Insurance Subsidiary Financial Information and Regulatory Matters

12 Months Ended

Dec. 31, 2019

Insurance Subsidiary Financial Information and Regulatory Matters

(18) Insurance Subsidiary Financial Information and Regulatory Matters

Dividends

Our insurance subsidiaries are subject to oversight by applicable insurance laws and regulations as to the amount of dividends they may pay to their parent in any year, the purpose of which is to protect affected insurance policyholders or contractholders, not stockholders. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. Based on estimated statutory results as of December 31, 2019, in accordance with applicable dividend restrictions, our insurance subsidiaries could pay dividends of approximately $300 million to us in 2020. While the approximately $300 million is considered unrestricted, our insurance subsidiaries may not pay dividends to us in 2020 at this level if they need to retain capital for growth or need to meet capital requirements and desired thresholds.

Dividends received from our domestic insurance subsidiaries is highly dependent on the performance of our U.S. mortgage insurance subsidiaries and their ability to pay dividends to us as anticipated. Given the performance of our U.S. life insurance subsidiaries, dividends will not be paid by these subsidiaries for the foreseeable future.

Our domestic insurance subsidiaries paid dividends of $250 million (none of which were deemed “extraordinary”), $60 million (none of which were deemed “extraordinary”) and $36 million (paid to our principal life insurance subsidiaries and none of which were deemed “extraordinary”) during 2019, 2018 and 2017, respectively. Our Australian mortgage insurance subsidiaries paid dividends of $212 million, $129 million and $147 million during 2019, 2018 and 2017, respectively.

As of December 31, 2019, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $13.8 billion and $14.8 billion, respectively. There are no regulatory restrictions on the ability of Genworth Financial to pay dividends. Our Board of Directors has suspended the payment of dividends on our common stock indefinitely. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will be dependent on many factors including the receipt of dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our debt obligations, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant.

U.S. domiciled insurance subsidiaries—statutory financial information

Our U.S. domiciled insurance subsidiaries file financial statements with state insurance regulatory authorities and the NAIC that are prepared on an accounting basis either prescribed or permitted by such authorities. Statutory accounting practices differ from U.S. GAAP in several respects, causing differences in reported net income (loss) and stockholders’ equity.

Permitted statutory accounting practices encompass all accounting practices not so prescribed but that have been specifically allowed by individual state insurance authorities. Our U.S. domiciled insurance subsidiaries have no material permitted accounting practices, except for River Lake Insurance Company VI (“River Lake VI”), River Lake Insurance Company VII (“River Lake VII”), River Lake Insurance Company VIII (“River Lake VIII”), River Lake Insurance Company IX (“River Lake IX”) and River Lake Insurance Company X (“River Lake X”), together with River Lake VI, River Lake VII, River Lake VIII, River Lake IX and River Lake X, the “SPFCs.” The permitted practices of the SPFCs were an essential element of their design and were expressly included in their plans of operation and in the licensing orders issued by their domiciliary state regulators and without those permitted accounting practices, these entities could be subject to regulatory action. Accordingly, we believe that the permitted accounting practices will remain in effect for so long as we maintain the SPFCs. The permitted accounting practices were as follows:

• In 2019, River Lake VI was granted a permitted accounting practice from the State of Delaware to carry its excess of loss reinsurance agreement with The Canada Life Assurance Company for its universal life insurance business assumed from GLAIC in 2019 as an admitted asset. In 2018, River Lake VI was granted a permitted accounting practice from the State of Delaware to carry its term life insurance reserves on a basis similar to U.S. GAAP and was subsequently granted an extension of this permitted accounting practice to include additional term life insurance policies assumed from GLAIC in 2019. Prior to 2018, River Lake VI was granted a permitted accounting practice to carry its excess of loss reinsurance agreement with The Canada Life Assurance Company for its term life insurance business as an admitted asset, which was withdrawn in 2018.

• In 2019 and 2018, River Lake VII, River Lake VIII, River Lake IX and River Lake X each had a permitted accounting practice from the State of Vermont to carry their reserves on a basis similar to U.S. GAAP. In addition, prior to 2018, River Lake IX and River Lake X were also granted a permitted accounting practice to carry their excess of loss reinsurance agreements with The Canada Life Assurance Company and Hannover Life Reassurance Company of America, respectively, as an admitted asset, which was withdrawn in 2018. As of December 31, 2019, there were no remaining reserves in River Lake IX as discussed below.

The impact of these permitted accounting practices on our combined U.S. domiciled life insurance subsidiaries’ statutory capital and surplus was zero as of December 31, 2019 and 2018. If these permitted accounting practices had not been used, no regulatory event would have been triggered.

The tables below include the combined statutory net income and statutory capital and surplus for our U.S. domiciled insurance subsidiaries for the periods indicated:

	Years ended December 31,
(Amounts in millions)	2019			2018			2017
Combined statutory net income (loss):
Life insurance subsidiaries, excluding captive life reinsurance subsidiaries	$	740		$	(895	)	$	(272	)
Mortgage insurance subsidiaries		847			697			512
Combined statutory net income (loss), excluding captive reinsurance subsidiaries		1,587			(198	)		240
Captive life insurance subsidiaries		(350	)		1,520			(36	)
Combined statutory net income	$	1,237		$	1,322		$	204

	As of December 31,
(Amounts in millions)	2019		2018
Combined statutory capital and surplus:
Life insurance subsidiaries, excluding captive life reinsurance subsidiaries	$	2,188	$	1,880
Mortgage insurance subsidiaries		3,664		3,206
Combined statutory capital and surplus	$	5,852	$	5,086

The statutory net income (loss) from our captive life reinsurance subsidiaries relates to the reinsurance of term and universal life insurance statutory reserves assumed from our U.S. domiciled life insurance companies. These reserves are, in turn, secured by excess of loss reinsurance treaties with third parties or, in the case of Rivermont I, funded through the issuance of non-recourse funding obligations to third parties. Additionally, the life insurance subsidiaries’ combined statutory net income (loss) and distributable income (loss) are not affected by the statutory net income (loss) of the captives, except to the extent dividends are received from the captives. The combined statutory capital and surplus of our life insurance subsidiaries does not include the capital and surplus of our captive life reinsurance subsidiaries of $447 million and $217 million as of December 31, 2019 and 2018, respectively.

In December 2019, GLAIC, one of our U.S. domiciled life insurance companies, recaptured its term life insurance business previously ceded to River Lake IX and its universal life insurance business previously ceded to Rivermont I. GLAIC then immediately ceded that recaptured business to River Lake VI. Prior to the GLAIC recapture, River Lake IX also recaptured all external reinsurance with third parties and terminated those agreements. As a result, there is no remaining reinsurance (assumed or ceded) in River Lake IX or Rivermont I as of December 31, 2019. River Lake IX also returned capital of $20 million to GLAIC in December 2019. Additionally, the capital and surplus (excluding non-recourse funding obligations) in Rivermont I was positive and, therefore, GLAIC recorded an investment in Rivermont I as of December 31, 2019. In January 2020, Rivermont I redeemed all of its outstanding non-recourse funding obligations and returned contributed surplus of $198 million to GLAIC in February 2020.

The NAIC has adopted RBC requirements to evaluate the adequacy of statutory capital and surplus in relation to risks associated with: (i) asset risk; (ii) insurance risk; (iii) interest rate and equity market risk; and (iv) business risk. The RBC formula is designated as an early warning tool for the states to identify possible undercapitalized companies for the purpose of initiating regulatory action. In the course of operations, we periodically monitor the RBC level of each of our life insurance subsidiaries. As of December 31, 2019 and 2018, each of our life insurance subsidiaries exceeded the minimum required RBC levels in their respective domiciliary state. The consolidated RBC ratio of our U.S. domiciled life insurance subsidiaries was approximately 213% and 199% as of December 31, 2019 and 2018, respectively.

During 2019 and 2018, we established $54 million and $120 million, respectively, of additional statutory reserves resulting from updates to our universal and term universal life insurance products with secondary guarantees in our Virginia and Delaware licensed life insurance subsidiaries.

The New York State Department of Financial Services (“NYDFS”) annually informs the industry that it does not permit in-force rate increases for long-term care insurance to be used in asset adequacy analysis until such increases have been approved. However, the NYDFS has allowed GLICNY, our New York insurance subsidiary, to incorporate recently filed in-force rate actions in its asset adequacy analysis prior to approval in the past. Moreover, the NYDFS has consistently granted approval for GLICNY to spread asset adequacy analysis reserve deficiencies related to its long-term care insurance business over future years.

As a result of its 2017 asset adequacy analysis, GLICNY recorded an additional $188 million of statutory reserves in the fourth quarter of 2017. Following its recording of the additional statutory reserves in the fourth quarter of 2017, GLICNY had a remaining asset adequacy deficit of approximately $302 million, which the NYDFS agreed to allow GLICNY to phase in over a two-year period. However, during 2018, the NYDFS approved an in-force rate increase. We incorporated this approved in-force rate increase along with other assumption and methodology updates into GLICNY’s 2018 asset adequacy testing. As a result, GLICNY’s asset adequacy analysis produced a positive margin and no incremental additional asset adequacy analysis reserves were recorded for the year ended December 31, 2018. As of December 31, 2018, the aggregate amount of GLICNY’s statutory reserves established for asset adequacy deficiencies was $454 million.

After discussions with the NYDFS and through the exercise of professional actuarial judgment, GLICNY incorporated in its 2019 asset adequacy analysis recently filed in-force rate actions for newer long-term care insurance products to offset emerging adverse experience for those products. As a result, GLICNY’s 2019 asset adequacy analysis would have produced a very modest positive margin at the end of 2019. However, there is an actuarial opinion requirement to address events subsequent to year end through the signing of the actuarial opinion. Given the decrease in the Treasury yield curve rate across all maturities from December 31, 2019 through February 13, 2020, the date that GLICNY’s actuarial opinion was signed, GLICNY’s asset adequacy testing resulted in a deficit of $16 million. GLICNY did not spread the deficit over future years. The incremental $16 million of additional statutory reserves established in 2019, when combined with the $454 million of previously established asset adequacy deficiency reserves as of December 31, 2018, increased the aggregate amount of additional actuarial statutory reserves established by GLICNY for asset adequacy deficits to $470 million as of December 31, 2019.

For regulatory purposes, our U.S. mortgage insurers are required to establish a special statutory contingency reserve. Annual additions to the statutory contingency reserve must equal 50% of net earned premiums, as defined by state insurance laws. These contingency reserves generally are held until the earlier of (i) the time that

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Certain of our insurance subsidiaries have securities on deposit with various state or foreign government insurance departments in order to comply with relevant insurance regulations. See note 4(d) for additional information related to these deposits. Additionally, under the terms of certain reinsurance agreements that our life insurance subsidiaries have with external parties, we pledged assets in either separate portfolios or in trust for the benefit of external reinsurers. These assets support the reserves ceded to those external reinsurers. See note 8 for additional information related to these pledged assets under reinsurance agreements. Certain of our U.S. life insurance subsidiaries are also members of regional FHLBs and the FHLBs have been granted a lien on certain of our invested assets to collateralize our obligations. See note 9 for additional information related to these pledged assets with the FHLBs.

Guarantees of obligations

In addition to the commitments discussed in note 21, we have provided guarantees to third parties for the performance of certain obligations of our subsidiaries. We estimate that our potential obligations under such guarantees was $5 million and $6 million as of December 31, 2019 and 2018, respectively. Genworth Financial and Genworth Holdings also previously provided a joint and several limited guarantee to Rivermont I related to a reinsurance agreement between Rivermont I and GLAIC. On December 1, 2019, the in-force business ceded to Rivermont I was recaptured and the associated joint and several limited guarantee was terminated. Concurrent with the termination, the cash restriction associated with this limited guarantee was withdrawn. As of December 31, 2018, the restricted cash balance associated with this former guarantee was $16 million. 

Genworth Holdings provides capital support of up to $175 million, subject to adjustments, to one of its insurance subsidiaries to fund claims to support its mortgage insurance business in Mexico. We believe this insurance subsidiary has adequate reserves to cover its underlying obligations.

Genworth Holdings also provided an unlimited guarantee for the benefit of policyholders for the payment of valid claims by our European mortgage insurance subsidiary prior to its sale in May 2016. Following the sale of this U.K. subsidiary to AmTrust Financial Services, Inc., the guarantee is now limited to the payment of valid claims on policies in-force prior to the sale date and those written approximately 90 days subsequent to the date of the sale, and AmTrust Financial Services, Inc. has agreed to provide us with a limited indemnification in the event there is any exposure under the guarantee. As of December 31, 2019, the risk in-force of the business subject to the guarantee was approximately $1.4 billion.