0001276520 srt:IndustrialPropertyMemberus-gaap:FixedMaturitiesMember us-gaap:DomesticCorporateDebtSecuritiesMember us-gaap:TechnologySectorMember gnw:GreaterThanHundredPercentMember 2019-12-31NetAssetValueMember 2020-09-30 0001276520 gnw:OtherIndustriesMemberInternalModelsMember us-gaap:FairValueInputsLevel3Member us-gaap:DomesticCorporateDebtSecuritiesMember gnw:InternalModelsMemberus-gaap:TechnologySectorMember 2020-01-01 2020-06-302020-09-30
Table of Contents
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM
10-Q
 
 
 
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2020
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
            
to
            
Commission file number
001-32195
 
 
 

GENWORTH FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
80-0873306
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
  
6620 West Broad Street
Richmond, Virginia
 
23230
(Address of principal executive offices)
 
(Zip Code)
(804)
281-6000
(Registrant’s telephone number, including area code)
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes
☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T
(§ (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes
☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
 
Large accelerated filer
 
☒
  
Accelerated filer
 
☐
    
Non-accelerated filer
 
☐
  
Smaller reporting company
 
☐
    
 
 
 
  
Emerging growth company
 
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2
of the Exchange Act).    Yes  ☐    No  ☒
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Trading

Symbol
 
Name of each exchange

on which registered
Class A Common Stock, par value $.001 per share
GNW
 
GNW
New York Stock Exchange
As of July 27,October 
28
, 2020, 594,010,907 505,594,794
shares of Class A Common Stock, par value $0.001 per share, were outstanding.
 
 
Table of Contents
TABLE OF CONTENTS
 
 
  
 
  
Page
 
PART I—FINANCIAL INFORMATION
  
3
   
Item 1.
  
Financial Statements
  
 
3
 
Condensed Consolidated Balance Sheets as of JuneSeptember 30, 2020 (Unaudited) and December 31, 2019
  
 
3
 
Condensed Consolidated Statements of Income for the three and sixnine months ended JuneSeptember 30, 2020 and 2019 (Unaudited)
  
 
4
 
Condensed Consolidated Statements of Comprehensive Income for the three and sixnine months ended JuneSeptember 30, 2020 and 2019 (Unaudited)
  
 
5
 
Condensed Consolidated Statements of Changes in Equity for the three and sixnine months ended JuneSeptember 30, 2020 and 2019 (Unaudited)
  
 
6
 
Condensed Consolidated Statements of Cash Flows for the sixnine months ended JuneSeptember 30, 2020 and 2019 (Unaudited)
  
 
8
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
  
 
9
 
   
Item 2.
  
Management’s Discussion and Analysis of Financial Condition and Results of Operations
  
 
7980
 
   
Item 3.
  
Quantitative and Qualitative Disclosures About Market Risk
  
 
173176
 
   
Item 4.
  
Controls and Procedures
  
 
173177
 
  
PART II—OTHER INFORMATION
  
174
Item 1.
Legal Proceedings
174177
 
   
Item 1A.
1.
  
Risk FactorsLegal Proceedings
  
 
174177
 
   
Item 6.
1A.
  
ExhibitsRisk Factors
  
 
175177
Item 6.
Exhibits
179
 
  
Signatures
  
 
176180
 
2
Table of Contents
PART I—FINANCIAL INFORMATION
Item 1.
Item 1. Financial Statements
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in millions, except per share amounts)
 
   
June 30,
2020
  
December 31,
2019
 
   
(Unaudited)
    
Assets
   
Investments:
   
Fixed maturity securities
available-for-sale,
at fair value (amortized cost of $54,834 and allowance for credit losses of $7 as of June 30,
2020)
  $63,544  $60,339 
Equity securities, at fair value
   206   239 
Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4 as of June 30, 2020 and December 31,
2019)
   6,945   6,976 
Less: Allowance for credit losses
   (28)   (13) 
  
 
 
  
 
 
 
Commercial mortgage loans, net
   6,917   6,963 
Policy loans
   2,182   2,058 
Other invested assets
   2,473   1,632 
  
 
 
  
 
 
 
Total investments
   75,322   71,231 
Cash, cash equivalents and restricted cash
   2,597   3,341 
Accrued investment income
   601   654 
Deferred acquisition costs
   1,718   1,836 
Intangible assets and goodwill
   223   201 
Reinsurance recoverable
   16,944   17,103 
Less: Allowance for credit losses
   (44)   —   
  
 
 
  
 
 
 
Reinsurance recoverable, net
   16,900   17,103 
Other assets
   454   443 
Deferred tax asset
   286   425 
Separate account assets
   5,536   6,108 
  
 
 
  
 
 
 
Total assets
  $103,637  $101,342 
  
 
 
  
 
 
 
Liabilities and equity
   
Liabilities:
   
Future policy benefits
  $41,463  $40,384 
Policyholder account balances
   22,921   22,217 
Liability for policy and contract claims
   11,280   10,958 
Unearned premiums
   1,804   1,893 
Other liabilities
   2,075   1,428 
Non-recourse
funding obligations
   —     311 
Long-term borrowings
   2,817   3,277 
Separate account liabilities
   5,536   6,108 
Liabilities related to discontinued operations
   653   134 
  
 
 
  
 
 
 
Total liabilities
   88,549   86,710 
  
 
 
  
 
 
 
Commitments and contingencies
  
Equity:
   
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 594 million and 592 million shares issued as of June 30, 2020 and December 31, 2019, respectively; 506 million and 504 million shares outstanding as of June 30, 2020 and December 31, 2019, respectively
   1   1 
Additional
paid-in
capital
   11,996   11,990 
Accumulated other comprehensive income (loss)
   4,447   3,433 
Retained earnings
   899   1,461 
Treasury stock, at cost (88 million shares as of June 30, 2020 and December 31, 2019)
   (2,700)   (2,700) 
  
 
 
  
 
 
 
Total Genworth Financial, Inc.’s stockholders’ equity
   14,643   14,185 
Noncontrolling interests
   445   447 
  
 
 
  
 
 
 
Total equity
   15,088   14,632 
  
 
 
  
 
 
 
Total liabilities and equity
  $103,637  $101,342 
  
 
 
  
 
 
 
 
 
September 30,
2020
 
 
December 31,
2019
 
 
 
(Unaudited)
 
 
 
 
Assets
 
   
 
   
Investments:
 
   
 
   
Fixed maturity securities available-for-sale, at fair value (amortized cost of $55,252 and allowance for credit losses of $5 as of September 30, 2020)
 
$
64,416
 
 
$
60,339
 
Equity securities, at fair value
 
 
629
 
 
 
239
 
Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4 as of September 30, 2020 and December 31, 2019)
 
 
6,911
 
 
 
6,976
 
Less: Allowance for credit losses
 
 
(31
) 
 
 
(13
) 
 
 
 
 
 
 
 
 
 
Commercial mortgage loans, net
 
 
6,880
 
 
 
6,963
 
Policy loans
 
 
2,153
 
 
 
2,058
 
Other invested assets
 
 
2,402
 
 
 
1,632
 
 
 
 
 
 
 
 
 
 
Total investments
 
 
76,480
 
 
 
71,231
 
Cash, cash equivalents and restricted cash
 
 
2,780
 
 
 
3,341
 
Accrued investment income
 
 
650
 
 
 
654
 
Deferred acquisition costs
 
 
1,623
 
 
 
1,836
 
Intangible assets and goodwill
 
 
209
 
 
 
201
 
Reinsurance recoverable
 
 
16,832
 
 
 
17,103
 
Less: Allowance for credit losses
 
 
(44
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
Reinsurance recoverable, net
 
 
16,788
 
 
 
17,103
 
Other assets
 
 
445
 
 
 
443
 
Deferred tax asset
 
 
250
 
 
 
425
 
Separate account assets
 
 
5,700
 
 
 
6,108
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
104,925
 
 
$
101,342
 
 
 
 
 
 
 
 
 
 
Liabilities and equity
 
   
 
   
Liabilities:
 
   
 
   
Future policy benefits
 
$
41,995
 
 
$
40,384
 
Policyholder account balances
 
 
22,731
 
 
 
22,217
 
Liability for policy and contract claims
 
 
11,373
 
 
 
10,958
 
Unearned premiums
 
 
1,846
 
 
 
1,893
 
Other liabilities
 
 
1,913
 
 
 
1,386
 
Non-recourse funding obligations
 
 
0  
 
 
 
311
 
Long-term borrowings
 
 
3,570
 
 
 
3,277
 
Separate account liabilities
 
 
5,700
 
 
 
6,108
 
Liabilities related to discontinued operations
 
 
565
 
 
 
176
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 
89,693
 
 
 
86,710
 
 
 
 
 
 
 
 
 
 
Commitments and contingencies
 
  
 
  
Equity:
 
   
 
   
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 594 million and 592 million shares issued as of September 30, 2020 and December 31, 2019, respectively; 506 million and 504 million shares outstanding as of September 30, 2020 and December 31, 2019, respectively
 
 
1
 
 
 
1
 
Additional paid-in capital
 
 
11,997
 
 
 
11,990
 
Accumulated other comprehensive income (loss)
 
 
4,141
 
 
 
3,433
 
Retained earnings
 
 
1,317
 
 
 
1,461
 
Treasury stock, at cost (88 million shares as of September 30, 2020 and December 31, 2019)
 
 
(2,700
) 
 
 
(2,700
) 
 
 
 
 
 
 
 
 
 
Total Genworth Financial, Inc.’s stockholders’ equity
 
 
14,756
 
 
 
14,185
 
Noncontrolling interests
 
 
476
 
 
 
447
 
 
 
 
 
 
 
 
 
 
Total equity
 
 
15,232
 
 
 
14,632
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
104,925
 
 
$
101,342
 
 
 
 
 
 
 
 
 
 
See Notes to Condensed Consolidated Financial Statements
 
3
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in millions, except per share amounts)
(Unaudited)
 
  
Three
 
months
 
ended

June 30,
  
Six
 
months
 
ended

June 30,
 
 
  
2020
  
2019
  
2020
  
2019
 
Revenues:
 
 
 
 
Premiums
 
$
1,019
 
 
$
1,001
 
 
$
2,034
 
 
$
1,989
 
Net investment income
 
 
786
 
 
 
816
 
 
 
1,579
 
 
 
1,610
 
Net investment gains (losses)
 
 
159
 
 
 
(46
) 
 
 
7
 
 
 
29
 
Policy fees and other income
 
 
174
 
 
 
223
 
 
 
355
 
 
 
410
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
 
 
2,138
 
 
 
1,994
 
 
 
3,975
 
 
 
4,038
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Benefits and expenses:
 
 
 
 
 
 
Benefits and other changes in policy reserves
 
 
1,486
 
 
 
1,251
 
 
 
2,847
 
 
 
2,533
 
Interest credited
 
 
139
 
 
 
146
 
 
 
280
 
 
 
293
 
Acquisition and operating expenses, net of deferrals
 
 
223
 
 
 
229
 
 
 
472
 
 
 
466
 
Amortization of deferred acquisition costs and intangibles
 
 
93
 
 
 
84
 
 
 
209
 
 
 
165
 
Goodwill impairment
 
 
5
 
 
 
—
  
 
 
 
5
 
 
 
—
  
 
Interest expense
 
 
44
 
 
 
60
 
 
 
96
 
 
 
120
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Total benefits and expenses
 
 
1,990
 
 
 
1,770
 
 
 
3,909
 
 
 
3,577
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Income from continuing operations before income taxes
 
 
148
 
 
 
224
 
 
 
66
 
 
 
461
 
Provision for income taxes
 
 
46
 
 
 
66
 
 
 
36
 
 
 
135
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Income from continuing operations
 
 
102
 
 
 
158
 
 
 
30
 
 
 
326
 
Income (loss) from discontinued operations, net of taxes
 
 
(520
) 
 
 
60
 
 
 
(520
) 
 
 
122
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss)
 
 
(418
) 
 
 
218
 
 
 
(490
) 
 
 
448
 
Less: net income from continuing operations attributable to noncontrolling interests
 
 
23
 
 
 
15
 
 
 
17
 
 
 
35
 
Less: net income from discontinued operations attributable to noncontrolling interests
 
 
—  
 
 
 
35
 
 
 
—  
 
 
 
71
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders
 
$
(441
) 
 
$
168
 
 
$
(507
) 
 
$
342
 
 
 
 
  
 
 
  
 
 
  
 
 
 
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
 
 
$
13
 
 
$
291
 
Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders
 
 
(520
) 
 
 
25
 
 
 
(520
) 
 
 
51
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders
 
$
(441
) 
 
$
168
 
 
$
(507
) 
 
$
342
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
 
 
 
 
 
 
Basic
 
$
0.16
 
 
$
0.29
 
 
$
0.03
 
 
$
0.58
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
 
$
0.15
 
 
$
0.28
 
 
$
0.03
 
 
$
0.57
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
 
 
 
 
 
 
Basic
 
$
(0.87
) 
 
$
0.33
 
 
$
(1.00
) 
 
$
0.68
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
 
$
(0.86
) 
 
$
0.33
 
 
$
(0.99
) 
 
$
0.67
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
Basic
 
 
505.4
 
 
 
503.4
 
 
 
504.8
 
 
 
502.3
 
 
 
 
  
 
 
  
 
 
  
 
 
 
Diluted
 
 
512.5
 
 
 
508.7
 
 
 
511.1
 
 
 
508.7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended
September 30,
 
 
Nine months ended
September 30,
 
 
 
    2020    
 
 
    2019    
 
 
2020
 
 
2019
 
Revenues:
 
   
 
   
 
   
 
   
Premiums
  
$
1,034
 
  
$
1,015
 
 
$
3,068
 
 
$
3,004
 
Net investment income
   827    816   2,406   2,426 
Net investment gains (losses)
   375    (2)   382   27 
Policy fees and other income
   184    191   539   601 
Total revenues
   2,420    2,020   6,395   6,058 
Benefits and expenses:
  
  
 
 
Benefits and other changes in policy reserves
  
 
1,299
 
  
 
1,284
 
 
 
4,146
 
 
 
3,817
 
Interest credited
   137    146   417   439 
Acquisition and operating expenses, net of deferrals
   249    247   721   713 
Amortization of deferred acquisition costs and intangibles
   101    112   310   277 
Goodwill impairment
   0      0     5   0   
Interest expense
   49    59   145   179 
Total benefits and expenses
   1,835    1,848   5,744   5,425 
Income from continuing operations before income taxes
   585    172   651   633 
Provision for income taxes
   150    34   186   169 
Income from continuing operations
   435    138   465   464 
Income (loss) from discontinued operations, net of taxes
   1    (80)   (519)   42 
Net income (loss)
   436    58   (54)   506 
Less: net income from continuing operations attributable to noncontrolling interests
   18    10   35   45 
Less: net income from discontinued operations attributable to noncontrolling interests
   0      30   0     101 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders
  $418   $18  $(89)  $360 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders:
      
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders
  $417   $128  $430  $419 
Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders
   1    (110)   (519)   (59) 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders
  $418   $18  $(89)  $360 
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
      
Basic
  $0.83   $0.25  $0.85  $0.83 
Diluted
  $0.82   $0.25  $0.84  $0.82 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
      
Basic
  $0.83   $0.04  $(0.18)  $0.72 
Diluted
  $0.82   $0.04  $(0.17)  $0.71 
Weighted-average common shares outstanding:
      
Basic
   505.6    503.5   505.1   502.7 
Diluted
   511.5    511.2   511.2   509.5 
See Notes to Condensed Consolidated Financial Statements
 
4
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in millions)
(Unaudited)
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
  2020  
  
  2019  
   
2020
  
2019
 
Net income (loss)
  $(418) $218   $(490)  $448 
Other comprehensive income (loss), net of taxes:
      
Net unrealized gains (losses) on securities without an allowance for credit losses
   682   —      362   —   
Net unrealized gains (losses) on securities with an allowance for credit losses
   (8)   —      (8)   —   
Net unrealized gains (losses) on securities not other-than-temporarily impaired
   —     376    —     755 
Net unrealized gains (losses) on other-than-temporarily impaired securities
   —     —      —     1 
Derivatives qualifying as hedges
   (78)   133    675   202 
Foreign currency translation and other adjustments
   73   43    (25)   97 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total other comprehensive income (loss)
   669   552    1,004   1,055 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total comprehensive income
   251   770    514   1,503 
Less: comprehensive income attributable to noncontrolling interests
   60   81    7   192 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total comprehensive income available to Genworth Financial, Inc.’s common stockholders
  $
 
191  $
 
689   $507  $1,311 
  
 
 
  
 
 
   
 
 
  
 
 
 
   
Three months ended
September 30,
  
Nine months ended
September 30,
 
   
    2020    
  
    2019    
  
    2020    
  
    2019    
 
Net income (loss)
  $436  $58  $(54)  $506 
Other comprehensive income (loss), net of taxes:
     
Net unrealized gains (losses) on securities without an allowance for credit losses
   (98)   0     264   0   
Net unrealized gains (losses) on securities with an allowance for credit losses
   (2)   0     (10)   0   
Net unrealized gains (losses) on securities not other-than-temporarily impaired
   0     371   0     1,126 
Net unrealized gains (losses) on other-than-temporarily impaired securities
   0     0     0     1 
Derivatives qualifying as hedges
   (226)   276   449   478 
Foreign currency translation and other adjustments
   33   (64)   8   33 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other comprehensive income (loss)
   (293)   583   711   1,638 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total comprehensive income
   143   641   657   2,144 
Less: comprehensive income attributable to noncontrolling interests
   31   14   38   206 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total comprehensive income available to Genworth Financial, Inc.’s common stockholders
  $112  $627  $619  $1,938 
  
 
 
  
 
 
  
 
 
  
 
 
 
See Notes to Condensed Consolidated Financial Statements
 
5
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in millions)
(Unaudited)
 
 
Three months ended September 30, 2020
 
 
Common
stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Treasury
stock, at
cost
 
Total
Genworth
Financial,
Inc.’s
stockholders’
equity
 
Noncontrolling
interests
 
Total
equity
 
Balances as of June 30, 2020
 $1  $11,996  $4,447  $899  $(2,700)  $14,643  $445  $15,088 
Comprehensive income (loss):
                            
Net income
  0     0     0    418   0    418  18  436 
Other comprehensive income (loss), net of
taxes
  0     0    (306)   0     0    (306)  13  (293) 
      
 
  
 
  
 
 
Total comprehensive income
      112  31  143 
Stock-based compensation expense and exercises
and other
  0    1   0     0     0    1   0    1 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Balances as of September 30, 2020
 
$
1
 
 
$
11,997
 
 
$
4,141
 
 
$
1,317
 
 
$
(2,700
) 
 
$
14,756
 
 
$
476
 
 
$
15,232
 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
Three months ended June 30, 2020
 
           
Total
      
Three months ended September 30, 2019
 
           
Genworth
      
Common
stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained
earnings
 
Treasury
stock, at
cost
 
Total
Genworth
Financial,
Inc.’s
stockholders’
equity
 
Noncontrolling
interests
 
Total
equity
 
     
Accumulated
     
Financial,
     
   
Additional
 
other
   
Treasury
 
Inc.’s
     
 
Common
 
paid-in
 
comprehensive
 
Retained
 
stock, at
 
stockholders’
 
Noncontrolling
 
Total
 
 
stock
 
capital
 
income (loss)
 
earnings
 
cost
 
equity
 
interests
 
equity
 
Balances as of March 31, 2020
 $1  $11,993  $3,815  $1,340  $(2,700)  $14,449  $385  $14,834 
Balances as of June 30, 2019
 $1  $11,983  $3,013  $1,460  $(2,700)  $13,757  $1,835  $15,592 
Comprehensive income (loss):
                                            
Net loss
  —     —     —     (441)   —     (441)   23   (418) 
Other comprehensive income, net of taxes
  —     —     632   —     —     632   37   669 
Total comprehensive income
            191   60   251 
Stock-based compensation expense and exercises and other
  —     3   —     —     —     3   —     3 
Balances as of June 30, 2020
 $1  $11,996  $4,447  $899  $(2,700)  $14,643  $445  $15,088 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
Three months ended June 30, 2019
 
           
Total
     
           
Genworth
     
     
Accumulated
     
Financial,
     
   
Additional
 
other
   
Treasury
 
Inc.’s
     
 
Common
 
paid-in
 
comprehensive
 
Retained
 
stock, at
 
stockholders’
 
Noncontrolling
 
Total
 
 
stock
 
capital
 
income (loss)
 
earnings
 
cost
 
equity
 
interests
 
equity
 
Balances as of March 31, 2019
 
$
1
 
 
$
11,989
 
 
$
2,492
 
 
$
1,292
 
 
$
(2,700
) 
 
$
13,074
 
 
$
1,808
 
 
$
14,882
 
Repurchase of subsidiary shares
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
(32
) 
 
 
(32
) 
Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
168
 
 
 
—
  
 
 
 
168
 
 
 
50
 
 
 
218
 
  0     0     0    18   0    18  40  58 
Other comprehensive income, net of taxes
 
 
—
  
 
 
 
—
  
 
 
 
521
 
 
 
—
  
 
 
 
—
  
 
 
 
521
 
 
 
31
 
 
 
552
 
Other comprehensive income (loss), net of
taxes
  0     0    609   0     0    609  (26)  583 
               
 
  
 
  
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
689
 
 
 
81
 
 
 
770
 
 
 
 
 
 
 
627
 
 
14
 
 
641
 
Dividends to noncontrolling interests
  —     —     —     —     —     —     (25)   (25)   0     0     0     0     0     0    (96)  (96) 
Stock-based compensation expense and exercises and other
  —     (6)   —     —     —     (6)   3   (3)   0    3   0     0     0    3  5  8 
                         
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Balances as of June 30, 2019
 $1  $11,983  $3,013  $1,460  $(2,700)  $13,757  $1,835  $15,592 
Balances as of September 30, 2019
 $1  $11,986  $3,622  $1,478  $(2,700)  $14,387  $1,758  $16,145 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
6
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY, CONTINUED
(Amounts in millions)
(Unaudited)
 
 
Nine months ended September 30, 2020
 
  
Common
stock
  
Additional
paid-in
capital
  
Accumulated
other
comprehensive
income (loss)
  
Retained
earnings
  
Treasury
stock, at
cost
  
Total
Genworth
Financial,
Inc.’s
stockholders’
equity
  
Noncontrolling
interests
  
Total
equity
 
Balances as of December 31, 2019
 $1  $11,990  $3,433  $1,461  $(2,700)  $14,185  $447  $14,632 
Cumulative effect of change in accounting, net of taxes
  0     0     0     (55)   0     (55)   0     (55) 
Comprehensive income (loss):
        
Net income (loss)
  0     0     0     (89)   0     (89)   35   (54) 
Other comprehensive income, net of taxes
  0     0     708   0     0     708   3   711 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
       619   38   657 
Dividends to noncontrolling interests
  0     0     0     0     0     0     (9)   (9) 
Stock-based compensation expense and exercises and other
  0     7   0     0     0     7   0     7 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2020
 $1  $11,997  $4,141  $1,317  $(2,700)  $14,756  $476  $15,232 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
Nine months ended September 30, 2019
 
  
Common
stock
  
Additional
paid-in
capital
  
Accumulated
other
comprehensive
income (loss)
  
Retained
earnings
  
Treasury
stock, at
cost
  
Total
Genworth
Financial,
Inc.’s
stockholders’
equity
  
Noncontrolling
interests
  
Total
equity
 
Balances as of December 31, 2018
 $1  $11,987  $2,044  $1,118  $(2,700)  $12,450  $1,739  $14,189 
Repurchase of subsidiary shares
  0     0     0     0     0     0     (44)   (44) 
Comprehensive income:
        
Net income
  0     0     0     360   0     360   146   506 
Other comprehensive income, net of taxes
  0     0     1,578   0     0     1,578   60   1,638 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total comprehensive income
       1,938   206   2,144 
Dividends to noncontrolling interests
  0     0     0     0     0     0     (149)   (149) 
Stock-based compensation expense and exercises and other
  0     (1)   0     0     0     (1)   6   5 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2019
 $1  $11,986  $3,622  $1,478  $(2,700)  $14,387  $1,758  $16,145 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
See Notes to Condensed Consolidated Financial Statements
7
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY, CONTINUED
(Amounts in millions)
(Unaudited)
  
Six months ended June 30, 2020
 
                 
Total
       
                 
Genworth
       
        
Accumulated
        
Financial,
       
     
Additional
  
other
     
Treasury
  
Inc.’s
       
  
Common
  
paid-in
  
comprehensive
  
Retained
  
stock, at
  
stockholders’
  
Noncontrolling
  
Total
 
  
stock
  
capital
  
income (loss)
  
earnings
  
cost
  
equity
  
interests
  
equity
 
Balances as of December 31, 2019
 
$
1
 
 
$
11,990
 
 
$
3,433
 
 
$
1,461
 
 
$
(2,700
) 
 
$
14,185
 
 
$
447
 
 
$
14,632
 
Cumulative effect of change in accounting, net of taxes
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
(55
) 
 
 
—
  
 
 
 
(55
) 
 
 
—
  
 
 
 
(55
) 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
(507
) 
 
 
—
  
 
 
 
(507
) 
 
 
17
 
 
 
(490
) 
Other comprehensive income (loss), net of taxes
 
 
—
  
 
 
 
—
  
 
 
 
1,014
 
 
 
—
  
 
 
 
—
  
 
 
 
1,014
 
 
 
(10
) 
 
 
1,004
 
            
 
 
  
 
 
  
 
 
 
Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
507
 
 
 
7
 
 
 
514
 
Dividends to noncontrolling interests
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
(9
) 
 
 
(9
) 
Stock-based compensation expense and exercises and other
 
 
—
  
 
 
 
6
 
 
 
—
  
 
 
 
—
  
 
 
 
—
  
 
 
 
6
 
 
 
—
  
 
 
 
6
 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balances as of June 30, 2020
 $1  $11,996  $4,447  $899  $(2,700)  $14,643  $445  $15,088 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
Six months ended June 30, 2019
 
                 
Total
       
                 
Genworth
       
        
Accumulated
        
Financial,
       
     
Additional
  
other
     
Treasury
  
Inc.’s
       
  
Common
  
paid-in
  
comprehensive
  
Retained
  
stock, at
  
stockholders’
  
Noncontrolling
  
Total
 
  
stock
  
capital
  
income (loss)
  
earnings
  
cost
  
equity
  
interests
  
equity
 
Balances as of December 31, 2018
 $1  $11,987  $2,044  $1,118  $(2,700)  $12,450  $1,739  $14,189 
Repurchase of subsidiary shares
  —     —     —     —     —     —     (44)   (44) 
Comprehensive income:
                
Net income
  —     —     —     342   —     342   106   448 
Other comprehensive income, net of taxes
  —     —     969   —     —     969   86   1,055 
           
 
 
  
 
 
  
 
 
 
Total comprehensive income
            1,311   192   1,503 
Dividends to noncontrolling interests
  —     —     —     —     —     —     (53)   (53) 
Stock-based compensation expense and exercises and other
  —     (4)   —     —     —     (4)   1   (3) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Balances as of June 30, 2019
 $1  $11,983  $3,013  $1,460  $(2,700)  $13,757  $1,835  $15,592 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
See Notes to Condensed Consolidated Financial Statements
7
Table of Contents
GENWORTH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in millions)
(Unaudited)
 
  
Six months ended
June 30,
 
  
2020
  
2019
 
Cash flows from operating activities:
  
Net income (loss)
 $(490)  $448 
Less (income) loss from discontinued operations, net of taxes
  520   (122) 
Adjustments to reconcile net income (loss) to net cash from operating activities:
  
Amortization of fixed maturity securities discounts and premiums
  (50)   (57) 
Net investment (gains) losses
  (7)   (29) 
Charges assessed to policyholders
  (314)   (364) 
Acquisition costs deferred
  (9)   (16) 
Amortization of deferred acquisition costs and intangibles
  209   165 
Goodwill impairment
  5   —   
Deferred income taxes
  28   98 
Derivative instruments, limited partnerships and other
  191   18 
Stock-based compensation expense
  19   10 
Change in certain assets and liabilities:
  
Accrued investment income and other assets
  (131)   (284) 
Insurance reserves
  674   609 
Current tax liabilities
  (1)   13 
Other liabilities, policy and contract claims and other policy-related balances
  655   134 
Cash from operating activities—discontinued operations
  —     172 
 
 
 
  
 
 
 
Net cash from operating activities
  1,299   795 
 
 
 
  
 
 
 
Cash flows used by investing activities:
  
Proceeds from maturities and repayments of investments:
  
Fixed maturity securities
  1,687   1,774 
Commercial mortgage loans
  302   291 
Other invested assets
  71   51 
Proceeds from sales of investments:
  
Fixed maturity and equity securities
  1,657   2,362 
Purchases and originations of investments:
  
Fixed maturity and equity securities
  (4,166)   (4,054) 
Commercial mortgage loans
  (271)   (561) 
Other invested assets
  (236)   (235) 
Short-term investments, net
  59   3 
Policy loans, net
  10   39 
Cash used by investing activities—discontinued operations
  —     (21) 
 
 
 
  
 
 
 
Net cash used by investing activities
  (887)   (351) 
 
 
 
  
 
 
 
Cash flows used by financing activities:
  
Deposits to universal life and investment contracts
  516   444 
Withdrawals from universal life and investment contracts
  (914)   (1,096) 
Redemption of
non-recourse
funding obligations
  (315)   —   
Repayment and repurchase of long-term debt
  (471)   (1) 
Repurchase of subsidiary shares
  —     (22) 
Dividends paid to noncontrolling interests
  (9)   (14) 
Other, net
  49   55 
Cash used by financing activities—discontinued operations
  —     (61) 
 
 
 
  
 
 
 
Net cash used by financing activities
  (1,144)   (695) 
 
 
 
  
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $—and $12 related to discontinued operations)
  (12)   12 
 
 
 
  
 
 
 
Net change in cash, cash equivalents and restricted cash
  (744)   (239) 
Cash, cash equivalents and restricted cash at beginning of period
  3,341   2,177 
 
 
 
  
 
 
 
Cash, cash equivalents and restricted cash at end of period
  2,597   1,938 
Less cash, cash equivalents and restricted cash of discontinued operations at end of period
  —     223 
 
 
 
  
 
 
 
Cash, cash equivalents and restricted cash of continuing operations at end of period
 $2,597  $1,715 
 
 
 
  
 
 
 
   
Nine months
ended
 
September 30,
 
   
    2020    
  
    2019    
 
Cash flows from operating activities:
  
 
Net income (loss)
  
$
(54
) 
 
$
506
 
Less (income) loss from discontinued operations, net of taxes
  
 
519
 
 
 
(42
) 
Adjustments to reconcile net income (loss) to net cash from operating activities:
  
 
Amortization of fixed maturity securities discounts and premiums
  
 
(97
) 
 
 
(93
) 
Net investment gains
  
 
(382
) 
 
 
(27
) 
Charges assessed to policyholders
  
 
(479
) 
 
 
(532
) 
Acquisition costs deferred
  
 
(9
) 
 
 
(22
) 
Amortization of deferred acquisition costs and intangibles
  
 
310
 
 
 
277
 
Goodwill impairment
  
 
5
 
 
 
0
  
 
Deferred income taxes
  
 
166
 
 
 
106
 
Derivative instruments, limited partnerships and other
  
 
88
 
 
 
121
 
Stock-based compensation expense
  
 
22
 
 
 
17
 
Change in certain assets and liabilities:
  
 
Accrued investment income and other assets
  
 
(183
) 
 
 
(327
) 
Insurance reserves
  
 
1,034
 
 
 
906
 
Current tax liabilities
  
 
6
 
 
 
36
 
Other liabilities, policy and contract claims and other policy-related balances
  
 
769
 
 
 
348
 
Cash from (used by) operating activities—discontinued operations
  
 
(263
) 
 
 
334
 
  
 
 
 
 
 
 
 
Net cash from operating activities
  
 
1,452
 
 
 
1,608
 
  
 
 
 
 
 
 
 
Cash flows used by investing activities:
  
 
Proceeds from maturities and repayments of investments:
  
 
Fixed maturity securities
  
 
2,760
 
 
 
2,734
 
Commercial mortgage loans
  
 
479
 
 
 
395
 
Other invested assets
  
 
108
 
 
 
106
 
Proceeds from sales of investments:
  
 
Fixed maturity and equity securities
  
 
3,270
 
 
 
3,024
 
Purchases and originations of investments:
  
 
Fixed maturity and equity securities
  
 
(7,179
) 
 
 
(5,805
) 
Commercial mortgage loans
  
 
(414
) 
 
 
(682
) 
Other invested assets
  
 
(318
) 
 
 
(349
) 
Short-term investments, net
  
 
(12
) 
 
 
(16
) 
Policy loans, net
  
 
27
 
 
 
51
 
Cash used by investing activities—discontinued operations
  
 
0
  
 
 
 
(6
) 
  
 
 
 
 
 
 
 
Net cash used by investing activities
  
 
(1,279
) 
 
 
(548
) 
  
 
 
 
 
 
 
 
Cash flows used by financing activities:
  
 
Deposits to universal life and investment contracts
  
 
693
 
 
 
637
 
Withdrawals from universal life and investment contracts
  
 
(1,408
) 
 
 
(1,699
) 
Redemption of non-recourse funding obligations
  
 
(315
) 
 
 
0
  
 
Proceeds from issuance of long-term debt
  
 
767
 
 
 
0
  
 
Repayment and repurchase of long-term debt
  
 
(493
) 
 
 
(3
) 
Repurchase of subsidiary shares
  
 
0
  
 
 
 
(22
) 
Dividends paid to noncontrolling interests
  
 
(9
) 
 
 
(55
) 
Other, net
  
 
31
 
 
 
(24
) 
Cash used by financing activities—discontinued operations
  
 
0
  
 
 
 
(76
) 
  
 
 
 
 
 
 
 
Net cash used by financing activities
  
 
(734
) 
 
 
(1,242
) 
  
 
 
 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $0
 
and $8
related to discontinued operations)
  
 
0
  
 
 
 
(4
) 
  
 
 
 
 
 
 
 
Net change in cash, cash equivalents and restricted cash
  
 
(561
) 
 
 
(186
) 
Cash, cash equivalents and restricted cash at beginning of period
  
 
3,341
 
 
 
2,177
 
  
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash at end of period
  
 
2,780
 
 
 
1,991
 
Less cash, cash equivalents and restricted cash of discontinued operations at end of period
  
 
0
  
 
 
 
362
 
  
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash of continuing operations at end of period
  
$
2,780
 
 
$
1,629
 
  
 
 
  
 
 
 
See Notes to Condensed Consolidated Financial Statements
 
8
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Formation of Genworth and Basis of Presentation
Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.
On October 21, 2016, Genworth Financial
F
inancial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as a direct, wholly-owned subsidiary of Asia Pacific Insurance. China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The closing of the transaction remains subject to other closing conditions.
The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.
References to “Genworth Financial,” “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and the notes thereto are, unless the context otherwise requires, to Genworth Financial, Inc. on a consolidated basis.
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. Prior year amounts have been reclassified to conform to the current year presentation.
We operate our business through the following four operating segments:
U.S. Mortgage Insurance.
In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.
•
U.S. Mortgage Insurance.
In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans at specified coverage percentages (“primary mortgage insurance”). We also selectively enter into insurance transactions with lenders and investors, under which we insure a portfolio of loans at or after origination (“pool mortgage insurance”).
•
Australia Mortgage Insurance.
In Australia, we offer lender mortgage insurance products which predominantly insure prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”) and selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.
 
Australia Mortgage Insurance.
In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.
U.S. Life Insurance.
We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.
Runoff.
The Runoff segment includes the results of products which have not been actively sold
since
2011
, but we continue to service our existing blocks of business. These products primarily include variable annuity, variable life insurance and corporate-owned life insurance, as well as funding agreements.
9
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
•
U.S. Life Insurance.
We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.
•
Runoff.
The Runoff segment includes the results of products which have not been actively sold since 2011, but we continue to service our existing blocks of business. These products primarily include variable annuity, variable life insurance and corporate-owned life insurance, as well as funding agreements.
In addition to our
4
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.
On December 12, 2019, we completed the sale of Genworth MI Canada Inc. (“Genworth Canada”), our former Canada mortgage insurance business, to an affiliate of Brookfield Business Partners L.P. (“Brookfield”) and received approximately $1.7 billion in net cash proceeds. Prior to the sale, in the third quarter of 2019, Genworth Canada was reported as discontinued operations and its financial position, results of operations and cash flows were separately reported for all periods presented. All prior periods reflected herein have been
re-presented
on this basis. See note 14 for additional information related to discontinued operations.
Unless otherwise indicated, references to the condensed consolidated balance sheets, the condensed consolidated statements of income, the condensed consolidated statements of cash flows and the notes to the condensed consolidated financial statements, exclude amounts related to discontinued operations.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. PotentialIn addition, potential impacts, risks and uncertainties of the coronavirus pandemic
(“COVID-19”)
may include investment valuations and impairments, commercial mortgage loan restructurings, deferred acquisition cost or intangible assets impairments or the acceleration of amortization, deferred tax asset recoverability and increases to insurance reserves, including higher claims reserves in our mortgage insurance businesses, among other matters. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2019 Annual Report on Form
10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Each reporting period, we assess our ability to continue as a going concern for one year
from
the date the financial statements are issued. As of JuneSeptember 30, 2020, Genworth Holdings has $494$740 million of unrestricted cash and cash equivalents. For the quarterly period ended JuneSeptember 30, 2020, our evaluation of our ability to meet our obligations included the following contractual obligations due within one year from the issue date of our unaudited condensed consolidated financial statements included herein:
Genworth Holdings has $338 million of its 7.20% senior notes maturing in February 2021 and $659 million of its 7.625% senior note
s
maturing in September 2021, excluding deferred amounts. We are currently in compliance with the terms of our debt agreements and interest payments on our senior notes are forecasted to be $144 million for the next twelve months. See note 9 for additional details on our long-term borrowings.
 
 
•
 
A partialAs part of the settlement paymentagreement reached in the amount of £100 million ($125 million) paid to
AXA S.A. (“AXA”) on
July
21
, 2020 in connection with a settlement reached regarding the case titled
AXA S.A. v. Genworth Financial International Holdings, LLC et al.,
As part of the settlement agreement, we issued a secured promissory note agreeing to pay AXA
two
 installments S.A. (“AXA”) that is due in 2022. Under the settlement, certain cash flows to
Genworth
Holdings, including dividends and capital raises, above defined thresholds must be paid to AXA until the promissory note is fully repaid. In addition,
over the next year, we expect to pay AXA approximately $25$45 million inconsisting
of interest on the 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
10
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
and a one-time payment on an unrelated liability and other expenses.associated with underwriting losses on a product sold by a distributor in our former lifestyle protection insurance business. See note 12 for additional details on the case. See note 14 for additional details related to the sale of our former lifestyle protection insurance business and amounts recorded related to loss from discontinued operations.
Genworth Holdings has $356 million of its 7.20% senior notes maturing in February 2021. We are currently in compliance with the terms of our debt agreements and interest payments on our senior notes are forecasted to be $158 million for the next twelve months. See note 9 for additional details on our long-term borrowings.
We also evaluate other conditions and events and their relative significance in relation to our ability to meet our obligations. As anFor example, Genworth Holdings expects to receive intercompany tax payments generated primarily from realized gains in the third quarter of 2020, among other transactions, and is expecting additional intercompany tax payments in future periods. In addition, we are exposed to risks associated with
COVID-19,
which has disrupted the global economy and financial markets, business operations, and consumer behavior and confidence.
 
Due to higher delinquencies and the impact to capital levels resulting from
COVID-19,
we do not expect to receive further dividends in 2020 from our mortgage insurance subsidiaries. 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.
 In addition, the receipt of dividends 
and sale proceeds above certain thresholds from ou
r
Australian mort
gage insurance business are also subject to mandatory
 prepayment conditions.
 
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 SeptemberNovember 30, 2020.
The However, the consummation of this transaction is dependent on steps outside of our control; accordingly, the associated
post-closing
capital contributions
from China
Oceanwide
have not been included in this evaluation.
Absent accessing additional liquidity through third party sources and/or the completion of the China Oceanwide transaction, Genworth Holdings expects to have a cash shortfall of approximately $215 million which raises doubt about our ability to meet our financial obligations for the next year. While conditions and events occurring and expected to occur raise doubt about our ability to meet our financial obligations for the next year, management’s plans alleviate this doubt.
WeManagement 
believes that its
plans
,
along with existing cash and cash equivalents, will 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. 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
financing
an 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.
The impact of the developingongoing coronavirus pandemic is very difficult to predict
.
predict. Its
related outcomes and impact on our business
and the capital markets, and our ability to raise capital
will depend on the length of the pandemic,
, economic impacts of social, global and political influences, and the
shape of the economic recovery,
, among other
11
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
factors and uncertainties. While these risks exist, we
believe the execution of our plan will provide sufficient funds to meet our obligations for
one
year following the issuance of our unaudited condensed consolidated financial statements.
(2) Accounting Changes
Accounting Pronouncements Recently Adopted
On January 1, 2020, we adopted new accounting guidance related to disclosure requirements for defined benefit plans as part of the Financial Accounting Standards Board’s (the “FASB”) disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for defined benefit pension and other postretirement benefit plans. We adopted this new accounting guidance using the retrospective method, which did not have a significant impact on our condensed consolidated financial statements and disclosures.
11
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On January 1, 2020, we adopted new accounting guidance related to fair value disclosure requirements as part of the FASB’s disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for fair value measurements. The guidance includes new disclosure requirements related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. We adopted this new accounting guidance using the prospective method for disclosures related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty and the retrospective method for all other disclosures. This accounting guidance did not impact our condensed consolidated financial statements but impacted our fair value disclosures.
In March 2020, the FASB issued new accounting guidance related to reference rate reform, which was effective for us on January 1, 2020. The guidance provides temporary guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform, which includes the transition away from the London Interbank Offered Rate (“LIBOR”). This new guidance provides optional practical expedients and exceptions for applying generally accepted accounting principles to investments, derivatives or other transactions affected by reference rate reform such as those that impact the assessment of derivative hedge effectiveness and contract modifications, to include continuing hedge accounting when certain critical terms of a hedging relationship change and modifying certain effectiveness assessments to exclude certain potential sources of ineffectiveness. In addition to the optional practical expedients, theth
e
 guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. We adopted this guidance prospectively and it did not have a significant impact on our condensed consolidated financial statements or disclosures. However, the amendments in this guidance may be elected over time through December 31, 2022 as reference rate reform activities occur and therefore, this guidance may impact our procedures, including our process for assessing the effectiveness of our cash flow hedging relationships, determined on an individual hedge basis, as we implement measures to transition away from LIBOR.LIBO
R.
On January 1, 2020, we adopted new accounting guidance related to accounting for credit losses on financial instruments.
The guidance requires entities to recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most financial instruments not measured at fair value, which primarily
12
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
includes our commercial mortgage loans, bank loan investments and reinsurance recoverables. The new guidance also requires the recognition of an allowance for expected credit losses as a liability in our consolidated balance sheet for off-balance
sheet
credit exposures, including commitments to fund bank loan investments, private placement investments and commercial mortgage loans. The new guidance did not have a significant impact on other assets not measured at fair value. The FASB also issued an amendment to the guidance allowing entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments, which we did not elect.
For our commercial mortgage loans, we determine the adequacy of the allowance for credit losses utilizing an analytical model that provides various loss scenarios based on historical experience adjusted for current events, trends, economic conditions and reasonable and supportable forecasts that result in a loss in the loan portfolio over the estimated life of the loans. We revert to historical credit loss experience for periods beyond forecasts that are reasonable and supportable. The allowance for credit losses is measured on a collective basis with consideration for debt service coverage ratio,
debt-to-value,
property-type and geographic location. Key
12
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
inputs into the analytical model include exposure, weighted-average life, return, historical loss rates and forecast
scenarios. Actual amounts realized over time could differ from the amounts estimated for the allowance for credit losses reported in the condensed consolidated financial statements. Commercial mortgage loans are written off against the allowance to the extent principal or interest is deemed uncollectible. Accrued interest related to commercial mortgage loans is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $
25
$24 million as of June 
September 30,
,
2020
. 2020. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our commercial mortgage loans are written off after
90
days and once
collectability
is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses).
We adopted the guidance related to our investments carried at amortized cost using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $23 million, net of deferred taxes of $6 million, for commercial mortgage loans and bank loan investments, with an offset to cumulative effect of change in accounting within retained earnings. See note 4 for additional disclosures related to commercial mortgage loans. We adopted the guidance related to our
off-balance
sheet credit exposures using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $1 million, included in other liabilities in our condensed consolidated balance sheet, with an offset to cumulative effect of change in accounting within retained earnings.
The allowance for credit losses for reinsurance recoverables is evaluated based on historical loss experience adjusted for current events and reasonable and supportable forecasts from both internal and external sources. The allowance is measured by reinsurer, taking into consideration the reinsured product type and collateral type, and is calculated based on an externally reported probability of default corresponding to the reinsurer’s credit rating and the expected duration of the reinsurer’s contractual obligation to reimburse us for ceded claims on the underlying policies. Our estimate of the allowance reflects consideration for collateral securing the reinsurance agreements and expected recoveries of amounts previously charged off and expected to be charged off. We also consider other credit risk factors, including, among other factors, the historical frequency and severity of the associated insurance claims, aging of recoverables and regulatory, legal and economic factors, to determine if an additional incremental allowance for credit losses is required. No reversion adjustments are necessary as the starting point for our allowance for credit losses reflects historical loss experience covering the expected duration of the reinsurer’s contractual obligation to reimburse us. If available facts and circumstances indicate the reinsurance recoverable does not reflect expectations consistent with the collective analysis, the reinsurance
13
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
recoverable is assessed on a separate basis. Write-offs of reinsurance recoverables are deducted from the allowance in the period the reinsurance recoverable is determined to be uncollectible. We adopted the guidance related to our reinsurance recoverables using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $31 million, net of deferred taxes of $9 million, with an offset to cumulative effect of change in accounting within retained earnings. See note 8 for additional disclosures related to reinsurance recoverables.
The new guidance retains most of the existing impairment guidance for
available-for-sale
fixed maturity securities but amends the presentation of credit losses to reflect an allowance for credit losses as opposed to a
write-down of the amortized cost of the investment and permits the reversal of credit losses through net income (loss) when reassessing changes in credit losses each reporting period.
Available-for-sale
fixed maturity securities in an unrealized loss position are evaluated to determine whether the decline in fair value is related to credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency/agencies and adverse conditions specifically related to the security, among other factors. If a credit loss exists, the present value of cash flows
13
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
expected to be collected from the security are compared to the amortized cost basis of the security. If the present
value of cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments. When developing the estimate of cash flows expected to be collected, we utilize an analytical model that provides for various loss scenarios and consider the industry sector, current levels of subordination, geographic location and other relevant characteristics of the security or underlying assets, as well as reasonable and supportable forecasts. Losses are written off against the allowance when deemed uncollectible or when we intend to sell or expect we will be required to sell a security prior to recovering our amortized cost. We exclude accrued interest related to
available-for-sale
fixed maturity securities from the estimate of allowance for credit losses. Accrued interest is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $544$
565
 million as of JuneSeptember 30, 2020. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our
available-for-sale
fixed maturity securities are written off after 90 days and once
collectability
is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses). We adopted the guidance related to our
available-for-sale
fixed maturity securities for which a previous other-than-temporary impairment was recognized prior to the date of adoption using the prospective method and the modified retrospective method for all other
available-for-sale
fixed maturity securities, which did not have any impact upon adoption.
Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued new accounting guidance related to simplifying the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is currently effective for us on January 1, 2021 using the retrospective method or modified retrospective method for certain changes and prospective method for all other changes, with early adoption permitted. We are in process of evaluating thedo not expect a significant impact thefrom this guidance may have on our condensed consolidated financial statements and disclosures.
In August 2018, the FASB issued new accounting guidance that significantly changes the recognition and measurement of long-duration insurance contracts and expands disclosure requirements, which impacts our life
14
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
insurance deferred acquisition costs (“DAC”) and liabilities. In accordance with the guidance, the more significant changes include:
assumptions will no longer be
locked-in
at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits (except the discount rate) will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required. Changes will be recorded in net income (loss) using a retrospective approach with a cumulative
catch-up
adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;
the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a
single-A
rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);
the provision for adverse deviation and the premium deficiency test will be eliminated;
14
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
•
assumptions will no longer be locked-in at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits (except the discount rate) will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required. Changes will be recorded in net income (loss) using a retrospective approach with a cumulative catch-up adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;
 
•
the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a single-A rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);
market risk benefits associated with deposit-type contracts will be measured at fair value with changes related to instrument-specific credit risk recorded in other comprehensive income (loss) and remaining changes recorded in net income (loss);
 
•
the provision for adverse deviation and the premium deficiency test will be eliminated;
the amortization method for DAC will generally be on a straight-line basis over the expected contract term; and
 
•
market risk benefits associated with deposit-type contracts will be measured at fair value with changes related to instrument-specific credit risk recorded in other comprehensive income (loss) and remaining changes recorded in net income (loss);
disclosures will be greatly expanded to include significant assumptions and product liability rollforwards.
•
the amortization method for DAC will generally be on a straight-line basis over the expected contract term; and
•
disclosures will be greatly expanded to include significant assumptions and product liability rollforwards.
We expect this guidance to be effective for us on January 1, 2023, subject to the FASB finalizing an additional
one-year
delay, using the modified retrospective method, with early adoption permitted.permitted, which we do not intend to elect. Given the nature and extent of the changes to our operations, this guidance is expected to have a significant impact on our condensed consolidated financial statements.
 
15
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss) per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted common shares outstanding for the periods indicated:
 
  
Three months ended
  
Six months ended
 
  
June 30,
  
June 30,
 
(Amounts in millions, except per share amounts)
 
2020
  
2019
  
2020
  
2019
 
Weighted-average shares used in basic earnings per share calculations
   505.4   503.4    504.8   502.3 
Potentially dilutive securities:
      
Stock options, restricted stock units and stock appreciation rights
   7.1   5.3    6.3   6.4 
  
 
 
  
 
 
   
 
 
  
 
 
 
Weighted-average shares used in diluted earnings per share calculations
   512.5   508.7    511.1   508.7 
  
 
 
  
 
 
   
 
 
  
 
 
 
Income from continuing operations:
  ��   
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 
  
 
 
  
 
 
   
 
 
  
 
 
 
Basic per share
  $0.16  $0.29   $0.03  $0.58 
  
 
 
  
 
 
   
 
 
  
 
 
 
Diluted per share
  $0.15  $0.28   $0.03  $0.57 
  
 
 
  
 
 
   
 
 
  
 
 
 
Income (loss) from discontinued operations:
      
Income (loss) from discontinued operations, net of taxes
  $(520)  $60   $(520)  $122 
Less: net income from discontinued operations attributable to noncontrolling interests
   —     35    —     71 
  
 
 
  
 
 
   
 
 
  
 
 
 
Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders
  $(520)  $25   $(520)  $51 
  
 
 
  
 
 
   
 
 
  
 
 
 
Basic per share
  $(1.03)  $0.05   $(1.03)  $0.10 
  
 
 
  
 
 
   
 
 
  
 
 
 
Diluted per share
  $(1.01)  $0.05   $(1.02)  $0.10 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income (loss):
      
Income from continuing operations
  $102  $158   $30  $326 
Income (loss) from discontinued operations, net of taxes
   (520)   60    (520)   122 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income (loss)
   (418)   218    (490)   448 
Less: net income attributable to noncontrolling interests
   23   50    17   106 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders
  $(441)  $168   $(507)  $342 
  
 
 
  
 
 
   
 
 
  
 
 
 
Basic per share
(1)
  $(0.87)  $0.33   $(1.00)  $0.68 
  
 
 
  
 
 
   
 
 
  
 
 
 
Diluted per share
  $(0.86)  $0.33   $(0.99)  $0.67 
  
 
 
  
 
 
   
 
 
  
 
 
 
   
Three months ended

September 30,
  
Nine months ended

September 30,
 
(Amounts in millions, except per share amounts)
  
     2020     
   
     20
19
     
  
2020
  
2019
 
Weighted-average shares used in basic earnings per share calculations
   505.6    503.5   505.1   502.7 
Potentially dilutive securities:
      
Stock options, restricted stock units and stock appreciation rights
   5.9    7.7   6.1   6.8 
  
 
 
   
 
 
  
 
 
  
 
 
 
Weighted-average shares used in diluted earnings per share calculations
   511.5    511.2   511.2   509.5 
  
 
 
   
 
 
  
 
 
  
 
 
 
Income from continuing operations:
      
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 
  
 
 
   
 
 
  
 
 
  
 
 
 
Basic per share
  $0.83   $0.25  $0.85  $0.83 
  
 
 
   
 
 
  
 
 
  
 
 
 
Diluted per share
  $0.82   $0.25  $0.84  $0.82 
  
 
 
   
 
 
  
 
 
  
 
 
 
Income (loss) from discontinued operations:
      
Income (loss) from discontinued operations, net of taxes
  $1   $(80)  $(519)  $42 
Less: net income from discontinued operations attributable to noncontrolling interests
   0      30   0     101 
  
 
 
   
 
 
  
 
 
  
 
 
 
Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders
  $1   $(110)  $(519)  $(59) 
  
 
 
   
 
 
  
 
 
  
 
 
 
Basic per share
  $0     $(0.22)  $(1.03)  $(0.12) 
  
 
 
   
 
 
  
 
 
  
 
 
 
Diluted per share
  $0     $(0.21)  $(1.02)  $(0.12) 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net income (loss):
      
Income from continuing operations
  $435   $138  $465  $464 
Income (loss) from discontinued operations, net of taxes
   1    (80)   (519)   42 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net income (loss)
   436    58   (54)   506 
Less: net income attributable to noncontrolling interests
   18    40   35   146 
  
 
 
   
 
 
  
 
 
  
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders
  $418   $18  $(89)  $360 
  
 
 
   
 
 
  
 
 
  
 
 
 
Basic per share
(1)
  $0.83   $0.04  $(0.18)  $0.72 
  
 
 
   
 
 
  
 
 
  
 
 
 
Diluted per share
(1)
  $0.82   $0.04  $(0.17)  $0.71 
  
 
 
   
 
 
  
 
 
  
 
 
 
 
(1)
May not total due to whole number calculation.
 
16
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
   
Three months ended
  
Six months ended
 
   
June 30,
  
June 30,
 
(Amounts in millions)
  
2020
  
2019
  
2020
  
2019
 
Fixed maturity securities—taxable
  $601  $634  $1,223  $1,247 
Fixed maturity
securities—non-taxable
   1   2   3   4 
Equity securities
   2   5   4   9 
Commercial mortgage loans
   84   85   169   167 
Policy loans
   49   45   98   91 
Other invested assets
   66   59   113   118 
Cash, cash equivalents, restricted cash and short-term investments
   4   11   15   22 
  
 
 
  
 
 
  
 
 
  
 
 
 
Gross investment income before expenses and fees
   807   841   1,625   1,658 
Expenses and fees
   (21)   (25)   (46)   (48) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net investment income
  $786  $816  $1,579  $1,610 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Three months ended
September 30,
  
Nine months ended
September 30,
 
(Amounts in millions)
  
    2020    
  
    2019    
  
2020
  
2019
 
Fixed maturity securities—taxable
  $632  $631  $1,855  $1,878 
Fixed maturity securities—non-taxable
   2   2   5   6 
Equity securities
   3   4   7   13 
Commercial mortgage loans
   82   87   251   254 
Policy loans
   51   47   149   138 
Other invested assets
   79   62   192   180 
Cash, cash equivalents, restricted cash and short-term investments
   2   8   17   30 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross investment income before expenses and fees
   851   841   2,476   2,499 
Expenses and fees
   (24)   (25)   (70)   (73) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
  $827  $816  $2,406  $2,426 
  
 
 
  
 
 
  
 
 
  
 
 
 
(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
 
   
Three months ended
  
Six months ended
 
   
June 30,
  
June 30,
 
(Amounts in millions)
  
2020
  
2019
  
2020
  
2019
 
Available-for-sale
fixed maturity securities:
     
Realized gains
  $119  $10  $133  $74 
Realized losses
   (5)   (21)   (6)   (27) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net realized gains (losses) on
available-for-sale
fixed maturity securities
   114   (11)   127   47 
  
 
 
  
 
 
  
 
 
  
 
 
 
Impairments:
     
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
   (7)   —     (7)   —   
Net realized gains (losses) on equity securities sold
   —     —     —     3 
Net unrealized gains (losses) on equity securities still held
   9   5   (10)   17 
Limited partnerships
   37   (11)   (3)   4 
Commercial mortgage loans
   1   1   1   —   
Derivative instruments
(1)
   10   (30)   (95)   (42) 
Other
   (5)   —     (6)   —   
  
 
 
  
 
 
  
 
 
  
 
 
 
Net investment gains (losses)
  $159  $(46)  $7  $29 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
Three months ended
September 30,
  
Nine months ended
September 30,
 
(Amounts in millions)
  
     2020     
  
     2019     
  
     2020     
  
     2019     
 
Available-for-sale fixed maturity securities:
     
Realized gains
  $332  $19  $465  $93 
Realized losses
   (2)   (3)   (8)   (30) 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized gains (losses) on available-for-sale fixed maturity securities
   330   16   457   63 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impairments:
     
Total other-than-temporary impairments
   0     0     0     0   
Portion of other-than-temporary impairments included in other comprehensive income (loss)
   0     0     0     0   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net other-than-temporary impairments
   0     0     0     0   
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in allowance for credit losses on available-for-sale fixed maturity securities
   2   0     (5)   0   
Write-down of available-for-sale fixed maturity securities
(1)
   (4)   0     (4)   0   
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 
Limited partnerships
   31   6   28   10 
Commercial mortgage loans
   (3)   (1)   (2)   (1) 
Derivative instruments
(2)
   22   (29)   (73)   (71) 
Other
   (3)   4   (9)   4 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
  $375  $(2)  $382  $27 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
(1)
Represents write-down of securities we intend to sell or will be required to sell prior to recovery of the amortized cost basis.
(2) 
See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).
 
1
177
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
See note 2 for a discussion of our policy for evaluating and measuring the allowance for credit losses related to our
available-for-sale
fixed maturity securities. The following table represents the allowance for credit losses aggregated by security type for
available-for-sale
fixed maturity investments as of and for the three and six months ended June 30, 2020:periods indicated:
 
     
Increase from
  
Increase
                
     
securities
  
(decrease)
     
Decrease
          
     
without
  
from securities
     
due to change
          
     
allowance in
  
with allowance
     
in intent or
          
  
Beginning
  
previous
  
in previous
  
Securities
  
requirement
        
Ending
 
(Amounts in millions)
 
balance
  
periods
  
periods
  
sold
  
to sell
  
Write-offs
  
Recoveries
  
balance
 
Fixed maturity securities:
        
Non-U.S.
corporate
 $—    $4  $—    $—    $—    $—    $—    $4 
Commercial mortgage-backed
  —     3   —     —     —     —     —     3 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
available-for-sale
fixed maturity securities
 $—  $7  $—    $—    $—    $—    $—    $7 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
Three months ended September 30, 2020
 
(Amounts in millions)
 
Beginning
balance
  
Increase
from
securities
without
allowance
in
 
previous
periods
  
Increase
(decrease)
from
securities
with
 
allowance
in
 
previous
periods
  
Securities
sold
  
Decrease
due
 
to
 
change
in
 
intent or
requirement
to sell
  
Write-offs
  
Recoveries
  
Ending
balance
 
Fixed maturity securities:
        
Non-U.S. corporate
 $4  $0    $(2)  $0    $0    $0    $0    $2 
Commercial mortgage-backed
  3   0     0     0     0     0     0     3 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total available-for-sale fixed maturity securities
 $7  $0    $(2)  $0    $0    $0    $0    $5 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
Nine months ended September 30, 2020
 
(Amounts in millions)
 
Beginning
balance
  
Increase
from
securities
without
allowance
in
previous
periods
  
Increase
(decrease)
from
securities
with
 
allowance
in
 
previous
periods
  
Securities
sold
  
Decrease
due
 
to
 
change
in
 
intent or
requirement
to sell
  
Write-offs
  
Recoveries
  
Ending
balance
 
Fixed maturity securities:
        
Non-U.S. corporate
 $0    $4  $(2)  $0    $0    $0    $0    $2 
Commercial mortgage-backed
  0     3   0     0     0     0     0     3 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total available-for-sale fixed maturity securities
 $0    $7  $(2)  $0    $0    $0    $0    $5 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (“OCI”) as of and for the periods indicated:
 
   
Three months
   
Six months
 
   
ended
   
ended
 
   
June 30,
   
June 30,
 
(Amounts in millions)
  
2019
   
2019
 
Beginning balance
  $23   $24 
Reductions:
    
Securities sold, paid down or disposed
   —      (1) 
  
 
 
   
 
 
 
Ending balance
  $23   $23 
  
 
 
   
 
 
 
(Amounts in millions)
  
Three months
ended
September 30,
2019
   
Nine months
ended
September 30,
2019
 
Beginning balance
  $23   $24 
Reductions:
    
Securities sold, paid down or disposed
   0      (1) 
  
 
 
   
 
 
 
Ending balance
  $23   $23 
  
 
 
   
 
 
 
 
1
188
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on
available-for-sale
investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:
 
(Amounts in millions)
 
June 30, 2020
  
December 31, 2019
 
Net unrealized gains (losses) on fixed maturity securities without an allowance for credit losses
(1)
  $8,766  $6,676 
Net unrealized gains (losses) on fixed maturity securities with an allowance for credit losses
(1)
   (10)   —   
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves
   (6,420)   (4,789) 
Income taxes, net
   (501)   (406) 
  
 
 
  
 
 
 
Net unrealized investment gains (losses)
   1,835   1,481 
Less: net unrealized investment gains (losses) attributable to noncontrolling interests
   24   25 
  
 
 
  
 
 
 
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.
  $1,811  $1,456 
  
 
 
  
 
 
 
(Amounts in millions)
  
September 30,
2020
  
December 31,
2019
 
Net unrealized gains (losses) on fixed maturity securities without an allowance for credit losses
(1)
  $9,218  $6,676 
Net unrealized gains (losses) on fixed maturity securities with an allowance for credit losses
(1)
   (12)   0   
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves
   (6,998)   (4,789) 
Income taxes, net
   (473)   (406) 
  
 
 
  
 
 
 
Net unrealized investment gains (losses)
   1,735   1,481 
Less: net unrealized investment gains (losses) attributable to noncontrolling interests
   24   25 
  
 
 
  
 
 
 
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.
  $1,711  $1,456 
  
 
 
  
 
 
 
 
(1) 
Excludes foreign exchange.
The change in net unrealized gains (losses) on
available-for-sale
investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:
 
   
As of or for the
 
   
three months ended
 
   
June 30,
 
(Amounts in millions)
  
2020
  
2019
 
Beginning balance
  $1,140  $943 
Unrealized gains (losses) arising during the period:
   
Unrealized gains (losses) on fixed maturity securities
   3,911   1,957 
Adjustment to deferred acquisition costs
   (111)   (52) 
Adjustment to present value of future profits
   5   (2) 
Adjustment to sales inducements
   (34)   (12) 
Adjustment to benefit reserves
   (2,802)   (1,412) 
Provision for income taxes
   (207)   (104) 
  
 
 
  
 
 
 
Change in unrealized gains (losses) on investment securities
   762   375 
Reclassification adjustments to net investment (gains) losses, net of taxes of $24 and $(1)
   (88)   1 
  
 
 
  
 
 
 
Change in net unrealized investment gains (losses)
   674   376 
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
   3   14 
  
 
 
  
 
 
 
Ending balance
  $1,811  $1,305 
  
 
 
  
 
 
 
  
As of or for the

three months ended

September 30,
 
(Amounts in millions)
 
2020
  
2019
 
Beginning balance
 $1,811  $1,305 
Unrealized gains (losses) arising during the period:
  
Unrealized gains (losses) on fixed maturity securities
  781   1,607 
Adjustment to deferred acquisition costs
  (9)   (8) 
Adjustment to present value of future profits
  2   1 
Adjustment to sales inducements
  (5)   (4) 
Adjustment to benefit reserves
  (566)   (1,108) 
Provision for income taxes
  (42)   (104) 
 
 
 
  
 
 
 
Change in unrealized gains (losses) on investment securities
  161   384 
Reclassification adjustments to net investment (gains) losses, net of taxes of $70 and $4
  (261)   (13) 
 
 
 
  
 
 
 
Change in net unrealized investment gains (losses)
  (100)   371 
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
  0     1 
 
 
 
  
 
 
 
Ending balance
 $1,711  $1,675 
 
 
 
  
 
 
 
 
1
199
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   
As of or for the
 
   
six months ended
 
   
June 30,
 
(Amounts in millions)
  
2020
  
2019
 
Beginning balance
  $1,456  $595 
Unrealized gains (losses) arising during the period:
   
Unrealized gains (losses) on fixed maturity securities
   2,199   3,956 
Adjustment to deferred acquisition costs
   57   (1,041) 
Adjustment to present value of future profits
   4   (55) 
Adjustment to sales inducements
   2   (31) 
Adjustment to benefit reserves
   (1,694)   (1,800) 
Provision for income taxes
   (120)   (227) 
  
 
 
  
 
 
 
Change in unrealized gains (losses) on investment securities
   448   802 
Reclassification adjustments to net investment (gains) losses, net of taxes of $25 and $12
   (94)   (46) 
  
 
 
  
 
 
 
Change in net unrealized investment gains (losses)
   354   756 
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
   (1)   46 
  
 
 
  
 
 
 
Ending balance
  $1,811  $1,305 
  
 
 
  
 
 
 
  
As of or for the

nine months ended

September 30,
 
(Amounts in millions)
 
2020
  
2019
 
Beginning balance
 $1,456  $595 
Unrealized gains (losses) arising during the period:
  
Unrealized gains (losses) on fixed maturity securities
  2,980   5,563 
Adjustment to deferred acquisition costs
  48   (1,049) 
Adjustment to present value of future profits
  6   (54) 
Adjustment to sales inducements
  (3)   (35) 
Adjustment to benefit reserves
  (2,260)   (2,908) 
Provision for income taxes
  (162)   (331) 
 
 
 
  
 
 
 
Change in unrealized gains (losses) on investment securities
  609   1,186 
Reclassification adjustments to net investment (gains) losses, net of taxes of $95 and $16
  (355)   (59) 
 
 
 
  
 
 
 
Change in net unrealized investment gains (losses)
  254   1,127 
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
  (1)   47 
 
 
 
  
 
 
 
Ending balance
 $1,711  $1,675 
 
 
 
  
 
 
 
Amounts reclassified out of accumulated other comprehensive income (loss) to net investment gains (losses) include realized gains (losses) on sales of securities, which are determined on a specific identification basis.
2
0
20
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(d) 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
available-for-sale
were as follows:
 
  
Amortized
  
Gross
  
Gross
  
Allowance
    
  
cost or
  
unrealized
  
unrealized
  
for credit
  
Fair
 
(Amounts in millions)
 
cost
  
gains
  
losses
  
losses
  
value
 
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 
Non-U.S.
government
   1,424    125    (7)   —     1,542 
U.S. corporate:
                     
Utilities
   4,392    879    (1)   —     5,270 
Energy
   2,454    203    (63)   —     2,594 
Finance and insurance
   7,400    1,017    (14)   —     8,403 
Consumer—non-cyclical
   5,132    1,147    (2)   —     6,277 
Technology and communications
   2,912    503    (4)   —     3,411 
Industrial
   1,350    157    (4)   —     1,503 
Capital goods
   2,580    454    (6)   —     3,028 
Consumer—cyclical
   1,748    224    (6)   —     1,966 
Transportation
   1,335    254    (24)   —     1,565 
Other
   340    38    —     —     378 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Total U.S. corporate
   29,643    4,876    (124)   —     34,395 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
                     
Utilities
   811    68    —     —     879 
Energy
   1,141    148    (14)   —     1,275 
Finance and insurance
   2,199    284    (16)   (1)   2,466 
Consumer—non-cyclical
   692    86    (1)   —     777 
Technology and communications
   1,066    182    (1)   —     1,247 
Industrial
   883    116    (4)   —     995 
Capital goods
   565    50    (2)   —     613 
Consumer—cyclical
   380    27    —     —     407 
Transportation
   560    84    (6)   (3)   635 
Other
   1,376    218    (3)   —     1,591 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Total
non-U.S.
corporate
   9,673    1,263    (47)   (4)   10,885 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
   1,927    259    (2)   —     2,184 
Commercial mortgage-backed
   2,800    225    (52)   (3)   2,970 
Other asset-backed
   2,987    30    (49)   —     2,968 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Total
available-for-sale
fixed maturity securities
  $54,834   $8,999   $(282)  $(7)  $63,544 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
(Amounts in millions)
 
Amortized
cost or
cost
  
Gross
unrealized
gains
  
Gross
unrealized
losses
  
Allowance
for credit
losses
  
Fair
value
 
Fixed maturity securities:
     
U.S. government, agencies and government-sponsored enterprises
 $3,318  $1,474  $0    $0    $4,792 
State and political subdivisions
  2,591   525   (1)   0     3,115 
Non-U.S. government
  1,276   126   (7)   0     1,395 
U.S. corporate:
     
Utilities
  4,294   924   (1)   0     5,217 
Energy
  2,581   238   (54)   0     2,765 
Finance and insurance
  7,611   1,135   (11)   0     8,735 
Consumer—non-cyclical
  5,160   1,210   (2)   0     6,368 
Technology and communications
  2,993   537   (3)   0     3,527 
Industrial
  1,363   189   (1)   0     1,551 
Capital goods
  2,558   503   (4)   0     3,057 
Consumer—cyclical
  1,794   252   (2)   0     2,044 
Transportation
  1,325   271   (15)   0     1,581 
Other
  346   43   0     0     389 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  30,025   5,302   (93)   0     35,234 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S. corporate:
     
Utilities
  860   75   0     0     935 
Energy
  1,192   163   (7)   0     1,348 
Finance and insurance
  2,319   312   (12)   (1)   2,618 
Consumer—non-cyclical
  712   95   (1)   0     806 
Technology and communications
  1,066   190   0     0     1,256 
Industrial
  935   134   (1)   0     1,068 
Capital goods
  571   61   (6)   0     626 
Consumer—cyclical
  400   38   (2)   0     436 
Transportation
  571   87   (9)   (1)   648 
Other
  1,562   241   (1)   0     1,802 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total non-U.S. corporate
  10,188   1,396   (39)   (2)   11,543 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
  1,825   250   0     0     2,075 
Commercial mortgage-backed
  2,775   228   (24)   (3)   2,976 
Other asset-backed
  3,254   48   (16)   0     3,286 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total available-for-sale fixed maturity securities
 $55,252  $9,349  $(180)  $(5)  $64,416 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
2
211
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
As of December 31, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as
available-for-sale
were as follows:
 
       
Gross unrealized gains
   
Gross unrealized losses
     
  
Amortized
  
Not other-than-
  
Other-than-
  
Not other-than-
  
Other-than-
    
  
cost or
  
temporarily
  
temporarily
  
temporarily
  
temporarily
  
Fair
 
(Amounts in millions)
 
cost
  
impaired
  
impaired
  
impaired
  
impaired
  
value
 
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 
Non-U.S.
government
   1,235    117    —      (2)   —      1,350 
U.S. corporate:
           
Utilities
   4,322    675    —      —     —      4,997 
Energy
   2,404    303    —      (8)   —      2,699 
Finance and insurance
   6,977    798    —      (1)   —      7,774 
Consumer—non-cyclical
   4,909    796    —      (4)   —      5,701 
Technology and communications
   2,883    363    —      (1)   —      3,245 
Industrial
   1,271    125    —      —     —      1,396 
Capital goods
   2,345    367    —      (1)   —      2,711 
Consumer—cyclical
   1,590    172    —      (2)   —      1,760 
Transportation
   1,320    187    —      (1)   —      1,506 
Other
   292    30    —      —     —      322 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Total U.S. corporate
   28,313    3,816    —      (18)   —      32,111 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Non-U.S.
corporate:
           
Utilities
   779    50    —      —     —      829 
Energy
   1,140    179    —      —     —      1,319 
Finance and insurance
   2,087    232    —      —     —      2,319 
Consumer—non-cyclical
   631    55    —      (2)   —      684 
Technology and communications
   1,010    128    —      —     —      1,138 
Industrial
   896    92    —      —     —      988 
Capital goods
   565    40    —      —     —      605 
Consumer—cyclical
   373    24    —      —     —      397 
Transportation
   557    73    —      (1)   —      629 
Other
   1,431    188    —      (2)   —      1,617 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Total
non-U.S.
corporate
   9,469    1,061    —      (5)   —      10,525 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Residential mortgage-backed
   2,057    199    15    (1)   —      2,270 
Commercial mortgage-backed
   2,897    137    —      (8)   —      3,026 
Other asset-backed
   3,262    30    —      (7)   —      3,285 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
Total
available-for-sale
fixed maturity securities
  $53,700   $6,667   $15   $(43)  $—     $60,339 
  
 
 
   
 
 
   
 
 
   
 
 
  
 
 
   
 
 
 
     
Gross unrealized gains
  
Gross unrealized losses
    
(Amounts in millions)
 
Amortized
cost or
cost
  
Not other-than-
temporarily
impaired
  
Other-
t
han-
temporarily
impaired
  
Not other-than-
temporarily
impaired
  
Other-
t
han-
temporarily
impaired
  
Fair
value
 
Fixed maturity securities:
      
U.S. government, agencies and government-sponsored enterprises
 $4,073  $952  $0    $0    $0    $5,025 
State and political subdivisions
  2,394   355   0     (2)   0     2,747 
Non-U.S. government
  1,235   117   0     (2)   0     1,350 
U.S. corporate:
      
Utilities
  4,322   675   0     0     0     4,997 
Energy
  2,404   303   0     (8)   0     2,699 
Finance and insurance
  6,977   798   0     (1)   0     7,774 
Consumer—non-cyclical
  4,909   796   0     (4)   0     5,701 
Technology and communications
  2,883   363   0     (1)   0     3,245 
Industrial
  1,271   125   0     0     0     1,396 
Capital goods
  2,345   367   0     (1)   0     2,711 
Consumer—cyclical
  1,590   172   0     (2)   0     1,760 
Transportation
  1,320   187   0     (1)   0     1,506 
Other
  292   30   0     0     0     322 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  28,313   3,816   0     (18)   0     32,111 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S. corporate:
      
Utilities
  779   50   0     0     0     829 
Energy
  1,140   179   0     0     0     1,319 
Finance and insurance
  2,087   232   0     0     0     2,319 
Consumer—non-cyclical
  631   55   0     (2) �� 0     684 
Technology and communications
  1,010   128   0     0     0     1,138 
Industrial
  896   92   0     0     0     988 
Capital goods
  565   40   0     0     0     605 
Consumer—cyclical
  373   24   0     0     0     397 
Transportation
  557   73   0     (1)   0     629 
Other
  1,431   188   0     (2)   0     1,617 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total non-U.S. corporate
  9,469   1,061   0     (5)   0     10,525 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
  2,057   199   15   (1)   0     2,270 
Commercial mortgage-backed
  2,897   137   0     (8)   0     3,026 
Other asset-backed
  3,262   30   0     (7)   0     3,285 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total available-for-sale fixed maturity securities
 $53,700  $6,667  $15  $(43)  $0    $60,339 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
2
222
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents the gross unrealized losses and fair values of our fixed maturity securities for which an allowance for credit losses has not been recorded, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of JuneSeptember 30, 2020:
 
  
Less than 12 months
  
12 months or more
  
Total
 
     Gross        Gross        Gross    
  Fair  unrealized  Number of  Fair  unrealized  Number of  Fair  unrealized  Number of 
(Dollar amounts in millions) value  losses  securities  value  losses  securities  value  losses  securities 
Description of Securities
         
Fixed maturity securities:
         
State and political subdivisions
 $23  $(1)   6  $—    $—     —    $23  $(1)   6 
Non-U.S.
government
  207   (7)   18   —     —     —     207   (7)   18 
U.S. corporate
  1,785   (107)   291   182   (17)   18   1,967   (124)   309 
Non-U.S.
corporate
  613   (37)   125   12   (2)   2   625   (39)   127 
Residential mortgage-backed
  36   (1)   11   8   (1)   4   44   (2)   15 
Commercial mortgage-backed
  625   (50)   105   —     —     —     625   (50)   105 
Other asset-backed
  1,329   (38)   291   263   (11)   62   1,592   (49)   353 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $4,618  $(241)   847  $465  $(31)   86  $5,083  $(272)   933 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% Below cost:
         
<20% Below cost
 $4,538  $(211)   825  $442  $(24)   83  $4,980  $(235)   908 
20%-50%
Below cost
  80   (30)   22   22   (6)   2   102   (36)   24 
>50% Below cost
  —     —     —     1   (1)   1   1   (1)   1 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $4,618  $(241)   847  $465  $(31)   86  $5,083  $(272)   933 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Investment grade
 $3,731  $(163)   701  $330  $(18)   71  $4,061  $(181)   772 
Below investment grade
  887   (78)   146   135   (13)   15   1,022   (91)   161 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $4,618  $(241)   847  $465  $(31)   86  $5,083  $(272)   933 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
Less than 12 months
  
12 months or more
  
Total
 
(Dollar amounts in millions)
 
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
 
Description of Securities
 
       
Fixed maturity securities:
         
State and political subdivisions
 $66  $(1)   10  $0    $0     —    $66  $(1)   10 
Non-U.S. government
  103   (7)   16   0     0     0     103   (7)   16 
U.S. corporate
  1,475   (82)   228   95   (11)   10   1,570   (93)   238 
Non-U.S. corporate
  589   (27)   106   7   (1)   2   596   (28)   108 
Commercial mortgage-backed
  430   (22)   68   1   (1)   1   431   (23)   69 
Other asset-backed
  675   (10)   159   308   (6)   67   983   (16)   226 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $3,338  $(149)   587  $411  $(19)   80  $3,749  $(168)   667 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% Below cost:
         
<20% Below cost
 $3,264  $(122)   569  $401  $(16)   78  $3,665  $(138)   647 
20%-50% Below cost
  74   (27)   18   10   (3)   2   84   (30)   20 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $3,338  $(149)   587  $411  $(19)   80  $3,749  $(168)   667 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Investment grade
 $2,631  $(85)   472  $338  $(9)   70  $2,969  $(94)   542 
Below investment grade
  707   (64)   115   73   (10)   10   780   (74)   125 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $3,338  $(149)   587  $411  $(19)   80  $3,749  $(168)   667 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
2
233
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents the gross unrealized losses and fair values of our corporate securities for which an allowance for credit losslosses has not been recorded, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of JuneSeptember 30, 2020:
 
 
Less than 12 months
 
12 months or more
 
Total
 
   Gross     Gross     Gross   
 Fair unrealized Number of Fair unrealized Number of Fair unrealized Number of  
Less than 12 months
 
12 months or more
 
Total
 
(Dollar amounts in millions) value losses securities value losses securities value losses securities  
Fair
value
 
Gross
unrealized
losses
 
Number
 
of
securities
 
Fair
value
 
Gross
unrealized
losses
 
Number
 
of
securities
 
Fair
value
 
Gross
unrealized
losses
 
Number
 
of
securities
 
Description of Securities
         
Description of Securities
 
       
U.S. corporate:
                  
Utilities
 $35  $(1)  6  $—    $—     —    $35  $(1)  6  $24  $(1)  6  $0    $0     0    $24  $(1)  6 
Energy
 594  (50)  93  88  (13)  11  682  (63)  104  557  (45)  84  52  (9)  6  609  (54)  90 
Finance and insurance
 429  (14)  56   —     —     —    429  (14)  56  373  (11)  42   0     0     0    373  (11)  42 
Consumer—non-cyclical
 80  (1)  17  43  (1)  2  123  (2)  19  93  (2)  12   0     0     0    93  (2)  12 
Technology and communications
 89  (4)  20   —     —     —    89  (4)  20  100  (3)  12   0     0     0    100  (3)  12 
Industrial
 98  (4)  9   —     —     —    98  (4)  9  72  (1)  6   0     0     0    72  (1)  6 
Capital goods
 90  (5)  14  14  (1)  1  104  (6)  15  33  (3)  7  14  (1)  1  47  (4)  8 
Consumer—cyclical
 181  (4)  32  37  (2)  4  218  (6)  36  86  (1)  21  29  (1)  3  115  (2)  24 
Transportation
 189  (24)  44   —     —     —    189  (24)  44  137  (15)  38   0     0     0    137  (15)  38 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Subtotal, U.S. corporate securities
 1,785  (107)  291  182  (17)  18  1,967  (124)  309  1,475  (82)  228  95  (11)  10  1,570  (93)  238 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Non-U.S.
corporate:
                  
Energy
 150  (14)  23   —     —     —    150  (14)  23  179  (7)  18   0     0     0    179  (7)  18 
Finance and insurance
 215  (10)  43   —     —     —    215  (10)  43  196  (5)  34   0     0     0    196  (5)  34 
Consumer—non-cyclical
  —     —     —    6  (1)  1  6  (1)  1   0     0     0    7  (1)  2  7  (1)  2 
Technology and communications
 34  (1)  16   —     —     —    34  (1)  16 
Industrial
 80  (4)  11   —     —     —    80  (4)  11  29  (1)  4   0     0     0    29  (1)  4 
Capital goods
 62  (2)  8   —     —     —    62  (2)  8  59  (6)  11   0     0     0    59  (6)  11 
Consumer—cyclical
 22  (2)  11   0     0     0    22  (2)  11 
Transportation
 42  (4)  15   —     —     —    42  (4)  15  59  (5)  15   0     0     0    59  (5)  15 
Other
 30  (2)  9  6  (1)  1  36  (3)  10  45  (1)  13   0     0     0    45  (1)  13 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Subtotal,
non-U.S.
corporate securities
 613  (37)  125  12  (2)  2  625  (39)  127  589  (27)  106  7  (1)  2  596  (28)  108 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Total for corporate securities in an unrealized loss position
 $2,398  $(144)  416  $194  $(19)  20  $2,592  $(163)  436  $2,064  $(109)  334  $102  $(12)  12  $2,166  $(121)  346 
 
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
We did not recognize an allowance for credit losses on securities in an unrealized loss position included in the tables above. Based on a qualitative and quantitative review of the issuers of the securities, we believe the decline in fair value is largely due to recent market volatility and is not indicative of credit losses. The issuers continue to make timely principal and interest payments. For all securities in an unrealized loss position without
2
4
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
an allowance for credit losses, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost.
24
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents the gross unrealized losses and fair values of our fixed maturity securities, aggregated by investment type and length of time that individual fixed maturity securities have been in a continuous unrealized loss position, as of December 31, 2019:
 
  
Less than 12 months
  
12 months or more
  
Total
 
(Dollar amounts in millions)
 
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
 
Description of Securities
         
Fixed maturity securities:
         
State and political subdivisions
 $91  $(2)   14  $—    $—     —    $91  $(2)   14 
Non-U.S.
government
  224   (2)   20   —     —     —     224   (2)   20 
U.S. corporate
  123   (5)   27   302   (13)   33   425   (18)   60 
Non-U.S.
corporate
  79   (1)   12   62   (4)   7   141   (5)   19 
Residential mortgage-backed
  22   (1)   10   —     —     —     22   (1)   10 
Commercial mortgage-backed
  381   (5)   51   14   (3)   3   395   (8)   54 
Other asset-backed
  532   (2)   97   439   (5)   115   971   (7)   212 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $1,452  $(18)   231  $817  $(25)   158  $2,269  $(43)   389 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% Below cost:
         
<20% Below cost
 $1,452  $(18)   231  $807  $(20)   155  $2,259  $(38)   386 
20%-50%
Below cost
  —     —     —     10   (5)   3   10   (5)   3 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $1,452  $(18)   231  $817  $(25)   158  $2,269  $(43)   389 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Investment grade
 $1,408  $(14)   223  $702  $(15)   145  $2,110  $(29)   368 
Below investment grade
  44   (4)   8   115   (10)   13   159   (14)   21 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $1,452  $(18)   231  $817  $(25)   158  $2,269  $(43)   389 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
Less than 12 months
  
12 months or more
  
Total
 
(Dollar amounts in millions)
 
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
 
Description of Securities
 
       
Fixed maturity securities:
         
State and political subdivisions
 $91  $(2)   14  $0    $0     0    $91  $(2)   14 
Non-U.S. government
  224   (2)   20   0     0     0     224   (2)   20 
U.S. corporate
  123   (5)   27   302   (13)   33   425   (18)   60 
Non-U.S. corporate
  79   (1)   12   62   (4)   7   141   (5)   19 
Residential mortgage-backed
  22   (1)   10   0     0     0     22   (1)   10 
Commercial mortgage-backed
  381   (5)   51   14   (3)   3   395   (8)   54 
Other asset-backed
  532   (2)   97   439   (5)   115   971   (7)   212 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $1,452  $(18)   231  $817  $(25)   158  $2,269  $(43)   389 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% Below cost:
         
<20% Below cost
 $1,452  $(18)   231  $807  $(20)   155  $2,259  $(38)   386 
20%-50% Below cost
  0     0     0     10   (5)   3   10   (5)   3 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $1,452  $(18)   231  $817  $(25)   158  $2,269  $(43)   389 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Investment grade
 $1,408  $(14)   223  $702  $(15)   145  $2,110  $(29)   368 
Below investment grade
  44   (4)   8   115   (10)   13   159   (14)   21 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for fixed maturity securities in an unrealized loss position
 $1,452  $(18)   231  $817  $(25)   158  $2,269  $(43)   389 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
2
5
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of December 31, 2019:
 
  
Less than 12 months
  
12 months or more
  
Total
 
(Dollar amounts in millions)
 
Fair
value
  
Gross
unrealized
losses
  
Number of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number of
securities
 
Description of Securities
         
U.S. corporate:
         
Energy
 $54  $(3)   10  $80  $(5)   10  $134  $(8)   20 
Finance and insurance
  —     —     —     34   (1)   4   34   (1)   4 
Consumer—non-cyclical
  34   (1)   9   93   (3)   9   127   (4)   18 
Technology and communications
  —     —     —     18   (1)   2   18   (1)   2 
Capital goods
  35   (1)   8   —     —     —     35   (1)   8 
Consumer—cyclical
  —     —     —     54   (2)   6   54   (2)   6 
Transportation
  —     —     —     23   (1)   2   23   (1)   2 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Subtotal, U.S. corporate securities
  123   (5)   27   302   (13)   33   425   (18)   60 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
         
Consumer—non-cyclical
  —     —     —     31   (2)   3   31   (2)   3 
Transportation
  —     —     —     25   (1)   3   25   (1)   3 
Other
  79   (1)   12   6   (1)   1   85   (2)   13 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Subtotal,
non-U.S.
corporate securities
  79   (1)   12   62   (4)   7   141   (5)   19 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for corporate securities in an unrealized loss position
 $202  $(6)   39  $364  $(17)   40  $566  $(23)   79 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
  
Less than 12 months
  
12 months or more
  
Total
 
(Dollar amounts in millions)
 
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
  
Fair
value
  
Gross
unrealized
losses
  
Number
 
of
securities
 
Description of Securities
 
       
U.S. corporate:
         
Energy
 $54  $(3)   10  $80  $(5)   10  $134  $(8)   20 
Finance and insurance
  0     0     0     34   (1)   4   34   (1)   4 
Consumer—non-cyclical
  34   (1)   9   93   (3)   9   127   (4)   18 
Technology and communications
  0     0     0     18   (1)   2   18   (1)   2 
Capital goods
  35   (1)   8   0     0     0     35   (1)   8 
Consumer—cyclical
  0     0     0     54   (2)   6   54   (2)   6 
Transportation
  0     0     0     23   (1)   2   23   (1)   2 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Subtotal, U.S. corporate securities
  123   (5)   27   302   (13)   33   425   (18)   60 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S. corporate:
         
Consumer—non-cyclical
  0     0     0     31   (2)   3   31   (2)   3 
Transportation
  0     0     0     25   (1)   3   25   (1)   3 
Other
  79   (1)   12   6   (1)   1   85   (2)   13 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Subtotal, non-U.S. corporate securities
  79   (1)   12   62   (4)   7   141   (5)   19 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total for corporate securities in an unrealized loss position
 $202  $(6)   39  $364  $(17)   40  $566  $(23)   79 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
The scheduled maturity distribution of fixed maturity securities as of JuneSeptember 30, 2020 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.
 
(Amounts in millions)
  
Amortized
cost or
cost
   
Fair
value
 
Due one year or less
  $1,494   $1,517 
Due after one year through five years
   9,518    10,054 
Due after five years through ten years
   12,978    14,478 
Due after ten years
   23,130    29,373 
  
 
 
   
 
 
 
Subtotal
   47,120    55,422 
Residential mortgage-backed
   1,927    2,184 
Commercial mortgage-backed
   2,800    2,970 
Other asset-backed
   2,987    2,968 
  
 
 
   
 
 
 
Total
  $54,834   $63,544 
  
 
 
   
 
 
 
(Amounts in millions)
  
Amortized
cost or
cost
   
Fair
value
 
Due one year or less
  $1,476   $1,499 
Due after one year through five years
   9,646    10,265 
Due after five years through ten years
   13,164    14,863 
Due after ten years
   23,112    29,452 
  
 
 
   
 
 
 
Subtotal
   47,398    56,079 
Residential mortgage-backed
   1,825    2,075 
Commercial mortgage-backed
   2,775    2,976 
Other asset-backed
   3,254    3,286 
  
 
 
   
 
 
 
Total
  $55,252   $64,416 
  
 
 
   
 
 
 
 
2
6
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
As of JuneSeptember 30, 2020, securities issued by finance and insurance,
consumer—non-cyclical,
utilities and technology and communications industry groups represented approximately 24%, 16%15%, 14%13% and 10%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.
As of JuneSeptember 30, 2020, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.
(e) Commercial Mortgage Loans
Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for credit losses.
We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:
 
  
June 30, 2020
 
December 31, 2019
   
September 30,
2020
 
December 31,
2019
 
(Amounts in millions)
  
Carrying
value
   
% of
total
 
Carrying
value
   
% of
total
   
Carrying
value
   
% of
total
 
Carrying
value
   
% of
total
 
Property type:
              
Retail
  $2,531    36%  $2,590    37%   $2,481    36%  $2,590    37% 
Industrial
   1,655    24   1,670    24    1,685    24  1,670    24 
Office
   1,636    24   1,632    23    1,625    24  1,632    23 
Apartments
   583    8   541    8    566    8  541    8 
Mixed use
   279    4   281    4    292    4  281    4 
Other
   261    4   266    4    262    4  266    4 
  
 
   
 
  
 
   
 
   
 
   
 
  
 
   
 
 
Subtotal
   6,945    100%   6,980    100%    6,911    100%  6,980    100% 
    
 
    
 
     
 
    
 
 
Unamortized balance of loan origination fees
   —       (4)      0      (4)   
Allowance for credit losses
   (28)     (13)      (31)    (13)   
  
 
    
 
     
 
    
 
   
Total
  $6,917    $6,963     $6,880    $6,963   
  
 
    
 
     
 
    
 
   
 
2
7
27
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   
June 30, 2020
  
December 31, 2019
 
(Amounts in millions)
  
Carrying
value
   
% of
total
  
Carrying
value
   
% of
total
 
Geographic region:
       
South Atlantic
  $1,751    25%  $1,715    25% 
Pacific
   1,623    23   1,673    24 
Middle Atlantic
   989    14   992    14 
Mountain
   765    11   753    11 
West North Central
   476    7   488    7 
East North Central
   457    7   455    6 
West South Central
   436    6   433    6 
New England
   254    4   257    4 
East South Central
   194    3   214    3 
  
 
 
   
 
 
  
 
 
   
 
 
 
Subtotal
   6,945    100%   6,980    100% 
    
 
 
    
 
 
 
Unamortized balance of loan origination fees
   —       (4)   
Allowance for credit losses
   (28)     (13)   
  
 
 
    
 
 
   
Total
  $6,917    $6,963   
  
 
 
    
 
 
   
 
  
September 30,
2020
 
 
December 31,
2019
 
(Amounts in millions)
  
Carrying
value
 
  
% of
total
 
 
Carrying
value
 
  
% of
total
 
Geographic region:
  
   
  
   
 
   
  
   
South Atlantic
  
$
1,761
 
  
 
25
% 
 
$
1,715
 
  
 
25
% 
Pacific
  
 
1,571
 
  
 
23
 
 
 
1,673
 
  
 
24
 
Middle Atlantic
  
 
993
 
  
 
14
 
 
 
992
 
  
 
14
 
Mountain
  
 
776
 
  
 
11
 
 
 
753
 
  
 
11
 
West North Central
  
 
481
 
  
 
7
 
 
 
488
 
  
 
7
 
East North Central
  
 
451
 
  
 
7
 
 
 
455
 
  
 
6
 
West South Central
  
 
427
 
  
 
6
 
 
 
433
 
  
 
6
 
New England
  
 
262
 
  
 
4
 
 
 
257
 
  
 
4
 
East South Central
  
 
189
 
  
 
3
 
 
 
214
 
  
 
3
 
 
  
 
 
 
  
 
 
 
 
 
 
 
  
 
 
 
Subtotal
  
 
6,911
 
  
 
100
% 
 
 
6,980
 
  
 
100
% 
 
  
   
  
 
 
 
 
   
  
 
 
 
Unamortized balance of loan origination fees
  
 
0  
 
  
   
 
 
(4
) 
  
   
Allowance for credit losses
  
 
(31
) 
  
   
 
 
(13
) 
  
   
 
  
 
 
 
  
   
 
 
 
 
  
   
Total
  
$
6,880
 
  
   
 
$
6,963
 
  
   
 
  
 
 
 
  
   
 
 
 
 
  
   
The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:
 
  
June 30, 2020
   
September 30, 2020
 
(Amounts in millions)
  
31 - 60 days
past due
 
61 - 90 days
past due
 
Greater than
90 days past
due
 
Total
past due
 
Current
 
Total
   
31 - 60 days
past due
 
61 - 90 days
past due
 
Greater than
90 days past

due
 
Total
past due
 
Current
 
Total
 
Property type:
              
Retail
  $10  $—    $—    $10  $2,521  $2,531   $4  $0    $10  $14  $2,467  $2,481 
Industrial
   —     —     —     —    1,655  1,655    0     0     0     0    1,685  1,685 
Office
   —     —     —     —    1,636  1,636    0     0     0     0    1,625  1,625 
Apartments
   —     —     —     —    583  583    0     0     0     0    566  566 
Mixed use
   —     —     —     —    279  279    0     0     0     0    292  292 
Other
   —     —     —     —    261  261    0     0     0     0    262  262 
  
 
  
 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
  
 
 
Total amortized cost
  $10  $—    $—    $10  $6,935  $6,945   $4  $0    $10  $14  $6,897  $6,911 
  
 
  
 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
  
 
 
% of total commercial mortgage loans
   —  %  —  %  —  %  —  %  100%  100%    0  %  0  %  0  %  0  %  100%  100% 
  
 
  
 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
  
 
 
 
2
8
28
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  
December 31, 2019
   
December 31, 2019
 
(Amounts in millions)
  
31 - 60 days
past due
 
61 - 90 days
past due
 
Greater than
90 days past
due
 
Total
past due
 
Current
 
Total
   
31 - 60 days

past due
 
61 - 90 days
past due
 
Greater than
90 days past

due
 
Total
past due
 
Current
 
Total
 
Property type:
              
Retail
  $—    $—    $—    $—    $2,590  $2,590   $0    $0    $0    $0    $2,590  $2,590 
Industrial
   —     —     —     —    1,670  1,670    0     0     0     0    1,670  1,670 
Office
   —     —     —     —    1,632  1,632    0     0     0     0    1,632  1,632 
Apartments
   —     —     —     —    541  541    0     0     0     0    541  541 
Mixed use
   —     —     —     —    281  281    0     0     0     0    281  281 
Other
   —     —     —     —    266  266    0     0     0     0    266  266 
  
 
  
 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
  
 
 
Total recorded investment
  $—    $—    $—    $—    $6,980  $6,980   $0    $0    $0    $0    $6,980  $6,980 
  
 
  
 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
  
 
 
% of total commercial mortgage loans
   —  %  —  %  —  %  —  %  100%  100%    0  %  0  %  0  %  0  %  100%  100% 
  
 
  
 
  
 
  
 
  
 
  
 
   
 
  
 
  
 
  
 
  
 
  
 
 
For a discussion of our policy related to placing commercial mortgage loans on
non-accrual
status, see Note 2—Summary of Significant Accounting Policies included in the Notes to Consolidated Financial Statements in our 2019 Annual Report on Form
10-K.
As of JuneSeptember 30, 2020, and December 31, 2019, we had 0 commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of September 30, 2020.
As of December 31, 2019, we had
0
commercial mortgage loans on non-accrual status.
status.
During the sixnine months ended JuneSeptember 30, 2020 and the year ended December 31, 2019, we did 0t have any modifications or extensions that were considered troubled debt restructurings.
The following table sets forth the allowance for credit losses related to commercial mortgage loans as of or for the periods indicated:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
(Amounts in millions)
  
  2020  
   
  2019  
   
  2020  
   
  2019  
 
Allowance for credit losses:
        
Beginning balance
  $29   $10   $13   $9 
Cumulative effect of change in accounting
   —      —      16    —   
Provision
   (1)    1    (1)    2 
Write-offs
   —      —      —      —   
Recoveries
   —      —      —      —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $28   $11   $28   $11 
  
 
 
   
 
 
   
 
 
   
 
 
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
(Amounts in millions)
  
    2020    
   
    2019    
   
    2020    
   
    2019    
 
Allowance for credit losses:
        
Beginning balance
  $28   $11   $13   $9 
Cumulative effect of change in accounting
   0      0      16    0   
Provision
   3    1    2    3 
Write-offs
   0      0      0      0   
Recoveries
   0      0      0      0   
  
 
 
   
 
 
   
 
 
   
 
 
 
Ending balance
  $31   $12   $31   $12 
  
 
 
   
 
 
   
 
 
   
 
 
 
In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the
debt-to-value
and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average
debt-to-value
ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower
debt-to-value
indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual
one-time
events such as capital expenditures, prepaid or 
 
2
929
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
based on “normalized” annual income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or
non-recurring
third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio is not used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.
The following tables set forth commercial mortgage loans by year of origination and credit quality indicator as of September 30, 2020:
(Amounts in millions)
  
2020
   
2019
   
2018
   
2017
   
2016
   
2015 and
prior
   
Total
 
Debt-to-value:
              
0% - 50%
  $9   $15   $38   $108   $131   $2,307   $2,608 
51% - 60%
   29    33    191    289    141    734    1,417 
61% - 75%
   373    746    758    330    223    448    2,878 
76% - 100%
   0      0      8    0      0      0      8 
Greater than 100%
   0      0      0      0      0      0      0   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total amortized cost
  $411   $794   $995   $727   $495   $3,489   $6,911 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Debt service coverage ratio:
              
Less than 1.00
  $0     $0     $33   $3   $0     $123   $159 
1.00 - 1.25
   41    12    106    73    13    252    497 
1.26 - 1.50
   69    357    260    96    87    405    1,274 
1.51 - 2.00
   251    356    503    320    266    1,214    2,910 
Greater than 2.00
   50    69    93    235    129    1,495    2,071 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total amortized cost
  $411   $794   $995   $727   $495   $3,489   $6,911 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Write-offs, gross
  $0     $0     $0     $0     $0     $0     $0   
Recoveries
   0      0      0      0      0      0      0   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Write-offs, net
  $0     $0     $0     $0     $0     $0     $0   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
30
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables set forth the
debt-to-value
of commercial mortgage loans by property type as of the dates indicated:
   
June 30, 2020
 
(Amounts in millions)
  
0% - 50%
  
51% - 60%
  
61% - 75%
  
76% - 100%
  
Greater
than 100%
  
Total
 
Property type:
       
Retail
  $963  $572  $996  $—    $—    $2,531 
Industrial
   758   344   553   —     —     1,655 
Office
   530   359   739   8   —     1,636 
Apartments
   218   98   267   —     —     583 
Mixed use
   104   67   108   —     —     279 
Other
   57   65   139   —     —     261 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total amortized cost
  $2,630  $1,505  $2,802  $8  $—    $6,945 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% of total
   38%   22%   40%   —  %   —  %   100% 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average debt service coverage ratio
   2.31   1.80   1.56   1.42   —     1.90 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
  
December 31, 2019
  
September 30, 2020
 
(Amounts in millions)
  
0% - 50%
 
51% - 60%
 
61% - 75%
 
76% - 100%
 
Greater
than 100%
 
Total
  
0% - 50%
 
51% - 60%
 
61% - 75%
 
76% - 100%
 
Greater
than 100%
 
Total
 
Property type:
             
Retail
  $986  $579  $1,025  $—    $—    $2,590  $940  $557  $984  $0    $0    $2,481 
Industrial
   808  337  525   —     —    1,670   775   310   600   0     0     1,685 
Office
   529  380  723   —     —    1,632   513   337   767   8   0     1,625 
Apartments
   211  110  220   —     —    541   220   85   261   0     0     566 
Mixed use
   104  70  107   —     —    281   106   63   123   0     0     292 
Other
   56  69  141   —     —    266   54   65   143   0     0     262 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Total recorded investment
  $2,694  $1,545  $2,741  $—    $—    $6,980 
Total amortized cost
 $2,608  $1,417  $2,878  $8  $0    $6,911 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
% of total
   39%  22%  39%  —  %  —  %  100%   38%   20%   42%   0  %   0  %   100% 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
Weighted-average debt service coverage ratio
   2.32  1.81  1.55   —     —    1.90   2.31   1.81   1.57   1.42   0     1.90 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
  
 
 
 
  
December 31, 2019
 
(Amounts in millions)
 
0% - 50%
  
51%
- 60%
  
61% - 75%
  
76% - 100%
  
Greater
than
 
100%
  
Total
 
Property type:
      
Retail
 $986  $579  $1,025  $0    $0    $2,590 
Industrial
  808   337   525   0     0     1,670 
Office
  529   380   723   0     0     1,632 
Apartments
  211   110   220   0     0     541 
Mixed use
  104   70   107   0     0     281 
Other
  56   69   141   0     0     266 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total recorded investment
 $2,694  $1,545  $2,741  $0    $0    $6,980 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% of total
  39%   22%   39%   0  %   0  %   100% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average debt service coverage ratio
  2.32   1.81   1.55   0     0     1.90 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
30
31
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:
   
June 30, 2020
 
(Amounts in millions)
  
Less than 1.00
  
1.00 - 1.25
  
1.26 - 1.50
  
1.51 - 2.00
  
Greater
than 2.00
  
Total
 
Property type:
       
Retail
  $63  $136  $599  $1,118  $615  $2,531 
Industrial
   24   64   215   670   682   1,655 
Office
   28   112   269   751   476   1,636 
Apartments
   11   25   178   184   185   583 
Mixed use
   3   18   37   106   115   279 
Other
   33   145   19   31   33   261 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total amortized cost
  $162  $500  $1,317  $2,860  $2,106  $6,945 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% of total
   3%   7%   19%   41%   30%   100% 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average
debt-to-value
   57%   61%   63%   58%   41%   54% 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
December 31, 2019
 
(Amounts in millions)
  
Less than 1.00
  
1.00 - 1.25
  
1.26 - 1.50
  
1.51 - 2.00
  
Greater
than 2.00
  
Total
 
Property type:
       
Retail
  $68  $141  $596  $1,148  $637  $2,590 
Industrial
   24   51   221   658   716   1,670 
Office
   44   89   277   751   471   1,632 
Apartments
   16   32   129   175   189   541 
Mixed use
   4   16   37   107   117   281 
Other
   34   147   20   31   34   266 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total recorded investment
  $190  $476  $1,280  $2,870  $2,164  $6,980 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% of total
   3%   7%   18%   41%   31%   100% 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average
debt-to-value
   59%   61%   63%   58%   41%   54% 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
3
1
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables set forth commercial mortgage loans by year of origination and credit quality indicator as of June 30, 2020:
  
September 30, 2020
 
(Amounts in millions)
 
Less than 1.00
  
1.00 - 1.25
  
1.26 - 1.50
  
1.51 - 2.00
  
Greater

than 2.00
  
Total
 
Property type:
      
Retail
 $61  $134  $585  $1,100  $601  $2,481 
Industrial
  23   66   218   704   674   1,685 
Office
  28   111   238   770   478   1,625 
Apartments
  11   24   177   182   172   566 
Mixed use
  3   18   37   118   116   292 
Other
  33   144   19   36   30   262 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total amortized cost
 $159  $497  $1,274  $2,910  $2,071  $6,911 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% of total
  2%   7%   19%   42%   30%   100% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average debt-to-value
  57%   61%   63%   59%   41%   54% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
(Amounts in millions)
  
2020
   
2019
   
2018
   
2017
   
2016
   
2015 and
prior
   
Total
 
Debt-to-value:
              
0% - 50%
  $4   $15   $36   $105   $118   $2,352   $2,630 
51% - 60%
   29    33    190    289    155    809    1,505 
61% - 75%
   236    748    766    337    226    489    2,802 
76% - 100%
   —      —      8    —      —      —      8 
Greater than 100%
   —      —      —      —      —      —      —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total amortized cost
  $269   $796   $1,000   $731   $499   $3,650   $6,945 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Debt service coverage ratio:
                                 
Less than 1.00
  $—     $—     $33   $3   $—     $126   $162 
1.00 - 1.25
   39    12    107    73    13    256    500 
1.26 - 1.50
   62    359    261    97    88    450    1,317 
1.51 - 2.00
   130    357    505    322    268    1,278    2,860 
Greater than 2.00
   38    68    94    236    130    1,540    2,106 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total amortized cost
  $269   $796   $1,000   $731   $499   $3,650   $6,945 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Write-offs, gross
  $—     $—     $—     $—     $—     $—     $—   
Recoveries
   —      —      —      —      —      —      —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Write-offs, net
  $—     $—     $—     $—     $—     $—     $—   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  
December 31, 2019
 
(Amounts in millions)
 
Less than 1.00
  
1.00 - 1.25
  
1.26 - 1.50
  
1.51 - 2.00
  
Greater
than 2.00
  
Total
 
Property type:
      
Retail
 $68  $141  $596  $1,148  $637  $2,590 
Industrial
  24   51   221   658   716   1,670 
Office
  44   89   277   751   471   1,632 
Apartments
  16   32   129   175   189   541 
Mixed use
  4   16   37   107   117   281 
Other
  34   147   20   31   34   266 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total recorded investment
 $190  $476  $1,280  $2,870  $2,164  $6,980 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
% of total
  3%   7%   18%   41%   31%   100% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Weighted-average debt-to-value
  59%   61%   63%   58%   41%   54% 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(f) Limited Partnerships or Similar Entities
Limited partnerships are accounted for at fair value when our partnership interest is considered minor (generally less than 3% ownership in the limited partnerships) and we exercise no influence over operating and financial policies. If our ownership percentage exceeds that threshold, limited partnerships are accounted for using the equity method of accounting. In applying either method, we use financial information provided by the investee generally on a
one-to-three
month lag. However, for limited partnerships measured at fair value, we consider whether an adjustment to the estimated fair value is necessary when the measurement date is not aligned with our reporting date.
Investments in limited partnerships or similar entities are generally considered VIEs when the equity group lacks sufficient financial control. Generally, these investments are limited partner or
non-managing
member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of JuneSeptember 30,
32
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2020 and December 31, 2019, the total carrying value of these investments was $743$823 million and $616 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.
(5) Derivative Instruments
Our business activities routinely deal with fluctuations in interest rates, equity prices, currency
exchange
rates and other asset and liability prices. We use derivative instruments to mitigate or reduce some of these risks.
3
2
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include cash flow hedges.
The following table sets forth our positions in derivative instruments as of the dates indicated:
  
Derivative assets
  
Derivative liabilities
 
     
Fair value
     
Fair value
 
(Amounts in millions)
 
Balance
sheet
 
classification
  
June 30,
2020
  
December 31,
2019
  
Balance
sheet
 
classification
  
June 30,
2020
  
December 31,
2019
 
Derivatives designated as hedges
      
Cash flow hedges:
      
Interest rate swaps
  Other invested assets  $939  $197   Other liabilities  $—    $10 
Foreign currency swaps
  Other invested assets   17   4   Other liabilities   —     —   
  
 
 
  
 
 
   
 
 
  
 
 
 
Total cash flow hedges
   956   201    —     10 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total derivatives designated as hedges
   956   201    —     10 
  
 
 
  
 
 
   
 
 
  
 
 
 
Derivatives not designated as hedges
      
Equity index options
  Other invested assets   66   81   Other liabilities   —     —   
Financial futures
  Other invested assets   —     —     Other liabilities   —     —   
Other foreign currency contracts
  Other invested assets   2   8   Other liabilities   1   1 
GMWB embedded derivatives
  Reinsurance
 
recoverable
(1)
 
 		  38   20   Policyholder
account balances
 
(2)
 
 		  559   323 
Fixed index annuity embedded derivatives
  Other assets   —     —     Policyholder
account balances
 
(3)
 
 		  447   452 
Indexed universal life embedded derivatives
  Reinsurance
 
recoverable		 
 		  —     —     Policyholder
account balances
 
(4)
 
 		  23   19 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total derivatives not designated as hedges
   106   109    1,030   795 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total derivatives
  $1,062  $310   $1,030  $805 
  
 
 
  
 
 
   
 
 
  
 
 
 
(1) 
Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.
(2) 
Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
(3) 
Represents the embedded derivatives associated with our fixed index annuity liabilities.
(4) 
Represents the embedded derivatives associated with our indexed universal life liabilities.
The fair value of derivative positions presented above was not offset by the respective collateral amounts received or provided under these agreements.
3
3
33
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table sets forth our positions in derivative instruments as of the dates indicated:
  
Derivative assets
  
Derivative liabilities
 
    
Fair value
    
Fair value
 
(Amounts in millions)
 
Balance
sheet
 
classification
 
September 30,
2020
  
December 31,
2019
  
Balance
sheet
 
classification
 
September 30,
2020
  
December 31,
2019
 
Derivatives designated as hedges
      
Cash flow hedges:
      
Interest rate swaps
 Other invested assets $708  $197  Other liabilities $4  $10 
Foreign currency swaps
 Other invested assets  10   4  Other liabilities  0     —   
  
 
 
  
 
 
   
 
 
  
 
 
 
Total cash flow hedges
   718   201    4   10 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total derivatives designated as hedges
   718   201    4   10 
  
 
 
  
 
 
   
 
 
  
 
 
 
Derivatives not designated as hedges
       
Equity index options
 Other invested assets  67   81  Other liabilities  0     —   
Financial futures
 Other invested assets  0     —    Other liabilities  0     —   
Other foreign currency contracts
 Other invested assets  19   8  Other liabilities  5   1 
GMWB embedded derivatives
 
Reinsurance recoverable 
(1)
  35   20  
Policyholder account balances 
(2)
  508   323 
Fixed index annuity embedded derivatives
 Other assets  0     —    Policyholder
account balances
(3)
  432   452 
Indexed universal life embedded derivatives
 
Reinsurance recoverable
  0     0    
Policyholder account balances 
(4)
  25   19 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total derivatives not designated as hedges
   121   109    970   795 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total derivatives
  $839  $310   $974  $805 
  
 
 
  
 
 
   
 
 
  
 
 
 
(1) 
Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.
(2) 
Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
(3) 
Represents the embedded derivatives associated with our fixed index annuity liabilities.
(4) 
Represents the embedded derivatives associated with our indexed universal life liabilities.
The fair value of derivative positions presented above was not offset by the respective collateral amounts received or provided under these agreements.
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
34
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:
 
(Notional in millions)
  
Measurement
  
December 31,
2019
   
Additions
   
Maturities/
terminations
 
June 30,
2020
   
Measurement
   
December 31,
2019
   
Additions
   
Maturities/
terminations
 
September 30,
2020
 
Derivatives designated as hedges
                  
Cash flow hedges:
                  
Interest rate swaps
  Notional  $8,968   $1,158   $(1,880)  $8,246    Notional   $8,968   $1,844   $(2,616)  $8,196 
Foreign currency swaps
  Notional   110    —      —     110    Notional    110    0      0     110 
    
 
   
 
   
 
  
 
     
 
   
 
   
 
  
 
 
Total cash flow hedges
     9,078    1,158    (1,880)   8,356      9,078    1,844    (2,616)   8,306 
    
 
   
 
   
 
  
 
     
 
   
 
   
 
  
 
 
Total derivatives designated as hedges
     9,078    1,158    (1,880)   8,356      9,078    1,844    (2,616)   8,306 
    
 
   
 
   
 
  
 
     
 
   
 
   
 
  
 
 
Derivatives not designated as hedges
                      
Interest rate swaps
  Notional   4,674    —      —     4,674    Notional    4,674    0      0     4,674 
Equity index options
  Notional   2,451    883    (1,126)   2,208    Notional    2,451    1,527    (1,849)   2,129 
Financial futures
  Notional   1,182    3,082    (2,914)   1,350    Notional    1,182    4,362    (4,275)   1,269 
Other foreign currency contracts
  Notional   628    3,009    (2,618)   1,019    Notional    628    5,689    (4,687)   1,630 
    
 
   
 
   
 
  
 
     
 
   
 
   
 
  
 
 
Total derivatives not designated as hedges
     8,935    6,974    (6,658)   9,251      8,935    11,578    (10,811)   9,702 
    
 
   
 
   
 
  
 
     
 
   
 
   
 
  
 
 
Total derivatives
    $18,013   $8,132   $(8,538)  $17,607     $18,013   $13,422   $(13,427)  $18,008 
    
 
   
 
   
 
  
 
     
 
   
 
   
 
  
 
 
(Number of policies)
  
Measurement
  
December 31,
2019
   
Additions
   
Maturities/
terminations
 
June 30,
2020
 
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 
(Number of policies)
  
Measurement
   
December 31,
2019
   
Additions
   
Maturities/
terminations
  
September 30,
2020
 
Derivatives not designated as hedges
         
GMWB embedded derivatives
   Policies    25,623    0      (1,452)   24,171 
Fixed index annuity embedded derivatives
   Policies    15,441    0      (1,511)   13,930 
Indexed universal life embedded derivatives
   Policies    884    0      (37)   847 
Cash Flow Hedges
Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; and (v) other instruments to hedge the cash flows of various forecasted transactions.
 
3
4
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about the
pre-tax
income (loss) effects of cash flow hedges for the three months ended June 30, 2020:
(Amounts in millions)
 
Gain (loss)
recognized in OCI
  
Gain (loss)
reclassified into
net income (loss)
from OCI
  
Classification of gain
(loss) reclassified into
net income (loss)
 
Gain (loss)
recognized in
net income (loss)
  
Classification of gain
(loss) recognized in
net income (loss)
Interest rate swaps hedging assets
 $(57)  $46  Net investment
income		 $—    Net investment
gains (losses)
Interest rate swaps hedging liabilities
  1   —    Interest expense  —    Net investment
gains (losses)
Foreign currency swaps
  (4)   —    Net investment
income		  —    Net investment
gains (losses)
 
 
 
  
 
 
   
 
 
  
Total
 $(60)  $46   $—    
 
 
 
  
 
 
   
 
 
  
The following table provides information about the
pre-tax
income (loss) effects of cash flow hedges for the three months ended June 30, 2019:
(Amounts in millions)
 
Gain (loss)
recognized in OCI
  
Gain (loss)
reclassified into
net income (loss)
from OCI
  
Classification of gain
(loss) reclassified into
net income (loss)
 
Gain (loss)
recognized in
net income (loss)
 
Classification of gain
(loss) recognized in
net income (loss)
Interest rate swaps hedging assets
 $216  $42  Net investment
income		 $—   Net investment
gains (losses)
Interest rate swaps hedging assets
  —     (4)  Net investment
gains (losses)		  —   Net investment
gains (losses)
Interest rate swaps hedging liabilities
  (20)   —    Interest expense  —   Net investment
gains (losses)
Foreign currency swaps
  2   (1)  Net investment
income		  —   Net investment
gains (losses)
 
 
 
  
 
 
   
 
 
 
Total
 $198  $37   $—   
 
 
 
  
 
 
   
 
 
 
The following table provides information about the
pre-tax
income (loss) effects of cash flow hedges for the six months ended June 30, 2020:
(Amounts in millions)
 
Gain (loss)
recognized in OCI
  
Gain (loss)
reclassified into
net income (loss)
from OCI
  
Classification of gain
(loss) reclassified into
net income (loss)
 
Gain (loss)
recognized in
net income (loss)
 
Classification of gain
(loss) recognized in
net income (loss)
Interest rate swaps hedging assets
 $984  $89  Net investment
income		 $—   Net investment
gains (losses)
Interest rate swaps hedging assets
  —     4  Net investment
gains (losses)		  —   Net investment
gains (losses)
Interest rate swaps hedging liabilities
  (62)   —    Interest expense  —   Net investment
gains (losses)
Foreign currency swaps
  13   —    Net investment
income		  —   Net investment
gains (losses)
 
 
 
  
 
 
   
 
 
 
Total
 $935  $93   $—   
 
 
 
  
 
 
   
 
 
 
3
5
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table provides information about the
pre-tax
income (loss) effects of cash flow hedges for the sixthree months ended JuneSeptember 30, 2019:2020:
 
(Amounts in millions)
 
Gain (loss)
recognized in OCI
 
Gain (loss)
reclassified into
net income (loss)
from OCI
 
Classification of gain
(loss) reclassified into
net income (loss)
 
Gain (loss)
recognized in
net income (loss)
 
Classification of gain
(loss) recognized in
net income (loss)
  
Gain (loss)
recognized
 
in OCI
 
Gain (loss)
reclassified into
net income (loss)
from OCI
   
Classification of
 
gain
(loss)
 
reclassified into
net income (loss)
  
Gain (loss)
recognized in
net income (loss)
   
Classification of
 
gain
(loss)
 
recognized in
net
 
income (loss)
Interest rate swaps hedging assets
 $353  $80  Net investment
income		 $—    Net investment
gains (losses)		  $(246)  $50   Net investment income  $0     Net investment gains (losses)
Interest rate swaps hedging assets
  —     2  Net investment
gains (losses)		  —    Net investment
gains (losses)		   0     4   Net investment gains (losses)   0     Net investment gains (losses)
Interest rate swaps hedging liabilities
  (32)   —    Interest expense  —    Net investment
gains (losses)		   10   0     Interest expense   0     Net investment gains (losses)
Foreign currency swaps
  (1)   (1)  Net investment
income		  —    Net investment
gains (losses)		   (7)   0     Net investment income   0     Net investment gains (losses)
Foreign currency swaps
  —     —    Net investment
gains (losses)		  2  Net investment
gains (losses)
 
 
  
 
   
 
    
 
  
 
     
 
   
Total
 $320  $81   $2    $(243)  $54     $0     
 
 
  
 
   
 
    
 
  
 
     
 
   
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2019:
(Amounts in millions)
 
Gain (loss)
recognized in OCI
  
Gain (loss)
reclassified into
net
 
income (loss)
from OCI
  
Classification of gain
(loss) reclassified into
net income (loss)
 
Gain (loss)
recognized in
net income (loss)
  
Classification of gain
(loss) recognized in
net income (loss)
Interest rate swaps hedging assets
 $406  $41  Net investment income $0    Net investment gains (losses)
Interest rate swaps hedging assets
  0     4  Net investment gains (losses)  0    Net investment gains (losses)
Interest rate swaps hedging liabilities
  (23)   0    Interest expense  0    Net investment gains (losses)
Foreign currency
 
swaps
  5   1  Net investment income  0    Net investment gains (losses)
 
 
 
  
 
 
   
 
 
  
Total
 $388  $46   $0    
 
 
 
  
 
 
   
 
 
  
36
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2020:
(Amounts in millions)
 
Gain (loss)
recognized in OCI
  
Gain (loss)
reclassified into
net income (loss)
from OCI
  
Classification of gain
(loss) reclassified into
net income (loss)
  
Gain (loss)
recognized in
net income (loss)
  
Classification of gain
(loss) recognized in
net income (loss)
 
Interest rate swaps hedging assets
 $738  $139   Net investment
income		 
 		 $0     Net investment
gains (losses)		 
 
Interest rate swaps hedging assets
  0     8   Net investment
gains (losses)		 
 		  0     Net investment
gains (losses)		 
 
Interest rate swaps hedging liabilities
  (52)   0     Interest expense   0     Net investment
gains (losses)		 
 
Foreign currency
 
swaps
  6   0     Net investment
income		 
 		  0     Net investment
gains (losses)		 
 
 
 
 
  
 
 
   
 
 
  
Total
 $692  $147   $0    
 
 
 
  
 
 
   
 
 
  
The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2019:
(Amounts in millions)
 
Gain (loss)
recognized in OCI
  
Gain (loss)
reclassified into
net income (loss)
from OCI
  
Classification of gain
(loss) reclassified into
net income (loss)
  
Gain (loss)
recognized in
net income (loss)
  
Classification of gain
(loss) recognized in
net income (loss)
 
Interest rate swaps hedging assets
 $759  $121   Net investment
income		 
 		 $0     Net investment
gains (losses)		 
 
Interest rate swaps hedging assets
  0     6   Net investment
gains (losses)		 
 		  0     Net investment
gains (losses)		 
 
Interest rate swaps hedging liabilities
  (55)   0     Interest expense   0     Net investment
gains (losses)		 
 
Foreign currency
 
swaps
  4   0     Net investment
income		 
 		  0     Net investment
gains (losses)		 
 
Foreign currency
 
swaps
  0     0     Net investment
gains (losses)		 
 		  2   Net investment
gains (losses)		 
 
 
 
 
  
 
 
   
 
 
  
Total
 $708  $127   $2  
 
 
 
  
 
 
   
 
 
  
The following tables provide a reconciliation of current period changes, net of applicable income taxes, for these
designated
derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:
 
   
Three months ended
June 30,
 
(Amounts in millions)
  
    2020    
  
    2019    
 
Derivatives qualifying as effective accounting hedges as of April 1
  $2,755  $1,850 
Current period increases (decreases) in fair value, net of deferred taxes of $12 and $(41)
   (48)   157 
Reclassification to net (income), net of deferred taxes of $16 and $13
   (30)   (24) 
  
 
 
  
 
 
 
Derivatives qualifying as effective accounting hedges as of June 30
  $2,677  $1,983 
  
 
 
  
 
 
 
   
Three months ended
September 30,
 
(Amounts in millions)
  
    2020    
  
    2019    
 
Derivatives qualifying as effective accounting hedges as of July 1
  $2,677  $1,983 
Current period increases (decreases) in fair value, net of deferred taxes of $52 and $(82)
   (191)   306 
Reclassification to net (income) loss, net of deferred taxes of $19 and $16
   (35)   (30) 
  
 
 
  
 
 
 
Derivatives qualifying as effective accounting hedges as of September 30
  $2,451  $2,259 
  
 
 
  
 
 
 
37
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   
Six months ended
June 30,
 
(Amounts in millions)
  
    2020    
  
    2019    
 
Derivatives qualifying as effective accounting hedges as of January 1
  $2,002  $1,781 
Current period increases (decreases) in fair value, net of deferred taxes of $(200) and $(66)
   735   254 
Reclassification to net (income), net of deferred taxes of $33 and $29
   (60)   (52) 
  
 
 
  
 
 
 
Derivatives qualifying as effective accounting hedges as of June 30
  $2,677  $1,983 
  
 
 
  
 
 
 
   
Nine months ended
September 30,
 
(Amounts in millions)
  
    2020    
  
    2019    
 
Derivatives qualifying as effective accounting hedges as of January 1
  $2,002  $1,781 
Current period increases (decreases) in fair value, net of deferred taxes of $(148) in both periods
   544   560 
Reclassification to net (income) loss, net of deferred taxes of $52 and $45
   (95)   (82) 
  
 
 
  
 
 
 
Derivatives qualifying as effective accounting hedges as of September 30
  $2,451  $2,259 
  
 
 
  
 
 
 
The total of derivatives designated as cash flow hedges of $2,677$2,451 million, net of taxes, recorded in stockholders’ equity as of JuneSeptember 30, 2020 is expected to be reclassified to net income (loss) in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $123$127 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2057. During the sixnine months ended JuneSeptember 30, 2020 and 2019, we reclassified $1$7 million
3
6
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and $2$4 million, respectively, to net income (loss) in connection with forecasted transactions that were no longer considered probable of occurring.
Derivatives Not Designated As Hedges
We also enter into certain
non-qualifying
derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iii) interest rate caps where the hedging relationship does not qualify for hedge accounting; (iv) foreign currency forward contracts to mitigate currency risk associated with
non-functional
currency investments held by certain foreign subsidiaries; and (v) foreign currency options and forward contracts to mitigate currency risk associated with future dividends or other cash flows from certain foreign subsidiaries to our holding company. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life insurance products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.
The following table provides the
pre-tax
gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:
 
Three months ended June 30,
  
Classification of gain (loss) recognized

in net income (loss)
 
Three months ended
September 30,
  
Classification of gain (loss) recognized
in net income (loss)
(Amounts in millions)
 
2020
 
 2019
  
    2020    
 
    2019    
 
Interest rate swaps
 $(2)  $(3)  Net investment gains (losses) $1  $(2)  Net investment gains (losses)
Equity index options
  4   10  Net investment gains (losses)  7   1  Net investment gains (losses)
Financial futures
  (123)   17  Net investment gains (losses)  (41)   35  Net investment gains (losses)
Other foreign currency contracts
  44   (7)  Net investment gains (losses)  12   (10)  Net investment gains (losses)
GMWB embedded derivatives
  129   (22)  Net investment gains (losses)  54   (44)  Net investment gains (losses)
Fixed index annuity embedded derivatives
  (45)   (20)  Net investment gains (losses)  (18)   (14)  Net investment gains (losses)
Indexed universal life embedded derivatives
  3   (1)  Net investment gains (losses)  3   1  Net investment gains (losses)
 
 
  
 
   
 
  
 
  
Total derivatives not designated as hedges
 $10  $(26)   $18  $(33)  
 
 
  
 
   
 
  
 
  
 
  
Six months ended June 30,
  
Classification of gain (loss) recognized

in net income (loss)
(Amounts in millions)
 
2020
  
2019
 
Interest rate swaps
 $(12)  $(4)  Net investment gains (losses)
Equity index options
  (9)   27  Net investment gains (losses)
Financial futures
  138   (27)  Net investment gains (losses)
Other foreign currency contracts
  (3)   (7)  Net investment gains (losses)
GMWB embedded derivatives
  (207)   23  Net investment gains (losses)
Fixed index annuity embedded derivatives
  (13)   (58)  Net investment gains (losses)
Indexed universal life embedded derivatives
  7   —    Net investment gains (losses)
 
 
 
  
 
 
  
Total derivatives not designated as hedges
 $(99)  $(46)  
 
 
 
  
 
 
  
3
738
Table of Contents
GENWORTH
FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(Amounts in millions)
 
Nine months ended
September 30,
  
Classification of gain (loss) recognized
in net income (loss)
 
    2020    
  
    2019    
 
Interest rate swaps
 $(11)  $(6)  Net investment gains (losses)
Equity index options
  (2)   28  Net investment gains (losses)
Financial futures
  97   8  Net investment gains (losses)
Other foreign currency contracts
  9   (17)  Net investment gains (losses)
GMWB embedded derivatives
  (153)   (21)  Net investment gains (losses)
Fixed index annuity embedded derivatives
  (31)   (72)  Net investment gains (losses)
Indexed universal life embedded derivatives
  10   1  Net investment gains (losses)
 
 
 
  
 
 
  
Total derivatives not designated as hedges
 $(81)  $(79)  
 
 
 
  
 
 
  
Derivative Counterparty Credit Risk
Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:
 
  
June 30, 2020
  
December 31, 2019
 
(Amounts in millions)
 
Derivative
assets 
(1)
  
Derivative
liabilities 
(2)
  
Net
derivatives
  
Derivative
assets 
(1)
  
Derivative
liabilities 
(2)
  
Net
derivatives
 
Amounts presented in the balance sheet:
      
Gross amounts recognized
 $1,024  $1  $1,023  $291  $11  $280 
Gross amounts offset in the balance sheet
  —     —     —     —     —     —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net amounts presented in the balance sheet
  1,024   1   1,023   291   11   280 
Gross amounts not offset in the balance sheet:
      
Financial instruments 
(3)
  (1)   (1)   —     (7)   (7)   —   
Collateral received
  (864)   —     (864)   (179)   —     (179) 
Collateral pledged
  —     (434)   434   —     (405)   405 
Over collateralization
  19   433   (414)   18   401   (383) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net amount
 $178  $(1)  $179  $123  $—    $123 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
   
September 30, 2020
  
December 31, 2019
 
(Amounts in millions)
  
Derivative
assets
(1)
  
Derivative
liabilities 
(2)
  
Net
derivatives
  
Derivative
assets
(1)
  
Derivative
liabilities 
(2)
  
Net
derivatives
 
Amounts presented in the balance sheet:
       
Gross amounts recognized
  $804  $9  $795  $291  $11  $280 
Gross amounts offset in the balance sheet
   0     0     0     0     0     0   
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net amounts presented in the balance sheet
   804   9   795   291   11   280 
Gross amounts not offset in the balance sheet:
        
Financial instruments
(3)
   (5)   (5)   0     (7)   (7)   0   
Collateral received
   (663)   0     (663)   (179)   0     (179) 
Collateral pledged
   0     (489)   489   0     (405)   405 
Over collateralization
   13   485   (472)   18   401   (383) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net amount
  $149  $0    $149  $123  $0    $123 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
(1) 
Included $1 million of accruals on derivatives classified as other assets as of December 31, 2019 and does not include amounts related to embedded derivatives as of JuneSeptember 30, 2020 and December 31, 2019.
(2) 
Does not include amounts related to embedded derivatives as of JuneSeptember 30, 2020 and December 31, 2019.
(3) 
Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.
counterparty
.
39
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) Fair Value of Financial Instruments
Recurring Fair Value Measurements
We have fixed maturity securities, short-term investments, equity securities, limited partnerships, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.
Fixed maturity, short-term investments and equity securities
The fair value of fixed maturity securities, short-term investments and equity securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or broker quotes, which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, that security is valued using market information for similar securities, which is also a market approach. When market
3
8
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
information is not available for a specific security (or similar securities) or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including mortgage-backed or asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.
Further, while we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information.
In general, we first obtain valuations from pricing services. If prices are unavailable for public securities, we obtain broker quotes. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for similar securities are not readily observable and these securities are not typically valued by pricing services.
Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.
Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.
For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of
4
0
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating or public bond spread as Level 3. In general, a significant increase (decrease) in credit spreads would have resulted in a significant decrease (increase) in the fair value for our fixed maturity securities as of JuneSeptember 30, 2020.
For remaining securities priced using internal models, we determine fair value using an income approach. We maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.
3
9
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing and/or rating, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from pricing services to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.
A summary of the inputs used for our fixed maturity securities, short-term investments and equity securities based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.
Level 1 measurements
Equity securities.
The primary inputs to the valuation of exchange-traded equity securities include quoted prices for the identical instrument.
Separate account assets.
The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.
Level 2 measurements
Fixed maturity securities
 
Third-party pricing services:
In estimating the fair value of fixed maturity securities, approximately 90%
91% of
our portfolio was priced using third-party pricing services as of JuneSeptember 30, 2020. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by third-party pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our third-party pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers. 
 
4
40
1
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers.
The following table presents a summary of the significant inputs used by our pricing services for certain fair value measurements of fixed maturity securities that are classified as Level
2
as of September 
30,
2020
:
(Amounts in millions)
  
Fair value
   
Primary methodologies
  
Significant inputs
U.S. government, agencies and government-sponsored enterprises
 $4,792  Price quotes from trading desk, broker feeds Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread
State and political subdivisions
 $3,058  Multi-dimensional attribute-based modeling systems, third-party pricing vendors Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes
Non-U.S. government
 $1,395  Matrix pricing, spread priced to benchmark curves, price quotes from market makers Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources
U.S. corporate
 $31,695  
Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, OAS-based models
 Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports
Non-U.S. corporate
 $9,220  Multi-dimensional attribute-based modeling systems, OAS-based models, price quotes from market makers Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources
Residential mortgage-backed
 $2,061  OAS-based models, single factor binomial models, internally priced Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports
Commercial mortgage-backed
 $2,956  Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports
Other asset-backed
 $3,125  Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers Spreads to daily updated swap curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports
4
2
Table of Contents
GENWORTH FINANCIAL,
INC
. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of June 30, 2020:
(Amounts in millions)
 
Fair value
  
Primary methodologies
 
Significant inputs
U.S. government, agencies and government-sponsored enterprises
 
$
5,602
 
 
Price quotes from trading desk, broker feeds
 
Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread
State and political subdivisions
 
$
2,935
 
 
Multi-dimensional attribute-based modeling systems, third-party pricing vendors
 
Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes
Non-U.S.
government
 
$
1,527
 
 
Matrix pricing, spread priced to benchmark curves, price quotes from market makers
 
Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,
bid-offer
spread, market research publications, third-party pricing sources
U.S. corporate
 
$
30,874
 
 
Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers,
OAS-based
models
 
Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports
Non-U.S.
corporate
 
$
8,589
 
 
Multi-dimensional attribute-based modeling systems,
OAS-based
models, price quotes from market makers
 
Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads,
bid-offer
spread, market research publications, third-party pricing sources
Residential mortgage-backed
 
$
2,160
 
 
OAS-based models, single factor binomial models, internally priced
 
Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports
Commercial mortgage-backed
 
$
 
 
 
 
 
2,949
 
 
Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model
 
Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports
Other asset-backed
 
$
2,847
 
 
Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers
 
Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports
41
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Internal models:
A portion of our
non-U.S.
government, U.S. corporate and
non-U.S.
corporate securities are valued using internal models. The fair value of these fixed maturity securities was $15 million, $1,189$1,299 million and $602$673 million, respectively, as of JuneSeptember 30, 2020. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.
Equity securities.
The primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active.
Securities lending collateral
The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.
Short-term investments
The fair value of short-term investments classified as Level 2 is determined after considering prices obtained by third-party pricing services.
Level 3 measurements
Fixed maturity securities
Broker quotes:
A portion of our state and political subdivisions, U.S. corporate, non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $828 million as of September 30, 2020.
 
•
Broker quotes:
A portion of our state and political subdivisions, U.S. corporate,
non-U.S.
corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are
42Internal models:
A portion of our state and political subdivisions, U.S. corporate, non-U.S. corporate, residential mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as the interest rate yield curve, as well as published credit spreads for similar securities, which includes significant unobservable inputs. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,314 million as of September 30, 2020.
4
3
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by third-party pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $863 million as of June 30, 2020.
•
Internal models:
A portion of our state and political subdivisions, U.S. corporate,
non-U.S.
corporate, residential mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as the interest rate yield curve, as well as published credit spreads for similar securities, which includes significant unobservable inputs. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,392 million as of June 30, 2020.
Equity securities.
The primary inputs to the valuation include broker quotes where the underlying inputs are unobservable and for internal models, structure of the security and issuer rating.
Net asset value
Limited partnerships
Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. We utilize the net asset value (“NAV”) from the underlying fund statements as a practical expedient for fair value.
Derivatives
We consider counterparty collateral arrangements and rights of
set-off
when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and our
non-performance
risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we have not recorded any incremental adjustment for our
non-performance
risk or the
non-performance
risk of the derivative counterparty for our derivative assets or liabilities.
Interest rate swaps.
The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2.
43
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Interest rate caps.
The valuation of interest rate caps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, forward interest rate volatility and time value component associated with the optionality in the derivative which are generally considered observable inputs and results in the derivatives being classified as Level 2.
Foreign currency swaps.
The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency
exchange rates, both of which are considered observable inputs, and results in the derivative being classified as Level
2
.
2.
Equity index options.
We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rates, equity index volatility, equity index and time value component associated with the optionality in the derivative. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As of JuneSeptember 30, 2020, a significant increase (decrease) in the equity index volatility discussed above would have resulted in a significantly higher (lower) fair value measurement.
Financial futures.
The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is 0 as a result of settling the margins on these contracts on a daily basis.
4
4
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Equity return swaps.
The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.
Other foreign currency contracts.
We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility and time value component associated with the optionality in the derivative, which are generally considered observable inputs and results in the derivative being classified as Level 2. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.
GMWB embedded derivatives
We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. We determine fair value using an internal model based on the various inputs noted above.
Non-performance
risk is integrated into the discount rate used to value GMWB liabilities. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to
44
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
reflect an adjustment for the non-performance risk of the GMWB liabilities.
As of JuneSeptember 30, 2020 and December 31, 2019, the impact of
non-performance
risk resulted in a lower fair value of our GMWB liabilities of $91$85 million and $62 million, respectively.
We classify the GMWB valuation as Level 3 based on having significant
unobservable
inputs, with equity index volatility and
non-performance
risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in
non-performance
risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value. As of JuneSeptember 30, 2020, a significant change in the unobservable inputs discussed above would have resulted in a significantly lower or higher fair value measurement.
Fixed index annuity embedded derivatives
We have fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate
non-performance
risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments
4
5
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease. As of JuneSeptember 30, 2020, a significant change in the unobservable inputs discussed above would have resulted in a significantly lower or higher fair value measurement.
Indexed universal life embedded derivatives
We have indexed universal life insurance products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate
non-performance
risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease. As of JuneSeptember 30, 2020, a significant change in the unobservable inputs discussed above would have resulted in a significantly lower or higher fair value measurement.
 
4
456
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables set forth our assets by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
 
   
June 30, 2020
 
(Amounts in millions)
  
Total
   
Level 1
   
Level 2
   
Level 3
   
NAV
 (1)
 
Assets
          
Investments:
          
Fixed maturity securities:
          
U.S. government, agencies and government-sponsored enterprises
  $5,602   $—     $5,602   $—     $—   
State and political subdivisions
   2,998    —      2,935    63    —   
Non-U.S.
government
   1,542    —      1,542    —      —   
U.S. corporate:
          
Utilities
   5,270    —      4,334    936    —   
Energy
   2,594    —      2,471    123    —   
Finance and insurance
   8,403    —      7,852    551    —   
Consumer—non-cyclical
   6,277    —      6,174    103    —   
Technology and communications
   3,411    —      3,345    66    —   
Industrial
   1,503    —      1,464    39    —   
Capital goods
   3,028    —      2,931    97    —   
Consumer—cyclical
   1,966    —      1,768    198    —   
Transportation
   1,565    —      1,511    54    —   
Other
   378    —      213    165    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total U.S. corporate
   34,395    —      32,063    2,332    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Non-U.S.
corporate:
          
Utilities
   879    —      522    357    —   
Energy
   1,275    —      1,038    237    —   
Finance and insurance
   2,466    —      2,155    311    —   
Consumer—non-cyclical
   777    —      723    54    —   
Technology and communications
   1,247    —      1,219    28    —   
Industrial
   995    —      903    92    —   
Capital goods
   613    —      440    173    —   
Consumer—cyclical
   407    —      251    156    —   
Transportation
   635    —      494    141    —   
Other
   1,591    —      1,446    145    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
non-U.S.
corporate
   10,885    —      9,191    1,694    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Residential mortgage-backed
   2,184    —      2,160    24    —   
Commercial mortgage-backed
   2,970    —      2,949    21    —   
Other asset-backed
   2,968    —      2,847    121    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total fixed maturity securities
   63,544    —      59,289    4,255    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Equity securities
   206    45    108    53    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other invested assets:
          
Derivative assets:
          
Interest rate swaps
   939    —      939    —      —   
Foreign currency swaps
   17    —      17    —      —   
Equity index options
   66    —      —      66    —   
Other foreign currency contracts
   2    —      2    —      —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total derivative assets
   1,024    —      958    66    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Securities lending collateral
   59    —      59    —      —   
Short-term investments
   190    —      190    —      —   
Limited partnerships
   598    —      —      —      598 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total other invested assets
   1,871    —      1,207    66    598 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Reinsurance recoverable
(2)
   38    —      —      38    —   
Separate account assets
   5,536    5,536    —      —      —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total assets
  $71,195   $5,581   $60,604   $4,412   $598 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  
September 30, 2020
 
(Amounts in millions)
 
Total
  
Level
 
1
  
Level 2
  
Level
 
3
  
NAV 
(1)
 
Assets
     
Investments:
     
Fixed maturity securities:
     
U.S. government, agencies and government-sponsored enterprises
 $4,792  $0    $4,792  $0    $0   
State and political subdivisions
  3,115   0     3,058   57   0   
Non-U.S. government
  1,395   0     1,395   0     0   
U.S. corporate:
      
Utilities
  5,217   0     4,376   841   0   
Energy
  2,765   0     2,651   114   0   
Finance and insurance
  8,735   0     8,204   531   0   
Consumer—non-cyclical
  6,368   0     6,265   103   0   
Technology and communications
  3,527   0     3,401   126   0   
Industrial
  1,551   0     1,511   40   0   
Capital goods
  3,057   0     2,960   97   0   
Consumer—cyclical
  2,044   0     1,874   170   0   
Transportation
  1,581   0     1,527   54   0   
Other
  389   0     225   164   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total U.S. corporate
  35,234   0     32,994   2,240   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. corporate:
      
Utilities
  935   0     588   347   0   
Energy
  1,348   0     1,111   237   0   
Finance and insurance
  2,618   0     2,314   304   0   
Consumer—non-cyclical
  806   0     752   54   0   
Technology and communications
  1,256   0     1,228   28   0   
Industrial
  1,068   0     975   93   0   
Capital goods
  626   0     453   173   0   
Consumer—cyclical
  436   0     269   167   0   
Transportation
  648   0     537   111   0   
Other
  1,802   0     1,666   136   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-U.S. corporate
  11,543   0     9,893   1,650   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
  2,075   0     2,061   14   0   
Commercial mortgage-backed
  2,976   0     2,956   20   0   
Other asset-backed
  3,286   0     3,125   161   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturity securities
  64,416   0     60,274   4,142   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
  629   465   112   52   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets:
      
Derivative assets:
      
Interest rate swaps
  708   0     708   0     0   
Foreign currency swaps
  10   0     10   0     0   
Equity index options
  67   0     0     67   0   
Other foreign currency contracts
  19   0     19   0     0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
  804   0     737   67   0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities lending collateral
  75   0     75   0     0   
Short-term investments
  251   0     251   0     0   
Limited partnerships
  674   0     0     0     674 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other invested assets
  1,804   0     1,063   67   674 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance recoverable
(2)
  35   0     0     35   0   
Separate account assets
  5,700   5,700   0     0     0   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 $72,584  $6,165  $61,449  $4,296  $674 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
(1)
Limited partnerships that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.
(2)
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.
 
4
467
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
   
December 31, 2019
 
(Amounts in millions)
  
Total
   
Level 1
   
Level 2
   
Level 3
   
NAV
 (1)
 
Assets
          
Investments:
          
Fixed maturity securities:
          
U.S. government, agencies and government-sponsored enterprises
  $5,025   $—     $5,025   $—     $—   
State and political subdivisions
   2,747    —      2,645    102    —   
Non-U.S.
government
   1,350    —      1,350    —      —   
U.S. corporate:
          
Utilities
   4,997    —      4,132    865    —   
Energy
   2,699    —      2,570    129    —   
Finance and insurance
   7,774    —      7,202    572    —   
Consumer—non-cyclical
   5,701    —      5,607    94    —   
Technology and communications
   3,245    —      3,195    50    —   
Industrial
   1,396    —      1,356    40    —   
Capital goods
   2,711    —      2,609    102    —   
Consumer—cyclical
   1,760    —      1,587    173    —   
Transportation
   1,506    —      1,428    78    —   
Other
   322    —      186    136    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total U.S. corporate
   32,111    —      29,872    2,239    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Non-U.S.
corporate:
          
Utilities
   829    —      455    374    —   
Energy
   1,319    —      1,072    247    —   
Finance and insurance
   2,319    —      2,085    234    —   
Consumer—non-cyclical
   684    —      625    59    —   
Technology and communications
   1,138    —      1,110    28    —   
Industrial
   988    —      884    104    —   
Capital goods
   605    —      444    161    —   
Consumer—cyclical
   397    —      250    147    —   
Transportation
   629    —      438    191    —   
Other
   1,617    —      1,477    140    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
non-U.S.
corporate
   10,525    —      8,840    1,685    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Residential mortgage-backed
   2,270    —      2,243    27    —   
Commercial mortgage-backed
   3,026    —      3,020    6    —   
Other asset-backed
   3,285    —      3,153    132    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total fixed maturity securities
   60,339    —      56,148    4,191    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Equity securities
   239    62    126    51    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Other invested assets:
          
Derivative assets:
          
Interest rate swaps
   197    —      197    —      —   
Foreign currency swaps
   4    —      4    —      —   
Equity index options
   81    —      —      81    —   
Other foreign currency contracts
   8    —      8    —      —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total derivative assets
   290    —      209    81    —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Securities lending collateral
   51    —      51    —      —   
Short-term investments
   211    —      211    —      —   
Limited partnerships
   503    —      —      —      503 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total other invested assets
   1,055    —      471    81    503 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Reinsurance recoverable
(2)
   20    —      —      20    —   
Separate account assets
   6,108    6,108    —      —      —   
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total assets
  $67,761   $6,170   $56,745   $4,343   $503 
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
  
December 31, 2019
 
(Amounts in millions)
 
Total
  
Level 1
  
Level 2
  
Level 3
  
NAV
 (1)
 
Assets
     
Investments:
     
Fixed maturity securities:
     
U.S. government, agencies and government-sponsored enterprises
 $5,025  $0    $5,025  $0    $0   
State and political subdivisions
  2,747   0     2,645   102   0   
Non-U.S. government
  1,350   0     1,350   0     0   
U.S. corporate:
      
Utilities
  4,997   0     4,132   865   0   
Energy
  2,699   0     2,570   129   0   
Finance and insurance
  7,774   0     7,202   572   0   
Consumer—non-cyclical
  5,701   0     5,607   94   0   
Technology and communications
  3,245   0     3,195   50   0   
Industrial
  1,396   0     1,356   40   0   
Capital goods
  2,711   0     2,609   102   0   
Consumer—cyclical
  1,760   0     1,587   173   0   
Transportation
  1,506   0     1,428   78   0   
Other
  322   0     186   136   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  32,111   0     29,872   2,239   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S. corporate:
      
Utilities
  829   0     455   374   0   
Energy
  1,319   0     1,072   247   0   
Finance and insurance
  2,319   0     2,085   234   0   
Consumer—non-cyclical
  684   0     625   59   0   
Technology and communications
  1,138   0     1,110   28   0   
Industrial
  988   0     884   104   0   
Capital goods
  605   0     444   161   0   
Consumer—cyclical
  397   0     250   147   0   
Transportation
  629   0     438   191   0   
Other
  1,617   0     1,477   140   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total non-U.S. corporate
  10,525   0     8,840   1,685   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
  2,270   0     2,243   27   0   
Commercial mortgage-backed
  3,026   0     3,020   6   0   
Other asset-backed
  3,285   0     3,153   132   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total fixed maturity securities
  60,339   0     56,148   4,191   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity securities
  239   62   126   51   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other invested assets:
      
Derivative assets:
      
Interest rate swaps
  197   0     197   0     0   
Foreign currency swaps
  4   0     4   0     0   
Equity index options
  81   0     0     81   0   
Other foreign currency contracts
  8   0     8   0     0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total derivative assets
  290   0     209   81   0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Securities lending collateral
  51   0     51   0     0   
Short-term investments
  211   0     211   0     0   
Limited partnerships
  503   0     0     0     503 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other invested assets
  1,055   0     471   81   503 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Reinsurance recoverable
(2)
  20   0     0     20   0   
Separate account assets
  6,108   6,108   0     0     0   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
 $67,761  $6,170  $56,745  $4,343  $503 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
(1)
Limited partnerships that are measured at fair value using the NAV per share (or its equivalent) practical expedient have not been categorized in the fair value hierarchy.
(2)
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.
 
47
48
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
 
  
Beginning
balance

as of
April 1,
2020
  
Total realized and
unrealized gains
(losses)
                    
Ending
balance

as of
June 30,
2020
  
Total gains (losses)
attributable to
assets still held
 
(Amounts in millions)
 
Included
 
in
net
 
income
(loss)
  
Included
in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer
into
Level 3 
(1)
  
Transfer
out of
Level 3 
(1)
  
Included
in net
income
 
(loss)
  
Included
in OCI
 
Fixed maturity securities:
            
State and political subdivisions
 $83  $—    $7  $—    $—    $—    $—    $—    $(27)  $63  $1  $6 
Non-U.S.
government
  1   —     —     —     —     —     (1)   —     —     —     —     —   
U.S. corporate:
            
Utilities
  843   —     37   32   —     —     (2)   26   —     936   —     37 
Energy
  124   1   13   —     —     —     (2)   —     (13)   123   —     9 
Finance and insurance
  510   —     33   21   —     —     (12)   —     (1)   551   —     33 
Consumer—non-cyclical
  88   —     8   8   —     —     (1)   —     —     103   —     8 
Technology and communications
  61   —     5   —     —     —     —     —     —     66   —     5 
Industrial
  37   —     2   —     —     —     —     —     —     39   —     2 
Capital goods
  90   —     7   —     —     —     —     —     —     97   —     7 
Consumer—cyclical
  179   —     11   —     —     —     (1)   9   —     198   —     11 
Transportation
  43   —     2   —     —     —     (1)   10   —     54   —     2 
Other
  138   —     2   —     —     —     (2)   27   —     165   —     2 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  2,113   1   120   61   —     —     (21)   72   (14)   2,332   —     116 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
            
Utilities
  355   —     23   1   —     —     —     —     (22)   357   —     23 
Energy
  236   —     22   —     —     —     (26)   5   —     237   —     22 
Finance and insurance
  223   1   50   —     —     —     —     37   —     311   1   49 
Consumer—non-cyclical
  58   —     5   —     —     —     —     —     (9)   54   —     4 
Technology and communications
  27   —     1   —     —     —     —     —     —     28   —     1 
Industrial
  92   —     8   —     —     —     —     —     (8)   92   —     7 
Capital goods
  135   —     9   —     —     —     —     29   —     173   —     9 
Consumer—cyclical
  164   —     12   —     —     —     (3)   —     (17)   156   —     11 
Transportation
  108   —     11   —     —     —     —     22   —     141   —     11 
Other
  131   —     9   5   —     —     —     —     —     145   —     9 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
non-U.S.
corporate
  1,529   1   150   6   —     —     (29)   93   (56)   1,694   1   146 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
  24   —     1   —     —     —     (1)   3   (3)   24   —     —   
Commercial mortgage-backed
  —     —     1   —     —     —     —     20   —     21   —     1 
Other asset-backed
  118   —     2   6   —     —     (5)   —     —     121   —     3 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total fixed maturity securities
  3,868   2   281   73   —     —     (57)   188   (100)   4,255   2   272 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity securities
  50   —     —     6   (3)   —     —     —     —     53   —     —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other invested assets:
            
Derivative assets:
            
Equity index options
  62   4   —     7   —     —     (7)   —     —     66   8   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total derivative assets
  62   4   —     7   —     —     (7)   —     —     66   8   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other invested assets
  62   4   —     7   —     —     (7)   —     —     66   8   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Reinsurance recoverable 
(2)
  47   (9)   —     —     —     —     —     —     —     38   (9)   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Level 3 assets
 $4,027  $(3)  $281  $86  $(3)  $—    $(64)  $188  $(100)  $4,412  $1  $272 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Beginning
balance

as of
July 1,
2020
 
 
Total realized and
unrealized gains
(losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2020
 
 
Total gains
(losses)
attributable to
assets still held
 
(Amounts in millions)
 
Included
in net
income
(loss)
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3 
(1)
 
 
Transfer
out of
Level 3 
(1)
 
 
Included
in net
income
(loss)
 
 
Included
in OCI
 
Fixed maturity securities:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
State and political subdivisions
 
$
63
 
 
$
1
 
 
$
(7
) 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
57
 
 
$
1
 
 
$
(6
) 
U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
936
 
 
 
10
 
 
 
(4
) 
 
 
15
 
 
 
0  
 
 
 
0  
 
 
 
(52
) 
 
 
0  
 
 
 
(64
) 
 
 
841
 
 
 
0  
 
 
 
1
 
Energy
 
 
123
 
 
 
0  
 
 
 
0  
 
 
 
7
 
 
 
0  
 
 
 
0  
 
 
 
(16
) 
 
 
0  
 
 
 
0  
 
 
 
114
 
 
 
0  
 
 
 
0  
 
Finance and insurance
 
 
551
 
 
 
0  
 
 
 
2
 
 
 
71
 
 
 
0  
 
 
 
0  
 
 
 
(16
) 
 
 
0  
 
 
 
(77
) 
 
 
531
 
 
 
0  
 
 
 
2
 
Consumer—non-cyclical
 
 
103
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
103
 
 
 
0  
 
 
 
1
 
Technology and communications
 
 
66
 
 
 
0  
 
 
 
3
 
 
 
57
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
126
 
 
 
0  
 
 
 
3
 
Industrial
 
 
39
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
40
 
 
 
0  
 
 
 
0  
 
Capital goods
 
 
97
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
97
 
 
 
0  
 
 
 
0  
 
Consumer— cyclical
 
 
198
 
 
 
3
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(30
) 
 
 
0  
 
 
 
0  
 
 
 
170
 
 
 
0  
 
 
 
1
 
Transportation
 
 
54
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
54
 
 
 
0  
 
 
 
1
 
Other
 
 
165
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
164
 
 
 
0 ��
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total U.S. corporate
 
 
2,332
 
 
 
13
 
 
 
2
 
 
 
150
 
 
 
0  
 
 
 
0  
 
 
 
(116
) 
 
 
0  
 
 
 
(141
) 
 
 
2,240
 
 
 
0  
 
 
 
9
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
357
 
 
 
0  
 
 
 
4
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
6
 
 
 
(20
) 
 
 
347
 
 
 
0  
 
 
 
3
 
Energy
 
 
237
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
237
 
 
 
0  
 
 
 
1
 
Finance and insurance
 
 
311
 
 
 
1
 
 
 
(2
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
19
 
 
 
(25
) 
 
 
304
 
 
 
1
 
 
 
(2
) 
Consumer—non-cyclical
 
 
54
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
54
 
 
 
0  
 
 
 
0  
 
Technology and communications
 
 
28
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
28
 
 
 
0  
 
 
 
0  
 
Industrial
 
 
92
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
93
 
 
 
0  
 
 
 
1
 
Capital goods
 
 
173
 
 
 
0  
 
 
 
0  
 
 
 
10
 
 
 
0  
 
 
 
0  
 
 
 
(10
) 
 
 
0  
 
 
 
0  
 
 
 
173
 
 
 
0  
 
 
 
(1
) 
Consumer—cyclical
 
 
156
 
 
 
0  
 
 
 
4
 
 
 
17
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(10
) 
 
 
167
 
 
 
0  
 
 
 
4
 
Transportation
 
 
141
 
 
 
0  
 
 
 
(2
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(28
) 
 
 
111
 
 
 
0  
 
 
 
(3
) 
Other
 
 
145
 
 
 
0  
 
 
 
3
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(12
) 
 
 
0  
 
 
 
0  
 
 
 
136
 
 
 
0  
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-U.S. corporate
 
 
1,694
 
 
 
1
 
 
 
8
 
 
 
27
 
 
 
0  
 
 
 
0  
 
 
 
(22
) 
 
 
25
 
 
 
(83
) 
 
 
1,650
 
 
 
1
 
 
 
6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
 
 
24
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(9
) 
 
 
14
 
 
 
0  
 
 
 
0  
 
Commercial mortgage-backed
 
 
21
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
20
 
 
 
0  
 
 
 
0  
 
Other asset-backed
 
 
121
 
 
 
0  
 
 
 
1
 
 
 
78
 
 
 
0  
 
 
 
0  
 
 
 
(10
) 
 
 
0  
 
 
 
(29
) 
 
 
161
 
 
 
0  
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturity securities
 
 
4,255
 
 
 
15
 
 
 
2
 
 
 
255
 
 
 
0  
 
 
 
0  
 
 
 
(148
) 
 
 
25
 
 
 
(262
) 
 
 
4,142
 
 
 
2
 
 
 
10
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
53
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
52
 
 
 
0  
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Derivative assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Equity index options
 
 
66
 
 
 
7
 
 
 
0  
 
 
 
27
 
 
 
0  
 
 
 
0  
 
 
 
(33
) 
 
 
0  
 
 
 
0  
 
 
 
67
 
 
 
(1
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
 
 
66
 
 
 
7
 
 
 
0  
 
 
 
27
 
 
 
0  
 
 
 
0  
 
 
 
(33
) 
 
 
0  
 
 
 
0  
 
 
 
67
 
 
 
(1
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other invested assets
 
 
66
 
 
 
7
 
 
 
0  
 
 
 
27
 
 
 
0  
 
 
 
0  
 
 
 
(33
) 
 
 
0  
 
 
 
0  
 
 
 
67
 
 
 
(1
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance recoverable
(2)
 
 
38
 
 
 
(3
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
35
 
 
 
(3
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 assets
 
$
4,412
 
 
$
19
 
 
$
2
 
 
$
282
 
 
$
(1
) 
 
$
0  
 
 
$
(181
) 
 
$
25
 
 
$
(262
) 
 
$
4,296
 
 
$
(2
) 
 
$
10
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.
 
4849
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  
Beginning
balance

as of
April 1,
2019
  
Total realized and
unrealized gains
(losses)
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer
into
Level 3 
(1)
  
Transfer
out of
Level 3 
(1)
  
Ending
balance

as of
June 30,
2019
  
Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
(Amounts in millions)
 
Included
 
in net
 
income
(loss)
  
Included
in OCI
 
Fixed maturity securities:
           
State and political subdivisions
 $52  $1  $8  $—    $—    $—    $—    $—    $—    $61  $—   
U.S. corporate:
              
Utilities
  748   —     20   82   (13)   —     (38)   —     (10)   789   —   
Energy
  115   —     3   5   —     —     (1)   —     —     122   —   
Finance and insurance
  590   —     15   10   —     —     (8)   —     —     607   —   
Consumer—non-cyclical
  74   —     1   14   —     —     —     —     —     89   —   
Technology and communications
  52   —     3   —     —     —     —     —     (11)   44   —   
Industrial
  40   —     —     —     —     —     —     —     —     40   —   
Capital goods
  95   —     3   —     —     —     —     —     —     98   —   
Consumer—cyclical
  195   —     3   —     —     —     (13)   —     —     185   —   
Transportation
  54   —     —     —     —     —     —     —     —     54   —   
Other
  199   —     3   —     —     —     (3)   —     —     199   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  2,162   —     51   111   (13)   —     (63)   —     (21)   2,227   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
             
Utilities
  435   —     7   —     (7)   —     (17)   —     (1)   417   —   
Energy
  221   —     5   15   —     —     —     —     —     241   —   
Finance and insurance
  182   1   7   2   —     —     (13)   —     —     179   1 
Consumer—non-cyclical
  67   —     1   —     —     —     —     —     —     68   —   
Technology and communications
  27   —     —     —     —     —     —     —     —     27   —   
Industrial
  63   —     1   —     —     —     —     —     —     64   —   
Capital goods
  173   —     3   5   —     —     —     —     —     181   —   
Consumer—cyclical
  125   —     2   —     —     —     (1)   —     —     126   —   
Transportation
  192   —     3   4   —     —     —     —     —     199   —   
Other
  90   —     4   35   —     —     —     —     —     129   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
non-U.S.
corporate
  1,575   1   33   61   (7)   —     (31)   —     (1)   1,631   1 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
  35   —     1   —     —     —     —     —     —     36   —   
Commercial mortgage-backed
  98   —     7   1   —     —     —     —     (14)   92   —   
Other asset-backed
  197   —     1   42   —     —     (29)   27   (4)   234   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total fixed maturity securities
  4,119   2   101   215   (20)   —     (123)   27   (40)   4,281   1 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity securities
  55   —     —     2   (1)   —     —     —     —     56   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other invested assets:
             
Derivative assets:
             
Equity index options
  60   10   —     9   —     —     (14)   —     —     65   7 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total derivative assets
  60   10   —     9   —     —     (14)   —     —     65   7 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other invested assets
  60   10   —     9   —     —     (14)   —     —     65   7 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Reinsurance recoverable 
(2)
  18   2   —     —     —     —     —     —     —     20   2 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Level 3 assets
 $4,252  $14  $101  $226  $(21)  $—    $(137)  $27  $(40)  $4,422  $10 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
 
Beginning
balance

as of
July 1,
2019
 
 
Total realized and
unrealized gains
(losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2019
 
 
Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
(Amounts in millions)
 
Included
in net
income
(loss)
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3 
(1)
 
 
Transfer
out of
Level 3 
(1)
 
Fixed maturity securities:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
State and political subdivisions
 
$
61
 
 
$
0  
 
 
$
11
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
72
 
 
$
1
 
U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
789
 
 
 
1
 
 
 
28
 
 
 
13
 
 
 
0  
 
 
 
0  
 
 
 
(7
) 
 
 
0  
 
 
 
0  
 
 
 
824
 
 
 
0  
 
Energy
 
 
122
 
 
 
0  
 
 
 
2
 
 
 
12
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
135
 
 
 
0  
 
Finance and insurance
 
 
607
 
 
 
0  
 
 
 
11
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(26
) 
 
 
20
 
 
 
0  
 
 
 
612
 
 
 
0  
 
Consumer—non-cyclical
 
 
89
 
 
 
0  
 
 
 
1
 
 
 
9
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
98
 
 
 
0  
 
Technology and communications
 
 
44
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
5
 
 
 
0  
 
 
 
50
 
 
 
0  
 
Industrial
 
 
40
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
40
 
 
 
0  
 
Capital goods
 
 
98
 
 
 
0  
 
 
 
2
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
100
 
 
 
0  
 
Consumer—cyclical
 
 
185
 
 
 
0  
 
 
 
2
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(2
) 
 
 
0  
 
 
 
(9
) 
 
 
176
 
 
 
0  
 
Transportation
 
 
54
 
 
 
0  
 
 
 
1
 
 
 
3
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
57
 
 
 
0  
 
Other
 
 
199
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(31
) 
 
 
168
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total U.S. corporate
 
 
2,227
 
 
 
1
 
 
 
48
 
 
 
37
 
 
 
0  
 
 
 
0  
 
 
 
(38
) 
 
 
25
 
 
 
(40
) 
 
 
2,260
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
417
 
 
 
0  
 
 
 
5
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(25
) 
 
 
0  
 
 
 
0  
 
 
 
397
 
 
 
0  
 
Energy
 
 
241
 
 
 
0  
 
 
 
5
 
 
 
31
 
 
 
0  
 
 
 
0  
 
 
 
(12
) 
 
 
0  
 
 
 
0  
 
 
 
265
 
 
 
0  
 
Finance and insurance
 
 
179
 
 
 
1
 
 
 
4
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(3
) 
 
 
16
 
 
 
0  
 
 
 
197
 
 
 
1
 
Consumer—non-cyclical
 
 
68
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(5
) 
 
 
0  
 
 
 
0  
 
 
 
64
 
 
 
0  
 
Technology and communications
 
 
27
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
28
 
 
 
0  
 
Industrial
 
 
64
 
 
 
0  
 
 
 
0  
 
 
 
13
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
77
 
 
 
0  
 
Capital goods
 
 
181
 
 
 
0  
 
 
 
2
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(4
) 
 
 
0  
 
 
 
0  
 
 
 
179
 
 
 
0  
 
Consumer—cyclical
 
 
126
 
 
 
0  
 
 
 
2
 
 
 
9
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
137
 
 
 
0  
 
Transportation
 
 
199
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
200
 
 
 
0  
 
Other
 
 
129
 
 
 
0  
 
 
 
3
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
131
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-U.S. corporate
 
 
1,631
 
 
 
1
 
 
 
24
 
 
 
53
 
 
 
0  
 
 
 
0  
 
 
 
(50
) 
 
 
16
 
 
 
0  
 
 
 
1,675
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
 
 
36
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
(4
) 
 
 
32
 
 
 
0  
 
Commercial mortgage-backed
 
 
92
 
 
 
0  
 
 
 
14
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
106
 
 
 
0  
 
Other asset-backed
 
 
234
 
 
 
0  
 
 
 
0  
 
 
 
13
 
 
 
0  
 
 
 
0  
 
 
 
(11
) 
 
 
0  
 
 
 
(106
) 
 
 
130
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturity securities
 
 
4,281
 
 
 
2
 
 
 
98
 
 
 
103
 
 
 
0  
 
 
 
0  
 
 
 
(100
) 
 
 
41
 
 
 
(150
) 
 
 
4,275
 
 
 
2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
56
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(2
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
54
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Derivative assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Equity index options
 
 
65
 
 
 
1
 
 
 
0  
 
 
 
13
 
 
 
0  
 
 
 
0  
 
 
 
(17
) 
 
 
0  
 
 
 
0  
 
 
 
62
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
 
 
65
 
 
 
1
 
 
 
0  
 
 
 
13
 
 
 
0  
 
 
 
0  
 
 
 
(17
) 
 
 
0  
 
 
 
0  
 
 
 
62
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other invested assets
 
 
65
 
 
 
1
 
 
 
0  
 
 
 
13
 
 
 
0  
 
 
 
0  
 
 
 
(17
) 
 
 
0  
 
 
 
0  
 
 
 
62
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance recoverable
(2)
 
 
20
 
 
 
5
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
25
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 assets
 
$
4,422
 
 
$
8
 
 
$
98
 
 
$
116
 
 
$
(2
) 
 
$
0  
 
 
$
(117
) 
 
$
41
 
 
$
(150
) 
 
$
4,416
 
 
$
7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.
 
49
50
Table of Contents
G
ENWORTH
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
 
  
Beginning

balance

as of

January 1,

2020
  
Total realized and

unrealized gains

(losses)
                    
Ending

balance

as of

June 30,

2020
  
Total gains (losses)

attributable to

assets still held
 
(Amounts in millions)
 
Included in

net income

(loss)
  
Included

in OCI
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer

into

Level 3 
(1)
  
Transfer

out of

Level 3 
(1)
  
Included

in net

income (loss)
  
Included

in OCI
 
Fixed maturity securities:
            
State and political subdivisions
 $102  $1  $(12)  $—    $—    $—    $(1)  $—    $(27)  $63  $2  $(13) 
Non-U.S.
government
  —     —     —     —     —     —     (1)   1   —     —     —     —   
U.S. corporate:
                                              
Utilities
  865   —     12   32   —     —     (2)   42   (13)   936   —     14 
Energy
  129   1   (2)   10   (21)   —     (3)   22   (13)   123   —     (5) 
Finance and insurance
  572   2   2   21   —     —     (24)   —     (22)   551   —     5 
Consumer—non-cyclical
  94   —     2   8   —     —     (1)   —     —     103   —     2 
Technology and communications
  50   —     1   20   —     —     —     —     (5)   66   —     2 
Industrial
  40   —     (1)   —     —     —     —     —     —     39   —     (1) 
Capital goods
  102   —     (1)   —     —     —     (4)   —     —     97   —     (1) 
Consumer—cyclical
  173   —     4   —     —     —     (3)   24   —     198   —     4 
Transportation
  78   —     (2)   —     —     —     (2)   10   (30)   54   —     1 
Other
  136   —     1   5   —     —     (4)   27   —     165   —     1 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  2,239   3   16   96   (21)   —     (43)   125   (83)   2,332   —     22 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
                                              
Utilities
  374   —     3   12   —     —     —     21   (53)   357   —     3 
Energy
  247   —     (8)   —     —     —     (26)   24   —     237   —     (8) 
Finance and insurance
  234   2   9   15   —     —     —     58   (7)   311   2   10 
Consumer—non-cyclical
  59   —     2   8   —     —     —     1   (16)   54   —     1 
Technology and communications
  28   —     —     —     —     —     —     —     —     28   —     —   
Industrial
  104   —     1   —     —     —     (5)   —     (8)   92   —     —   
Capital goods
  161   1   (2)   —     —     —     (16)   29   —     173   —     (1) 
Consumer—cyclical
  147   —     (3)   4   —     —     (7)   32   (17)   156   —     (5) 
Transportation
  191   —     2   —     —     —     —     22   (74)   141   —     6 
Other
  140   —     —     5   —     —     (1)   1   —     145   —     —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
non-U.S.
corporate
  1,685   3   4   44   —     —     (55)   188   (175)   1,694   2   6 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
  27   —     —     —     —     —     (1)   4   (6)   24   —     —   
Commercial mortgage-backed
  6   —     2   —     —     —     —     20   (7)   21   —     1 
Other asset-backed
  132   —     (2)   15   —     —     (22)   —     (2)   121   —     (2) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total fixed maturity securities
  4,191   7   8   155   (21)   —     (123)   338   (300)   4,255   4   14 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity securities
  51   —     —     6   (4)   —     —     —     —     53   —     —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other invested assets:
                                              
Derivative assets:
                                              
Equity index options
  81   (9)   —     18   —     —     (24)   —     —     66   5   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total derivative assets
  81   (9)   —     18   —     —     (24)   —     —     66   5   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other invested assets
  81   (9)   —     18   —     —     (24)   —     —     66   5   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Reinsurance recoverable 
(2)
  20   17   —     —     —     1   —     —     —     38   17   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Level 3 assets
 $4,343  $15  $8  $179  $(25)  $1  $(147)  $338  $(300)  $4,412  $26  $14 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Beginning
balance

as of
January 1,
2020
 
 
Total realized and
unrealized gains
(losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2020
 
 
Total gains
(losses)
attributable to
assets still held
 
(Amounts in millions)
 
Included
in net
income
(loss)
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3 
(1)
 
 
Transfer
out of
Level 3 
(1)
 
 
Included
in net
income
(loss)
 
 
Included
in OCI
 
Fixed maturity securities:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
State and political subdivisions
 
$
102
 
 
$
2
 
 
$
(19
) 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
(1
) 
 
$
0  
 
 
$
(27
) 
 
$
57
 
 
$
2
 
 
$
(19
) 
Non-U.S. government
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
865
 
 
 
10
 
 
 
8
 
 
 
47
 
 
 
0  
 
 
 
0  
 
 
 
(54
) 
 
 
42
 
 
 
(77
) 
 
 
841
 
 
 
0  
 
 
 
14
 
Energy
 
 
129
 
 
 
1
 
 
 
(2
) 
 
 
17
 
 
 
(21
) 
 
 
0  
 
 
 
(19
) 
 
 
22
 
 
 
(13
) 
 
 
114
 
 
 
0  
 
 
 
(4
) 
Finance and insurance
 
 
572
 
 
 
2
 
 
 
4
 
 
 
92
 
 
 
0  
 
 
 
0  
 
 
 
(40
) 
 
 
0  
 
 
 
(99
) 
 
 
531
 
 
 
0  
 
 
 
7
 
Consumer—non-cyclical
 
 
94
 
 
 
0  
 
 
 
2
 
 
 
8
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
103
 
 
 
0  
 
 
 
3
 
Technology and communications
 
 
50
 
 
 
0  
 
 
 
4
 
 
 
77
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(5
) 
 
 
126
 
 
 
0  
 
 
 
4
 
Industrial
 
 
40
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
40
 
 
 
0  
 
 
 
0  
 
Capital goods
 
 
102
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(4
) 
 
 
0  
 
 
 
0  
 
 
 
97
 
 
 
0  
 
 
 
(1
) 
Consumer—cyclical
 
 
173
 
 
 
3
 
 
 
3
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(33
) 
 
 
24
 
 
 
0  
 
 
 
170
 
 
 
0  
 
 
 
5
 
Transportation
 
 
78
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(3
) 
 
 
10
 
 
 
(30
) 
 
 
54
 
 
 
0  
 
 
 
1
 
Other
 
 
136
 
 
 
0  
 
 
 
1
 
 
 
5
 
 
 
0  
 
 
 
0  
 
 
 
(5
) 
 
 
27
 
 
 
0  
 
 
 
164
 
 
 
0  
 
 
 
1
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total U.S. corporate
 
 
2,239
 
 
 
16
 
 
 
18
 
 
 
246
 
 
 
(21
) 
 
 
0  
 
 
 
(159
) 
 
 
125
 
 
 
(224
) 
 
 
2,240
 
 
 
0  
 
 
 
30
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
374
 
 
 
0  
 
 
 
7
 
 
 
12
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
27
 
 
 
(73
) 
 
 
347
 
 
 
0  
 
 
 
5
 
Energy
 
 
247
 
 
 
0  
 
 
 
(8
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(26
) 
 
 
24
 
 
 
0  
 
 
 
237
 
 
 
0  
 
 
 
(7
) 
Finance and insurance
 
 
234
 
 
 
3
 
 
 
7
 
 
 
15
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
77
 
 
 
(32
) 
 
 
304
 
 
 
3
 
 
 
8
 
Consumer—non-cyclical
 
 
59
 
 
 
0  
 
 
 
2
 
 
 
8
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
1
 
 
 
(16
) 
 
 
54
 
 
 
0  
 
 
 
1
 
Technology and communications
 
 
28
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
28
 
 
 
0  
 
 
 
0  
 
Industrial
 
 
104
 
 
 
0  
 
 
 
2
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(5
) 
 
 
0  
 
 
 
(8
) 
 
 
93
 
 
 
0  
 
 
 
2
 
Capital goods
 
 
161
 
 
 
1
 
 
 
(2
) 
 
 
10
 
 
 
0  
 
 
 
0  
 
 
 
(26
) 
 
 
29
 
 
 
0  
 
 
 
173
 
 
 
0  
 
 
 
(2
) 
Consumer—cyclical
 
 
147
 
 
 
0  
 
 
 
1
 
 
 
21
 
 
 
0  
 
 
 
0  
 
 
 
(7
) 
 
 
32
 
 
 
(27
) 
 
 
167
 
 
 
0  
 
 
 
(1
) 
Transportation
 
 
191
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
22
 
 
 
(102
) 
 
 
111
 
 
 
0  
 
 
 
3
 
Other
 
 
140
 
 
 
0  
 
 
 
3
 
 
 
5
 
 
 
0  
 
 
 
0  
 
 
 
(13
) 
 
 
1
 
 
 
0  
 
 
 
136
 
 
 
0  
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-U.S. corporate
 
 
1,685
 
 
 
4
 
 
 
12
 
 
 
71
 
 
 
0  
 
 
 
0  
 
 
 
(77
) 
 
 
213
 
 
 
(258
) 
 
 
1,650
 
 
 
3
 
 
 
12
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
 
 
27
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
4
 
 
 
(15
) 
 
 
14
 
 
 
0  
 
 
 
0  
 
Commercial mortgage-backed
 
 
6
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
20
 
 
 
(7
) 
 
 
20
 
 
 
0  
 
 
 
1
 
Other asset-backed
 
 
132
 
 
 
0  
 
 
 
(1
) 
 
 
93
 
 
 
0  
 
 
 
0  
 
 
 
(32
) 
 
 
0  
 
 
 
(31
) 
 
 
161
 
 
 
0  
 
 
 
(1
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturity securities
 
 
4,191
 
 
 
22
 
 
 
10
 
 
 
410
 
 
 
(21
) 
 
 
0  
 
 
 
(271
) 
 
 
363
 
 
 
(562
) 
 
 
4,142
 
 
 
5
 
 
 
23
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
51
 
 
 
0  
 
 
 
0  
 
 
 
6
 
 
 
(5
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
52
 
 
 
0  
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Derivative assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Equity index options
 
 
81
 
 
 
(2
) 
 
 
0  
 
 
 
45
 
 
 
0  
 
 
 
0  
 
 
 
(57
) 
 
 
0  
 
 
 
0  
 
 
 
67
 
 
 
4
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
 
 
81
 
 
 
(2
) 
 
 
0  
 
 
 
45
 
 
 
0  
 
 
 
0  
 
 
 
(57
) 
 
 
0  
 
 
 
0  
 
 
 
67
 
 
 
4
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other invested assets
 
 
81
 
 
 
(2
) 
 
 
0  
 
 
 
45
 
 
 
0  
 
 
 
0  
 
 
 
(57
) 
 
 
0  
 
 
 
0  
 
 
 
67
 
 
 
4
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance recoverable
(2)
 
 
20
 
 
 
14
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
35
 
 
 
14
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 assets
 
$
4,343
 
 
$
34
 
 
$
10
 
 
$
461
 
 
$
(26
) 
 
$
1
 
 
$
(328
) 
 
$
363
 
 
$
(562
) 
 
$
4,296
 
 
$
23
 
 
$
23
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.
 
50
51
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
  
Beginning
balance

as of
January 1,
2019
  
Total realized and
unrealized gains
(losses)
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer
into
Level 3 
(1)
  
Transfer
out of
Level 3 
(1)
  
Ending
balance

as of
June 30,
2019
  
Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
(Amounts in millions)
 
Included
 
in net
 
income
(loss)
  
Included
in OCI
 
Fixed maturity securities:
           
State and political subdivisions
 $51  $2  $8  $—    $—    $—    $—    $—    $—    $61  $1 
U.S. corporate:
                                          
Utilities
  643   —     42   96   (14)   —     (40)   72   (10)   789   —   
Energy
  121   —     7   5   —     —     (11)   —     —     122   —   
Finance and insurance
  534   —     38   40   —     —     (12)   7   —     607   —   
Consumer—non-cyclical
  73   —     3   14   —     —     (10)   9   —     89   —   
Technology and communications
  50   —     5   —     —     —     —     —     (11)   44   —   
Industrial
  39   —     1   —     —     —     —     —     —     40   —   
Capital goods
  92   —     6   —     —     —     —     —     —     98   —   
Consumer—cyclical
  211   —     10   —     (13)   —     (14)   —     (9)   185   —   
Transportation
  57   —     1   4   —     —     (8)   —     —     54   —   
Other
  178   —     6   22   —     —     (15)   8   —     199   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  1,998   —     119   181   (27)   —     (110)   96   (30)   2,227   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
                                          
Utilities
  404   —     23   30   (7)   —     (17)   —     (16)   417   —   
Energy
  217   —     12   16   —     —     (4)   —     —     241   —   
Finance and insurance
  171   2   18   7   —     —     (13)   —     (6)   179   2 
Consumer—non-cyclical
  106   2   4   —     —     —     (44)   —     —     68   —   
Technology and communications
  26   —     1   —     —     —     —     —     —     27   —   
Industrial
  61   —     3   —     —     —     —     —     —     64   —   
Capital goods
  173   —     9   10   —     —     (11)   —     —     181   —   
Consumer—cyclical
  122   —     8   —     —     —     (4)   —     —     126   —   
Transportation
  171   —     9   19   —     —     —     —     —     199   —   
Other
  81   —     8   35   —     —     (1)   6   —     129   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
n
on-U.S.
corporate
  1,532   4   95   117   (7)   —     (94)   6   (22)   1,631   2 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Residential mortgage-backed
  35   —     1   —     —     —     —     —     —     36   —   
Commercial mortgage-backed
  95   —     9   2   —     —     —     —     (14)   92   —   
Other asset-backed
  154   —     2   96   —     —     (42)   28   (4)   234   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total fixed maturity securities
  3,865   6   234   396   (34)   —     (246)   130   (70)   4,281   3 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity securities
  58   —     —     2   (4)   —     —     —     —     56   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Other invested assets:
                                          
Derivative assets:
                                          
Equity index options
  39   27   —     21   —     —     (22)   —     —     65   11 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total derivative assets
  39   27   —     21   —     —     (22)   —     —     65   11 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total other invested assets
  39   27   —     21   —     —     (22)   —     —     65   11 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Reinsurance recoverable 
(2)
  20   (1)   —     —     —     1   —     —     —     20   (1) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Level 3 assets
 $3,982  $32  $234  $419  $(38)  $1  $(268)  $130  $(70)  $4,422  $13 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Beginning
balance

as of
January 1,
2019
 
 
Total realized and
unrealized gains
(losses)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2019
 
 
Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
(Amounts in millions)
 
Included
in net
income
(loss)
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3 
(1)
 
 
Transfer
out of
Level 3 
(1)
 
Fixed maturity securities:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
State and political subdivisions
 
$
51
 
 
$
2
 
 
$
19
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
72
 
 
$
2
 
U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
643
 
 
 
1
 
 
 
70
 
 
 
109
 
 
 
(14
) 
 
 
0  
 
 
 
(47
) 
 
 
72
 
 
 
(10
) 
 
 
824
 
 
 
0  
 
Energy
 
 
121
 
 
 
0  
 
 
 
9
 
 
 
17
 
 
 
0  
 
 
 
0  
 
 
 
(12
) 
 
 
0  
 
 
 
0  
 
 
 
135
 
 
 
0  
 
Finance and insurance
 
 
534
 
 
 
0  
 
 
 
49
 
 
 
40
 
 
 
0  
 
 
 
0  
 
 
 
(38
) 
 
 
27
 
 
 
0  
 
 
 
612
 
 
 
0  
 
Consumer—non-cyclical
 
 
73
 
 
 
0  
 
 
 
4
 
 
 
23
 
 
 
0  
 
 
 
0  
 
 
 
(11
) 
 
 
9
 
 
 
0  
 
 
 
98
 
 
 
0  
 
Technology and communications
 
 
50
 
 
 
0  
 
 
 
6
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
5
 
 
 
(11
) 
 
 
50
 
 
 
0  
 
Industrial
 
 
39
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
40
 
 
 
0  
 
Capital goods
 
 
92
 
 
 
0  
 
 
 
8
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
100
 
 
 
0  
 
Consumer—cyclical
 
 
211
 
 
 
0  
 
 
 
12
 
 
 
0  
 
 
 
(13
) 
 
 
0  
 
 
 
(16
) 
 
 
0  
 
 
 
(18
) 
 
 
176
 
 
 
0  
 
Transportation
 
 
57
 
 
 
0  
 
 
 
2
 
 
 
7
 
 
 
0  
 
 
 
0  
 
 
 
(9
) 
 
 
0  
 
 
 
0  
 
 
 
57
 
 
 
0  
 
Other
 
 
178
 
 
 
0  
 
 
 
6
 
 
 
22
 
 
 
0  
 
 
 
0  
 
 
 
(15
) 
 
 
8
 
 
 
(31
) 
 
 
168
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total U.S. corporate
 
 
1,998
 
 
 
1
 
 
 
167
 
 
 
218
 
 
 
(27
) 
 
 
0  
 
 
 
(148
) 
 
 
121
 
 
 
(70
) 
 
 
2,260
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-U.S. corporate:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Utilities
 
 
404
 
 
 
0  
 
 
 
28
 
 
 
30
 
 
 
(7
) 
 
 
0  
 
 
 
(42
) 
 
 
0  
 
 
 
(16
) 
 
 
397
 
 
 
0  
 
Energy
 
 
217
 
 
 
0  
 
 
 
17
 
 
 
47
 
 
 
0  
 
 
 
0  
 
 
 
(16
) 
 
 
0  
 
 
 
0  
 
 
 
265
 
 
 
0  
 
Finance and insurance
 
 
171
 
 
 
3
 
 
 
22
 
 
 
7
 
 
 
0  
 
 
 
0  
 
 
 
(16
) 
 
 
16
 
 
 
(6
) 
 
 
197
 
 
 
3
 
Consumer—non-cyclical
 
 
106
 
 
 
2
 
 
 
5
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(49
) 
 
 
0  
 
 
 
0  
 
 
 
64
 
 
 
0  
 
Technology and communications
 
 
26
 
 
 
0  
 
 
 
2
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
28
 
 
 
0  
 
Industrial
 
 
61
 
 
 
0  
 
 
 
3
 
 
 
13
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
77
 
 
 
0  
 
Capital goods
 
 
173
 
 
 
0  
 
 
 
11
 
 
 
10
 
 
 
0  
 
 
 
0  
 
 
 
(15
) 
 
 
0  
 
 
 
0  
 
 
 
179
 
 
 
0  
 
Consumer—cyclical
 
 
122
 
 
 
0  
 
 
 
10
 
 
 
9
 
 
 
0  
 
 
 
0  
 
 
 
(4
) 
 
 
0  
 
 
 
0  
 
 
 
137
 
 
 
0  
 
Transportation
 
 
171
 
 
 
0  
 
 
 
10
 
 
 
19
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
200
 
 
 
0  
 
Other
 
 
81
 
 
 
0  
 
 
 
11
 
 
 
35
 
 
 
0  
 
 
 
0  
 
 
 
(2
) 
 
 
6
 
 
 
0  
 
 
 
131
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total non-U.S. corporate
 
 
1,532
 
 
 
5
 
 
 
119
 
 
 
170
 
 
 
(7
) 
 
 
0  
 
 
 
(144
) 
 
 
22
 
 
 
(22
) 
 
 
1,675
 
 
 
3
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage-backed
 
 
35
 
 
 
0  
 
 
 
2
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
(4
) 
 
 
32
 
 
 
0  
 
Commercial mortgage-backed
 
 
95
 
 
 
0  
 
 
 
23
 
 
 
2
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(14
) 
 
 
106
 
 
 
0  
 
Other asset-backed
 
 
154
 
 
 
0  
 
 
 
2
 
 
 
109
 
 
 
0  
 
 
 
0  
 
 
 
(53
) 
 
 
28
 
 
 
(110
) 
 
 
130
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total fixed maturity securities
 
 
3,865
 
 
 
8
 
 
 
332
 
 
 
499
 
 
 
(34
) 
 
 
0  
 
 
 
(346
) 
 
 
171
 
 
 
(220
) 
 
 
4,275
 
 
 
5
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
58
 
 
 
0  
 
 
 
0  
 
 
 
2
 
 
 
(6
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
54
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Derivative assets:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
Equity index options
 
 
39
 
 
 
28
 
 
 
0  
 
 
 
34
 
 
 
0  
 
 
 
0  
 
 
 
(39
) 
 
 
0  
 
 
 
0  
 
 
 
62
 
 
 
(2
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total derivative assets
 
 
39
 
 
 
28
 
 
 
0  
 
 
 
34
 
 
 
0  
 
 
 
0  
 
 
 
(39
) 
 
 
0  
 
 
 
0  
 
 
 
62
 
 
 
(2
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total other invested assets
 
 
39
 
 
 
28
 
 
 
0  
 
 
 
34
 
 
 
0  
 
 
 
0  
 
 
 
(39
) 
 
 
0  
 
 
 
0  
 
 
 
62
 
 
 
(2
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reinsurance recoverable
(2)
 
 
20
 
 
 
4
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
1
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
25
 
 
 
4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 assets
 
$
3,982
 
 
$
40
 
 
$
332
 
 
$
535
 
 
$
(40
) 
 
$
1
 
 
$
(385
) 
 
$
171
 
 
$
(220
) 
 
$
4,416
 
 
$
7
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)
Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.
 
51
52
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents the gains and losses included in net income (loss) from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
(Amounts in millions)
  
2020
  
2019
   
2020
   
 2019
 
Total realized and unrealized gains (losses) included in net income (loss):
       
Net investment income
  $2  $2   $6   $6 
Net investment gains (losses)
   (5)   12    9    26 
  
 
 
  
 
 
   
 
 
   
 
 
 
Total
  $(3)  $14   $15   $32 
  
 
 
  
 
 
   
 
 
   
 
 
 
Total gains (losses) included in net income (loss) attributable to assets still held:
       
Net investment income
  $2  $1   $4   $3 
Net investment gains (losses)
   (1)   9    22    10 
  
 
 
  
 
 
   
 
 
   
 
 
 
Total
  $1  $10   $26   $13 
  
 
 
  
 
 
   
 
 
   
 
 
 
 
  
Three months
ended
September 30,
 
  
Nine months
ended
September 30,
 
(Amounts in millions)
  
  2020  
 
 
  2019  
 
  
  2020  
 
  
  2019  
 
Total realized and unrealized gains (losses) included in net income (loss):
  
   
 
   
  
   
  
   
Net investment income
  
$
15
 
 
$
2
 
  
$
21
 
  
$
8
 
Net investment gains (losses)
  
 
4
 
 
 
6
 
  
 
13
 
  
 
32
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
19
 
 
$
8
 
  
$
34
 
  
$
40
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
Total gains (losses) included in net income (loss) attributable to assets still held:
  
   
 
   
  
   
  
   
Net investment income
  
$
2
 
 
$
2
 
  
$
5
 
  
$
5
 
Net investment gains (losses)
  
 
(4
) 
 
 
5
 
  
 
18
 
  
 
2
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
(2
) 
 
$
7
 
  
$
23
 
  
$
7
 
 
  
 
 
 
 
 
 
 
  
 
 
 
  
 
 
 
The amount presented for realized and unrealized gains (losses) included in net income (loss) for fixed maturity securities primarily represents amortization and accretion of premiums and discounts on certain fixed maturity securities.
 
52
53
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents a summary of the significant unobservable inputs used for certain asset fair value measurements that are based on internal models and classified as Level 3 as of JuneSeptember 30, 2020:
 
(Amounts in millions)
 
Valuation technique
  
Fair value
  
Unobservable input
  
Range
  
Weighted-average 
(1)
 
Fixed maturity securities:
     
U.S. corporate:
     
Utilities
  Internal models  $826   Credit spreads   71bps - 427bps   194bps 
Energy
  Internal models   8   Credit spreads   108bps   N/A 
Finance and insurance
  Internal models   497   Credit spreads   73bps - 380bps   206bps 
Consumer—non-cyclical
  Internal models   102   Credit spreads   83bps - 395bps   202bps 
Technology and communications
  Internal models   66   Credit spreads   212bps - 395bps   271bps 
Industrial
  Internal models   39   Credit spreads   199bps - 483bps   293bps 
Capital goods
  Internal models   97   Credit spreads   120bps - 294bps   214bps 
Consumer—cyclical
  Internal models   161   Credit spreads   131bps - 307bps   208bps 
Transportation
  Internal models   44   Credit spreads   76bps - 199bps   144bps 
Other
  Internal models   165   Credit spreads   99bps - 213bps   122bps 
  
 
 
    
Total U.S. corporate
  Internal models  $2,005   Credit spreads   71bps - 483bps   197bps 
  
 
 
    
Non-U.S.
corporate:
     
Utilities
  Internal models  $357   Credit spreads   97bps - 286bps   176bps 
Energy
  Internal models   82   Credit spreads   120bps - 272bps   175bps 
Finance and insurance
  Internal models   209   Credit spreads   136bps - 188bps   133bps 
Consumer—non-cyclical
  Internal models   53   Credit spreads   107bps - 182bps   160bps 
Technology and communications
  Internal models   28   Credit spreads   153bps - 260bps   221bps 
Industrial
  Internal models   92   Credit spreads   108bps - 272bps   193bps 
Capital goods
  Internal models   144   Credit spreads   107bps - 294bps   215bps 
Consumer—cyclical
  Internal models   45   Credit spreads   97bps - 272bps   194bps 
Transportation
  Internal models   114   Credit spreads   83bps - 294bps   175bps 
Other
  Internal models   144   Credit spreads   121bps - 507bps   300bps 
  
 
 
    
Total
non-U.S.
corporate
  Internal models  $1,268   Credit spreads   83bps - 507bps   196bps 
  
 
 
    
Derivative assets:
      
Equity index options
  Discounted cash
flows		 
 		 $66   Equity index
volatility		 
 		  6% - 38%   28% 
(Amounts in millions)
 
Valuation
technique
 
 
Fair value
 
 
Unobservable
input
 
 
Range
 
Weighted-average 
(1)
 
Fixed maturity securities:
 
   
 
   
 
   
 
 
 
   
U.S. corporate:
 
   
 
   
 
   
 
 
 
   
Utilities
 
 
Internal models
 
 
$
774
 
 
 
Credit spreads
 
 
71bps – 368bps
 
 
183bps
 
Energy
 
 
Internal models
 
 
 
7
 
 
 
Credit spreads
 
 
91bps
 
 
Not applicable
 
Finance and insurance
 
 
Internal models
 
 
 
493
 
 
 
Credit spreads
 
 
66bps – 321bps
 
 
178bps
 
Consumer—non-cyclical
 
 
Internal models
 
 
 
103
 
 
 
Credit spreads
 
 
78bps – 358bps
 
 
174bps
 
Technology and communications
 
 
Internal models
 
 
 
126
 
 
 
Credit spreads
 
 
133bps – 358bps
 
 
224bps
 
Industrial
 
 
Internal models
 
 
 
40
 
 
 
Credit spreads
 
 
156bps – 373bps
 
 
230bps
 
Capital goods
 
 
Internal models
 
 
 
97
 
 
 
Credit spreads
 
 
102bps – 273bps
 
 
190bps
 
Consumer—cyclical
 
 
Internal models
 
 
 
133
 
 
 
Credit spreads
 
 
139bps – 276bps
 
 
201bps
 
Transportation
 
 
Internal models
 
 
 
43
 
 
 
Credit spreads
 
 
67bps – 156bps
 
 
118bps
 
Other
 
 
Internal models
 
 
 
164
 
 
 
Credit spreads
 
 
93bps – 206bps
 
 
114bps
 
 
 
   
 
 
 
 
 
   
 
 
 
   
Total U.S. corporate
 
��
Internal models
 
 
$
1,980
 
 
 
Credit spreads
 
 
66bps – 373bps
 
 
179bps
 
 
 
   
 
 
 
 
 
   
 
 
 
   
Non-U.S. corporate:
 
   
 
   
 
   
 
 
 
   
Utilities
 
 
Internal models
 
 
$
347
 
 
 
Credit spreads
 
 
89bps – 292bps
 
 
164bps
 
Energy
 
 
Internal models
 
 
 
82
 
 
 
Credit spreads
 
 
102bps – 241bps
 
 
156bps
 
Finance and insurance
 
 
Internal models
 
 
 
199
 
 
 
Credit spreads
 
 
86bps – 174bps
 
 
134bps
 
Consumer—non-cyclical
 
 
Internal models
 
 
 
53
 
 
 
Credit spreads
 
 
97bps – 162bps
 
 
142bps
 
Technology and communications
 
 
Internal models
 
 
 
28
 
 
 
Credit spreads
 
 
102bps – 238bps
 
 
184bps
 
Industrial
 
 
Internal models
 
 
 
93
 
 
 
Credit spreads
 
 
91bps – 241bps
 
 
165bps
 
Capital goods
 
 
Internal models
 
 
 
146
 
 
 
Credit spreads
 
 
97bps – 254bps
 
 
177bps
 
Consumer—cyclical
 
 
Internal models
 
 
 
54
 
 
 
Credit spreads
 
 
102bps – 241bps
 
 
197bps
 
Transportation
 
 
Internal models
 
 
 
95
 
 
 
Credit spreads
 
 
78bps – 241bps
 
 
129bps
 
Other
 
 
Internal models
 
 
 
135
 
 
 
Credit spreads
 
 
110bps – 490bps
 
 
209bps
 
 
 
   
 
 
 
 
 
   
 
 
 
   
Total non-U.S. corporate
 
 
Internal models
 
 
$
1,232
 
 
 
Credit spreads
 
 
78bps – 490bps
 
 
163bps
 
 
 
   
 
 
 
 
 
   
 
 
 
   
Derivative assets:
 
   
 
   
 
   
 
 
 
   
Equity index options
 
 
Discounted cash
flows
 
 
 
$
67
 
 
 
Equity index
volatility
 
 
 
6% – 41%
 
 
28%
 
 
(1)
Unobservable inputs weighted by the relative fair value of the associated instrument for fixed maturity securities and by notional for derivative assets.
Certain classes of instruments classified as Level 3 are excluded above as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value.
 
53
54
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables set forth our liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:
 
   
June 30, 2020
 
(Amounts in millions)
  
Total
   
Level 1
   
Level 2
   
Level 3
 
Liabilities
        
Policyholder account balances:
        
GMWB embedded derivatives
(1)
  $559   $—     $—     $559 
Fixed index annuity embedded derivatives
   447    —      —      447 
Indexed universal life embedded derivatives
   23    —      —      23 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total policyholder account balances
   1,029    —      —      1,029 
  
 
 
   
 
 
   
 
 
   
 
 
 
Derivative liabilities:
        
Other foreign currency contracts
   1    —      1    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total derivative liabilities
   1    —      1    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total liabilities
  $1,030   $—     $1   $1,029 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
  
September 30, 2020
 
(Amounts in millions)
  
Total
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Liabilities
  
   
  
   
  
   
  
   
Policyholder account balances:
  
   
  
   
  
   
  
   
GMWB embedded derivatives
(1)
  
$
508
 
  
$
0  
 
  
$
0  
 
  
$
508
 
Fixed index annuity embedded derivatives
  
 
432
 
  
 
0  
 
  
 
0  
 
  
 
432
 
Indexed universal life embedded derivatives
  
 
25
 
  
 
0  
 
  
 
0  
 
  
 
25
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total policyholder account balances
  
 
965
 
  
 
0  
 
  
 
0  
 
  
 
965
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Derivative liabilities:
  
   
  
   
  
   
  
   
Interest rate swaps
  
 
4
 
  
 
0  
 
  
 
4
 
  
 
0  
 
Other foreign currency contracts
  
 
5
 
  
 
0  
 
  
 
5
 
  
 
0  
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total derivative liabilities
  
 
9
 
  
 
0  
 
  
 
9
 
  
 
0  
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total liabilities
  
$
974
 
  
$
0  
 
  
$
9
 
  
$
965
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
 
   
December 31, 2019
 
(Amounts in millions)
  
  Total  
   
  Level 1  
   
  Level 2  
   
  Level 3  
 
Liabilities
        
Policyholder account balances:
        
GMWB embedded derivatives
(1)
  $323   $—     $—     $323 
Fixed index annuity embedded derivatives
   452    —      —      452 
Indexed universal life embedded derivatives
   19    —      —      19 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total policyholder account balances
   794    —      —      794 
  
 
 
   
 
 
   
 
 
   
 
 
 
Derivative liabilities:
        
Interest rate swaps
   10    —      10    —   
Other foreign currency contracts
   1    —      1    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total derivative liabilities
   11    —      11    —   
  
 
 
   
 
 
   
 
 
   
 
 
 
Total liabilities
  $
 
805   $
 
—     $11   $794 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
  
December 31, 2019
 
(Amounts in millions)
  
Total
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Liabilities
  
   
  
   
  
   
  
   
Policyholder account balances:
  
   
  
   
  
   
  
   
GMWB embedded derivatives
(1)
  
$
323
 
  
$
0  
 
  
$
0  
 
  
$
323
 
Fixed index annuity embedded derivatives
  
 
452
 
  
 
0  
 
  
 
0  
 
  
 
452
 
Indexed universal life embedded derivatives
  
 
19
 
  
 
0  
 
  
 
0  
 
  
 
19
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total policyholder account balances
  
 
794
 
  
 
0  
 
  
 
0  
 
  
 
794
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Derivative liabilities:
  
   
  
   
  
   
  
   
Interest rate swaps
  
 
10
 
  
 
0  
 
  
 
10
 
  
 
0  
 
Other foreign currency contracts
  
 
1
 
  
 
0  
 
  
 
1
 
  
 
0  
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total derivative liabilities
  
 
11
 
  
 
0  
 
  
 
11
 
  
 
0  
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total liabilities
  
$
805
 
  
$
0  
 
  
$
11
 
  
$
794
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
 
54
55
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
 
(Amounts in millions)
 
Beginning
balance

as of
April 1,
2020
  
Total realized and
unrealized (gains)
losses
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer
into
Level 3
  
Transfer
out of
Level 3
  
Ending
balance

as of
June 30,
2020
  
Total (gains) 
losses
attributable to
liabilities still held
 
 
Included
in net
(income)
loss
  
Included
in OCI
  
Included
in net
(income)
loss
  
Included
in OCI
 
Policyholder account balances:
            
GMWB embedded derivatives
(1)
 $691  $(138)  $—    $—    $—    $6  $—    $—    $—    $559  $(137)  $—   
Fixed index annuity embedded derivatives
  413   45   —     —     —     —     (11)   —     —     447   45   —   
Indexed universal life embedded derivatives
  21   (3)   —     —     —     5   —     —     —     23   (3)   —   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total policyholder account balances
  1,125   (96)   —     —     —     11   (11)   —     —     1,029   (95)   —   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 liabilities
 $1,125  $(96)  $—    $—    $—    $11  $(11)  $—    $—    $1,029  $(95)  $—   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Beginning
balance

as of
July 1,
2020
 
 
Total realized and
unrealized (gains)
losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2020
 
 
Total (gains)

losses

attributable to
liabilities

still held
 
(Amounts in millions)
 
Included

in net

(income)
loss
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3
 
 
Transfer
out of
Level 3
 
 
Included
in net
(income)
loss
 
 
Included
in OCI
 
Policyholder account balances:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
GMWB embedded derivatives 
(1)
 
$
559
 
 
$
(57
) 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
6
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
508
 
 
$
(57
) 
 
$
0  
 
Fixed index annuity embedded derivatives
 
 
447
 
 
 
18
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(33
) 
 
 
0  
 
 
 
0  
 
 
 
432
 
 
 
18
 
 
 
0  
 
Indexed universal life embedded derivatives
 
 
23
 
 
 
(3
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
5
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
25
 
 
 
(3
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total policyholder account balances
 
 
1,029
 
 
 
(42
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
11
 
 
 
(33
) 
 
 
0  
 
 
 
0  
 
 
 
965
 
 
 
(42
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 liabilities
 
$
1,029
 
 
$
(42
) 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
11
 
 
$
(33
) 
 
$
0  
 
 
$
0  
 
 
$
965
 
 
$
(42
) 
 
$
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
 
  
Beginning
balance

as of
April 1,
2019
  
Total realized and
unrealized (gains)
losses
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer
into
Level 3
  
Transfer
out of
Level 3
  
Ending
balance

as of
June 30,
2019
  
Total (gains)
losses
included in
net (income)
loss

attributable
to liabilities
still held
 
(Amounts in millions)
 
Included
in net
(income)
loss
  
Included
in OCI
 
Policyholder account balances:
           
GMWB embedded derivatives
(1)
 $295  $24  $—    $—    $—    $6  $—    $—    $—    $325  $24 
Fixed index annuity embedded derivatives
  423   20   —     —     —     —     (5)   —     —     438   20 
Indexed universal life embedded derivatives
  13   1   —     —     —     1   —     —     —     15   1 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total policyholder account balances
  731   45   —     —     —     7   (5)   —     —     778   45 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Level 3 liabilities
 $731  $45  $—    $—    $—    $7  $(5)  $—    $—    $778  $45 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Beginning
balance

as of
July 1,
2019
 
 
Total realized and
unrealized (gains)
losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2019
 
 
Total (gains)
losses
included

in net
(income)
loss

attributable
to liabilities
still held
 
(Amounts in millions)
 
Included
in net
(income)
loss
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3
 
 
Transfer
out of
Level 3
 
Policyholder account balances:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
GMWB embedded derivatives 
(1)
 
$
325
 
 
$
49
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
7
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
381
 
 
$
50
 
Fixed index annuity embedded derivatives
 
 
438
 
 
 
14
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(8
) 
 
 
0  
 
 
 
0  
 
 
 
444
 
 
 
14
 
Indexed universal life embedded derivatives
 
 
15
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
4
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
18
 
 
 
(1
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total policyholder account balances
 
 
778
 
 
 
62
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
11
 
 
 
(8
) 
 
 
0  
 
 
 
0  
 
 
 
843
 
 
 
63
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 liabilities
 
$
778
 
 
$
62
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
11
 
 
$
(8
) 
 
$
0  
 
 
$
0  
 
 
$
843
 
 
$
63
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
 
5556
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:
 
(Amounts in millions)
 
Beginning
balance

as of
January 1,
2020
  
Total realized and
unrealized (gains)
losses
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer
into
Level 3
  
Transfer
out of
Level 3
  
Ending
balance

as of
June 30,
2020
  
Total (gains)
losses
attributable to
liabilities still held
 
 
Included
in net
(income)
loss
  
Included
in OCI
  
Included
in net
(income)
loss
  
Included
in OCI
 
Policyholder account balances:
            
GMWB embedded derivatives
(1)
 $323  $224  $—    $—    $—    $12  $—    $—    $—    $559  $231  $—   
Fixed index annuity embedded derivatives
  452   13   —     —     —     —     (18)   —     —     447   13   —   
Indexed universal life embedded derivatives
  19   (7)   —     —     —     11   —     —     —     23   (7)   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total policyholder account balances
  794   230   —     —     —     23   (18)   —     —     1,029   237   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Level 3 liabilities
 $794  $230  $—    $—    $—    $23  $(18)  $—    $—    $1,029  $237  $—   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Beginning
balance

as of
January 1,
2020
 
 
Total realized and
unrealized (gains)
losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2020
 
 
Total (gains)
losses

attributable to
liabilities

still held
 
(Amounts in millions)
 
Included
in net
(income)
loss
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3
 
 
Transfer
out of
Level 3
 
 
Included
in net
(income)
loss
 
 
Included
in OCI
 
Policyholder account balances:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
GMWB embedded derivatives 
(1)
 
$
323
 
 
$
167
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
18
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
508
 
 
$
174
 
 
$
0  
 
Fixed index annuity embedded derivatives
 
 
452
 
 
 
31
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(51
) 
 
 
0  
 
 
 
0  
 
 
 
432
 
 
 
31
 
 
 
0  
 
Indexed universal life embedded derivatives
 
 
19
 
 
 
(10
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
16
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
25
 
 
 
(10
) 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total policyholder account balances
 
 
794
 
 
 
188
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
34
 
 
 
(51
) 
 
 
0  
 
 
 
0  
 
 
 
965
 
 
 
195
 
 
 
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 liabilities
 
$
794
 
 
$
188
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
34
 
 
$
(51
) 
 
$
0  
 
 
$
0  
 
 
$
965
 
 
$
195
 
 
$
0  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
 
  
Beginning
balance

as of
January 1,
2019
  
Total realized and
unrealized (gains)
losses
  
Purchases
  
Sales
  
Issuances
  
Settlements
  
Transfer
into
Level 3
  
Transfer
out of
Level 3
  
Ending
balance

as of
June 30,
2019
  
Total (gains)
losses
included in
net (income) loss

attributable
to
 
liabilities
still
 
held
 
(Amounts in millions)
 
Included
 
in net
 
(income)
loss
  
Included
in OCI
 
Policyholder account balances:
           
GMWB embedded derivatives
(1)
 $337  $(24)  $—    $—    $—    $12  $—    $—    $—    $325  $(20) 
Fixed index annuity embedded derivatives
  389   58   —     —     —     —     (9)   —     —     438   58 
Indexed universal life embedded derivatives
  12   —     —     —     —     3   —     —     —     15   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total policyholder account balances
  738   34   —     —     —     15   (9)   —     —     778   38 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Level 3 liabilities
 $738  $34  $—    $—    $—    $15  $(9)  $—    $—    $778  $38 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
 
Beginning
balance

as of
January 1,
2019
 
 
Total realized and
unrealized (gains)
losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending
balance

as of
September 30,
2019
 
 
Total (gains)
losses
included

in net
(income)
loss

attributable
to liabilities
still held
 
(Amounts in millions)
 
Included
in net
(income)
loss
 
 
Included
in OCI
 
 
Purchases
 
 
Sales
 
 
Issuances
 
 
Settlements
 
 
Transfer
into
Level 3
 
 
Transfer
out of
Level 3
 
Policyholder account balances:
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
GMWB embedded derivatives 
(1)
 
$
337
 
 
$
25
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
19
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
381
 
 
$
29
 
Fixed index annuity embedded derivatives
 
 
389
 
 
 
72
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
(17
) 
 
 
0  
 
 
 
0  
 
 
 
444
 
 
 
72
 
Indexed universal life embedded derivatives
 
 
12
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
7
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
18
 
 
 
(1
) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total policyholder account balances
 
 
738
 
 
 
96
 
 
 
0  
 
 
 
0  
 
 
 
0  
 
 
 
26
 
 
 
(17
) 
 
 
0  
 
 
 
0  
 
 
 
843
 
 
 
100
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Level 3 liabilities
 
$
738
 
 
$
96
 
 
$
0  
 
 
$
0  
 
 
$
0  
 
 
$
26
 
 
$
(17
) 
 
$
0  
 
 
$
0  
 
 
$
843
 
 
$
100
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
 
56
57
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents the gains and losses included in net (income) loss from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the periods indicated:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
(Amounts in millions)
  
2020
  
2019
   
2020
   
2019
 
Total realized and unrealized (gains) losses included in net (income) loss:
       
Net investment income
  $—    $—     $—     $—   
Net investment (gains) losses
   (96)   45    230    34 
  
 
 
  
 
 
   
 
 
   
 
 
 
Total
  $(96)  $45   $230   $34 
  
 
 
  
 
 
   
 
 
   
 
 
 
Total (gains) losses included in net (income) loss attributable to liabilities still held:
       
Net investment income
  $—    $—     $—     $—   
Net investment (gains) losses
   (95)   45    237    38 
  
 
 
  
 
 
   
 
 
   
 
 
 
Total
  $(95)  $45   $237   $38 
  
 
 
  
 
 
   
 
 
   
 
 
 
 
  
Three months ended
September 30,
 
  
Nine months ended
September 30,
 
(Amounts in millions)
  
2020
 
  
2019
 
  
2020
 
  
2019
 
Total realized and unrealized (gains) losses included in net (income) loss:
  
   
  
   
  
   
  
   
Net investment income
  
$
0  
 
  
$
0  
 
  
$
0  
 
  
$
0  
 
Net investment (gains) losses
  
 
(42
) 
  
 
62
 
  
 
188
 
  
 
96
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
(42
) 
  
$
62
 
  
$
188
 
  
$
96
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total (gains) losses included in net (income) loss attributable to liabilities still held:
  
   
  
   
  
   
  
   
Net investment income
  
$
0  
 
  
$
0  
 
  
$
0  
 
  
$
0  
 
Net investment (gains) losses
  
 
(42
) 
  
 
63
 
  
 
195
 
  
 
100
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total
  
$
(42
) 
  
$
63
 
  
$
195
 
  
$
100
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Purchases, sales, issuances and settlements represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases, sales and settlements of fixed maturity and equity securities and purchases, issuances and settlements of derivative instruments.
Issuances presented for GMWB embedded derivative liabilities are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance. Issuances for fixed index annuity and indexed universal life embedded derivative liabilities represent the amount of the premium received that is attributed to the value of the embedded derivative. Settlements of embedded derivatives are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income) loss” in the tables presented above.
 
5758
Table of Contents
GENWORTH
FINANCIAL,
,
INC
. INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table presents a summary of the significant unobservable inputs used for certain liability fair value measurements that are based on internal models and classified as Level 3 as of JuneSeptember 30, 2020:
 
(Amounts in millions)
 
Valuation technique
 
Fair value
 
Unobservable input
  
Range
 
Weighted-average 
(1)
 
  
Valuation technique
 
  
Fair value
 
  
Unobservable input
 
  
Range
  
Weighted-
average
(1)
 
Policyholder account balances:
   Withdrawal
utilization rate		  56% - 88%  73%
  
 
  
 
  
 
  
 
  
 
   Lapse rate  2% - 9%  3%
  
 
  
 
  
 
Withdrawal
utilization rate
 
 
  
56% – 88%
  
 
73%
 
   Non-performance risk   
  
 
  
 
  
 
Lapse rate
 
  
2% – 9%
  
 
4%
 
   (credit spreads)  9bps - 83bps  67bps
  
 
  
 
  
 
Non-performance risk

(credit spreads)
 
 
  
12bps –83bps
  
 
67bps
 
GMWB embedded derivatives
(2)
 
 
Stochastic cash flow
model
 
 
 $559  Equity index
volatility		  21% - 30%  24%
  
 
Stochastic cash flow
model
 
 
  
$
508
 
  
 
Equity index
volatility
 
 
  
21% – 27%
  
 
23%
 
Fixed index annuity embedded derivatives
 
 
Option budget
method
 
 
 $447  Expected future
interest credited		  —
  
%
 - 3%		  1
%
 
  
 
Option budget
method
 
 
  
$
432
 
  
 
Expected future
interest credited
 
 
  
0  % – 3%
  
 
1%
 
Indexed universal life embedded derivatives
 
 
 
Option budget
method

 
 $23  Expected future
interest credited		  3% - 11% 
 
 
 
 
 
 6
%
 
  
 
Option budget
method
 
 
  
$
25
 
  
 
Expected future
interest credited
 
 
  
3% – 10%
  
 
5%
 
 
(1)
Unobservable inputs weighted by the policyholder account balances associated with the instrument.
(2)
Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance. The unobservable inputs associated with GMWB embedded derivatives are not interrelated and therefore, a directional change in one input will not affect the other inputs.
Assets and Liabilities Not Required to Be Carried at Fair Value
Assets and liabilities that are reflected in the accompanying unaudited condensed consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash, cash equivalents and restricted cash, short-term investments, investment securities, separate accounts, securities held as collateral and derivative instruments. Apart from certain of our borrowings and certain marketable securities, few of the instruments are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.
 
58
59
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:
 
   
June 30, 2020
 
   
Notional

amount
  
Carrying

amount
   
Fair value
 
(Amounts in millions)
  
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
           
Commercial mortgage loans
               (1)  $6,917   $7,225   $—     $—     $7,225 
Other invested assets
               (1)   418    421    —      22    399 
Liabilities:
           
Long-term borrowings
               (1)   2,817    2,153    —      2,016    137 
Investment contracts
               (1)  
11,258
  
12,227
  
—
  
—
  
12,227
Other firm commitments:
           
Commitments to fund limited partnerships
   1,135   —      —      —      —      —   
Commitments to fund bank loan investments
   35   —      —      —      —      —   
Ordinary course of business lending commitments
   116   —      —      —      —      —   
 
  
September 30, 2020
 
 
  
Notional

amount
 
 
Carrying

amount
 
  
Fair value
 
(Amounts in millions)
  
Total
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Assets:
  
   
 
   
  
   
  
   
  
   
  
   
Commercial mortgage loans
  
 
        
(1)
 
 
$
6,880
 
  
$
7,169
 
  
$
0  
 
  
$
0  
 
  
$
7,169
 
Other invested assets
  
 
        
(1)
 
 
 
410
 
  
 
411
 
  
 
0  
 
  
 
23
 
  
 
388
 
Liabilities:
  
   
 
   
  
   
  
   
  
   
  
   
Long-term borrowings
  
 
        
(1)
 
 
 
3,570
 
  
 
3,148
 
  
 
0  
 
  
 
2,979
 
  
 
169
 
Investment contracts
  
 
        
(1)
 
 
 
10,872
 
  
 
12,016
 
  
 
0  
 
  
 
0  
 
  
 
12,016
 
Other firm commitments:
  
   
 
   
  
   
  
   
  
   
  
   
Commitments to fund limited partnerships
  
 
1,112
 
 
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
Commitments to fund bank loan investments
  
 
35
 
 
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
Ordinary course of business lending commitments
  
 
126
 
 
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
 
(1)
These financial instruments do not have notional amounts.
 
   
December 31, 2019
 
   
Notional

amount
  
Carrying

amount
   
Fair value
 
(Amounts in millions)
  
Total
   
Level 1
   
Level 2
   
Level 3
 
Assets:
           
Commercial mortgage loans
               (1)  $6,963   $7,239   $—     $—     $7,239 
Other invested assets
               (1)   432    432    —      49    383 
Liabilities:
           
Long-term borrowings
               (1)   3,277    3,093    —      2,951    142 
Non-recourse
funding obligations
               (1)   311    207    —      —      207 
Investment contracts
               (1)   11,466    12,086    —      —      12,086 
Other firm commitments:
           
Commitments to fund limited partnerships
   976   —      —      —      —      —   
Commitments to fund bank loan investments
   52   —      —      —      —      —   
Ordinary course of business lending commitments
   69   —      —      —      —      —   
 
  
December 31, 2019
 
 
  
Notional

amount
 
 
Carrying

amount
 
  
Fair value
 
(Amounts in millions)
  
Total
 
  
Level 1
 
  
Level 2
 
  
Level 3
 
Assets:
  
   
 
   
  
   
  
   
  
   
  
   
Commercial mortgage loans
  
 
        
(1)
 
 
$
6,963
 
  
$
7,239
 
  
$
0  
 
  
$
0  
 
  
$
7,239
 
Other invested assets
  
 
        
(1)
 
 
 
432
 
  
 
432
 
  
 
0  
 
  
 
49
 
  
 
383
 
Liabilities:
  
   
 
   
  
   
  
   
  
   
  
   
Long-term borrowings
  
 
        
(1)
 
 
 
3,277
 
  
 
3,093
 
  
 
0  
 
  
 
2,951
 
  
 
142
 
Non-recourse funding obligations
  
 
        
(1)
 
 
 
311
 
�� 
 
207
 
  
 
0  
 
  
 
0  
 
  
 
207
 
Investment contracts
  
 
        
(1)
 
 
 
11,466
 
  
 
12,086
 
  
 
0  
 
  
 
0  
 
  
 
12,086
 
Other firm commitments:
  
   
 
   
  
   
  
   
  
   
  
   
Commitments to fund limited partnerships
  
 
976
 
 
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
Commitments to fund bank loan investments
  
 
52
 
 
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
Ordinary course of business lending commitments
  
 
69
 
 
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
  
 
0  
 
 
(1)
These financial instruments do not have notional amounts.
59
60
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(7) Liability for Policy and Contract Claims
The following table sets forth changes in our liability for policy and contract claims as of the dates indicated:
 
   
As of or for the six
months ended

June 30,
 
(Amounts in millions)
  
2020
   
2019
 
Beginning balance
  $10,958   $10,295 
Less reinsurance recoverables
   (2,406)    (2,379) 
  
 
 
   
 
 
 
Net beginning balance
   8,552    7,916 
  
 
 
   
 
 
 
Incurred related to insured events of:
    
Current year
   2,238    1,961 
Prior years
   (255)    (206) 
  
 
 
   
 
 
 
Total incurred
   1,983    1,755 
  
 
 
   
 
 
 
Paid related to insured events of:
    
Current year
   (436)    (407) 
Prior years
   (1,339)    (1,253) 
  
 
 
   
 
 
 
Total paid
   (1,775)    (1,660) 
  
 
 
   
 
 
 
Interest on liability for policy and contract claims
   205    188 
Foreign currency translation
   (4)    (1) 
  
 
 
   
 
 
 
Net ending balance
   8,961    8,198 
Add reinsurance recoverables
   2,319    2,388 
  
 
 
   
 
 
 
Ending balance
  $11,280   $10,586 
  
 
 
   
 
 
 
 
  
As of or for the nine
months ended
September 30,
 
(Amounts in millions)
  
2020
 
  
2019
 
Beginning balance
  
$
10,958
 
  
$
10,295
 
Less reinsurance recoverables
  
 
(2,406
) 
  
 
(2,379
) 
 
  
 
 
 
  
 
 
 
Net beginning balance
  
 
8,552
 
  
 
7,916
 
 
  
 
 
 
  
 
 
 
Incurred related to insured events of:
  
   
  
   
Current year
  
 
3,179
 
  
 
2,865
 
Prior years
  
 
(389
) 
  
 
(237
) 
 
  
 
 
 
  
 
 
 
Total incurred
  
 
2,790
 
  
 
2,628
 
 
  
 
 
 
  
 
 
 
Paid related to insured events of:
  
   
  
   
Current year
  
 
(708
) 
  
 
(659
) 
Prior years
  
 
(1,867
) 
  
 
(1,794
) 
 
  
 
 
 
  
 
 
 
Total paid
  
 
(2,575
) 
  
 
(2,453
) 
 
  
 
 
 
  
 
 
 
Interest on liability for policy and contract claims
  
 
308
 
  
 
285
 
Foreign currency translation
  
 
5
 
  
 
(9
) 
 
  
 
 
 
  
 
 
 
Net ending balance
  
 
9,080
 
  
 
8,367
 
Add reinsurance recoverables
  
 
2,293
 
  
 
2,413
 
 
  
 
 
 
  
 
 
 
Ending balance
  
$
11,373
 
  
$
10,780
 
 
  
 
 
 
  
 
 
 
The liability for policy and contract claims represents our current best estimate; however, there may be future adjustments to this estimate and related assumptions. Such adjustments, reflecting any variety of new and adverse trends, could possibly be significant, and result in increases in reserves by an amount that could be material to our results of operations and financial condition and liquidity.
In addition, loss reserves recorded on new delinquencies in our U.S. mortgage insurance business have a high degree of estimation, particularly due to the level of uncertainty regarding whether borrowers in forbearance will ultimately cure or result in a new delinquency.claim payment.
For the sixnine months ended JuneSeptember 30, 2020, the favorable development of $255$389 million related to insured events of prior years was primarily attributable to our long-term care insurance business largely from favorable
claim terminations mostly attributable to higher mortality, favorable
development on prior year incurred but not reported claims and favorable experience on pending claims that terminated before becoming an active claim.
These decreases were partially offset by a strengthening of incurred but not reported reserves in the current yearreserves.
.
For the sixnine months ended JuneSeptember 30, 2020, the liability for policy and contract claims increased $322$415 million largely related to our U.S. mortgage insurance business, principally 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 earlyunfavorable cure emergence patterns impacting claim frequency along with a modest increase in claim severity. The current year also reflected lowerand severity offset by net benefits from cures and aging of existing delinquencies compared to the prior year.paid claims. The increase was also attributable to our long-term care insurance business primarily attributable to new claims,
 
6061
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
new claims,
which includes higher new claims frequency as a result of the aging of the in-force block, as well as higher severity, partially offset by an increase in claim terminations driven mostly by higher mortality and favorable development on prior year incurred but not reported claims in the current year. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by $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.
(8) Reinsurance
(8) Reinsurance
The following table sets forth the changes in the allowance for credit losses related to reinsurance recoverables as of or for the periods indicated:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
(Amounts in millions)
  
2020
   
2020
 
Allowance for credit losses:
    
Beginning balance
  $42   $—   
Cumulative effect of change in accounting
   —      40 
Provision
   2    4 
Write-offs
   —      —   
Recoveries
   —      —   
  
 
 
   
 
 
 
Ending balance
  $44   $44 
  
 
 
   
 
 
 
 
  
Three months ended
September 30,
 
  
Nine months ended
September 30,
 
(Amounts in millions)
  
2020
 
  
2020
 
Allowance for credit losses:
  
   
  
   
Beginning balance
  
$
44
 
  
$
0  
 
Cumulative effect of change in accounting
  
 
0  
 
  
 
40
 
Provision
  
 
0  
 
  
 
4
 
Write-offs
  
 
0  
 
  
 
0  
 
Recoveries
  
 
0  
 
  
 
0  
 
 
  
 
 
 
  
 
 
 
Ending balance
  
$
44
 
  
$
44
 
 
  
 
 
 
  
 
 
 
As discussed in note 2, our policy for evaluating and measuring the allowance for credit losses related to reinsurance recoverables utilizes the reinsurer’s credit rating, updated quarterly, to assess the credit quality of reinsurance recoverables. The following table sets forth A.M. Best Company, Inc.’s (“A.M. Best”) credit ratings related to our reinsurance recoverables, gross of the allowance for credit losses, as of JuneSeptember 30, 2020:
 
(Amounts in millions)
  
Collateralized
   
Non-collateralized
   
Total
 
Credit rating:
      
A++
  $—     $508   $508 
A+
   1,267    1,467    2,734 
A
   20    58    78 
B+
   —      2    2 
Not rated
   13,542    80    13,622 
  
 
 
   
 
 
   
 
 
 
Total reinsurance recoverable
  $14,829   $2,115   $16,944 
  
 
 
   
 
 
   
 
 
 
(Amounts in millions)
  
Collateralized
 
  
Non-collateralized
 
  
Total
 
Credit rating:
  
   
  
   
  
   
A++
  
$
0  
 
  
$
514
 
  
$
514
 
A+
  
 
1,380
 
  
 
1,366
 
  
 
2,746
 
A
  
 
20
 
  
 
46
 
  
 
66
 
B+
  
 
0  
 
  
 
2
 
  
 
2
 
Not rated
  
 
13,422
 
  
 
82
 
  
 
13,504
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total reinsurance recoverable
  
$
14,822
 
  
$
2,010
 
  
$
16,832
 
 
  
 
 
 
  
 
 
 
  
 
 
 
We have several significant reinsurance transactions (“Reinsurance Transactions”) with Union Fidelity Life Insurance Company (“UFLIC”), an affiliate of our former parent, General Electric Company (“GE”). In the Reinsurance Transactions, we ceded to UFLIC
in-force
blocks of structured settlements issued prior to 2004, substantially all of our
in-force
blocks of variable annuities issued prior to 2004 and a block of long-term care insurance policies that we reinsured in 2000 from legal entities now a part of Brighthouse Life Insurance Company. Although we remain directly liable under these contracts and policies as the ceding insurer, the Reinsurance Transactions have the effect of transferring the financial results of the reinsured blocks to UFLIC. To secure the payment of its obligations to us under the reinsurance agreements governing the Reinsurance Transactions, UFLIC has established trust accounts to maintain an aggregate amount of assets with a statutory book value at least equal to the statutory general account reserves attributable to the reinsured business less an
61
62
Table of ContentsContents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
book value at least equal to the statutory general account reserves attributable to the reinsured business less an amount required to be held in certain claims-paying accounts. A trustee administers the trust accounts and we are permitted to withdraw from the trust accounts amounts due to us pursuant to the terms of the reinsurance agreements that are not otherwise paid by UFLIC. In addition, pursuant to a Capital Maintenance Agreement, GE is obligated to maintain sufficient capital in UFLIC to maintain UFLIC’s risk-based capital (“RBC”) at not less than 150% of its company action level, as defined by the National Association of Insurance Commissioners (“NAIC”).
As of JuneSeptember 30, 2020 and December 31, 2019, we had a reinsurance recoverable of $13,539$13,418 million and $13,752 million, respectively, with UFLIC. In March 2019, upon UFLIC’s request, A.M. Best withdrew UFLIC’s credit rating.
There was
no impact
to us
from this action as UFLIC has trust accounts and a guarantee from its parent, as discussed above, and is sufficiently collateralized. Accordingly, the reinsurance recoverable with UFLIC is fully collectible and no allowance for credit losses was recorded as of JuneSeptember 30, 2020.
Reinsurance recoverables are considered past due when contractual payments have not been received from the reinsurer by the required payment date. Claims submitted for payment are generally due in less than one year. As of JuneSeptember 30, 2020, we did 0t have any reinsurance recoverables past due, except for Scottish Re US Inc. (“Scottish Re”), a reinsurance company domiciled in Delaware. On March 6, 2019, Scottish Re was ordered into receivership for the purposes of rehabilitation by the Court of Chancery of the State of Delaware.
The proposed Plan
of Rehabilitation
of Scottish Re
was filed on June 30, 2020
. The filing did not include2020; however, we expect a schedule for affected cedentsrevised Plan of Rehabilitation to objectbe filed by March 16, 2021 with any objections required to the proposed rehabilitation plan.be submitted by April 15, 2021. We do not know what deadlines will be imposed related to the Court of Chancery’s consideration of the proposed plan but we expect a finaland no hearing to be scheduled in November or December of this year.
date has been scheduled. As of JuneSeptember 30, 2020, amounts past due related to Scottish Re were $13$16 million, all of which was included in the allowance for credit losses.
We
will continue to monitor the plan of rehabilitation and expected recovery of the claims balance.
62
Mortgage Insurance—Excess of Loss Reinsurance
On October 22, 2020, our U.S. mortgage insurance business obtained $350 million of 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. Triangle Re 2020-1 Ltd. is a VIE and special purpose insurer domiciled in Bermuda and financed the reinsurance coverage by issuing mortgage insurance-linked notes to unaffiliated investors. The notes are non-recourse to us and our affiliates. The excess of loss reinsurance coverage is fully collateralized by a reinsurance trust account which requires the proceeds from the sale of the mortgage
insurance-linked
notes be deposited into the trust and be invested in eligible investments in accordance with the reinsurance trust agreement. The collateralized trust serves to cover reinsurance obligations if losses exceed our first loss tier. For the reinsurance coverage, we retain the first layer of aggregate losses up to $522 million. Triangle Re 2020-1 Ltd. provides 67% reinsurance coverage for losses above our retained first layer up to $350 million.
63
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) Borrowings and Liquidity
(a) Long-Term Borrowings
The following table sets forth total long-term borrowings as of the dates indicated:
 
(Amounts in millions)
  
June 30,
2020
   
December 31,
2019
 
Genworth Holdings
(1)
    
7.70% Senior Notes, due 2020
  $—     $397 
7.20% Senior Notes, due 2021
   356    382 
7.625% Senior Notes, due 2021
   661    701 
4.90% Senior Notes, due 2023
   399    399 
4.80% Senior Notes, due 2024
   400    400 
6.50% Senior Notes, due 2034
   297    297 
Floating Rate Junior Subordinated Notes, due 2066
   598    598 
  
 
 
   
 
 
 
Subtotal
   2,711    3,174 
Bond consent fees
   (22)    (25) 
Deferred borrowing charges
   (10)    (12) 
  
 
 
   
 
 
 
Total Genworth Holdings
   2,679    3,137 
  
 
 
   
 
 
 
Australia
(2)
    
Floating Rate Junior Subordinated Notes, due 2025
   138    140 
  
 
 
   
 
 
 
Total Australia
   138    140 
  
 
 
   
 
 
 
Total
  $2,817   $3,277 
  
 
 
   
 
 
 
(Amounts in millions)
  
September 30,
2020
 
  
December 31,
2019
 
Genworth Holdings
(1)
  
   
  
   
7.70% Senior Notes, due 2020
  
$
0  
 
  
$
397
 
7.20% Senior Notes, due 2021
  
 
338
 
  
 
382
 
7.625% Senior Notes, due 2021
  
 
661
 
  
 
701
 
4.90% Senior Notes, due 2023
  
 
399
 
  
 
399
 
4.80% Senior Notes, due 2024
  
 
400
 
  
 
400
 
6.50% Senior Notes, due 2034
  
 
297
 
  
 
297
 
Floating Rate Junior Subordinated Notes, due 2066
  
 
598
 
  
 
598
 
 
  
 
 
 
  
 
 
 
Subtotal
  
 
2,693
 
  
 
3,174
 
Bond consent fees
  
 
(20
) 
  
 
(25
) 
Deferred borrowing charges
  
 
(10
) 
  
 
(12
) 
 
  
 
 
 
  
 
 
 
Total Genworth Holdings
  
 
2,663
 
  
 
3,137
 
 
  
 
 
 
  
 
 
 
Genworth Mortgage Holdings, Inc.
  
   
  
   
6.50% Senior Notes, due 2025
  
 
750
 
  
 
0  
 
Deferred borrowing charges
  
 
(12
) 
  
 
0  
 
 
  
 
 
 
  
 
 
 
Total Genworth Mortgage Holdings, Inc.
  
 
738
 
  
 
0  
 
 
  
 
 
 
  
 
 
 
Australia
(2)
  
   
  
   
Floating Rate Junior Subordinated Notes, due 2025
  
 
35
 
  
 
140
 
Floating Rate Junior Subordinated Notes, due 2030
  
 
136
 
  
 
0  
 
 
  
 
 
 
  
 
 
 
Subtotal
  
 
171
 
  
 
140
 
Deferred borrowing charges
  
 
(2
) 
  
 
0  
 
 
  
 
 
 
  
 
 
 
Total Australia
  
 
169
 
  
 
140
 
 
  
 
 
 
  
 
 
 
Total
  
$
3,570
 
  
$
3,277
 
 
  
 
 
 
  
 
 
 
 
(1)
We have the option to redeem all or a portion of the senior notes at any time with notice to the noteholders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread.
(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.
64
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 March
On 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 a
pre-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
63
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
(10) Income Taxes
The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:
 
  
Three months ended
 
Six months ended
 
  
June 30,
 
June 30,
 
  
Three months ended
September 30,
 
Nine months ended
September 30,
 
  
2020
 
2019
 
2020
 
2019
 
  
  2020  
 
  2019  
 
  2020  
 
  2019  
 
Statutory U.S. federal income tax rate
  
 
21.0
% 
 
21.0
% 
 
21.0
% 
 
21.0
% 
  
 
21.0
% 
 
21.0
% 
 
21.0
% 
 
21.0
% 
Increase (reduction) in rate resulting from:
  
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
Swaps terminated prior to the TCJA
  
 
4.8
 
 
3.2
 
 
19.1
 
 
3.9
 
  
 
2.6
 
 
1.2
 
 
4.3
 
 
3.2
 
Provision to return adjustments
  
 
0.8
 
 
(1.6
) 
 
0.7
 
 
(0.4
) 
Effect of foreign operations
  
 
3.7
 
 
2.3
 
 
7.3
 
 
2.7
 
  
 
1.1
 
 
(0.8
) 
 
1.8
 
 
2.5
 
Non-deductible
goodwill
  
 
1.2
 
 
 
—  
 
 
2.7
 
 
 
—  
 
Non-deductible
expense
  
 
0.7
 
 
0.6
 
 
2.8
 
 
0.7
 
Tax favored investments
  
 
(0.8
) 
 
(0.5
) 
 
(3.2
) 
 
(0.5
) 
Stock-based compensation
  
 
0.1
 
 
0.1
 
 
2.9
 
 
 
—  
 
Other, net
  
 
0.4
 
 
2.8
 
 
1.9
 
 
1.5
 
  
 
0.1
 
 
0.1
 
 
0.8
 
 
0.3
 
  
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
Effective rate
  
 
31.1
% 
 
 
29.5
% 
 
 
54.5
% 
 
 
29.3
% 
  
 
25.6
% 
 
19.9
% 
 
28.6
% 
 
26.6
% 
  
 
 
 
 
 
 
 
 
 
 
 
65
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 lower
pre-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 to
small changes in projected
pre-tax
income
.
(11) Segment Information
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
64
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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)
66
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
65
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
67
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:
 
                 
   
Three
 
months
 
ended
June 30,
   
Six months ended
June 30,
 
(Amounts in millions)
  
2020
   
2019
   
 
 
 
2020
 
 
 
   
 
 
2019
 
 
 
 
Revenues:
        
U.S. Mortgage Insurance segment
  $274   $235   $535   $458 
  
 
 
   
 
 
   
 
 
   
 
 
 
Australia Mortgage Insurance segment
   136    96    163    206 
  
 
 
   
 
 
   
 
 
   
 
 
 
U.S. Life Insurance segment:
            
Long-term care insurance
   1,200    1,055    2,206    2,169 
Life insurance
   335    382    683    754 
Fixed annuities
   129    151    262    310 
  
 
 
   
 
 
   
 
 
   
 
 
 
U.S. Life Insurance segment
   1,664    1,588    3,151    3,233 
  
 
 
   
 
 
   
 
 
   
 
 
 
Runoff segment
   90    78    97    160 
  
 
 
   
 
 
   
 
 
   
 
 
 
Corporate and Other activities
   (26)    (3)    29    (19) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Total revenues
  $2,138   $1,994   $3,975   $4,038 
  
 
 
   
 
 
   
 
 
   
 
 
 
 
  
Three months ended
September 30,
 
  
Nine months ended
September 30,
 
(Amounts in millions)
  
    2020    
 
  
    2019    
 
  
    2020    
 
  
    2019    
 
Revenues:
  
   
  
   
  
   
  
   
U.S. Mortgage Insurance segment
  
$
284
 
  
$
251
 
  
$
819
 
  
$
709
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Australia Mortgage Insurance segment
  
 
102
 
  
 
82
 
  
 
265
 
  
 
288
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
U.S. Life Insurance segment:
  
   
  
   
  
   
  
   
Long-term care insurance
  
 
1,466
 
  
 
1,110
 
  
 
3,672
 
  
 
3,279
 
Life insurance
  
 
333
 
  
 
347
 
  
 
1,016
 
  
 
1,101
 
Fixed annuities
  
 
138
 
  
 
145
 
  
 
400
 
  
 
455
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
U.S. Life Insurance segment
  
 
1,937
 
  
 
1,602
 
  
 
5,088
 
  
 
4,835
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Runoff segment
  
 
103
 
  
 
74
 
  
 
200
 
  
 
234
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Corporate and Other activities
  
 
(6
) 
  
 
11
 
  
 
23
 
  
 
(8
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total revenues
  
$
2,420
 
  
$
2,020
 
  
$
6,395
 
  
$
6,058
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
6668
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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,
  
Six months
 
ended
June 30,
 
(Amounts in millions)
  
2020
  
2019
  
2020
  
2019
 
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 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss)
   (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 
Taxes on adjustments
   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,
 
(Amounts in millions)
  
  2020  
 
 
  2019  
 
 
  2020  
 
 
  2019  
 
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
  
 
0  
 
 
 
30
 
 
 
0  
 
 
 
101
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
  
 
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)
  
 
0  
 
 
 
0  
 
 
 
3
 
 
 
0  
 
(Gains) losses on early extinguishment of debt
  
 
0  
 
 
 
0  
 
 
 
9
 
 
 
0  
 
Expenses related to restructuring
  
 
0  
 
 
 
0  
 
 
 
2
 
 
 
4
 
Taxes on adjustments
  
 
77
 
 
 
0  
 
 
 
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 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.
 
6769
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
(Amounts in millions)
  
2020
   
2019
   
2020
   
2019
 
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:
     
Long-term care insurance
   48   37   49   17 
Life insurance
   (81)   10   (158)   8 
Fixed annuities
   28   19   34   36 
  
 
 
  
 
 
  
 
 
  
 
 
 
U.S. Life Insurance segment
   (5)   66   (75)   61 
  
 
 
  
 
 
  
 
 
  
 
 
 
Runoff segment
   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,
 
(Amounts in millions)
  
  2020  
 
 
  2019  
 
 
  2020  
 
 
  2019  
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:
  
   
 
   
 
   
 
   
U.S. Mortgage Insurance segment
  
$
141
 
 
$
137
 
 
$
286
 
 
$
408
 
Australia Mortgage Insurance segment
  
 
7
 
 
 
12
 
 
 
17
 
 
 
39
 
U.S. Life Insurance segment:
  
   
 
   
 
   
 
   
Long-term care insurance
  
 
59
 
 
 
21
 
 
 
108
 
 
 
38
 
Life insurance
  
 
(69
) 
 
 
(25
) 
 
 
(227
) 
 
 
(17
) 
Fixed annuities
  
 
24
 
 
 
3
 
 
 
58
 
 
 
39
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Life Insurance segment
  
 
14
 
 
 
(1
) 
 
 
(61
) 
 
 
60
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Runoff segment
  
 
19
 
 
 
10
 
 
 
30
 
 
 
39
 
Corporate and Other activities
  
 
(49
) 
 
 
(35
) 
 
 
(128
) 
 
 
(150
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
  
$
132
 
 
$
123
 
 
$
144
 
 
$
396
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:
 
(Amounts in millions)
  
June 30,
2020
   
December 31,
2019
 
Assets:
    
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 
Runoff segment
   9,783    9,953 
Corporate and Other activities
   2,642    2,839 
  
 
 
   
 
 
 
Total assets
  $103,637   $101,342 
  
 
 
   
 
 
 
(Amounts in millions)
  
September 30,
2020
 
  
December 31,
2019
 
Assets:
  
   
  
   
U.S. Mortgage Insurance segment
  
$
5,494
 
  
$
4,504
 
Australia Mortgage Insurance segment
  
 
2,601
 
  
 
2,406
 
U.S. Life Insurance segment
  
 
84,208
 
  
 
81,640
 
Runoff segment
  
 
9,901
 
  
 
9,953
 
Corporate and Other activities
  
 
2,721
 
  
 
2,839
 
 
  
 
 
 
  
 
 
 
Total assets
  
$
104,925
 
  
$
101,342
 
 
  
 
 
 
  
 
 
 
(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 o
n
on products,
, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to
68
70
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
6971
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 PPI
mis-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
amended
its claim
and updated
 its
demand
to
£499 million
,
excluding
 an
alleged claim
for
a
tax gross up for a possible additional
amount
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
pur
suant t
o 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
subseque
ntly iss
ued
subsequently issued damages
judgment of July 27, 2020.
See note 14 f
o
r
for additional
details on the terms of the settlement with AXA,
, the
sale of our former lifestyle protection insurance business
and amo
unts recor
ded r
el
atedamounts recorded related to
loss
from d
i
scon
ti
ndiscontinued operations.
ued
operations
.
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
Insurance Company
. 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
70
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
72
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
Richard
 F. Burkhart, William
 E. Kelly, Richard
 S. Lavery, Thomas
 R. Pratt, Gerald Green, individually and on behalf of all other persons similarly situated v. Genworth et
 al
. 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.
71
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
73
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
72
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
(b) Commitments
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.
74
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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:
 
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
 
(1)
  
Derivatives
qualifying
 
as
hedges
 
(2)
  
Foreign
currency
translation
and other
adjustments
  
Total
 
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) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Current period OCI
   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 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
(1)
 
 
Derivatives
qualifying as
hedges
 (2)
 
 
Foreign
currency
translation
and other
adjustments
 
 
Total
 
Balances as of July 1, 2020
  
$
1,811
 
 
$
2,677
 
 
$
(41
) 
 
$
4,447
 
OCI before reclassifications
  
 
161
 
 
 
(191
) 
 
 
33
 
 
 
3
 
Amounts reclassified from (to) OCI
  
 
(261
) 
 
 
(35
) 
 
 
0  
 
 
 
(296
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period OCI
  
 
(100
) 
 
 
(226
) 
 
 
33
 
 
 
(293
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2020 before noncontrolling interests
  
 
1,711
 
 
 
2,451
 
 
 
(8
) 
 
 
4,154
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: change in OCI attributable to noncontrolling interests
  
 
0  
 
 
 
0  
 
 
 
13
 
 
 
13
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2020
  
$
1,711
 
 
$
2,451
 
 
$
(21
) 
 
$
4,141
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
(1)
 
 
Derivatives
qualifying as
hedges
 (2)
 
 
Foreign
currency
translation
and other
adjustments
 
 
Total
 
Balances as of July 1, 2019
  
$
1,305
 
 
$
1,983
 
 
$
(275
) 
 
$
3,013
 
OCI before reclassifications
  
 
384
 
 
 
306
 
 
 
(64
) 
 
 
626
 
Amounts reclassified from (to) OCI
  
 
(13
) 
 
 
(30
) 
 
 
0  
 
 
 
(43
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period OCI
  
 
371
 
 
 
276
 
 
 
(64
) 
 
 
583
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2019 before noncontrolling interests
  
 
1,676
 
 
 
2,259
 
 
 
(339
) 
 
 
3,596
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: change in OCI attributable to noncontrolling interests
  
 
1
 
 
 
0  
 
 
 
(27
) 
 
 
(26
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2019
  
$
1,675
 
 
$
2,259
 
 
$
(312
) 
 
$
3,622
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.
75
Table of Contents
73
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
(1)
 
 
Derivatives
qualifying as
hedges
 (2)
 
 
Foreign
currency
translation
and other
adjustments
 
 
Total
 
Balances as of January 1, 2020
  
$
1,456
 
 
$
2,002
 
 
$
(25
) 
 
$
3,433
 
OCI before reclassifications
  
 
609
 
 
 
544
 
 
 
8
 
 
 
1,161
 
Amounts reclassified from (to) OCI
  
 
(355
) 
 
 
(95
) 
 
 
0  
 
 
 
(450
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period OCI
  
 
254
 
 
 
449
 
 
 
8
 
 
 
711
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2020 before noncontrolling interests
  
 
1,710
 
 
 
2,451
 
 
 
(17
) 
 
 
4,144
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: change in OCI attributable to noncontrolling interests
  
 
(1
) 
 
 
0  
 
 
 
4
 
 
 
3
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2020
  
$
1,711
 
 
$
2,451
 
 
$
(21
) 
 
$
4,141
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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.
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
(1)
 
 
Derivatives
qualifying as
hedges
 (2)
 
 
Foreign
currency
translation
and other
adjustments
 
 
Total
 
Balances as of January 1, 2019
  
$
595
 
 
$
1,781
 
 
$
(332
) 
 
$
2,044
 
OCI before reclassifications
  
 
1,186
 
 
 
560
 
 
 
33
 
 
 
1,779
 
Amounts reclassified from (to) OCI
  
 
(59
) 
 
 
(82
) 
 
 
0  
 
 
 
(141
) 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current period OCI
  
 
1,127
 
 
 
478
 
 
 
33
 
 
 
1,638
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2019 before noncontrolling interests
  
 
1,722
 
 
 
2,259
 
 
 
(299
) 
 
 
3,682
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less: change in OCI attributable to noncontrolling interests
  
 
47
 
 
 
0  
 
 
 
13
 
 
 
60
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of September 30, 2019
  
$
1,675
 
 
$
2,259
 
 
$
(312
) 
 
$
3,622
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 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.
76
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, for the periods presented:
 
  
Amount reclassified from

accumulated other comprehensive
income (loss)
 
 
Affected line item in the
consolidated statements
of income
 
  
Three months ended
September 30,
 
 
Nine months ended
September 30,
 
(Amounts in millions)
  
  2020  
 
 
  2019  
 
 
  2020  
 
 
  2019  
 
Net unrealized investment (gains) losses:
  
   
 
   
 
   
 
   
 
 
Unrealized (gains) losses on investments
(1)
  
$
(331
) 
 
$
(17
) 
 
$
(450
) 
 
$
(75
) 
 
Net investment (gains) losses
Income taxes
  
 
70
 
 
 
4
 
 
 
95
 
 
 
16
 
 
Provision for income taxes
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
  
$
(261
) 
 
$
(13
) 
 
$
(355
) 
 
$
(59
) 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives qualifying as hedges:
  
   
 
   
 
   
 
   
 
 
Interest rate swaps hedging assets
  
$
(50
) 
 
$
(41
) 
 
$
(139
) 
 
$
(121
) 
 
Net investment income
Interest rate swaps hedging assets
  
 
(4
) 
 
 
(4
) 
 
 
(8
) 
 
 
(6
) 
 
Net investment (gains) losses
Foreign currency swaps
  
 
0  
 
 
 
(1
) 
 
 
0  
 
 
 
0  
 
 
Net investment income
Income taxes
  
 
19
 
 
 
16
 
 
 
52
 
 
 
45
 
 
Provision for income taxes
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
  
$
(35
) 
 
$
(30
) 
 
$
(95
) 
 
$
(82
) 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
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 for
a
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 installments
i
n June 2022 and September 2022. Future claims that are still being processed will be added to the September 2022 installment payment.
77
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
(1)
   
Derivatives
qualifying
 
as
hedges
 
(2)
  
Foreign
currency
translation
and other
adjustments
  
Total
 
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) 
  
 
 
   
 
 
  
 
 
  
 
 
 
Current period OCI
   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.
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
(1)
  
Derivatives
qualifying
 
as
hedges
 
(2)
  
Foreign
currency
translation
and other
adjustments
  
Total
 
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) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Current period OCI
   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.
(2)
See note 5 for additional information.
74
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in millions)
  
Net
unrealized
investment
gains
(losses)
(1)
  
Derivatives
qualifying
 
as
hedges
 
(2)
  
Foreign
currency
translation
and other
adjustments
  
Total
 
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) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Current period OCI
   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
consolidated statements
of income
  
Three months ended June 30,
  
Six months ended June 30,
 
(Amounts in millions)
 
2020
  
2019
  
2020
  
2019
 
Net unrealized investment (gains) losses:
      
Unrealized (gains) losses on investments 
(1)
  $(112)  $2  $(119)  $(58)  Net investment (gains) losses
Income
taxes
   24   (1)   25   12  Provision for income taxes
  
 
 
  
 
 
  
 
 
  
 
 
  
Total
  $(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
Foreign currency swaps
   —     1   —     1  Net investment income
Income
taxes
   16   13   33   29  Provision for income taxes
  
 
 
  
 
 
  
 
 
  
 
 
  
Total
  $(30)  $(24)  $(60)  $(52)  
  
 
 
  
 
 
  
 
 
  
 
 
  
(1)
Amounts exclude adjustments to DAC, present value of future profits, sales inducements and benefit reserves.
75
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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:
(Amounts in millions)
  
Three months
 
ended
June 30, 2019
   
Six months
 
ended
June 30,
 
2019
 
Revenues:
    
Premiums
  $125   $251 
Net investment income
   36    71 
Net investment gains (losses)
   1    —   
  
 
 
   
 
 
 
Total revenues
   162    322 
  
 
 
   
 
 
 
Benefits and expenses:
    
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 
Interest expense
(1)
   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 includes
pre-tax
income from discontinued operations available to Genworth Financial, Inc.’s common stockholders of $55 million and $111 million, respectively.
76
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
(Amounts in millions)
  
September 30, 2020
 
  
British Pounds
 
  
U.S. Dollar
 
Installment payments due to AXA:
  
   
  
   
June 2022
  
£
159
 
  
$
206
 
September 2022:
  
   
  
   
Beginning balance
  
 
158
 
  
 
205
 
Amounts billed as future losses
  
 
29
 
  
 
38
 
 
  
 
 
 
  
 
 
 
Ending balance
  
 
187
 
  
 
243
 
 
  
 
 
 
  
 
 
 
Total amounts due under the promissory note
  
346
 
  
449
 
 
  
 
 
 
  
 
 
 
Future claims:
  
   
  
   
Estimated beginning balance
  
107
 
  
138
 
Less: Amounts billed to date
  
 
(29
)
 
  
 
(38
)
 
 
  
 
 
 
  
 
 
 
Estimated future billings
  
 
78
 
  
 
100
 
 
  
 
 
 
  
 
 
 
Total amounts due to AXA under the settlement agreement
  
£
424
 
  
$
549
 
 
  
 
 
 
  
 
 
 
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
remeasurement
that
 f
or losses incurred from mis-selling complaints on policies sold from 1970 through 2004. An
after-tax
loss
of $516 million
related to
the
settlement
was alsois included in lossincome (loss) from discontinued operations for the three and six months ended June 30, 2020, along with other
after-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 to
make payments for
certain payment protection insurance
 mis
-selling
claims, along with
 a significant p
ortion of
future 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;
78
Table of Contents
GENWORTH FINANCIAL, INC.
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.
77
Table of Contents
GENWORTH FINANCIAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
 
78
79
Table of Contents
Item 2.
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 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
•
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
 
79
80
Table of Contents

 
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
 
8081
Table of Contents
 
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 to
COVID-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;
 
operational risks
including: inability to retain, attract and motivate qualified employees or senior management; ineffective or inadequate risk management in identifying, controlling or mitigating risks; the impact on processes caused by
shelter-in-place
or other governmental restrictions imposed as a result of
COVID-19;
reliance on, and loss of, key customer or distribution relationships; competition, including in our mortgage insurance businesses from 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;
 
8182
Table of Contents
and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations; and failure or any compromise of the security of our computer systems, disaster recovery systems and business continuity plans and failures to safeguard, or breaches of, its confidential information;
insurance and product-related risks
including: our inability to increase premiums and reduce benefits sufficiently, and in a timely manner, on our
in-force
long-term care insurance policies, in each case, as currently anticipated and as may be required from time to time in the future (including as a result of a delay or failure to obtain any necessary regulatory approvals, including as a result of
COVID-19,
or unwillingness or inability of policyholders to pay increased premiums and/or accept reduced benefits), including to offset any negative impact on our long-term care insurance margins; availability, affordability and adequacy of reinsurance to protect us against losses; decreases in the volume of high
loan-to-value
mortgage originations or increases in mortgage insurance cancellations; increases in the use of alternatives to private mortgage insurance and reductions in the level of coverage selected; potential liabilities in connection with our U.S. contract underwriting services; and medical advances, such as genetic research and diagnostic imaging, and related legislation that impact policyholder behavior in ways adverse to us;
 
other risks
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.
Strategic Update
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,
83
Table of Contents
(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
82
Table of Contents
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
84
Table of Contents
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
83
Table of Contents
contribute additional capital to support our legacy long-term care insurance business other than agreed in connection with the regulatory approvals for the China Oceanwide transaction.
If the China Oceanwide transaction is completed, we will be a standalone subsidiary and our senior management team will continue to lead the business from our current headquarters in Richmond, Virginia. We intend to maintain our existing portfolio of businesses. Except for the specific monitoring and reporting required under the Committee on Foreign Investment in the United States data security risk mitigation plan, our
day-to-day
operations are not expected to change as a result of this transaction.
Strategic Alternatives
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.
Ongoing Priorities
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.
85
Table of Contents
COVID-19 Summary
Summary
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.
84
Table of Contents
Economic Backdrop
 
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 of
COVID-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 to
COVID-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.
U.S. Mortgage Insurance
 
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.
 
86
Table of Contents
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 efforts
New delinquencies continue to contain the spread of
COVID-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 to
pre-COVID-19
levels. Severity of loss on loans that do go to claim, however, may be negatively impacted by the extended forbearance timeline, the associated elevated expenses such as accumulated interest, the higher loan amount of the recent new delinquencies and home price depreciation, if any.
85
Table of Contents
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 loans
in-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.
 
The
For 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 of
COVID-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.
 
87
Table of Contents
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.
U.S. Life Insurance
 
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.
 
86
Table of Contents
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 to
COVID-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
shelter-in-place
and social distancing protocols are in effect. We have temporarily discontinued
in-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 an
in-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.
Runoff
 
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.
 
88
While
Table of Contents

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.
Investment Portfolio
 
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.
 
87
TableAs of Contents
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 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. We recognized a $7 million credit loss on our
available-for-sale
investment securities during the second quarter of 2020 due in part to the adverse effects of
COVID-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.
89
Table of Contents
Liquidity
 
Genworth Holdings maintains a continuous process for evaluating group-level liquidity, under normal and stressed environments. In light of
COVID-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.”
88
Table of Contents
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.”
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 of
COVID-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
 
90
Table of Contents
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
91
Table of Contents
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
89
Table of Contents
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 from
in-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 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 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 of
COVID-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 by
COVID-19
and lower net investment income in the current year.
90
Table of Contents
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 an
The 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.
U.S. Mortgage Insurance
 
Incurred losses.losses
. 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.
92
Table of Contents
forbearance as a result of COVID-19. The increase was also attributable to strengthening of existing reserves by $28 million in the current year primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity.
 
PMIERs compliance.
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 insurance
business
.
 
91
Mortgage originations.
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
 
Regulatory capital.
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.
 
Key Customers.
In May 2020, following a
request-for-proposal
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.
93
Table of Contents
impact future financial results of our mortgage insurance business in Australia following the expiration of the existing contract in November 2020.
U.S. Life Insurance
 
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
GMHI debt offering.
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.
 
94
Table of Contents
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
92
Table pre-tax gain of Contents$4 million and paid accrued interest thereon.
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 a
pre-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.
95
Table of Contents
Consolidated
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
93
Table of Contents
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.”
 
9496
Table of Contents
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,
  
Increase

(decrease) and

percentage

change
 
(Amounts in millions)
  
2020
  
2019
  
2020 vs. 2019
 
Revenues:
     
Premiums
  $1,019  $1,001  $18   2% 
Net investment income
   786   816   (30)   (4)% 
Net investment gains (losses)
   159   (46)   205   NM(1) 
Policy fees and other income
   174   223   (49)   (22)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   2,138   1,994   144   7%
 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
Benefits and other changes in policy reserves
   1,486   1,251   235   19% 
Interest credited
   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% 
Goodwill impairment
   5   —     5   NM(1) 
Interest expense
   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) 
  
 
 
  
 
 
  
 
 
  
Net income (loss)
   (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
 
(Amounts in millions)
  
    2020    
   
    2019    
  
  2020 vs. 2019  
 
Revenues:
      
Premiums
  $1,034   $1,015  $19   2% 
Net investment income
   827    816   11   1% 
Net investment gains (losses)
   375    (2)   377   NM(1) 
Policy fees and other income
   184    191   (7)   (4)% 
  
 
 
   
 
 
  
 
 
  
Total revenues
   2,420    2,020   400   20% 
  
 
 
   
 
 
  
 
 
  
Benefits and expenses:
      
Benefits and other changes in policy reserves
   1,299    1,284   15   1% 
Interest credited
   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)% 
Interest expense
   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% 
  
 
 
   
 
 
  
 
 
  
Net income
   436    58   378   NM(1) 
Less: net income from continuing operations attributable to noncontrolling interests
  
 
18
 
  
 
10
 
 
 
8
 
 
 
80
% 
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.
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.
 
95
Our Australia Mortgage Insurance segment decreased $6 million predominantly from portfolio seasoning and lower policy cancellations in the current year.
97
Table of Contents
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.
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 insurance
in-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.
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.
98
Table of Contents
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.
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.
99
Table of Contents
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:
   
Nine months ended

September 30,
  
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
  
  2020  
  
  2019  
  
  2020 vs. 2019  
 
Revenues:
     
Premiums
  $3,068  $3,004  $64   2% 
Net investment income
   2,406   2,426   (20)   (1)% 
Net investment gains (losses)
   382   27   355   NM(1) 
Policy fees and other income
   539   601   (62)   (10)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   6,395   6,058   337   6% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
Benefits and other changes in policy reserves
   4,146   3,817   329   9% 
Interest credited
   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% 
Goodwill impairment
   5   —     5   NM(1) 
Interest expense
   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) 
  
 
 
  
 
 
  
 
 
  
Net income (loss)
   (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%.
Premiums
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.
100
Table of Contents

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.
Net investment income.
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 by
COVID-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.
 
96101
Table of Contents
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 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 to
in-force
rate actions approved and implemented. Our life insurance business increased $45
Our Runoff segment increased $9 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 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.
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 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 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.
Goodwill impairment.
Charges for impairment of goodwill are the result of declines in the fair value of the reporting units.
Our Australia Mortgage Insurance segment recorded a goodwill impairment charge of $5 million in the current year, which represented the remaining amount of goodwill related to our mortgage insurance business in Australia.
97
Table of Contents
Interest expense.
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 lower
pre-tax
income in the current year. The increase was also attributable to a higher tax expense related to foreign operations and
non-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.
98
Table of Contents
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:
   
Six months ended
June 30,
   
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
  
2020
  
2019
   
2020 vs. 2019
 
Revenues:
      
Premiums
  $2,034  $1,989   $45   2%
 
Net investment income
   1,579   1,610    (31)   (2)% 
Net investment gains (losses)
   7   29    (22)   (76)% 
Policy fees and other income
   355   410    (55)   (13)% 
  
 
 
  
 
 
   
 
 
  
Total revenues
   3,975   4,038    (63)   (2)% 
  
 
 
  
 
 
   
 
 
  
Benefits and expenses:
      
Benefits and other changes in policy reserves
   2,847   2,533    314   12% 
Interest credited
   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% 
Goodwill impairment
   5   —      5   NM(1) 
Interest expense
   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) 
  
 
 
  
 
 
   
 
 
  
Net income (loss)
   (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%.
Premiums
Our U.S. Mortgage Insurance segment increased $69 million mainly attributable to higher insurance
in-force
and an increase in policy cancellations in our single premium mortgage insurance product driven largely by higher mortgage refinancing, partially offset by lower average premium rates in the current year.
99
Table of Contents
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 from
in-force
rate actions approved and implemented, partially offset by policy terminations and policies entering
paid-up
status in the current year. Our life insurance business decreased $15 million mainly attributable to the continued runoff of our term 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.
Net investment income.
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 insurance
in-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 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 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 to
in-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 during
COVID-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 the
in-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 our
10-year
term universal life insurance block entering its post-level premium period during the premium grace period and from higher mortality in our universal and term life insurance products in the current year compared to the prior year attributable in part to
COVID-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.
100
Table of Contents
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 by
COVID-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.
Interest credited.
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.
Goodwill impairment.
Charges for impairment of goodwill are the result of declines in the fair value of the reporting units. Our Australia Mortgage Insurance segment recorded a goodwill impairment charge of $5 million in the current year, which represented the remainingfull amount of goodwill related to our mortgage insurance business in Australia.
Interest expense.expense
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.
102
Table of Contents
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 lower
pre-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.
101
Table of Contents
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
103
Table of Contents
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
102
Table of Contents
investment gains (losses) are also adjusted for DAC and other intangible amortization and certain benefit reserves.
104
Table of Contents
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,
  
Six months ended
June 30,
 
(Amounts in millions)
  
2020
  
2019
  
2020
  
2019
 
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 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss)
   (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 
Taxes on adjustments
   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,
 
(Amounts in millions)
  
  2020  
  
  2019  
  
  2020  
  
  2019  
 
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 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss)
   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 
Taxes on adjustments
   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 a
pre-tax
gain of $3 million and $1 million, respectively. In January 2020, we paid a
pre-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 outstanding
non-recourse
funding obligations originally due in 2050 resulting in
 
103105
Table of Contents
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.
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,
   
Six months ended
June 30,
 
(Amounts in millions, except per share amounts)
  
2020
  
2019
   
2020
  
2019
 
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
      
Basic
  $0.16  $0.29   $0.03  $0.58 
  
 
 
  
 
 
   
 
 
  
 
 
 
Diluted
  $0.15  $0.28   $0.03  $0.57 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
      
Basic
  $(0.87)  $0.33   $(1.00)  $0.68 
  
 
 
  
 
 
   
 
 
  
 
 
 
Diluted
  $(0.86)  $0.33   $(0.99)  $0.67 
  
 
 
  
 
 
   
 
 
  
 
 
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
      
Basic
  $(0.04)  $0.35   $0.02  $0.54 
  
 
 
  
 
 
   
 
 
  
 
 
 
Diluted
  $(0.04)  $0.35   $0.02  $0.54 
  
 
 
  
 
 
   
 
 
  
 
 
 
Weighted-average common shares outstanding:
      
Basic
   505.4   503.4    504.8   502.3 
  
 
 
  
 
 
   
 
 
  
 
 
 
Diluted
   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)
  
2020
   
2019
   
2020
  
2019
 
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
       
Basic
  $0.83   $0.25   $0.85  $0.83 
  
 
 
   
 
 
   
 
 
  
 
 
 
Diluted
  $0.82   $0.25   $0.84  $0.82 
  
 
 
   
 
 
   
 
 
  
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders per share:
       
Basic
  $0.83   $0.04   $(0.18)  $0.72 
  
 
 
   
 
 
   
 
 
  
 
 
 
Diluted
  $0.82   $0.04   $(0.17)  $0.71 
  
 
 
   
 
 
   
 
 
  
 
 
 
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders per share:
       
Basic
  $0.26   $0.25   $0.29  $0.79 
  
 
 
   
 
 
   
 
 
  
 
 
 
Diluted
  $0.26   $0.24   $0.28  $0.78 
  
 
 
   
 
 
   
 
 
  
 
 
 
Weighted-average common shares outstanding:
       
Basic
   505.6    503.5    505.1   502.7 
  
 
 
   
 
 
   
 
 
  
 
 
 
Diluted
   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
104
Table of Contents
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.
106
Table of Contents
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
Trends and conditions
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
105
107
Table of Contents
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 by
COVID-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 developing
COVID-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.
106
Table of Contents
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
108
Table of Contents
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.
 
107
109
Table of Contents
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
pre-COVID-19
levels. Severity of loss on loans that do go to claim, however, may be negatively impacted by the extended forbearance timeline, the associated elevated expenses such as accumulated interest, the higher loan amount of the recent new delinquencies and home price depreciation, if any. Unlike a hurricane where the natural disaster occurs at a point in time and the rebuild starts soon after,
COVID-19
is an ongoing health crisis and we do not know when it will end, making it more difficult to determine the effectiveness of forbearance and the resulting 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
pre-COVID-19
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
110
Table of Contents
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.
108
Table of Contents
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
risk-to-capital
ratio under the current regulatory framework as established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), GMICO’s domestic insurance regulator, was approximately 12.2:12.3:1, compared with a
risk-to-capital
ratio of approximately 12.4:12.2:1 as of March 31,June 30, 2020 and 12.5:1 as of December 31, 2019. This
GMICO’s risk-to-capital
ratio remains below the NCDOI’s maximum
risk-to-capital
ratio of 25:1. North Carolina’s calculation of
risk-to-capital
excludes the
risk-in-force
for delinquent loans given the established loss reserves against all delinquencies. As a result, we do not expect any immediate, material pressure to GMICO’s
risk-to-capital
ratio in the short term as a result of
COVID-19.
GMICO’s ongoing
risk-to-capital
ratio will depend principally on the magnitude of future losses incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses and the amount of additional capital that is generated or distributed by the business or capital support (if any) that we provide.
Under PMIERs, we are subject to operational and financial requirements that private mortgage insurers must meet in order to remain eligible 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
111
Table of Contents
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
109
Table of Contents
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 from
COVID-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 of
COVID-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 that
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 (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
112
Table of Contents
(“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.
110
Table of Contents
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,
   
Increase

(decrease) and

percentage

change
 
(Amounts in millions)
  
2020
  
2019
   
2020 vs. 2019
 
Revenues:
      
Premiums
  $243  $206   $37   18% 
Net investment income
   31   28    3   11% 
Net investment gains (losses)
   (1)   —      (1)   NM(1) 
Policy fees and other income
   1   1    —     —  % 
  
 
 
  
 
 
   
 
 
  
Total revenues
   274   235    39   17% 
  
 
 
  
 
 
   
 
 
  
Benefits and expenses:
      
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) 
Taxes on adjustments
   —     —      —     —  % 
  
 
 
  
 
 
   
 
 
  
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
 
(Amounts in millions)
  
    2020    
  
    2019    
   
    2020 vs. 2019    
 
Revenues:
                            
Premiums
  $251  $219   $32   15% 
Net investment income
   34   31    3   10% 
Net investment gains (losses)
   (2)   —      (2)   NM (1) 
Policy fees and other income
   1   1    —     —  % 
  
 
 
  
 
 
   
 
 
  
Total revenues
   284   251    33   13% 
  
 
 
  
 
 
   
 
 
  
Benefits and expenses:
      
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    —     —  % 
Interest expense
   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) 
Taxes on adjustments
   —     —      —     —  % 
  
 
 
  
 
 
   
 
 
  
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%.
113
Table of Contents
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders
The decrease to an adjusted
Adjusted 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.
Revenues
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.
111
Table of Contents
Benefits and expenses
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 a
pre-tax
loss inconsistent with the current year compared to
pre-tax
U.S. corporate federal income in the prior year.tax rate.
114
Table of Contents
Six
Nine 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:
 
          
Increase
 
          
(decrease) and
 
   
Six months ended
   
percentage
 
   
June 30,
   
change
 
(Amounts in millions)
  
2020
  
2019
   
2020 vs. 2019
 
Revenues:
      
Premiums
  $469  $400   $69   17% 
Net investment income
   64   56    8   14% 
Net investment gains (losses)
   (1)   —      (1)   NM(1) 
Policy fees and other income
   3   2    1   50% 
  
 
 
  
 
 
   
 
 
  
Total revenues
   535   458    77   17% 
  
 
 
  
 
 
   
 
 
  
Benefits and expenses:
      
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) 
Taxes on adjustments
   —     —      —     —  % 
  
 
 
  
 
 
   
 
 
  
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
 
(Amounts in millions)
  
    2020    
  
    2019    
   
    2020 vs. 2019    
 
Revenues:
                          
Premiums
  $720  $619   $101   16% 
Net investment income
   98   87    11   13% 
Net investment gains (losses)
   (3)   —      (3)   NM (1) 
Policy fees and other income
   4   3    1   33% 
  
 
 
  
 
 
   
 
 
  
Total revenues
   819   709    110   16% 
  
 
 
  
 
 
   
 
 
  
Benefits and expenses:
      
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    —     —  % 
Interest expense
   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) 
Taxes on adjustments
   —     —      —     —  % 
  
 
 
  
 
 
   
 
 
  
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%.
112
Table of Contents
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.
Revenues
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.
115
Table of Contents
Benefits and expenses
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
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:
 
           
Increase (decrease) and
 
   
As of June 30,
   
percentage change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
Primary insurance
in-force
(1)
  $207,400   $178,500   $28,900    16% 
Risk
in-force
  $50,000   $43,100   $6,900    16% 
   
As of September 30,
   
Increase (decrease) and
percentage change
 
(Amounts in millions)
  
2020
   
2019
   
        2020 vs. 2019        
 
Primary insurance in-force
(1)
  $212,400   $185,400   $27,000    15% 
Risk in-force
  $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.
           
Increase
          
Increase
 
           
(decrease) and
          
(decrease) and
 
   
Three months ended
   
percentage
  
Six months ended
   
percentage
 
   
June 30,
   
change
  
June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
  
2020
   
2019
   
2020 vs. 2019
 
New insurance written
  $28,400   $15,800   $12,600    80%  $46,300   $25,400   $20,900    82% 
Net premiums written
  $217   $204   $13    6%  $425   $397   $28    7% 
 
113116
Table of Contents

   
Three months ended
September 30,
   
Increase
(decrease) and
percentage
change
  
Nine months ended
September 30,
   
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
  
2020
   
2019
   
2020 vs. 2019
 
New insurance written
  $26,600   $18,900   $7,700    41%  $72,900   $44,300   $28,600    65% 
Net premiums written
  $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 insurance
in-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 insurance
in-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, risk
in 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.
New insurance written
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
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.
Loss and expense ratios
The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the dates indicated:
 
   
Three months ended
     
Six months ended
    
   
June 30,
  
Increase (decrease)
  
June 30,
  
Increase (decrease)
 
   
2020
  
2019
  
2020 vs. 2019
  
2020
  
2019
  
2020 vs. 2019
 
Loss ratio
   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,
  
Increase (decrease)
  
Nine months ended
September 30,
  
Increase (decrease)
 
   
2020
  
2019
  
2020 vs. 2019
  
2020
  
2019
  
2020 vs. 2019
 
Loss ratio
   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
117
Table of Contents
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.
114
Table of Contents
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.
Delinquent loans
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:
 
   
June 30,
  
December 31,
  
June 30,
 
   
2020
  
2019
  
2019
 
Primary insurance:
    
Insured loans
in-force
   904,753   860,214   818,358 
Delinquent loans
   53,894   16,607   15,482 
Percentage of delinquent loans (delinquency rate)
   5.96%   1.93%   1.89% 
Flow loans
in-force
   894,715   846,472   806,739 
Flow delinquent loans
   53,372   16,209   15,070 
Percentage of flow delinquent loans (delinquency rate)
   5.97%   1.91%   1.87% 
Bulk loans
in-force
   10,038   10,742   11,619 
Bulk delinquent loans
(1)
   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% 
Pool insurance:
    
Insured loans
in-force
   3,818   4,122   4,331 
Delinquent loans
   151   167   177 
Percentage of delinquent loans (delinquency rate)
   3.95%   4.05%   4.09% 
   
September 30,
2020
  
December 31,
2019
  
September 30,
2019
 
Primary insurance:
    
Insured loans in-force
   913,974   851,070   833,215 
Delinquent loans
   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% 
Pool insurance:
    
Insured loans in-force
   11,888   13,266   13,738 
Delinquent loans
   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.
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:
 
   
June 30, 2020
 
       
Direct case
   
Risk
   
Reserves as %
 
(Dollar amounts in millions)
  
Delinquencies
   
reserves
(1)
   
in-force
   
of risk in-force
 
Payments in default:
        
3 payments or less
   43,044   $162   $2,687    6% 
4 - 11 payments
   7,404    111    388    29% 
12 payments or more
   2,924    105    147    71% 
  
 
 
   
 
 
   
 
 
   
Total
   53,372   $378   $3,222    12% 
  
 
 
   
 
 
   
 
 
   
   
September 30, 2020
 
(Dollar amounts in millions)
  
Delinquencies
   
Direct case
reserves
(1)
   
Risk
in-force
   
Reserves as %
of risk in-force
 
Payments in default:
        
3 payments or less
   13,904   $49   $763    6% 
4—11 payments
   32,366    264    2,014    13% 
12 payments or more
   3,422    123    168    73% 
  
 
 
   
 
 
   
 
 
   
Total
   49,692   $436   $2,945    15% 
  
 
 
   
 
 
   
 
 
   
 
(1)
Direct flowprimary case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.
 
115118
Table of Contents
   
December 31, 2019
 
       
Direct case
   
Risk
   
Reserves as %
 
(Dollar amounts in millions)
  
Delinquencies
   
reserves
(1)
   
in-force
   
of risk in-force
 
Payments in default:
        
3 payments or less
   8,524   $27   $386    7% 
4 - 11 payments
   4,836    78    224    35% 
12 payments or more
   2,849    99    145    68% 
  
 
 
   
 
 
   
 
 
   
Total
   16,209   $204   $755    27% 
  
 
 
   
 
 
   
 
 
   
   
December 31, 2019
 
(Dollar amounts in millions)
  
Delinquencies
   
Direct case
reserves
(1)
   
Risk
in-force
   
Reserves as %
of risk in-force
 
Payments in default:
        
3 payments or less
   8,618   $28   $386    7% 
4—11 payments
   4,876    78    225    35% 
12 payments or more
   2,898    99    146    68% 
  
 
 
   
 
 
   
 
 
   
Total
   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.
 
   
Percent of primary

risk in-force as of

June 30, 2020
  
Percent of total

reserves as of

June 30, 2020 
(1)
  
Delinquency rate
 
  
June 30,
  
December 31,
  
June 30,
 
  
2020
  
2019
  
2019
 
By Region:
      
Southeast
(2)
   19%   21%   6.68%   2.15%   2.18% 
Pacific
(3)
   18   17   7.24%   1.36%   1.22% 
South Central
(4)
   17   14   6.02%   1.84%   1.79% 
Northeast
(5)
   12   21   8.01%   2.72%   2.87% 
Great Lakes
(6)
   10   6   3.81%   1.69%   1.56% 
North Central
(7)
   10   9   4.97%   1.91%   1.79% 
Mid-Atlantic
(8)
   6   5   6.31%   1.90%   1.81% 
New England
(9)
   5   5   5.22%   1.92%   1.95% 
Plains
(10)
   3   2   3.31%   1.69%   1.67% 
  
 
 
  
 
 
    
Total
   100%   100%   5.96%   1.93%   1.89% 
  
 
 
  
 
 
    
   
Percent of primary

risk in-force as of
September 30, 2020
  
Percent of total

reserves as of
September 30, 2020 
(1)
  
Delinquency rate
 
  
September 30,
2020
  
December 31,
2019
  
September 30,
2019
 
By Region:
      
Southeast
(2)
   19%   20%   5.96%   2.14%   2.14% 
Pacific
(3)
   18   18   6.86%   1.36%   1.28% 
South Central
(4)
   17   15   5.56%   1.84%   1.77% 
Northeast
(5)
   11   20   6.87%   2.69%   2.76% 
Great Lakes
(6)
   10   6   3.56%   1.71%   1.63% 
North Central
(7)
   10   9   4.79%   1.90%   1.84% 
Mid-Atlantic
(8)
   6   5   5.63%   1.87%   1.89% 
New England
(9)
   5   5   4.66%   1.90%   1.87% 
Plains
(10)
   4   2   3.13%   1.69%   1.66% 
  
 
 
  
 
 
    
Total
   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.
 
116119
Table of Contents
   
Percent of primary

risk in-force as of

June 30, 2020
  
Percent of total

reserves as of

June 30, 2020
 (1)
  
Delinquency rate
 
  
June 30,
  
December 31,
  
June 30,
 
  
2020
  
2019
  
2019
 
By State:
      
California
   11%   10%   7.63%   1.42%   1.26% 
Texas
   7%   7%   7.30%   2.02%   1.86% 
Florida
   7%   11%   9.04%   2.13%   2.26% 
New York
   5%   12%   8.90%   3.00%   3.12% 
Illinois
   5%   6%   6.12%   2.27%   2.10% 
Washington
   4%   3%   5.59%   1.10%   0.90% 
Michigan
   4%   2%   4.08%   1.44%   1.28% 
Pennsylvania
   4%   3%   5.46%   2.15%   2.24% 
North Carolina
   4%   3%   4.99%   1.79%   1.82% 
Ohio
   3%   2%   4.01%   1.84%   1.69% 
   
Percent of primary

risk in-force as of
September 30, 2020
  
Percent of total

reserves as of
September 30, 2020
 (1)
  
Delinquency rate
 
  
September 30,
2020
  
December 31,
2019
  
September 30,
2019
 
By State:
      
California
   11%   11%   7.13%   1.42%   1.27% 
Texas
   7%   7%   6.57%   2.02%   1.86% 
Florida
   7%   10%   8.04%   2.13%   2.18% 
Illinois
   5%   6%   5.90%   2.25%   2.10% 
New York
   5%   11%   7.78%   2.98%   3.00% 
Michigan
   4%   2%   3.53%   1.43%   1.31% 
Washington
   4%   3%   5.60%   1.10%   1.08% 
Pennsylvania
   4%   3%   4.52%   2.12%   2.18% 
North Carolina
   3%   3%   4.47%   1.79%   1.75% 
Arizona
   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:
 
         
Primary
      
Primary
     
   
Average
  
Percent of total
  
insurance
   
Percent
  
risk
   
Percent
 
(Amounts in millions)
  
rate
  
reserves
(1)
  
in-force
   
of total
  
in-force
   
of total
 
Policy Year
         
2004 and prior
   6.15%   4.2%  $1,241    0.6%  $231    0.5% 
2005 to 2008
   5.47%   30.2   14,017    6.8   3,193    6.4 
2009 to 2013
   4.23%   2.7   5,461    2.6   1,267    2.5 
2014
   4.46%   3.1   5,719    2.8   1,367    2.7 
2015
   4.16%   5.1   11,858    5.7   2,843    5.7 
2016
   3.89%   9.2   22,566    10.9   5,415    10.8 
2017
   4.25%   11.5   23,845    11.5   5,752    11.5 
2018
   4.77%   12.9   24,767    11.9   5,975    12.0 
2019
   4.25%   18.4   52,068    25.1   12,690    25.4 
2020
   3.58%   2.7   45,816    22.1   11,253    22.5 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total portfolio
   4.29%   100.0%  $207,358    100.0%  $49,986    100.0% 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
(Amounts in millions)
  
Average
rate
  
Percent of total
reserves
(1)
  
Primary
insurance
in-force
   
Percent
of total
  
Primary
risk
in-force
   
Percent
of total
 
Policy Year
 
      
2004 and prior
   6.08%   3.7%  $870    0.4%  $212    0.4% 
2005 to 2008
   5.43%   27.8   12,940    6.1   2,932    5.7 
2009 to 2012
   4.20%   1.3   1,858    0.9   404    0.8 
2013
   4.13%   1.3   2,567    1.2   613    1.2 
2014
   4.45%   3.1   4,944    2.3   1,174    2.3 
2015
   4.15%   5.3   10,336    4.9   2,465    4.8 
2016
   3.88%   9.2   19,715    9.3   4,727    9.2 
2017
   4.24%   11.4   20,541    9.7   4,938    9.6 
2018
   4.75%   13.4   21,282    10.0   5,119    9.9 
2019
   4.20%   18.2   46,638    21.9   11,346    22.1 
2020
   3.42%   5.3   70,745    33.3   17,463    34.0 
   
 
 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total portfolio
   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
Trends and conditions
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,
120
Table of Contents
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
117
Table of Contents
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 policies
insured loans in-force
as of JuneSeptember 30, 2020. For many borrowers, the initial
six-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 by
COVID-19
to extend their repayment deferrals for up to an additional four months. In response, our mortgage insurance business in Australia expanded its
COVID-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 by
COVID-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 new
COVID-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 since
mid-March
2020 due to
COVID-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 of
COVID-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 of
COVID-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 of
COVID-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 from
COVID-19,
ourOur mortgage insurance business in Australia assessed the adequacy of its unearned premium liability under local AAS as part of its first quarter of 2020 results. The liability adequacy test under AAS resulted in a
121
Table of Contents
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
118
Table of Contents
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
request-for-proposal
process, this customer advised our mortgage insurance business in Australia that the contract will not be renewed and will expire in November 2020. These two customers represented 56%59% and 10%11%, respectively, of our gross written premiums infor the first 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%,
122
Table of Contents
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
119
Table of Contents
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.
123
Table of Contents
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:
 
         
Increase
 
         
(decrease) and
 
   
Three months ended
  
percentage
 
   
June 30,
  
change
 
(Amounts in millions)
  
2020
  
2019
  
2020 vs. 2019
 
Revenues:
     
Premiums
  $62  $80  $(18)   (23)% 
Net investment income
   8   15   (7)   (47)% 
Net investment gains (losses)
   66   1   65   NM(1) 
  
 
 
  
 
 
  
 
 
  
Total revenues
   136   96   40   42% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
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)% 
Goodwill impairment
   5   —     5   NM(1) 
Interest expense
   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) 
Goodwill impairment
(3)
   3   —     3   NM(1) 
Taxes on adjustments
   9   —     9   NM(1) 
  
 
 
  
 
 
  
 
 
  
Adjusted operating income available to Genworth Financial, Inc.’s common stockholders
  $1  $13  $(12)   (92)% 
  
 
 
  
 
 
  
 
 
  
   
Three months ended

September 30,
  
Increase

(decrease) and

percentage

change
 
(Amounts in millions)
  
    2020    
  
    2019    
  
2020 vs. 2019
 
Revenues:
     
Premiums
  $71  $77  $(6)   (8)% 
Net investment income
   7   13   (6)   (46)% 
Net investment gains (losses)
   24   (9)   33   NM
 
(1) 
Policy fees and other income
   —     1   (1)   (100)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   102   82   20   24% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
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)% 
Interest expense
   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) 
Taxes on adjustments
   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.
120
Table of Contents
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.
124
Table of Contents
Revenues
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 expenses
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.
125
Table of Contents
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:
   
Nine months ended

September 30,
  
Increase

(decrease) and

percentage

change
 
(Amounts in millions)
  
    2020    
  
    2019    
  
2020 vs. 2019
 
Revenues:
     
Premiums
  $202  $240  $(38)   (16)% 
Net investment income
   25   44   (19)   (43)% 
Net investment gains (losses)
   37   4   33   NM
 
(1) 
Policy fees and other income
   1   —     1   NM
 
(1) 
  
 
 
  
 
 
  
 
 
  
Total revenues
   265   288   (23)   (8)% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
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)% 
Goodwill impairment
   5   —     5   NM
 
(1) 
Interest expense
   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) 
Goodwill impairment
 (3)
   3   —     3   NM
 
(1) 
Taxes on adjustments
   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,
126
Table of Contents
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.
Revenues
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 expenses
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.
121
Table of Contents
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:
           
Increase
 
           
(decrease) and
 
   
Six months ended
   
percentage
 
   
June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
Revenues:
        
Premiums
  $131   $163   $(32)    (20)% 
Net investment income
   18    31    (13)    (42)% 
Net investment gains (losses)
   13    13    —      —  % 
Policy fees and other income
   1    (1)    2    200% 
  
 
 
   
 
 
   
 
 
   
Total revenues
   163    206    (43)    (21)% 
  
 
 
   
 
 
   
 
 
   
Benefits and expenses:
        
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)% 
Goodwill impairment
   5    —      5    NM(1) 
Interest expense
   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)    —      —  % 
Goodwill impairment
(3)
   3    —      3    NM(1) 
Taxes on adjustments
   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%.
(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.
(3)
For the six 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, higher losses mostly associated with the economic impacts caused by
COVID-19
and lower net investment income in the current year.
122
Table of Contents
Revenues
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 expenses
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 by
COVID-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:
 
           
Increase
 
           
(decrease) and
 
   
As of June 30,
   
percentage change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
Primary insurance
in-force
  $210,200   $215,600   $(5,400)   (3)% 
Risk
in-force
  $73,200   $75,100   $(1,900)   (3)% 
   
As of September 30,
   
Increase
(decrease) and
percentage change
 
(Amounts in millions)
  
2020
   
2019
   
      2020 vs. 2019      
 
Primary insurance in-force
  $215,800   $206,400   $9,400    5% 
Risk in-force
  $75,200   $71,900   $3,300    5% 
 
           
Increase
          
Increase
 
           
(decrease) and
          
(decrease) and
 
   
Three months ended
   
percentage
  
Six months ended
   
percentage
 
   
June 30,
   
change
  
June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
  
2020
   
2019
   
2020 vs. 2019
 
New insurance written
  $4,500   $4,900   $(400)    (8)%  $8,800   $8,800   $—      —  % 
Net premiums written
  $70   $58   $12    21%  $132   $110   $22    20% 
127
Table of Contents
   
Three months ended
September 30,
   
Increase
(decrease) and
percentage
change
  
Nine months ended
September 30,
   
Increase
(decrease) and
percentage
change
 
(Amounts in millions)
  
    2020    
   
    2019    
   
    2020 vs. 2019    
  
2020
   
2019
   
    2020 vs. 2019    
 
New insurance written
  $5,600   $4,600   $1,000    22%  $14,400   $13,400   $1,000      7% 
Net premiums written
  $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
123
Table of Contents
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 insurance
in-force
and risk
in-force
included decreases of $3.7 increased $12.5 billion and $1.3$4.4 billion, respectively, from changes inattributable to foreign exchange rates.
New insurance written
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
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.
Net premiums written
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.
128
Table of Contents
Loss and expense ratios
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,
  
Increase (decrease)
  
Six months ended June 30,
  
Increase (decrease)
 
  
2020
  
2019
  
2020 vs. 2019
  
2020
  
2019
  
2020 vs. 2019
 
Loss ratio
  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,
  
Increase (decrease)
  
Nine months ended
September 30,
  
Increase (decrease)
 
   
2020
  
2019
  
2020 vs. 2019
  
2020
  
2019
  
2020 vs. 2019
 
Loss ratio
   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.
124
Table of Contents
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 by
COVID-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.
Delinquent loans
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:
 
 
June 30, 2020
 
December 31, 2019
 
June 30, 2019
   
September 30,
2020
 
December 31,
2019
 
September 30,
2019
 
Primary insured loans
in-force
 1,236,657  1,290,216  1,308,811    1,193,072  1,290,216  1,293,961 
Delinquent loans
 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% 
Flow loans
in-force
 1,137,784  1,189,019  1,200,603    1,096,679  1,189,019  1,192,282 
Flow delinquent loans
 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% 
Bulk loans
in-force
 98,873  101,197  108,208    96,393  101,197  101,679 
Bulk delinquent loans
 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.
 
125129
Table of Contents
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.
 
  
Percent of primary

risk in-force as of

June 30, 2020
  
Delinquency rate
 
 
June 30,
 
December 31,
 
June 30,
   
Percent of primary

risk in-force as of

September 30, 2020
  
Delinquency rate
 
 
2020
 
2019
 
2019
  
September 30,
2020
 
December 31,
2019
 
September 30,
2019
 
By state and territory:
          
New South Wales
   27%  0.51%  0.42%  0.45%    28%  0.50%  0.42%  0.45% 
Queensland
   23  0.78%  0.75%  0.81%    23  0.77%  0.75%  0.80% 
Victoria
   23  0.46%  0.41%  0.45%    23  0.49%  0.41%  0.43% 
Western Australia
   13  1.06%  1.00%  1.10%    13  1.04%  1.00%  1.06% 
South Australia
   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% 
Tasmania
   2  0.27%  0.29%  0.31%    2  0.24%  0.29%  0.31% 
New Zealand
   2  0.03%  0.02%  0.02%    1  0.05%  0.02%  0.02% 
Northern Territory
   1  0.87%  0.71%  0.83%    1  0.92%  0.71%  0.85% 
  
 
      
 
    
Total
   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
COVID-19
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
shelter-in-place
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
 
126
130
Table of Contents
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.
Trends and conditions
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
 
127
131
Table of Contents
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.
Long-term care insurance
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
 
128
132
Table of Contents
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
 
129133
Table of Contents
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.
Life insurance
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 additional
10-,
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
134
Table of Contents
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
130
Table of Contents
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.
Fixed annuities
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.
 
131135
Table of Contents
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:
 
           
Increase
 
           
(decrease) and
 
   
Three months ended
   
percentage
 
   
June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
Revenues:
        
Premiums
  $712   $713   $(1)    —  % 
Net investment income
   692    724    (32)    (4)% 
Net investment gains (losses)
   118    (36)    154    NM(1) 
Policy fees and other income
   142    187    (45)    (24)% 
  
 
 
   
 
 
   
 
 
   
Total revenues
   1,664    1,588    76    5% 
  
 
 
   
 
 
   
 
 
   
Benefits and expenses:
        
Benefits and other changes in policy reserves
   1,213    1,211    2    —  % 
Interest credited
   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% 
Interest expense
   —      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% 
Taxes on adjustments
   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
 
(Amounts in millions)
  
2020
  
2019
  
2020 vs. 2019
 
Revenues:
     
Premiums
  $711  $717  $(6)   (1)% 
Net investment income
   726   722   4   1% 
Net investment gains (losses)
   348   11   337   NM (1) 
Policy fees and other income
   152   152   —     —  % 
  
 
 
  
 
 
  
 
 
  
Total revenues
   1,937   1,602   335   21% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
Benefits and other changes in policy reserves
   1,221   1,225   (4)   —  % 
Interest credited
   95   106   (11)   (10)% 
Acquisition and operating expenses, net of deferrals
   158   158   —     —  % 
Amortization of deferred acquisition costs and intangibles
   87   89   (2)   (2)% 
Interest expense
   —   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) 
Taxes on adjustments
   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.
 
132136
Table of Contents
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:
 
           
Increase
 
           
(decrease) and
 
   
Three months ended
   
percentage
 
   
June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:
        
Long-term care insurance
  $48   $37   $11    30% 
Life insurance
   (81)    10    (91)    NM(1) 
Fixed annuities
   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
 
(Amounts in millions)
  
  2020  
  
  2019  
  
2020 vs. 2019
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:
     
Long-term care insurance
  $59  $21  $38   181% 
Life insurance
   (69)   (25)   (44)   (176)% 
Fixed annuities
   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 from
in-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 an
The 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.
Revenues
Premiums
 
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.
133
Table of Contents
Net investment income
 
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.
 
137
Table of Contents
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 expenses
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.
Interest 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.
Interest expense.
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.
138
Table of Contents
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
 
(Amounts in millions)
  
    2020    
  
    2019    
  
  2020 vs. 2019  
 
Revenues:
     
Premiums
  $2,141  $2,139  $2   —  % 
Net investment income
   2,113   2,147   (34)   (2)% 
Net investment gains (losses)
   396   59   337   NM (1) 
Policy fees and other income
   438   490   (52)   (11)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   5,088   4,835   253   5% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
Benefits and other changes in policy reserves
   3,731   3,672   59   2% 
Interest credited
   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% 
Interest expense
   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)% 
Taxes on adjustments
   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.
139
Table of Contents
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
 
(Amounts in millions)
  
    2020    
  
    2019    
  
  2020 vs. 2019  
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:
     
Long-term care insurance
  $108  $38  $70   184% 
Life insurance
   (227)   (17)   (210)   NM (1) 
Fixed annuities
   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.
Revenues
Premiums
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.
Net investment income
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.
140
Table of Contents
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 expenses
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 to
in-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.
134
Table of Contents
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.
 
141
Table of Contents
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.
Interest expense.
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.
135
Table of Contents
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:
           
Increase
 
           
(decrease) and
 
   
Six months ended
   
percentage
 
   
June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
Revenues:
        
Premiums
  $1,430   $1,422   $8    1% 
Net investment income
   1,387    1,425    (38)    (3)% 
Net investment gains (losses)
   48    48    —      —  % 
Policy fees and other income
   286    338    (52)    (15)% 
  
 
 
   
 
 
   
 
 
   
Total revenues
   3,151    3,233    (82)    (3)%��
  
 
 
   
 
 
   
 
 
   
Benefits and expenses:
        
Benefits and other changes in policy reserves
   2,510    2,447    63    3% 
Interest credited
   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% 
Interest expense
   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)% 
Taxes on adjustments
   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%.
(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.
136
Table of Contents
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:
           
Increase
 
           
(decrease) and
 
   
Six months ended
   
percentage
 
   
June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:
        
Long-term care insurance
  $49   $17   $32    188% 
Life insurance
   (158)    8    (166)    NM(1) 
Fixed annuities
   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%.
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 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 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 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 $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.
Revenues
Premiums
Our long-term care insurance business increased $23 million largely from $65 million of increased premiums in the current year from
in-force
rate actions approved and implemented, partially offset by policy terminations and policies entering
paid-up
status in the current year.
Our life insurance business decreased $15 million mainly attributable to the continued runoff of our term life insurance products in the current year.
137
Table of Contents
Net investment income
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 insurance
in-force
and higher ceded reinsurance costs in the current year.
Benefits and expenses
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 to
in-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 during
COVID-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 the
in-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 our
10-year
term universal life insurance block entering its post-level premium period during the premium grace period and from higher mortality in our universal and term life insurance products in the current year compared to the prior year attributable in part to
COVID-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.
Interest 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.
138
Table of Contents
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 large
20-year
term life insurance block entering its post-level premium period in the current year and higher reinsurance rates.
Interest expense.
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 (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 a
pre-tax
loss in the current year.
U.S. Life Insurance selected operating performance measures
Long-term care insurance
The following table sets forth selected operating performance measures regarding our long-term care insurance business for the dates indicated:
 
        
Increase
        
Increase
 
        
(decrease) and
        
(decrease) and
 
  
Three months ended
  
percentage
  
Six months ended
  
percentage
 
  
June 30,
  
change
  
June 30,
  
change
 
(Amounts in millions)
 
2020
  
2019
  
2020 vs. 2019
  
2020
  
2019
  
2020 vs. 2019
 
Net earned premiums:
        
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% 
 
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
Total
 $649  $640  $9   1%  $1,291  $1,268  $23   2% 
 
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
Loss ratio
  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
 
(Amounts in millions)
 
    2020    
  
    2019    
  
  2020 vs. 2019  
  
    2020    
  
    2019    
  
  2020 vs. 2019  
 
Net earned premiums:
        
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% 
 
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
Total
 $661  $652  $9   1%  $1,952  $1,920  $32   2% 
 
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
Loss ratio
  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.
 
139
142
Table of Contents
Life insurance
The following tables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:
 
           
Increase
          
Increase
 
           
(decrease) and
          
(decrease) and
 
   
Three months
   
percentage
  
Six months
   
percentage
 
   
ended June 30,
   
change
  
ended June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
  
2020
   
2019
   
2020 vs. 2019
 
Term and whole life insurance
             
Net earned premiums
  $63   $73   $(10)   (14)%  $139   $154   $(15)   (10)% 
Term universal life insurance
             
Net deposits
  $57   $59   $(2)   (3)%  $113   $117   $(4)   (3)% 
Universal life insurance
             
Net deposits
  $65   $141   $(76)   (54)%  $136   $217   $(81)   (37)% 
Total life insurance
             
  
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
  
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
 
(Amounts in millions)
 
    2020    
  
    2019    
  
2020 vs. 2019
  
    2020    
  
    2019    
  
  2020 vs. 2019  
 
Term and whole life insurance
        
Net earned premiums
 $50  $65  $(15)   (23)%  $189  $219  $(30)   (14)% 
Term universal life insurance
        
Net deposits
 $53  $57  $(4)   (7)%  $166  $174  $(8)   (5)% 
Universal life insurance
        
Net deposits
 $69  $74  $(5)   (7)%  $205  $291  $(86)   (30)% 
Total life insurance
        
 
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
Net earned premiums and deposits
 $172  $196  $(24)   (12)%  $560  $684  $(124)   (18)% 
 
 
 
  
 
 
  
 
 
   
 
 
  
 
 
  
 
 
  
 
       
Percentage
 
   
As of June 30,
   
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
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)% 
Universal life insurance
      
Life insurance
in-force,
net of reinsurance
  $33,212   $34,581    (4)% 
Life insurance
in-force
before reinsurance
  $37,753   $39,357    (4)% 
Total life insurance
      
Life insurance
in-force,
net of reinsurance
  $213,886   $240,181    (11)% 
Life insurance
in-force
before reinsurance
  $529,190   $573,602    (8)% 
   
As of September 30,
   
Percentage
change
 
(Amounts in millions)
  
2020
   
2019
   
2020 vs. 2019
 
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)% 
Universal life insurance
      
Life insurance in-force, net of reinsurance
  $32,848   $34,230    (4)% 
Life insurance in-force before reinsurance
  $37,307   $38,956    (4)% 
Total life insurance
      
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.
Universal life insurance
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.
 
140
143
Table of Contents
Fixed annuities
The following table sets forth selected operating performance measures regarding our fixed annuities business as of or for the dates indicated:
 
   
As of or for the three
   
As of or for the six
 
   
months ended June 30,
   
months ended June 30,
 
(Amounts in millions)
  
2020
   
2019
   
2020
   
2019
 
Account value, beginning of period
  $12,487   $14,109   $13,023   $14,348 
Premiums and deposits
   17    16    39    45 
Surrenders, benefits and product charges
   (375)    (486)    (842)    (1,002) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net flows
   (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

September 30,
  
As of or for the nine
months ended
September 30,
 
(Amounts in millions)
  
2020
  
2019
  
2020
  
2019
 
Account value, beginning of period
  $12,256  $13,875  $13,023  $14,348 
Premiums and deposits
   23   21   62   66 
Surrenders, benefits and product charges
   (489)   (567)   (1,331)   (1,569) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net flows
   (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.
Runoff segment
COVID-19
Similar to our U.S. life insurance businesses, the
The 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.
Trends and conditions
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.
 
141144
Table of Contents
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:
 
        
Increase
 
        
(decrease) and
 
  
Three months ended
  
percentage
 
  
June 30,
  
change
 
(Amounts in millions)
 
2020
  
2019
  
2020 vs. 2019
 
Revenues:
    
Net investment income
 $54  $47  $7   15% 
Net investment gains (losses)
  4   (4)   8   200% 
Policy fees and other income
  32   35   (3)   (9)% 
 
 
 
  
 
 
  
 
 
  
Total revenues
  90   78   12   15% 
 
 
 
  
 
 
  
 
 
  
Benefits and expenses:
    
Benefits and other changes in policy reserves
  4   13   (9)   (69)% 
Interest credited
  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) 
Taxes on adjustments
  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
 
(Amounts in millions)
  
2020
  
2019
  
2020 vs. 2019
 
Revenues:
     
Net investment income
  $55  $48  $7   15% 
Net investment gains (losses)
   15   (9)   24   NM(1) 
Policy fees and other income
   33   35   (2)   (6)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   103   74   29   39% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
Benefits and other changes in policy reserves
   7   8   (1)   (13)% 
Interest credited
   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) 
Taxes on adjustments
   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.
Revenues
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.
 
142145
Table of Contents
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 expenses
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:
 
        
Increase
 
        
(decrease) and
 
  
Six months ended
  
percentage
 
  
June 30,
  
change
 
(Amounts in millions)
 
2020
  
2019
  
2020 vs. 2019
 
Revenues:
    
Net investment income
 $103  $94  $9   10% 
Net investment gains (losses)
  (71)   (4)   (67)   NM(1) 
Policy fees and other income
  65   70   (5)   (7)% 
 
 
 
  
 
 
  
 
 
  
Total revenues
  97   160   (63)   (39)% 
 
 
 
  
 
 
  
 
 
  
Benefits and expenses:
    
Benefits and other changes in policy reserves
  24   14   10   71% 
Interest credited
  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) 
Taxes on adjustments
  (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
 
(Amounts in millions)
  
  2020  
  
  2019  
  
2020 vs. 2019
 
Revenues:
     
Net investment income
  $158  $142  $16   11% 
Net investment gains (losses)
   (56)   (13)   (43)   NM(1) 
Policy fees and other income
   98   105   (7)   (7)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   200   234   (34)   (15)% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
Benefits and other changes in policy reserves
   31   22   9   41% 
Interest credited
   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) 
Taxes on adjustments
   (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.
 
143146
Table of Contents
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.
Revenues
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 expenses
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:
 
   
As of or for the three
   
As of or for the six
 
   
months ended June 30,
   
months ended June 30,
 
(Amounts in millions)
  
2020
   
2019
   
2020
   
2019
 
Account value, beginning of period
  $4,521   $5,113   $5,042   $4,918 
Deposits
   6    6    10    13 
Surrenders, benefits and product charges
   (122)    (158)    (288)    (319) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net flows
   (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,
 
(Amounts in millions)
  
    2020    
  
    2019    
  
    2020    
  
    2019    
 
Account value, beginning of period
  $4,782  $5,121  $5,042  $4,918 
Deposits
   4   7   14   20 
Surrenders, benefits and product charges
   (126)   (161)   (414)   (480) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net flows
   (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.
 
144
147
Table of Contents
Institutional products
The following table sets forth selected operating performance measures regarding our institutional products as of or for the dates indicated:
 
   
As of or for the three
   
As of or for the six
 
   
months ended June 30,
   
months ended June 30,
 
(Amounts in millions)
  
2020
   
2019
   
2020
   
2019
 
Funding Agreements
        
Account value, beginning of period
  $253   $305   $253   $381 
Deposits
   150    —      150    —   
Surrenders and benefits
   (51)    (2)    (52)    (80) 
  
 
 
   
 
 
   
 
 
   
 
 
 
Net flows
   99    (2)    98    (80) 
Interest credited
   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,
 
(Amounts in millions)
  
    2020    
  
    2019    
  
    2020    
  
    2019    
 
Funding Agreements
     
Account value, beginning of period
  $353  $305  $253  $381 
Deposits
   —     —     150   —   
Surrenders and benefits
   (1)   (2)   (53)   (82) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net flows
   (1)   (2)   97   (82) 
Interest credited
   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.
148
Table of Contents
Corporate and Other Activities
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 Corporate and Other activities for the periods indicated:
 
        
Increase
 
        
(decrease) and
 
  
Three months ended
  
percentage
 
  
June 30,
  
change
 
(Amounts in millions)
 
2020
  
2019
  
2020 vs. 2019
 
Revenues:
    
Premiums
 $2  $2  $—     —  % 
Net investment income
  1   2   (1)   (50)% 
Net investment gains (losses)
  (28)   (7)   (21)   NM(1) 
Policy fees and other income
  (1)   —     (1)   NM(1) 
 
 
 
  
 
 
  
 
 
  
Total revenues
  (26)   (3)   (23)   NM(1) 
 
 
 
  
 
 
  
 
 
  
Benefits and expenses:
    
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) 
Interest expense
  42   54   (12)   (22)% 
 
 
 
  
 
 
  
 
 
  
Total benefits and expenses
  45   68   (23)   (34)% 
 
 
 
  
 
 
  
 
 
  
Loss from continuing operations before income taxes
  (71)   (71)   —     —  % 
Benefit for income taxes
  (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   —     —  % 
Taxes on adjustments
  (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
 
(Amounts in millions)
  
  2020  
  
  2019  
  
2020 vs. 2019
 
Revenues:
     
Premiums
  $1  $2  $(1)   (50)% 
Net investment income
   5   2   3   150% 
Net investment gains (losses)
   (10)   5   (15)   NM(1) 
Policy fees and other income
   (2)   2   (4)   (200)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   (6)   11   (17)   (155)% 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
Acquisition and operating expenses, net of deferrals
   6   8   (2)   (25)% 
Amortization of deferred acquisition costs and intangibles
   —     1   (1)   (100)% 
Interest expense
   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) 
Taxes on adjustments
   (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%.
145
Table of Contents
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.
Revenues
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.
Benefits and expenses
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
149
Table of Contents
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 the
pre-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.
146
Table of Contents
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:
 
        
Increase
 
        
(decrease) and
 
  
Six months ended
  
percentage
 
  
June 30,
  
change
 
(Amounts in millions)
 
2020
  
2019
  
2020 vs. 2019
 
Revenues:
    
Premiums
 $4  $4  $—     —  % 
Net investment income
  7   4   3   75% 
Net investment gains (losses)
  18   (28)   46   164% 
Policy fees and other income
  —     1   (1)   (100)% 
 
 
 
  
 
 
  
 
 
  
Total revenues
  29   (19)   48   NM(1) 
 
 
 
  
 
 
  
 
 
  
Benefits and expenses:
    
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) 
Interest expense
  88   107   (19)   (18)% 
 
 
 
  
 
 
  
 
 
  
Total benefits and expenses
  110   135   (25)   (19)% 
 
 
 
  
 
 
  
 
 
  
Loss from continuing operations before income taxes
  (81)   (154)   73   47% 
Benefit for income taxes
  (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% 
Taxes on adjustments
  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
 
(Amounts in millions)
  
  2020  
  
  2019  
  
2020 vs. 2019
 
Revenues:
     
Premiums
  $5  $6  $(1)   (17)% 
Net investment income
   12   6   6   100% 
Net investment gains (losses)
   8   (23)   31   135% 
Policy fees and other income
   (2)   3   (5)   (167)% 
  
 
 
  
 
 
  
 
 
  
Total revenues
   23   (8)   31   NM(1) 
  
 
 
  
 
 
  
 
 
  
Benefits and expenses:
     
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   —     —  % 
Interest expense
   129   160   (31)   (19)% 
  
 
 
  
 
 
  
 
 
  
Total benefits and expenses
   157   197   (40)   (20)% 
  
 
 
  
 
 
  
 
 
  
Loss from continuing operations before income taxes
   (134)   (205)   71   35% 
Benefit for income taxes
   (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% 
Taxes on adjustments
   —     (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.
Revenues
Net investment income increased from higher limited partnership income in the current year.
150
Table of Contents
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.
Benefits and expenses
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.
147
Table of Contents
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 the
pre-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
Trends and conditions
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. The
10-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
through
5-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 to
COVID-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/
151
Table of Contents
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 from
COVID-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 to
COVID-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 from
COVID-19,
with credit spreads tightening throughout the second quarter of 2020 back to
non-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 of
COVID-19,
we expect the number of modifications or extensions related to our commercial mortgage loans to increase during the
148
Table of Contents
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.
Derivatives
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
152
Table of Contents
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
over-the-counter
(“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
149
Table of Contents
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
153
Table of Contents
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.
150
Table of Contents
Investment results
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,
  
Increase (decrease)
 
   
2020
  
2019
  
2020 vs. 2019
 
(Amounts in millions)
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
 
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) 
Equity securities
   4.1%   2   7.8%   5   (3.7)%   (3) 
Commercial mortgage loans
   4.9%   84   4.9%   85   —  %   (1) 
Policy loans
   9.3%   49   8.8%   45   0.5%   4 
Other invested assets
(1)
   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) 
Expenses and fees
   (0.1)%   (21)   (0.1)%   (25)   —  %   4 
   
 
 
   
 
 
   
 
 
 
Net investment income
   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,
  
Increase (decrease)
 
  
2020
  
2019
  
2020 vs. 2019
 
(Amounts in millions)
 
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
 
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%   —   
Equity securities
  2.9%   3   6.4%   4   (3.5)%   (1) 
Commercial mortgage loans
  4.8%   82   5.0%   87   (0.2)%   (5) 
Policy loans
  9.4%   51   9.1%   47   0.3%   4 
Other invested assets
(1)
  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 
Expenses and fees
  (0.2)%   (24)   (0.2)%   (25)   —  %   1 
  
 
 
   
 
 
   
 
 
 
Net investment income
  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,
  
Increase (decrease)
 
   
2020
  
2019
  
2020 vs. 2019
 
(Amounts in millions)
  
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
 
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) 
Equity securities
   3.8%   4   6.8%   9   (3.0)%   (5) 
Commercial mortgage loans
   4.9%   169   4.8%   167   0.1%   2 
Policy loans
   9.3%   98   9.2%   91   0.1%   7 
Other invested assets
(1)
   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) 
Expenses and fees
   (0.1)%   (46)   (0.1)%   (48)   —%   2 
   
 
 
   
 
 
   
 
 
 
Net investment income
   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,
  
Increase (decrease)
 
  
2020
  
2019
  
2020 vs. 2019
 
(Amounts in millions)
 
Yield
  
Amount
  
Yield
  
Amount
  
Yield
  
Amount
 
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) 
Equity securities
  3.0%   7   6.8%   13   (3.8)%   (6) 
Commercial mortgage loans
  4.8%   251   4.9%   254   (0.1)%   (3) 
Policy loans
  9.4%   149   9.2%   138   0.2%   11 
Other invested assets
(1)
  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) 
Expenses and fees
  (0.2)%   (70)   (0.2)%   (73)   —  %   3 
  
 
 
   
 
 
   
 
 
 
Net investment income
  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.
154
Table of Contents
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.
151
Table of Contents
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:
 
  
Three months ended
  
Six months ended
 
  
June 30,
  
June 30,
 
(Amounts in millions)
 
2020
  
2019
  
2020
  
2019
 
Available-for-sale
fixed maturity securities:
    
Realized gains
 $119  $10  $133  $74 
Realized losses
  (5)   (21)   (6)   (27) 
 
 
 
  
 
 
  
 
 
  
 
 
 
Net realized gains (losses) on
available-for-sale
fixed maturity securities
  114   (11)   127   47 
 
 
 
  
 
 
  
 
 
  
 
 
 
Impairments:
    
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
  (7)   —     (7)   —   
Net realized gains (losses) on equity securities sold
  —     —     —     3 
Net unrealized gains (losses) on equity securities still held
  9   5   (10)   17 
Limited partnerships
  37   (11)   (3)   4 
Commercial mortgage loans
  1   1   1   —   
Derivative instruments
  10   (30)   (95)   (42) 
Other
  (5)   —     (6)   —   
 
 
 
  
 
 
  
 
 
  
 
 
 
Net investment gains (losses)
 $159  $(46)  $7  $29 
 
 
 
  
 
 
  
 
 
  
 
 
 
   
Three months ended
September 30,
  
Nine months ended
September 30,
 
(Amounts in millions)
  
  2020  
  
  2019  
  
  2020  
  
  2019  
 
Available-for-sale fixed maturity securities:
     
Realized gains
  $332  $19  $465  $93 
Realized losses
   (2)   (3)   (8)   (30) 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net realized gains (losses) on available-for-sale fixed maturity securities
   330   16   457   63 
  
 
 
  
 
 
  
 
 
  
 
 
 
Impairments:
     
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 
Limited partnerships
   31   6   28   10 
Commercial mortgage loans
   (3)   (1)   (2)   (1) 
Derivative instruments
   22   (29)   (73)   (71) 
Other
   (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
155
Table of Contents
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 on
and a $4 million write-down of available-for-sale
fixed maturity securities, as well as credit losses related to bank loan investments and off-balance sheet credit exposures of $6 million and $3 million, respectively, during the 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 to
COVID-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.
152
Table of Contents
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
Table of Contents
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.
Investment portfolio
The following table sets forth our cash, cash equivalents, restricted cash and invested assets as of the dates indicated:
 
   
June 30, 2020
  
December 31, 2019
 
(Amounts in millions)
  
Carrying value
   
% of total
  
Carrying value
   
% of total
 
Fixed maturity securities,
available-for-sale:
       
Public
  $44,794    58%  $42,162    57% 
Private
   18,750    24   18,177    24 
Equity securities
   206    —     239    —   
Commercial mortgage loans, net
   6,917    9   6,963    9 
Policy loans
   2,182    3   2,058    3 
Other invested assets
   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% 
  
 
 
   
 
 
  
 
 
   
 
 
 
  
September 30, 2020
  
December 31, 2019
 
(Amounts in millions)
 
Carrying value
  
% of total
  
Carrying value
  
% of total
 
Fixed maturity securities, available-for-sale:
    
Public
 $44,840   56%  $42,162   57% 
Private
  19,576   25   18,177   24 
Equity securities
  629   1   239   —   
Commercial mortgage loans, net
  6,880   8   6,963   9 
Policy loans
  2,153   3   2,058   3 
Other invested assets
  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.
 
153
157
Table of Contents
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
available-for-sale
were as follows:
 
(Amounts in millions)
 
Amortized
cost or
cost
  
Gross
unrealized
gains
  
Gross
unrealized
losses
  
Allowance
for credit
losses
  
Fair
value
 
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 
Non-U.S.
government
  1,424   125   (7)   —     1,542 
U.S. corporate:
     
Utilities
  4,392   879   (1)   —     5,270 
Energy
  2,454   203   (63)   —     2,594 
Finance and insurance
  7,400   1,017   (14)   —     8,403 
Consumer—non-cyclical
  5,132   1,147   (2)   —     6,277 
Technology and communications
  2,912   503   (4)   —     3,411 
Industrial
  1,350   157   (4)   —     1,503 
Capital goods
  2,580   454   (6)   —     3,028 
Consumer—cyclical
  1,748   224   (6)   —     1,966 
Transportation
  1,335   254   (24)   —     1,565 
Other
  340   38   —     —     378 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  29,643   4,876   (124)   —     34,395 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
     
Utilities
  811   68   —     —     879 
Energy
  1,141   148   (14)   —     1,275 
Finance and insurance
  2,199   284   (16)   (1)   2,466 
Consumer—non-cyclical
  692   86   (1)   —     777 
Technology and communications
  1,066   182   (1)   —     1,247 
Industrial
  883   116   (4)   —     995 
Capital goods
  565   50   (2)   —     613 
Consumer—cyclical
  380   27   —     —     407 
Transportation
  560   84   (6)   (3)   635 
Other
  1,376   218   (3)   —     1,591 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
non-U.S.
corporate
  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 
Other asset-backed
  2,987   30   (49)   —     2,968 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
available-for-sale
fixed maturity securities
 $54,834  $8,999  $(282)  $(7)  $63,544 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
  
Amortized
cost or
cost
   
Gross
unrealized
gains
   
Gross
unrealized
losses
  
Allowance
for credit
losses
  
Fair
value
 
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 
Non-U.S. government
   1,276    126    (7)   —     1,395 
U.S. corporate:
        
Utilities
   4,294    924    (1)   —     5,217 
Energy
   2,581    238    (54)   —     2,765 
Finance and insurance
   7,611    1,135    (11)   —     8,735 
Consumer—non-cyclical
   5,160    1,210    (2)   —     6,368 
Technology and communications
   2,993    537    (3)   —     3,527 
Industrial
   1,363    189    (1)   —     1,551 
Capital goods
   2,558    503    (4)   —     3,057 
Consumer—cyclical
   1,794    252    (2)   —     2,044 
Transportation
   1,325    271    (15)   —     1,581 
Other
   346    43    —     —     389 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Total U.S. corporate
   30,025    5,302    (93)   —     35,234 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Non-U.S. corporate:
        
Utilities
   860    75    —     —     935 
Energy
   1,192    163    (7)   —     1,348 
Finance and insurance
   2,319    312    (12)   (1)   2,618 
Consumer—non-cyclical
   712    95    (1)   —     806 
Technology and communications
   1,066    190    —     —     1,256 
Industrial
   935    134    (1)   —     1,068 
Capital goods
   571    61    (6)   —     626 
Consumer—cyclical
   400    38    (2)   —     436 
Transportation
   571    87    (9)   (1)   648 
Other
   1,562    241    (1)   —     1,802 
  
 
 
   
 
 
   
 
 
  
 
 
  
 
 
 
Total non-U.S. corporate
   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 
Other asset-backed
   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.
 
154158
Table of Contents
As of December 31, 2019, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity securities classified as
available-for-sale
were as follows:
 
     
Gross unrealized gains
  
Gross unrealized losses
    
(Amounts in millions)
 
Amortized
cost or
cost
  
Not other-than-

temporarily
impaired
  
Other-than-

temporarily
impaired
  
Not other-than-

temporarily
impaired
  
Other-than-

temporarily
impaired
  
Fair
value
 
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 
Non-U.S.
government
  1,235   117   —     (2)   —     1,350 
U.S. corporate:
      
Utilities
  4,322   675   —     —     —     4,997 
Energy
  2,404   303   —     (8)   —     2,699 
Finance and insurance
  6,977   798   —     (1)   —     7,774 
Consumer—non-cyclical
  4,909   796   —     (4)   —     5,701 
Technology and communications
  2,883   363   —     (1)   —     3,245 
Industrial
  1,271   125   —     —     —     1,396 
Capital goods
  2,345   367   —     (1)   —     2,711 
Consumer—cyclical
  1,590   172   —     (2)   —     1,760 
Transportation
  1,320   187   —     (1)   —     1,506 
Other
  292   30   —     —     —     322 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  28,313   3,816   —     (18)   —     32,111 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S.
corporate:
      
Utilities
  779   50   —     —     —     829 
Energy
  1,140   179   —     —     —     1,319 
Finance and insurance
  2,087   232   —     —     —     2,319 
Consumer—non-cyclical
  631   55   —     (2)   —     684 
Technology and communications
  1,010   128   —     —     —     1,138 
Industrial
  896   92   —     —     —     988 
Capital goods
  565   40   —     —     —     605 
Consumer—cyclical
  373   24   —     —     —     397 
Transportation
  557   73   —     (1)   —     629 
Other
  1,431   188   —     (2)   —     1,617 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
non-U.S.
corporate
  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 
Other asset-backed
  3,262   30   —     (7)   —     3,285 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total
available-for-sale
fixed maturity securities
 $53,700  $6,667  $15  $(43)  $—    $60,339 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
     
Gross unrealized gains
  
Gross unrealized losses
    
(Amounts in millions)
 
Amortized
cost or
cost
  
Not other-
than-
temporarily
impaired
  
Other-than-

temporarily
impaired
  
Not other-
than-
temporarily
impaired
  
Other-than-

temporarily
impaired
  
Fair
value
 
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 
Non-U.S. government
  1,235   117   —     (2)   —     1,350 
U.S. corporate:
      
Utilities
  4,322   675   —     —     —     4,997 
Energy
  2,404   303   —     (8)   —     2,699 
Finance and insurance
  6,977   798   —     (1)   —     7,774 
Consumer—non-cyclical
  4,909   796   —     (4)   —     5,701 
Technology and communications
  2,883   363   —     (1)   —     3,245 
Industrial
  1,271   125   —     —     —     1,396 
Capital goods
  2,345   367   —     (1)   —     2,711 
Consumer—cyclical
  1,590   172   —     (2)   —     1,760 
Transportation
  1,320   187   —     (1)   —     1,506 
Other
  292   30   —     —     —     322 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total U.S. corporate
  28,313   3,816   —     (18)   —     32,111 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Non-U.S. corporate:
      
Utilities
  779   50   —     —     —     829 
Energy
  1,140   179   —     —     —     1,319 
Finance and insurance
  2,087   232   —     —     —     2,319 
Consumer—non-cyclical
  631   55   —     (2)   —     684 
Technology and communications
  1,010   128   —     —     —     1,138 
Industrial
  896   92   —     —     —     988 
Capital goods
  565   40   —     —     —     605 
Consumer—cyclical
  373   24   —     —     —     397 
Transportation
  557   73   —     (1)   —     629 
Other
  1,431   188   —     (2)   —     1,617 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total non-U.S. corporate
  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 
Other asset-backed
  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.
155
Table of Contents
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:
   
June 30, 2020
 
(Dollar amounts in millions)
  
Total
amortized
cost
   
Number of

loans
   
Debt-to-value 
(1)
  
Delinquent
principal
balance
   
Number of
delinquent
loans
 
Loan Year
         
2010 and prior
  $1,069    381    36%  $—      —   
2011
   161    41    37%   —      —   
2012
   400    74    41%   —      —   
2013
   549    112    46%   —      —   
2014
   685    122    49%   10    1 
2015
   786    129    55%   —      —   
2016
 �� 499    91    58%   —      —   
2017
   731    141    60%   —      —   
2018
   1,000    164    66%   —      —   
2019
   796    110    70%   —      —   
2020
   269    42    70%   —      —   
  
 
 
   
 
 
    
 
 
   
 
 
 
Total
  $6,945    1,407    54%  $10    1 
  
 
 
   
 
 
    
 
 
   
 
 
 
(1)
Represents weighted-average
debt-to-value
as of June 30, 2020.
   
December 31, 2019
 
(Dollar amounts in millions)
  
Total
recorded
investment
   
Number of
loans
   
Debt-to-value 
(1)
  
Delinquent
principal
balance
   
Number of
delinquent
loans
 
Loan Year
         
2010 and prior
  $1,182    419    37%  $—      —   
2011
   168    42    38%   —      —   
2012
   415    75    42%   —      —   
2013
   579    114    47%   —      —   
2014
   720    129    50%   —      —   
2015
   833    136    56%   —      —   
2016
   517    93    59%   —      —   
2017
   740    141    61%   —      —   
2018
   1,019    165    66%   —      —   
2019
   807    111    71%   —      —   
  
 
 
   
 
 
    
 
 
   
 
 
 
Total
  $6,980    1,425    54%  $—      —   
  
 
 
   
 
 
    
 
 
   
 
 
 
(1)
Represents weighted-average
debt-to-value
as of December 31, 2019.
156159
Table of Contents
Other invested assets
The following table sets forth the carrying values of our other invested assets as of the dates indicated:
 
   
June 30, 2020
  
December 31, 2019
 
(Amounts in millions)
  
Carrying value
   
% of total
  
Carrying value
   
% of total
 
Derivatives
  $1,024    41%  $290    18% 
Limited partnerships
   764    31   634    39 
Bank loan investments
   396    16   383    23 
Short-term investments
   212    9   260    16 
Securities lending collateral
   59    2   51    3 
Other investments
   18    1   14    1 
  
 
 
   
 
 
  
 
 
   
 
 
 
Total other invested assets
  $2,473    100%  $1,632    100% 
  
 
 
   
 
 
  
 
 
   
 
 
 
   
September 30, 2020
  
December 31, 2019
 
(Amounts in millions)
  
Carrying value
   
% of total
  
Carrying value
   
% of total
 
Limited partnerships
  $844    36%  $634    39% 
Derivatives
   804    33   290    18 
Bank loan investments
   387    16   383    23 
Short-term investments
   274    11   260    16 
Securities lending collateral
   75    3   51    3 
Other investments
   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.
Derivatives
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:
 
    
December 31,
     
Maturities/
  
June 30,
 
(Notional in millions)
 
Measurement
 
2019
  
Additions
  
terminations
  
2020
 
Derivatives designated as hedges
     
Cash flow hedges:
     
Interest rate swaps
 Notional $8,968  $1,158  $(1,880)  $8,246 
Foreign currency swaps
 Notional  110   —     —     110 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total cash flow hedges
   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
     
Interest rate swaps
 Notional  4,674   —     —     4,674 
Equity index options
 Notional  2,451   883   (1,126)   2,208 
Financial futures
 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 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total derivatives
  $18,013  $8,132  $(8,538)  $17,607 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Number of policies)
 
Measurement
 
December 31,

2019
  
Additions
  
Maturities/
terminations
  
June 30,
2020
 
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 
(Notional in millions)
  
Measurement
   
December 31,
2019
   
Additions
   
Maturities/
terminations
  
September 30,
2020
 
Derivatives designated as hedges
         
Cash flow hedges:
         
Interest rate swaps
   Notional   $8,968   $1,844   $(2,616)  $8,196 
Foreign currency swaps
   Notional    110    —    —   110 
    
 
 
   
 
 
   
 
 
  
 
 
 
Total cash flow hedges
     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
         
Interest rate swaps
   Notional    4,674    —      —     4,674 
Equity index options
   Notional    2,451    1,527    (1,849)   2,129 
Financial futures
   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 
    
 
 
   
 
 
   
 
 
  
 
 
 
Total derivatives
    $18,013   $13,422   $(13,427)  $18,008 
    
 
 
   
 
 
   
 
 
  
 
 
 
(Number of policies)
  
Measurement
   
December 31,
2019
   
Additions
   
Maturities/
terminations
  
September 30,
2020
 
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 
 
157160
Table of Contents
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
. 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
. 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.
 
161
Table of Contents
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.
158
Table of Contents
driven largely by borrower forbearance resulting from
COVID-19.
In addition, existing reserves were strengthened by $28 million in the current year primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. The increase was also attributable to our long-term care insurance business primarily attributable to new claims, which includes higher new claims frequency as a result of the aging of the
in-force
block, as well as higher severity, partially offset by an increase in claim terminations driven mostly by higher mortality and favorable development on prior year incurred but not reported claims in the current year. Given the lower new claim counts submitted during
COVID-19,
incurred but not reported reserves were strengthened by $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
. 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 to
COVID-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.
162
Table of Contents
Genworth and subsidiaries
The following table sets forth our unaudited condensed consolidated cash flows for the sixnine months ended JuneSeptember 30:
 
(Amounts in millions)
  
2020
   
2019
 
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) 
  
 
 
   
 
 
 
159
Table of Contents
(Amounts in millions)
  
2020
   
2019
 
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—holding company
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
163
Table of Contents
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
160
Table of Contents
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.
164
Table of Contents
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
161
Table of Contents
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 of
COVID-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
Capital resources
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
165
Table of Contents
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.
Financing activities
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
162
Table of Contents
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;
and
 
beginning in 2021, until the secured promissory note to AXA is paid, dividends above $50 million from our U.S. mortgage insurance subsidiaries are subject to mandatory prepayment conditions;
the receipt of dividends and sale proceeds above certain thresholds from our Australian mortgage insurance business are also subject to mandatory prepayment conditions; and
due to the uncertain macroeconomic conditions surrounding
COVID-19,
on JuneSeptember 30, 2020, Genworth and China Oceanwide agreed to a fifteenthsixteenth waiver and agreement extending the merger deadline to no later than September
166
Table of Contents
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
163
Table of Contents
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 by
COVID-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.
167
Table of Contents
Contractual obligations and commercial commitments
Except
We 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.
164
Table of Contents
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.
 
165168
Table of Contents
The following table presents the condensed consolidating balance sheet information as of JuneSeptember 30, 2020:
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Assets
     
Investments:
     
Fixed maturity securities
available-for-sale,
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 
Policy loans
  —     —     2,182   —     2,182 
Other invested assets
  —     50   2,423   —     2,473 
Investments in subsidiaries
  14,548   16,174   —     (30,722)   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total investments
  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 
Reinsurance recoverable
  —     —     16,944   —     16,944 
Less: Allowance for credit losses
  —     —     (44)   —     (44) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Reinsurance recoverable, net
  —     —     16,900   —     16,900 
Other assets
  5   188   261   —     454 
Intercompany notes receivable
  96   214   —     (310)   —   
Deferred tax assets
  9   944   (667)   —     286 
Separate account assets
  —     —     5,536   —     5,536 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
 $14,658  $18,074  $101,937  $(31,032)  $103,637 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Liabilities and equity
     
Liabilities:
     
Future policy benefits
 $—    $—    $41,463  $—    $41,463 
Policyholder account balances
  —     —     22,921   —     22,921 
Liability for policy and contract claims
  —     —     11,280   —     11,280 
Unearned premiums
  —     —     1,804   —     1,804 
Other liabilities
  15   109   1,951   —     2,075 
Intercompany notes payable
  —     96   214   (310)   —   
Long-term borrowings
  —     2,679   138   —     2,817 
Separate account liabilities
  —     —     5,536   —     5,536 
Liabilities related to discontinued operations
  —     653   —     —     653 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities
  15   3,537   85,307   (310)   88,549 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity:
     
Common stock
  1   —     3   (3)   1 
Additional
paid-in
capital
  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 
Retained earnings
  899   (2,671)   (7,089)   9,760   899 
Treasury stock, at cost
  (2,700)   —     —     —     (2,700) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Genworth Financial, Inc.’s stockholders’ equity
  14,643   14,537   15,885   (30,422)   14,643 
Noncontrolling interests
  —     —     745   (300)   445 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total equity
  14,643   14,537   16,630   (30,722)   15,088 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities and equity
 $14,658  $18,074  $101,937  $(31,032)  $103,637 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Assets
     
Investments:
     
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 
Policy loans
  —     —     2,153   —     2,153 
Other invested assets
  —     16   2,386   —     2,402 
Investments in subsidiaries
  14,690   15,959   —     (30,649)   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total investments
  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 
Reinsurance recoverable
  —     —     16,832   —     16,832 
Less: Allowance for credit losses
  —     —     (44)   —     (44) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Reinsurance recoverable, net
  —     —     16,788   —     16,788 
Other assets
  5   326   114   —     445 
Intercompany notes receivable
  99   189   —     (288)   —   
Deferred tax assets
  (19)   779   (510)   —     250 
Separate account assets
  —     —     5,700   —     5,700 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
 $14,775  $18,083  $103,004  $(30,937)  $104,925 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Liabilities and equity
     
Liabilities:
     
Future policy benefits
 $—    $—    $41,995  $—    $41,995 
Policyholder account balances
  —     —     22,731   —     22,731 
Liability for policy and contract claims
  —     —     11,373   —     11,373 
Unearned premiums
  —     —     1,846   —     1,846 
Other liabilities
  19   92   1,802   —     1,913 
Intercompany notes payable
  —     99   189   (288)   —   
Long-term borrowings
  —     2,663   907   —     3,570 
Separate account liabilities
  —     —     5,700   —     5,700 
Liabilities related to discontinued operations
  —     549   16   —     565 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities
  19   3,403   86,559   (288)   89,693 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity:
     
Common stock
  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 
Retained earnings
  1,317   (2,222)   (6,992)   9,214   1,317 
Treasury stock, at cost
  (2,700)   —     —     —     (2,700) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Genworth Financial, Inc.’s stockholders’ equity
  14,756   14,680   15,669   (30,349)   14,756 
Noncontrolling interests
  —     —     776   (300)   476 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total equity
  14,756   14,680   16,445   (30,649)   15,232 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities and equity
 $14,775  $18,083  $103,004  $(30,937)  $104,925 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
166169
Table of Contents
The following table presents the condensed consolidating balance sheet information as of December 31, 2019:
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Assets
     
Investments:
     
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 
Policy loans
  —     —     2,058   —     2,058 
Other invested assets
  —     71   1,561   —     1,632 
Investments in subsidiaries
  14,079   15,090   —     (29,169)   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total investments
  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 
Reinsurance recoverable
  —     —     17,103   —     17,103 
Other assets
  4   201   239   (1)   443 
Intercompany notes receivable
  119   132   —     (251)   —   
Deferred tax assets
  13   821   (409)   —     425 
Separate account assets
  —     —     6,108   —     6,108 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
 $14,215  $17,776  $98,975  $(29,624)  $101,342 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Liabilities and equity
     
Liabilities:
     
Future policy benefits
 $—    $—    $40,384  $—    $40,384 
Policyholder account balances
  —     —     22,217   —     22,217 
Liability for policy and contract claims
  —     —     10,958   —     10,958 
Unearned premiums
  —     —     1,893   —     1,893 
Other liabilities
  30   118   1,285   (5)   1,428 
Intercompany notes payable
  —     319   132   (451)   —   
Non-recourse
funding obligations
  —     —     311   —     311 
Long-term borrowings
  —     3,137   140   —     3,277 
Separate account liabilities
  —     —     6,108   —     6,108 
Liabilities related to discontinued operations
  —     134   —     —     134 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities
  30   3,708   83,428   (456)   86,710 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity:
     
Common stock
  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 
Retained earnings
  1,461   (2,126)   (7,108)   9,234   1,461 
Treasury stock, at cost
  (2,700)   —     —     —     (2,700) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Genworth Financial, Inc.’s stockholders’ equity
  14,185   14,068   14,800   (28,868)   14,185 
Noncontrolling interests
  —     —     747   (300)   447 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total equity
  14,185   14,068   15,547   (29,168)   14,632 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities and equity
 $14,215  $17,776  $98,975  $(29,624)  $101,342 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Assets
     
Investments:
     
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 
Policy loans
  —     —     2,058   —     2,058 
Other invested assets
  —     71   1,561   —     1,632 
Investments in subsidiaries
  14,079   15,090   —     (29,169)   —   
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total investments
  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 
Reinsurance recoverable
  —     —     17,103   —     17,103 
Other assets
  4   201   239   (1)   443 
Intercompany notes receivable
  119   132   —     (251)   —   
Deferred tax assets
  13   821   (409)   —     425 
Separate account assets
  —     —     6,108   —     6,108 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total assets
 $14,215  $17,776  $98,975  $(29,624)  $101,342 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Liabilities and equity
     
Liabilities:
     
Future policy benefits
 $—    $—    $40,384  $—    $40,384 
Policyholder account balances
  —     —     22,217   —     22,217 
Liability for policy and contract claims
  —     —     10,958   —     10,958 
Unearned premiums
  —     —     1,893   —     1,893 
Other liabilities
  30   118   1,243   (5)   1,386 
Intercompany notes payable
  —     319   132   (451)   —   
Non-recourse funding obligations
  —     —     311   —     311 
Long-term borrowings
  —     3,137   140   —     3,277 
Separate account liabilities
  —     —     6,108   —     6,108 
Liabilities related to discontinued operations
  —     134   42   —     176 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities
  30   3,708   83,428   (456)   86,710 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Equity:
     
Common stock
  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 
Retained earnings
  1,461   (2,126)   (7,108)   9,234   1,461 
Treasury stock, at cost
  (2,700)   —     —     —     (2,700) 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total Genworth Financial, Inc.’s stockholders’ equity
  14,185   14,068   14,800   (28,868)   14,185 
Noncontrolling interests
  —     —     747   (300)   447 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total equity
  14,185   14,068   15,547   (29,168)   14,632 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total liabilities and equity
 $14,215  $17,776  $98,975  $(29,624)  $101,342 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
167170
Table of Contents
The following table presents the condensed consolidating income statement information for the sixnine months ended JuneSeptember 30, 2020:
 
(Amounts in millions)
  
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Revenues:
      
Premiums
  $—    $—    $2,034  $—    $2,034 
Net investment income
   (2)   5   1,579   (3)   1,579 
Net investment gains (losses)
   —     8   (1)   —     7 
Policy fees and other income
   —     2   356   (3)   355 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
   (2)   15   3,968   (6)   3,975 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Benefits and expenses:
      
Benefits and other changes in policy reserves
   —     —     2,847   —     2,847 
Interest credited
   —     —     280   —     280 
Acquisition and operating expenses, net of deferrals
   15   5   452   —     472 
Amortization of deferred acquisition costs and intangibles
   —     —     209   —     209 
Goodwill impairment
   —     —     5   —     5 
Interest expense
   —     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) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss)
   (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) 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
  
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
   
Eliminations
  
Consolidated
 
Revenues:
       
Premiums
  $—    $—    $3,068   $—    $3,068 
Net investment income
   (2)   5   2,405    (2)   2,406 
Net investment gains (losses)
   —     7   375    —     382 
Policy fees and other income
   —     2   541    (4)   539 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total revenues
   (2)   14   6,389    (6)   6,395 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Benefits and expenses:
       
Benefits and other changes in policy reserves
   —     —     4,146    —     4,146 
Interest credited
   —     —     417    —     417 
Acquisition and operating expenses, net of deferrals
   17   6   698    —     721 
Amortization of deferred acquisition costs and intangibles
   —     —     310    —     310 
Goodwill impairment
   —     —     5    —     5 
Interest expense
   —     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) 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income (loss)
   (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) 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
 
168171
Table of Contents
The following table presents the condensed consolidating income statement information for the year ended December 31, 2019:
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Revenues:
     
Premiums
 $—    $—    $4,037  $—    $4,037 
Net investment income
  (3)   10   3,228   (15)   3,220 
Net investment gains (losses)
  —     (5)   55   —     50 
Policy fees and other income
  —     2   792   (5)   789 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Total revenues
  (3)   7   8,112   (20)   8,096 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Benefits and expenses:
     
Benefits and other changes in policy reserves
  —     —     5,163   —     5,163 
Interest credited
  —     —     577   —     577 
Acquisition and operating expenses, net of deferrals
  20   —     942   —     962 
Amortization of deferred acquisition costs and intangibles
  —     —     441   —     441 
Interest expense
  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 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
Net income (loss)
  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 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
  
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
   
Eliminations
  
Consolidated
 
Revenues:
       
Premiums
  $—    $—    $4,037   $—    $4,037 
Net investment income
   (3)   10   3,228    (15)   3,220 
Net investment gains (losses)
   —     (5)   55    —     50 
Policy fees and other income
   —     2   792    (5)   789 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Total revenues
   (3)   7   8,112    (20)   8,096 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Benefits and expenses:
       
Benefits and other changes in policy reserves
   —     —     5,163    —     5,163 
Interest credited
   —     —     577    —     577 
Acquisition and operating expenses, net of deferrals
   20   —     942    —     962 
Amortization of deferred acquisition costs and intangibles
   —     —     441    —     441 
Interest expense
   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 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
Net income (loss)
   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 
  
 
 
  
 
 
  
 
 
   
 
 
  
 
 
 
 
169172
Table of Contents
The following table presents the condensed consolidating comprehensive income statement information for the sixnine months ended JuneSeptember 30, 2020:
 
(Amounts in millions)
  
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Net income (loss)
  $(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 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
  
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Net income (loss)
  $(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:
 
(Amounts in millions)
  
Parent
Guarantor
   
Issuer
  
All Other
Subsidiaries
   
Eliminations
  
Consolidated
 
Net income (loss)
  $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 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
(Amounts in millions)
  
Parent
Guarantor
   
Issuer
  
All Other
Subsidiaries
   
Eliminations
  
Consolidated
 
Net income (loss)
  $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 
  
 
 
   
 
 
  
 
 
   
 
 
  
 
 
 
 
170173
Table of Contents
The following table presents the condensed consolidating cash flow statement information for the sixnine months ended JuneSeptember 30, 2020:
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Cash flows from (used by) operating activities:
     
Net income (loss)
 $(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 
Goodwill impairment
  —     —     5   —     5 
Deferred income taxes
  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) 
Insurance reserves
  —     —     674   —     674 
Current tax liabilities
  (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 
Other invested assets
  —     —     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) 
Other invested assets
  —     —     (236)   —     (236) 
Short-term investments, net
  —     20   39   —     59 
Policy loans, net
  —     —     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   —   
Other, net
  (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 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Cash flows from (used by) operating activities:
     
Net income (loss)
 $(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) 
Net investment gains
  —     (7)   (375)   —     (382) 
Charges assessed to policyholders
  —     —     (479)   —     (479) 
Acquisition costs deferred
  —     —     (9)   —     (9) 
Amortization of deferred acquisition costs and intangibles
  —     —     310   —     310 
Goodwill impairment
  —     —     5   —     5 
Deferred income taxes
  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) 
Insurance reserves
  —     —     1,034   —     1,034 
Current tax liabilities
  (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 
Other invested assets
  —     —     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) 
Other invested assets
  —     —     (318)   —     (318) 
Short-term investments, net
  —     70   (82)   —     (12) 
Policy loans, net
  —     —     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   —   
Other, net
  (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 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
171174
Table of Contents
The following table presents the condensed consolidating cash flow statement information for the year ended December 31, 2019:
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Cash flows from operating activities:
     
Net income (loss)
 $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 
Deferred income taxes
  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) 
Insurance reserves
  —     —     1,259   —     1,259 
Current tax liabilities
  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) 
Policy loans, net
  —     —     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) 
Other, net
  (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 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
(Amounts in millions)
 
Parent
Guarantor
  
Issuer
  
All Other
Subsidiaries
  
Eliminations
  
Consolidated
 
Cash flows from operating activities:
     
Net income (loss)
 $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 
Deferred income taxes
  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) 
Insurance reserves
  —     —     1,259   —     1,259 
Current tax liabilities
  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) 
Policy loans, net
  —     —     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) 
Other, net
  (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 
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
 
 
172175
Table of Contents
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.
Securitization Entities
There were no
off-balance
sheet securitization transactions during the sixnine months ended JuneSeptember 30, 2020 or 2019.
New Accounting Standards
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
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. Except as disclosed below and in our executive summary under “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of
Operations—COVID-19
Summary,” there were no other material changes in our market risks since December 31, 2019. See “—Business trends and conditions” and “—Investments and Derivative Instruments” in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of recent market conditions, including changes in interest rates.
176
Table of Contents
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.
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.
173
Table of Contents
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.
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.
Item 1A. Risk Factors
Item 1A.
Risk Factors
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
177
Table of Contents
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.
 
174
178
Table of Contents
Item 6.
Item 6. Exhibits
 
Number
  
Description
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)
  10.4Secured 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.
 
175179
Table of Contents
SIGNATURES
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.
 
   
GENWORTH FINANCIAL, INC.
(Registrant)
Date: AugustNovember 5, 2020
   
  By: 
/s/ Matthew D. Farney
   
Matthew D. Farney
Vice President and Controller
(Principal Accounting Officer)
 
176180