offset by lower commercial mortgage loan originations and higher net sales of short-term investments 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 redemption of $315 million of Rivermont I’s non-recourse funding obligations originally due in 2050 and the repurchase of $66$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), 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 $504$814 million and $1,461 million of cash, cash equivalents and restricted cash as of JuneSeptember 30, 2020 and December 31, 2019, respectively, which included $10$74 million of restricted cash equivalents as of JuneSeptember 30, 2020. Genworth Holdings also held $50 million and $70 million in U.S. government securities as of June 30, 2020 and December 31, 2019, respectively, which included approximately $49 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 interim litigation payment to AXA. For additional details onreceived from our U.S. mortgage insurance business in the decrease in cash, cash equivalents and restricted cash, see below under “—Capital resources and financing activities.” 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. Under the settlement agreement,In January 2020, we made an interim litigation payment of $134 million and on July 21, 2020 we paid an initial amount under the settlement agreement of £100 million ($125 million) to AXA, along with accrued interest. For additional details on July 21, 2020. This cash disbursement did not reduce the amount ofdecrease in cash, cash equivalents and restricted cash, held by Genworth Holdings as of June 30, 2020 but will be reflected as a reduction in cash in the third quarter of 2020.see below under “—Capital resources and financing activities.” During the sixnine months ended JuneSeptember 30, 2020 and 2019, Genworth received cash dividends from its international subsidiaries of $11 million and $105$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 do not expect to receive further dividends from our mortgage insurance businesses in 2020. Future dividends and the timing of their distribution will depend on the economic recovery from 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 JuneSeptember 30, 2020, our total cash, cash equivalents, restricted cash and invested assets were $77.9$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 JuneSeptember 30, 2020. As of JuneSeptember 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 $1,043$777 million of PMIERs capital credit as of JuneSeptember 30, 2020. In the second quarter of 2020, our U.S. mortgage insurance business completed an aggregate excess of loss reinsurance transaction providing up to $300 million of reinsurance coverage on our 2009 to 2019 book years that is intended to provide PMIERs capital credit for elevated delinquencies as result ofCOVID-19.
The second quarter of 2020 PMIERs sufficiency included an estimated $180 million of capital credit from this transaction. 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 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. In addition, on July 3, 2020, GFMIPL2025 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 hashad 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 sixnine months ended JuneSeptember 30, 2020, Genworth Holdings repurchased $66$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. 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 addition to the partialinitial settlement payment of £100 million ($125 million) paid to AXA on July 21, 2020, we also issued a secured promissory note to AXA under which we agreedthat is due in 2022. Under the settlement, certain cash flows to make deferred cash payments totaling approximately £317 million in two installment payments in June 2022Genworth Holdings, including dividends and September 2022, subjectcapital raises, above defined thresholds must be paid to certain prepayment obligations. Future claims that are still being processed, which are currently estimated to be approximately £107 million, will be added toAXA until the promissory note as part of the September 2022 payment. The promissory note will accrue interest at a fixed rate of 5.25% due quarterly, with a potential for an interest rate decrease to 2.75% following certain prepayment trigger events. Certain conditions and events occurring and expected to occur raise doubt about our ability to meet our financial obligations foris fully repaid. In addition, over the next year, given Genworth Holdings current unrestricted cashwe expect to pay AXA approximately $45 million consisting of interest on the promissory note, assuming we do not make any pre-payments, and cash equivalents balance of $494 million. However, we believe management’s plans alleviate this doubt. a one-time payment on an unrelated liability associated with underwriting losses on a product sold by a distributor in our former lifestyle protection insurance business.
Our evaluation of our ability to meet our obligations includedinclude the following contractual obligations due within one year from the issue date of our unaudited condensed consolidated financial statements, along with other certain conditions and events: a partial settlement payment in the amount of £100 million ($125 million) paid to AXA on July 21, 2020. In addition, over the next year, we expect to pay AXA approximately $25 million in interest on the secured promissory note, assuming we do not make any pre-payments, and we may make an additional one-time payment of approximately $40 million for an unrelated liability and other expenses;
Genworth Holdings has $356$338 million of its 7.20% senior notes maturing in February 2021;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 $158$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; andbeginning 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 JuneSeptember 30, 2020, Genworth and China Oceanwide agreed to a fifteenthsixteenth waiver and agreement extending the merger deadline to no later than September
| 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 cannot be included astransaction, Genworth Holdings expects to have a potential sourcecash shortfall of liquidity. We believe management’s plans alleviateapproximately $215 million which raises doubt about our ability to meet our financial obligations for the next year. TheseWhile 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 includealleviate 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 to raisetoward raising capital to address our obligations, including a debt financing as well as, should our pending transaction with China Oceanwide not close,by preparing for a 19.9%possible public offering of our U.S. mortgage insurance business, subject to market conditions. We expectIn addition to engage in a debt financing throughpartial sale of our U.S. mortgage insurance business later in 2020 which, along with existing cash and cash equivalents, would provide Genworth Holdings sufficient liquidity to meet its obligations and maintain business operations for one year fromthrough a public offering, we are also evaluating the issue datepossibility of the unaudited condensed consolidated financial statements.issuance of convertible, equity-linked securities or another transaction, prior to our senior notes maturing in September 2021. We believe this debt financingan equity transaction involving our U.S. mortgage insurance business, if needed, is probable to beof being effectively implementedexecuted given the value of the U.S. mortgage insurance business, the healthy conditions of the relevant credit markets, recent similar peer transactionshistorical investor interest and our successful history of similar refinancing transactions, among other factors. Our outside financial advisors agree with our assessment based on current conditions. In addition to the contractual obligations due within one year from the issue date of our unaudited condensed consolidated financial statements listed above, we also have, among other obligations, debt maturing in September 2021 of approximately $660 million and installment payments due to AXA under the secured promissory note as described above. Beyond management’s plans, described above, we believe additional sources
of cash coming from payments under tax sharing and expense reimbursement arrangements with subsidiaries, and if necessary, sales of assets, would provide us with sufficient capital flexibility and liquidity to meet our projected future operating and financing requirements. However, untilrequirements 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 has beenis 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 absence of the transaction with China Oceanwide, we currently expect we would need to pursue a 19.9% public offering of our U.S. mortgage insurance business to address our debt maturities and other obligations. The timing and feasibility of such a potential transaction may adversely be affected byCOVID-19.
The availability of additional funding, including a debt financing or an equity offeringtransaction through our U.S. mortgage insurance business or the issuance of convertible, 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, 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. These risks may be exacerbated by the economic impact of COVID-19. No references herein to any potential debt or equity financingtransaction 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 JuneSeptember 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 sixnine months ended JuneSeptember 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 JuneSeptember 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities at fair value (amortized cost of $54,834 and allowance for credit losses of $7) | | $ | — | | | $ | — | | | $ | 63,544 | | | $ | — | | | $ | 63,544 | | Equity securities, at fair value | | | — | | | | — | | | | 206 | | | | — | | | | 206 | | Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4) | | | — | | | | — | | | | 6,945 | | | | — | | | | 6,945 | | Less: Allowance for credit losses | | | — | | | | — | | | | (28 | ) | | | — | | | | (28 | ) | | | | | | | | | | | | | | | | | | | | | | Commercial mortgage loans, net | | | — | | | | — | | | | 6,917 | | | | — | | | | 6,917 | | | | | — | | | | — | | | | 2,182 | | | | — | | | | 2,182 | | | | | — | | | | 50 | | | | 2,423 | | | | — | | | | 2,473 | | Investments in subsidiaries | | | 14,548 | | | | 16,174 | | | | — | | | | (30,722 | ) | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | 14,548 | | | | 16,224 | | | | 75,272 | | | | (30,722 | ) | | | 75,322 | | Cash, cash equivalents and restricted cash | | | — | | | | 504 | | | | 2,093 | | | | — | | | | 2,597 | | Accrued investment income | | | — | | | | — | | | | 601 | | | | — | | | | 601 | | Deferred acquisition costs | | | — | | | | — | | | | 1,718 | | | | — | | | | 1,718 | | Intangible assets and goodwill | | | — | | | | — | | | | 223 | | | | — | | | | 223 | | | | | — | | | | — | | | | 16,944 | | | | — | | | | 16,944 | | Less: Allowance for credit losses | | | — | | | | — | | | | (44 | ) | | | — | | | | (44 | ) | | | | | | | | | | | | | | | | | | | | | | Reinsurance recoverable, net | | | — | | | | — | | | | 16,900 | | | | — | | | | 16,900 | | | | | 5 | | | | 188 | | | | 261 | | | | — | | | | 454 | | Intercompany notes receivable | | | 96 | | | | 214 | | | | — | | | | (310 | ) | | | — | | | | | 9 | | | | 944 | | | | (667 | ) | | | — | | | | 286 | | | | | — | | | | — | | | | 5,536 | | | | — | | | | 5,536 | | | | | | | | | | | | | | | | | | | | | | | | | $ | 14,658 | | | $ | 18,074 | | | $ | 101,937 | | | $ | (31,032 | ) | | $ | 103,637 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 41,463 | | | $ | — | | | $ | 41,463 | | Policyholder account balances | | | — | | | | — | | | | 22,921 | | | | — | | | | 22,921 | | Liability for policy and contract claims | | | — | | | | — | | | | 11,280 | | | | — | | | | 11,280 | | | | | — | | | | — | | | | 1,804 | | | | — | | | | 1,804 | | | | | 15 | | | | 109 | | | | 1,951 | | | | — | | | | 2,075 | | Intercompany notes payable | | | — | | | | 96 | | | | 214 | | | | (310 | ) | | | — | | | | | — | | | | 2,679 | | | | 138 | | | | — | | | | 2,817 | | Separate account liabilities | | | — | | | | — | | | | 5,536 | | | | — | | | | 5,536 | | Liabilities related to discontinued operations | | | — | | | | 653 | | | | — | | | | — | | | | 653 | | | | | | | | | | | | | | | | | | | | | | | | | | 15 | | | | 3,537 | | | | 85,307 | | | | (310 | ) | | | 88,549 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 | | | | — | | | | 3 | | | | (3 | ) | | | 1 | | | | | 11,996 | | | | 12,761 | | | | 18,432 | | | | (31,193 | ) | | | 11,996 | | Accumulated other comprehensive income (loss) | | | 4,447 | | | | 4,447 | | | | 4,539 | | | | (8,986 | ) | | | 4,447 | | | | | 899 | | | | (2,671 | ) | | | (7,089 | ) | | | 9,760 | | | | 899 | | | | | (2,700 | ) | | | — | | | | — | | | | — | | | | (2,700 | ) | | | | | | | | | | | | | | | | | | | | | | Total Genworth Financial, Inc.’s stockholders’ equity | | | 14,643 | | | | 14,537 | | | | 15,885 | | | | (30,422 | ) | | | 14,643 | | | | | — | | | | — | | | | 745 | | | | (300 | ) | | | 445 | | | | | | | | | | | | | | | | | | | | | | | | | | 14,643 | | | | 14,537 | | | | 16,630 | | | | (30,722 | ) | | | 15,088 | | | | | | | | | | | | | | | | | | | | | | | Total liabilities and equity | | $ | 14,658 | | | $ | 18,074 | | | $ | 101,937 | | | $ | (31,032 | ) | | $ | 103,637 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 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 | | | | 1,285 | | | | (5 | ) | | | 1,428 | | 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 | | | | — | | | | — | | | | 134 | | | | | | | | | | | | | | | | | | | | | | | | | | 30 | | | | 3,708 | | | | 83,428 | | | | (456 | ) | | | 86,710 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1 | | | | — | | | | 3 | | | | (3 | ) | | | 1 | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 sixnine months ended JuneSeptember 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 2,034 | | | $ | — | | | $ | 2,034 | | | | | (2 | ) | | | 5 | | | | 1,579 | | | | (3 | ) | | | 1,579 | | Net investment gains (losses) | | | — | | | | 8 | | | | (1 | ) | | | — | | | | 7 | | Policy fees and other income | | | — | | | | 2 | | | | 356 | | | | (3 | ) | | | 355 | | | | | | | | | | | | | | | | | | | | | | | | | | (2 | ) | | | 15 | | | | 3,968 | | | | (6 | ) | | | 3,975 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Benefits and other changes in policy reserves | | | — | | | | — | | | | 2,847 | | | | — | | | | 2,847 | | | | | — | | | | — | | | | 280 | | | | — | | | | 280 | | Acquisition and operating expenses, net of deferrals | | | 15 | | | | 5 | | | | 452 | | | | — | | | | 472 | | Amortization of deferred acquisition costs and intangibles | | | — | | | | — | | | | 209 | | | | — | | | | 209 | | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | — | | | | 92 | | | | 10 | | | | (6 | ) | | | 96 | | | | | | | | | | | | | | | | | | | | | | | Total benefits and expenses | | | 15 | | | | 97 | | | | 3,803 | | | | (6 | ) | | | 3,909 | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations before income taxes and equity in income (loss) of subsidiaries | | | (17 | ) | | | (82 | ) | | | 165 | | | | — | | | | 66 | | Provision (benefit) for income taxes | | | — | | | | (17 | ) | | | 53 | | | | — | | | | 36 | | Equity in income (loss) of subsidiaries | | | (491 | ) | | | 96 | | | | — | | | | 395 | | | | — | | | | | | | | | | | | | | | | | | | | | | | Income (loss) from continuing operations | | | (508 | ) | | | 31 | | | | 112 | | | | 395 | | | | 30 | | Income (loss) from discontinued operations, net of taxes | | | 1 | | | | (521 | ) | | | — | | | | — | | | | (520 | ) | | | | | | | | | | | | | | | | | | | | | | | | | (507 | ) | | | (490 | ) | | | 112 | | | | 395 | | | | (490 | ) | Less: net income from continuing operations attributable to noncontrolling interests | | | — | | | | — | | | | 17 | | | | — | | | | 17 | | Less: net income from discontinued operations attributable to noncontrolling interests | | | — | | | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Net income (loss) available to Genworth Financial, Inc.’s common stockholders | | $ | (507 | ) | | $ | (490 | ) | | $ | 95 | | | $ | 395 | | | $ | (507 | ) | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 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 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | — | | | $ | — | | | $ | 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 sixnine months ended JuneSeptember 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (507 | ) | | $ | (490 | ) | | $ | 112 | | | $ | 395 | | | $ | (490 | ) | Other comprehensive income (loss), net of taxes: | | | | | | | | | | | | | | | | | | | | | Net unrealized gains (losses) on securities without an allowance for credit losses | | | 363 | | | | 363 | | | | 363 | | | | (727 | ) | | | 362 | | Net unrealized gains (losses) on securities with an allowance for credit losses | | | (8 | ) | | | (8 | ) | | | (8 | ) | | | 16 | | | | (8 | ) | Derivatives qualifying as hedges | | | 675 | | | | 675 | | | | 725 | | | | (1,400 | ) | | | 675 | | Foreign currency translation and other adjustments | | | (16 | ) | | | (16 | ) | | | (25 | ) | | | 32 | | | | (25 | ) | | | | | | | | | | | | | | | | | | | | | | Total other comprehensive income (loss) | | | 1,014 | | | | 1,014 | | | | 1,055 | | | | (2,079 | ) | | | 1,004 | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income | | | 507 | | | | 524 | | | | 1,167 | | | | (1,684 | ) | | | 514 | | Less: comprehensive income attributable to noncontrolling interests | | | — | | | | — | | | | 7 | | | | — | | | | 7 | | | | | | | | | | | | | | | | | | | | | | | Total comprehensive income available to Genworth Financial, Inc.’s common stockholders | | $ | 507 | | | $ | 524 | | | $ | 1,160 | | | $ | (1,684 | ) | | $ | 507 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | (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 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 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 sixnine months ended JuneSeptember 30, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used by) operating activities: | | | | | | | | | | | | | | | | | | | | | | | $ | (507 | ) | | $ | (490 | ) | | $ | 112 | | | $ | 395 | | | $ | (490 | ) | Less (income) loss from discontinued operations, net of taxes | | | (1 | ) | | | 521 | | | | — | | | | — | | | | 520 | | Adjustments to reconcile net income (loss) to net cash from (used by) operating activities: | | | | | | | | | | | | | | | | | | | | | Equity in income (loss) from subsidiaries | | | 491 | | | | (96 | ) | | | — | | | | (395 | ) | | | — | | Dividends from subsidiaries | | | — | | | | 11 | | | | (11 | ) | | | — | | | | — | | Amortization of fixed maturity securities discounts and premiums | | | — | | | | 3 | | | | (53 | ) | | | — | | | | (50 | ) | Net investment (gains) losses | | | — | | | | (8 | ) | | | 1 | | | | — | | | | (7 | ) | Charges assessed to policyholders | | | — | | | | — | | | | (314 | ) | | | — | | | | (314 | ) | Acquisition costs deferred | | | — | | | | — | | | | (9 | ) | | | — | | | | (9 | ) | Amortization of deferred acquisition costs and intangibles | | | — | | | | — | | | | 209 | | | | — | | | | 209 | | | | | — | | | | — | | | | 5 | | | | — | | | | 5 | | | | | 3 | | | | 29 | | | | (4 | ) | | | — | | | | 28 | | Derivative instruments, limited partnerships and other | | | — | | | | (54 | ) | | | 245 | | | | — | | | | 191 | | Stock-based compensation expense | | | 19 | | | | — | | | | — | | | | — | | | | 19 | | Change in certain assets and liabilities: | | | | | | | | | | | | | | | | | | | | | Accrued investment income and other assets | | | (1 | ) | | | (3 | ) | | | (122 | ) | | | (5 | ) | | | (131 | ) | | | | — | | | | — | | | | 674 | | | | — | | | | 674 | | | | | (6 | ) | | | 23 | | | | (18 | ) | | | — | | | | (1 | ) | Other liabilities, policy and contract claims and other policy-related balances | | | (15 | ) | | | (133 | ) | | | 798 | | | | 5 | | | | 655 | | | | | | | | | | | | | | | | | | | | | | | Net cash from (used by) operating activities | | | (17 | ) | | | (197 | ) | | | 1,513 | | | | — | | | | 1,299 | | | | | | | | | | | | | | | | | | | | | | | Cash flows from (used by) investing activities: | | | | | | | | | | | | | | | | | | | | | Proceeds from maturities and repayments of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity securities | | | — | | | | — | | | | 1,687 | | | | — | | | | 1,687 | | Commercial mortgage loans | | | — | | | | — | | | | 302 | | | | — | | | | 302 | | | | | — | | | | — | | | | 71 | | | | — | | | | 71 | | Proceeds from sales of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | — | | | | — | | | | 1,657 | | | | — | | | | 1,657 | | Purchases and originations of investments: | | | | | | | | | | | | | | | | | | | | | Fixed maturity and equity securities | | | — | | | | — | | | | (4,166 | ) | | | — | | | | (4,166 | ) | Commercial mortgage loans | | | — | | | | — | | | | (271 | ) | | | — | | | | (271 | ) | | | | — | | | | — | | | | (236 | ) | | | — | | | | (236 | ) | Short-term investments, net | | | — | | | | 20 | | | | 39 | | | | — | | | | 59 | | | | | — | | | | — | | | | 10 | | | | — | | | | 10 | | Intercompany notes receivable | | | 23 | | | | (82 | ) | | | 200 | | | | (141 | ) | | | — | | Capital contributions to subsidiaries | | | (1 | ) | | | — | | | | 1 | | | | — | | | | — | | | | | | | | | | | | | | | | | | | | | | | Net cash from (used by) investing activities | | | 22 | | | | (62 | ) | | | (706 | ) | | | (141 | ) | | | (887 | ) | | | | | | | | | | | | | | | | | | | | | | Cash flows used by financing activities: | | | | | | | | | | | | | | | | | | | | | Deposits to universal life and investment contracts | | | — | | | | — | | | | 516 | | | | — | | | | 516 | | Withdrawals from universal life and investment contracts | | | — | | | | — | | | | (914 | ) | | | — | | | | (914 | ) | Redemption of non-recourse funding obligations | | | — | | | | — | | | | (315 | ) | | | — | | | | (315 | ) | Repayment and repurchase of long-term debt | | | — | | | | (471 | ) | | | — | | | | — | | | | (471 | ) | Dividends paid to noncontrolling interests | | | — | | | | — | | | | (9 | ) | | | — | | | | (9 | ) | Intercompany notes payable | | | — | | | | (223 | ) | | | 82 | | | | 141 | | | | — | | | | | (5 | ) | | | (4 | ) | | | 58 | | | | — | | | | 49 | | | | | | | | | | | | | | | | | | | | | | | Net cash used by financing activities | | | (5 | ) | | | (698 | ) | | | (582 | ) | | | 141 | | | | (1,144 | ) | | | | | | | | | | | | | | | | | | | | | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | — | | | | — | | | | (12 | ) | | | — | | | | (12 | ) | | | | | | | | | | | | | | | | | | | | | | Net change in cash, cash equivalents and restricted cash | | | — | | | | (957 | ) | | | 213 | | | | — | | | | (744 | ) | 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 | | | — | | | | 504 | | | | 2,093 | | | | — | | | | 2,597 | | 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 | | $ | — | | | $ | 504 | | | $ | 2,093 | | | $ | — | | | $ | 2,597 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 | | | | | | | | | | | | | | | | | | | | | | 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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 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 JuneSeptember 30, 2020, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $14.2$14.4 billion and $15.9$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 sixnine months ended JuneSeptember 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. Quantitative and Qualitative Disclosures About Market Risk | Quantitative and Qualitative Disclosures About Market Risk
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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 JuneSeptember 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 secondthird quarter of 2020, the U.S. dollar strengthenedweakened against the Australian dollar compared to the respective average rate in the secondthird 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. Controls and Procedures |
Evaluation of Disclosure Controls and Procedures As of JuneSeptember 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 JuneSeptember 30, 2020.
Changes in Internal Control Over Financial Reporting During the Quarter Ended JuneSeptember 30, 2020 During the three months ended JuneSeptember 30, 2020, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II—OTHER INFORMATION | 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 JuneSeptember 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 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 has 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 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. 178
| | | | | | | | 2.1 | | FifteenthSixteenth Waiver and Agreement, dated as of JuneSeptember 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 June 30,October 1, 2020) | | | 10.1§ | | Form of 2020-2022 Performance Stock Unit Award Agreement under the 2018 Genworth Financial, Inc. Omnibus Incentive Plan (filed herewith) | | | 10.2§ | | Form of 2020-2022 Restricted Stock Award Agreement under the 2018 Genworth Financial, Inc. Omnibus Incentive Plan (filed herewith) | | | 10.3§ | | Form of 2020-2022 Cash Based Award Agreement under the 2018 Genworth Financial, Inc. Omnibus Incentive Plan (filed herewith) | | | 10.4 | | Secured Promissory Note, dated as of July 20, 2020, issued by Genworth Financial, Inc. and Genworth Financial International Holdings, LLC to AXA S.A. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 20, 2020) | | | 31.1 | | Certification of Thomas J. McInerney (filed herewith) | | | 31.2 | | Certification of Kelly L. GrohDaniel J. Sheehan, IV (filed herewith) | | | 32.1 | | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Thomas J. McInerney (filed herewith) | | | 32.2 | | Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Kelly L. GrohDaniel J. Sheehan, IV (filed herewith) | | | 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 JuneSeptember 30, 2020, has been formatted in Inline XBRL |
§ | Management contract or compensatory plan or arrangement.
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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: AugustNovember 5, 2020 | | | | | | | | | | | | | | | By: | | | | | | | | | Vice President and Controller (Principal Accounting Officer) |
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