Accounting Changes

6 Months Ended

Jun. 30, 2023

Disclosue of Accounting Changes [Abstract]

Accounting Changes

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2023, we adopted LDTI, which significantly changed the recognition and measurement of long-duration insurance contracts. This new accounting guidance directly impacted deferred acquisition costs (“DAC”), intangible assets and insurance assets and liabilities in our U.S. life insurance companies, and also significantly increased our disclosure requirements. While the new guidance has had a significant impact on existing U.S. GAAP financial statements and disclosures, it does not impact the cash flows or underlying economics of the business, business strategy, statutory net income (loss), risk-based capital of our U.S. life insurance companies, management of capital or our Enact segment and Corporate and Other.

We adopted this new accounting guidance using the modified retrospective transition method for all topics except for market risk benefits (“MRBs”), which was required to be applied using the retrospective transition method. The modified retrospective transition method generally results in applying the guidance to contracts on the basis of existing carrying values as of the Transition Date. The new accounting guidance, for all topics, was applied as of the Transition Date with an adjustment to beginning retained earnings and accumulated other comprehensive income (loss). In addition, prior period financial information has been re-presented in accordance

with the new accounting standard. As of the Transition Date, we decreased total stockholders’ equity by $13.7 billion after-tax. The total decrease to stockholders’ equity included a reduction to retained earnings of $2.2 billion and a reduction in accumulated other comprehensive income (loss) of $11.5 billion. Our long-term care insurance business was the most significantly impacted from the adoption due to the requirement to remeasure the liability for future policy benefits and related reinsurance recoverables at the single-A bond rate as of the Transition Date, which at that time was materially lower than the locked-in discount rate. Refer to note 3 for further information about the cumulative effect adjustment recorded upon adoption of this new accounting guidance.

As a result of adopting this new accounting guidance, our insurance assets and liabilities have been sensitive to movements in interest rates, which will likely result in continued volatility to our stockholders’ equity. Refer to note 19 for additional detail related to the impact changes in interest rates have had on our accumulated other comprehensive income (loss) resulting from updating the discount rate used to measure the liability for future policy benefits and related reinsurance recoverables.

The key areas of change introduced by the adoption of LDTI and the related effect to our accounting policies are summarized in the table below. Less significant accounting policy changes from adopting LDTI are not included in the below table.

Key Area Impacted	Change to Accounting Policy	Policy Elections and Other Significant Matters
DAC and balances amortized on a basis consistent with DAC, including intangible assets and cost of reinsurance	DAC associated with long-duration insurance contracts is grouped into cohorts consistent with groupings used to estimate the related liability for future policy benefits and is amortized on a constant level basis over the expected contract term, which approximates straight-line. Assumptions used to amortize DAC are consistent with the assumptions used to estimate the liability for future policy benefits. Revised assumptions are recognized prospectively over the remaining term of the related contract. DAC and balances amortized on a basis consistent with DAC are no longer subject to impairment, shadow adjustments or recoverability testing; however, present value of future profits (“PVFP”) is still assessed for recoverability in connection with premium deficiency testing.	The constant level basis we use to amortize DAC by product is as follows: •  long-term care insurance—total life count •  life insurance—face amount •  fixed and variable annuities—policy count We apply the amortization rate at the beginning of the current reporting period, which reflects assumption updates, if applicable, and actual experience through the end of the current reporting period. We have elected to amortize intangible assets associated with investment contracts, such as PVFP, in a manner consistent with DAC. Cost of reinsurance is deferred and amortized in a manner consistent with DAC over the terms of the related reinsurance treaties.

Key Area Impacted	Change to Accounting Policy	Policy Elections and Other Significant Matters
MRBs, which include contracts or contract features that protect the policyholder’s account balance and expose the insurer to other-than-nominal capital market risk, such as guaranteed minimum death benefits (“GMDBs”), guaranteed minimum withdrawal benefits (“GMWBs”) and guaranteed payout annuity floor benefits (“GPAFs”)	MRBs are measured at fair value with changes related to instrument-specific credit risk recorded as a separate component in accumulated other comprehensive income (loss) and remaining changes recorded in net income (loss).	For additional details, see notes 7 and 13.
Liability for future policy benefits—level of aggregation	For the purpose of calculating the net premium ratio used to measure the liability for future policy benefits, long-duration insurance contracts are grouped into annual cohorts on the basis of original contract issue date. For acquired contracts, the acquisition date is considered the original contract issue date. The net premium ratio for long-duration traditional and limited payment contracts is the ratio of expected benefits less the existing carrying value of reserves to gross premiums.	Traditional and limited-payment long-duration insurance contracts are generally grouped into annual calendar-year cohorts based on the contract issue date, product type and company. Limited-payment contracts are grouped into cohorts separately from other traditional products and riders are combined with the associated base policies. Certain products may also be grouped by acquisition date for acquired contracts and reinsurance treaty effective date for reinsurance recoverables.

Key Area Impacted	Change to Accounting Policy	Policy Elections and Other Significant Matters
Liability for future policy benefits—cash flow assumptions	All cash flow assumptions used to estimate the liability for future policy benefits (including health care experience, policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates), and benefit reductions associated with our long-term care insurance in-force rate actions and legal settlements as well as payments to policyholders electing reduced benefits in connection with legal settlements) are reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required. Changes in cash flow assumptions are recorded using a retrospective approach with a cumulative catch-up adjustment by recalculating the net premium ratio (which is capped at 100%) using actual historical and updated future cash flow assumptions. The liability for future policy benefits is recalculated using the revised net premium ratio and locked-in discount rate as of the beginning of the current reporting period and compared to the carrying amount as of the beginning of the current reporting period using the previous net premium ratio and locked-in discount rate, with any difference recorded as a remeasurement gain (loss). Cash flow assumptions no longer reflect a provision for adverse deviation, and the premium deficiency test and shadow adjustments are eliminated.	We calculate a single liability for future policy benefits and therefore, all cash flows, including benefit payments (such as claims in course of settlement and incurred claims) are aggregated. As a result, our U.S. life insurance companies elected to combine their previously disclosed liability for policy and contract claims, excluding amounts related to certain life and annuity products not subject to the new accounting guidance, within the liability for future policy benefits and present the aggregate liability as one line item in our condensed consolidated balance sheets. Cash flow assumptions will be formally reviewed and updated as necessary based on experience studies in the fourth quarter each year. We elected to update the net premium ratio quarterly for actual versus expected experience; therefore, during interim reporting periods we will replace forecasted cash flow assumptions with actual cash flows with any difference recorded in net income (loss). We made an entity-wide election not to update our expense assumptions and therefore, these assumptions remain locked-in at the time of the Transition Date or if issued after the Transition Date, at the time of contract inception.

Key Area Impacted	Change to Accounting Policy	Policy Elections and Other Significant Matters
Liability for future policy benefits—discount rate assumptions	The liability for future policy benefits is measured using two different discount rates, a current discount rate and a locked-in discount rate. The current discount rate is used to remeasure the liability for future policy benefits recorded in the condensed consolidated balance sheets and is a current upper-medium grade fixed-income instrument yield, commonly interpreted to be a single-A rated bond rate, with the same duration as the corresponding liability. The locked-in discount rate is used to determine the amounts recorded to net income (loss) and is held constant for the purpose of calculating the net premium ratio and interest accretion. The difference between the liability measured using the locked-in rate and the liability measured using the current rate is recorded in accumulated other comprehensive income (loss). For policies in-force prior to the Transition Date, the locked-in discount rate is equal to the discount rate in effect immediately before the Transition Date. For contracts issued on or after the Transition Date, the locked-in discount rate is a single-A rated bond rate identified at inception of the contract.	The methodology used to determine the current discount rate assumption maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs. The current discount rate assumption is based on a single-A curve published by a market data service. For cash flows projected beyond the observable curve, we use estimation techniques consistent with Level 3 fair value measurements as defined in note 2—Summary of Significant Accounting Policies included in the Notes to Consolidated Financial Statements in our 2022 Annual Report on Form 10-K to interpolate from the last observable rate to an estimated ultimate long-term rate. For contracts issued on or after the Transition Date, the locked-in discount rate for each issue-year cohort is determined as a single discount rate, using the weighted-average monthly single-A fixed-income forward curves over the current calendar year.

Key Area Impacted	Change to Accounting Policy	Policy Elections and Other Significant Matters
Liability for future policy benefits—deferred profit liability	A deferred profit liability is established for limited-payment products at the time of contract issuance for any amount of gross premiums received in excess of net premiums, which is amortized into net income (loss) in proportion to insurance in-force for life insurance products and expected future benefit payments for fixed annuity products. Cash flow assumptions related to the deferred profit liability are consistent with the assumptions used to estimate the related liability for future policy benefits and are updated at the same time. The deferred profit liability is recalculated using updated cash flow assumptions as of the beginning of the current reporting period and compared to the current carrying amount as of the beginning of the current reporting period, with any difference recorded in net income (loss).
Policyholder account balances—additional insurance liabilities	Additional insurance liabilities are established for guarantees or certain product features not classified as MRBs or embedded derivatives. The calculation of additional insurance liabilities includes investment performance. Therefore, the impacts from net unrealized investment gains and losses on available for-sale investment securities backing additional insurance liabilities are required to be analyzed, as if those unrealized investment gains and losses were realized. These “shadow adjustments” result in the recognition of unrealized gains and losses on additional insurance liabilities in a manner consistent with unrealized gains and losses on available-for-sale investment securities, which are recorded in accumulated other comprehensive income (loss).	Annual premium deficiency testing is still required to be performed for our universal and term universal life insurance products.

The following table presents the impacted lines of the condensed consolidated balance sheet as of December 31, 2022 reflecting the impact of adopting LDTI on January 1, 2023:

(Amounts in millions)	As originally reported			Effect of adopting LDTI			As adjusted
Assets
Deferred acquisition costs	$	2,200		$	11		$	2,211
Intangible assets		241			(38	)		203
Reinsurance recoverable		16,495			2,564			19,059
Less: Allowance for credit losses		(60	)		(3	)		(63	)
Reinsurance recoverable, net		16,435			2,561			18,996
Other assets		415			73			488
Deferred tax asset		1,344			639			1,983
Market risk benefit assets		—			26			26
Total assets		86,442			3,272			89,714
Liabilities and equity
Liabilities:
Future policy benefits		38,064			17,343			55,407
Policyholder account balances		17,113			(549	)		16,564
Market risk benefit liabilities		—			748			748
Liability for policy and contract claims		12,234			(11,551	)		683
Unearned premiums		584			(381	)		203
Other liabilities		1,672			15			1,687
Total liabilities		75,703			5,625			81,328
Equity:
Accumulated other comprehensive income (loss)		(2,220	)		(394	)		(2,614	)
Retained earnings		3,098			(1,959	)		1,139
Total Genworth Financial, Inc.’s stockholders’ equity		9,984			(2,353	)		7,631
Total equity		10,739			(2,353	)		8,386
Total liabilities and equity		86,442			3,272			89,714

The following table presents the impacted lines of the condensed consolidated statements of income for the three and six months ended June 30, 2022 reflecting the impact of adopting LDTI on January 1, 2023:

	Three months ended June 30, 2022							Six months ended June 30, 2022
(Amounts in millions, except per share amounts)	As originally reported		Effect of adopting LDTI			As adjusted		As originally reported		Effect of adopting LDTI			As adjusted
Revenues:
Premiums	$	927	$	(11	)	$	916	$	1,858	$	(25	)	$	1,833
Net investment gains (losses)		8		11			19		36		25			61
Policy fees and other income		159		6			165		328		7			335
Total revenues		1,881		6			1,887		3,773		7			3,780
Benefits and expenses:
Benefits and other changes in policy reserves		764		4			768		1,903		32			1,935
Liability remeasurement (gains) losses		—		24			24		—		(40	)		(40	)
Changes in fair value of market risk benefits and associated hedges		—		20			20		—		(21	)		(21	)
Interest credited		125		1			126		250		1			251
Acquisition and operating expenses, net of deferrals		589		(10	)		579		860		(45	)		815
Amortization of deferred acquisition costs and intangibles		84		—			84		176		(4	)		172
Total benefits and expenses		1,588		39			1,627		3,241		(77	)		3,164
Income from continuing operations before income taxes		293		(33	)		260		532		84			616
Provision for income taxes		73		(11	)		62		131		15			146
Income from continuing operations		220		(22	)		198		401		69			470
Net income		219		(22	)		197		398		69			467
Net income available to Genworth Financial, Inc.’s common stockholders		181		(22	)		159		330		69			399
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders		182		(22	)		160		333		69			402
Net income available to Genworth Financial, Inc.’s common stockholders		181		(22	)		159		330		69			399
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders per share:
Basic		0.36		(0.04	)		0.32		0.65		0.14			0.79
Diluted		0.36		(0.05	)		0.31		0.65		0.13			0.78
Net income available to Genworth Financial, Inc.’s common stockholders per share:
Basic		0.36		(0.05	)		0.31		0.65		0.14			0.79
Diluted		0.35		(0.04	)		0.31		0.64		0.13			0.77

The following table presents the impacted lines of the condensed consolidated statement of cash flows for the six months ended June 30, 2022 reflecting the impact of adopting LDTI on January 1, 2023:

(Amounts in millions)	As originally reported			Effect of adopting LDTI			As adjusted
Cash flows from (used by) operating activities:
Net income	$	398		$	69		$	467
Adjustments to reconcile net income to net cash from operating activities:
Net investment (gains) losses		(36	)		(25	)		(61	)
Changes in fair value of market risk benefits and associated hedges		—			(21	)		(21	)
Charges assessed to policyholders		(292	)		3			(289	)
Acquisition costs deferred		(1	)		(6	)		(7	)
Amortization of deferred acquisition costs and intangibles		176			(4	)		172
Deferred income taxes		128			15			143
Change in certain assets and liabilities:
Accrued investment income and other assets		(70	)		(1	)		(71	)
Insurance reserves		494			147			641
Other liabilities, policy and contract claims and other policy-related balances		(205	)		(177	)		(382	)
Net cash from operating activities		337			—			337

Accounting Pronouncements Not Yet Adopted

In June 2022, the FASB issued new accounting guidance related to the fair value measurement of equity securities subject to contractual sale restrictions. The guidance clarifies existing fair value guidance on measuring the fair value of an equity security subject to contractual sale restrictions and adds new disclosures related to these securities. This guidance is currently effective for us on January 1, 2024 using the prospective method, with early adoption permitted, which we do not intend to elect. We do not expect a significant impact from this guidance on our condensed consolidated financial statements and disclosures.