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 "
• 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 ourU.S. mortgage insurance business to repay the promissory note toAXA 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 toNovember 30, 2020 (and either or both of the parties may not be willing to further waive their end date termination rights beyondNovember 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continuing delays, circumstances may arise that make one or more previously obtained regulatory approvals or clearances no longer valid, one or both parties unwilling to proceed with the China Oceanwide transaction or unable to comply with the conditions to existing regulatory approvals, or one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 80
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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 ourU.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 81
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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 ourU.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 ourU.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 ourU.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 theU.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 ourU.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 a 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 ourU.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 82
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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 ourU.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 theU.S. Securities and Exchange Commission ("SEC") onJanuary 25, 2017 , and our Annual Report on Form 10-K, filed with theSEC onFebruary 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 ourU.S. life insurance businesses. China Oceanwide Transaction OnOctober 21, 2016 ,Genworth Financial, Inc. ("Genworth Financial") entered into an agreement and plan of merger (the "Merger Agreement") withAsia Pacific Global Capital Co., Ltd. ("Parent"), a limited liability company incorporated inthe People's Republic of China and a subsidiary ofChina Oceanwide Holdings Group Co., Ltd. , a limited liability company incorporated inthe People's Republic of China (together with its affiliates, "China Oceanwide"), andAsia Pacific Global Capital USA Corporation ("Merger Sub"), aDelaware corporation and a direct, wholly-owned subsidiary ofAsia Pacific Insurance USA Holdings LLC ("Asia Pacific Insurance "), which is aDelaware 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 intoGenworth Financial withGenworth Financial surviving the merger as a direct, wholly-owned subsidiary ofAsia 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 onMarch 7, 2017 ,Genworth Financial's stockholders voted on and approved a proposal to adopt the Merger Agreement. OnSeptember 30, 2020 ,Genworth , Parent and Merger Sub entered into a sixteenth waiver and agreement ("Sixteenth Waiver and Agreement") pursuant to whichGenworth and Parent each agreed to waive its right to terminate the Merger Agreement and abandon the Merger to the earliest date of: (i)November 30, 2020 , 83
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Table of Contents (ii) failure by the Parent to approve final documents provided byGenworth for the sale ofGenworth , its subsidiaries or a portion of its assets or (iii) in the event that afterSeptember 30, 2020 any governmental entity imposes or requires, any term, condition, obligation, restriction, requirement, limitation, qualification, remedy or other action that applies to the Merger Agreement, that is materially and adversely different, individually or in the aggregate, from the conditions set forth by the governmental entities with respect to the Merger that were in effect on the date of the Sixteenth Waiver and Agreement. In addition, as part of the conditions set forth in the Sixteenth Waiver and Agreement, China Oceanwide agreed to submit toGenworth satisfactory evidence byOctober 31, 2020 confirming that approximately$1.0 billion is available to China Oceanwide from sources in Mainland China and debt financing of up to$1.8 billion is available from sources outside of Mainland China throughHony Capital and/or other acceptable third parties. In aggregate, these funding sources would provide China Oceanwide the necessary funds to acquireGenworth at the agreed upon purchase price of$5.43 per share. China Oceanwide has made significant progress on theHony Capital funding and has provided satisfactory documentation toGenworth indicating thatHony Capital expects to be able to finalize the$1.8 billion financing inNovember 2020 , and that China Oceanwide is continuing to work diligently with the goal of closing the transaction byNovember 30, 2020 , subject to timely receipt of outstanding regulatory re-approvals, confirmations and/or clearances. China Oceanwide is also gathering funds in Mainland China to provide the remaining amount required to pay for the totalGenworth purchase price of$5.43 per share.Genworth also has the right, in connection with the conditions set forth in the Sixteenth Waiver and Agreement, to issue debt or other financing instruments, and pursue other strategic transactions, such as transactions to sell some or all of its interests in its mortgage insurance businesses, as needed to meet its short-term financial obligations, including but not limited to, the AXA promissory note and debt of approximately$1.0 billion maturing in 2021. For additional details on the AXA litigation, the associated settlement agreement and issuance of the promissory note to AXA, see notes 12 and 14 to our unaudited condensed consolidated financial statements under "Item 1-Financial Statements." If China Oceanwide disagrees with any steps thatGenworth takes to meet its financial obligations, it has the right to terminate the transaction in its sole discretion. Under the Sixteenth 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 byNovember 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 has received allU.S. regulatory approvals needed to close the transaction, subject to confirmation from theDelaware Department of Insurance that the acquisition ofGenworth's Delaware -domiciled insurer may proceed under the existing approval.Genworth recently received confirmation from theU.S. Financial Industry Regulatory Authority ("FINRA") that the transaction may close underFINRA rules prior to receiving its final approval. In addition, the GSEs recently re-approved the transaction, subject to certain conditions and theNorth Carolina Department of Insurance extended its previously granted approval throughJanuary 24, 2021 . China Oceanwide needs to receive clearance for currency conversion and transfer of funds fromChina's State Administration of Foreign Exchange , and theChinese National Development and Reform Commission needs to confirm the extension of the acceptance of filing with respect to the transaction, as its prior acceptance of filing has expired. All other required approvals and clearances have been secured. InSeptember 2020 , the GSEs imposed certain conditions and restrictions on ourU.S. mortgage insurance business with respect to its capital. These capital restrictions will remain in effect during the pendency of the China Oceanwide transaction, and if the China Oceanwide transaction 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 andGenworth have agreed on a capital investment plan under which China Oceanwide and/or its affiliates will contribute an aggregate of$1.5 billion toGenworth over 84
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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 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 inRichmond, Virginia . We intend to maintain our existing portfolio of businesses. Except for the specific monitoring and reporting required under theCommittee on Foreign Investment inthe 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 have taken and will continue to take steps to address our near-term liabilities, which include a secured promissory note issued to AXA under the settlement agreement reached onJuly 20, 2020 and approximately$1.0 billion in debt maturing in 2021. These steps included a debt offering fromGenworth Mortgage Holdings, Inc. ("GMHI"),Genworth's indirect wholly-owned mortgage insurance subsidiary. OnAugust 21, 2020 , GMHI issued$750 million of its 6.50% senior notes due in 2025 ("2025 Senior Notes"). A dividend of$436 million was paid toGenworth 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 addressGenworth Holdings' debt maturing inFebruary 2021 . Due to the uncertainty regarding the completion of the China Oceanwide transaction, we are continuing to take steps toward raising capital by preparing for a possible public offering of ourU.S. mortgage insurance business, subject to market conditions. Changes to our financial projections, including changes that anticipate planned strategic transactions, may negatively impact our ability to realize certain foreign tax credits or other deferred tax assets and may impair our ability to utilize beneficial consolidated tax rules, all of which could result in a material adverse effect on our results of operations. As a result of the performance of our long-term care and life insurance businesses, as well as the resulting lack of potential dividend capacity from ourU.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 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 theU.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 ourU.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
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Table of Contents COVID-19 Summary COVID-19 continues to bring unprecedented changes to the global economy. We have taken steps to mitigate some of the risks associated with COVID-19. However, the ultimate impact on our businesses from the pandemic remains unknown, therefore, we are planning for 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. 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. Weekly unemployment claims have slowed compared to the height of the pandemic; however, they remain elevated. The unemployment rate decreased in the third quarter of 2020 compared to the second quarter of 2020, as theU.S. economy continued to add jobs lost at the height of the pandemic. However, the number of unemployed Americans remains high and underemployment is likely to remain high for an extended period of time. • TheU.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 indicators improved from the lows of the second quarter of 2020 and efforts by theU.S. federal government through fiscal stimulus packages helped contribute to this recovery. However, political gridlock and the upcomingU.S. presidential election have added uncertainty to the timing of future stimulus measures and contributed to increased market volatility. • During the third quarter of 2020, theU.S. Federal Reserve maintained interest rates near zero as theU.S. economy continues to recover from the negative impact of COVID-19. TheU.S. Federal Reserve's latest forecast indicates that interest rates will remain at near zero through 2023 and will be maintained until the labor market recovers. • Credit markets continued their recovery in the third quarter of 2020 with credit spreads tightening early in the quarter, however, this activity leveled off inAugust 2020 as recovery slowed. A resurgence of localized COVID-19 cases acrossEurope 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. • TheU.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 that began inMay 2020 and secondary market purchases of corporate bonds that started inJune 2020 .
• As a result of COVID-19, the second quarter of 2020 financial results of ourU.S. mortgage insurance business were negatively impacted primarily through increased borrower uptake of forbearance options, many of which resulted in a new delinquency. Elevated borrower forbearance continued into the third quarter of 2020, however, it slowed meaningfully compared to activity in the second quarter of 2020. Servicer reported forbearance ended the third quarter of 2020 with approximately 6.7% or 61,183 of our active policies reported in a forbearance plan, of which approximately 63% were reported as delinquent. Forbearance to date has 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
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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 and third quarters of 2020. • New delinquencies continue to increase driven primarily by an increase in borrower forbearance as a result of COVID-19. Approximately 75% of our primary new delinquencies in the third quarter of 2020 were subject to a forbearance plan. New delinquencies of 16,664 contributed$61 million of loss expense for the three months endedSeptember 30, 2020 . • OurU.S. mortgage insurance business third quarter of 2020 PMIERs required assets benefited from the application of a 0.30 multiplier applied to the risk-based required asset amount factor for certain non-performing loans. The application of the 0.30 multiplier to all eligible delinquencies provided an estimated$1,217 million of benefit to ourSeptember 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 ourU.S. mortgage insurance business, among other restraints, we intend to preserve PMIERs available assets and do not expect to receive additional dividends from ourU.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.
• Many of our lender customers created programs that allow affected borrowers the option to defer their mortgage repayments, without penalty, for a period of up to six months. Under regulatory guidance, borrowers participating in these programs, unless previously delinquent, are reported as current during the deferral period. As ofSeptember 30, 2020 , ourAustralia mortgage insurance business had approximately 31,000 insured loans in-force still participating in a deferral program, down from over 48,000 as ofJune 30, 2020 . This represents approximately 3% of ourAustralia mortgage insurance business total insured loans in-force as ofSeptember 30, 2020 . • For many borrowers, the six-month deferral period expired inSeptember 2020 . Therefore, onSeptember 22, 2020 theAustralian Prudential Regulatory Authority ("APRA") released guidance regarding treatment of loans impacted by COVID-19, including options for loans to be restructured without being treated as delinquent. Lenders have been completing serviceability assessments to determine the most appropriate solutions for borrowers experiencing hardships, including, in some cases, extension of payment deferral programs. • The Australian government continued to provide support for incomes, jobs and businesses with additional measures announced in the Federal Budget inOctober 2020 . While the government programs and lender initiatives may lessen the effect of COVID-19 related losses to the business, uncertainties remain, and it could take a considerable amount of time for the economy to recover the lost output and employment resulting from the pandemic. • OurAustralia mortgage insurance business strengthened its loss reserves by$24 million in the third quarter of 2020 reflecting the economic impacts caused by COVID-19, including a provision for incurred but not reported losses on loans in payment deferral programs. As the majority of loans enrolled in payment deferral programs 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 inAustralia anticipates 87
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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 inAustralia for the remainder of 2020. The amount and timing of future dividends will depend on the economic recovery from COVID-19, among other factors.
• We have experienced some degree of higher mortality across all of ourU.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 and third quarters of 2020. In our life insurance products, overall mortality experience was also higher for the nine months endedSeptember 30, 2020 compared to nine months endedSeptember 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. Given the lower new claim counts submitted during COVID-19, incurred but not reported reserves were strengthened by$61 million for the nine months endedSeptember 30, 2020 , reflecting our assumption that lower new claim incidence during this period will ultimately return to normal levels. Our long-term care insurance benefit utilization will be monitored for impact; although it is too early to tell the magnitude and/or direction of that impact. • OurU.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. • OurU.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 ourU.S. life insurance businesses while there have been premium deferrals/grace period mandates in place in certain states, however, the extension of grace periods and reinstatements mandated by state regulators during COVID-19 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. During the first half of 2020, our variable annuity products experienced a sharp decline in financial performance. Our third quarter of 2020 financial results experienced a modest rebound as equity markets continued their recovery. However, adjusted operating income remains depressed for the nine months endedSeptember 30, 2020 , and is down 23% compared to the prior year. 88
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Table of Contents • Although certain states had 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 55% rated "A" and above. The carrying value of our investment portfolio as ofSeptember 30, 2020 andDecember 31, 2019 was$76.5 billion and$71.2 billion , respectively, of which 84% and 85%, respectively, was invested in fixed maturity securities. • During the third quarter of 2020, credit markets continued their recovery supported by strong investor inflows, improved corporate balance sheets and liquidity positions, asset/liability management measures taken by companies and minimal negative credit rating migration. We recognized approximately$0.8 billion of unrealized investment 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 endedSeptember 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. • As ofSeptember 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 ofSeptember 30, 2020 , as borrowers have sought additional relief related to COVID-19.
Operational Readiness and Business Continuity
• Our business continuity plans consider workforce continuity and we currently are requiring all employees to work from home throughJune 2021 . We will continue to monitor workforce continuity and the safety of our employees as we start the process of returning to an office environment in mid 2021. • Remote access capabilities have existed atGenworth 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 withinGenworth 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
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Table of Contents Liquidity •Genworth Holdings' financial obligations due one year from the issue date of the unaudited condensed consolidated financial statements, including debt maturing in 2021, exceed its current liquidity. Absent accessing additional liquidity through third party sources and/or the completion of the China Oceanwide transaction, we would not expect to have a 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 continuing to actively take steps toward raising capital by preparing for a possible public offering of ourU.S. mortgage insurance business, subject to market conditions. Proceeds from an equity transaction along with existing cash and cash equivalents, are expected to provideGenworth 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 ourU.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 toGenworth Holdings of$436 million which is sufficient to fully address its debt maturing inFebruary 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, includingFederal 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." 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 EndedSeptember 30, 2020 Compared to Three Months EndedSeptember 30, 2019 • We had net income available toGenworth Financial, Inc.'s common stockholders of$418 million and$18 million for the three months endedSeptember 30, 2020 and 2019, respectively. We had adjusted operating income available toGenworth Financial, Inc.'s common stockholders of$132 million and$123 million for the three months endedSeptember 30, 2020 and 2019, respectively. • OurU.S. Mortgage Insurance segment had adjusted operating income available toGenworth Financial, Inc.'s common stockholders of$141 million and$137 million for the three months endedSeptember 30, 2020 and 2019, respectively. The increase was 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 90
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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. • OurAustralia Mortgage Insurance segment had adjusted operating income available toGenworth Financial, Inc.'s common stockholders of$7 million and$12 million for the three months endedSeptember 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. • OurU.S. Life Insurance segment had adjusted operating income available toGenworth 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 toGenworth 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 toGenworth 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 toGenworth 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 toGenworth Financial, Inc.'s common stockholders of$19 million and$10 million for the three months endedSeptember 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 toGenworth Financial, Inc.'s common stockholders of$49 million and$35 million for the three months endedSeptember 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 EndedSeptember 30, 2020 Compared to Nine Months EndedSeptember 30, 2019 • We had a net loss available toGenworth Financial, Inc.'s common stockholders of$89 million for the nine months endedSeptember 30, 2020 compared to net income available toGenworth Financial, Inc.'s common stockholders of$360 million for the nine months endedSeptember 30, 2019 . We had adjusted operating income available toGenworth Financial, Inc.'s common stockholders of$144 million and$396 million for the nine months endedSeptember 30, 2020 and 2019, respectively. • OurU.S. Mortgage Insurance segment had adjusted operating income available toGenworth Financial, Inc.'s common stockholders of$286 million and$408 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The decrease was primarily attributable to higher losses 91
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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. • OurAustralia Mortgage Insurance segment had adjusted operating income available toGenworth Financial, Inc.'s common stockholders of$17 million and$39 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The decrease was primarily driven by lower earned premiums largely from portfolio seasoning and lower policy cancellations, lower net investment income and higher losses mostly associated with the economic impacts caused by COVID-19 in the current year. • OurU.S. Life Insurance segment had an adjusted operating loss available toGenworth Financial, Inc.'s common stockholders of$61 million for the nine months endedSeptember 30, 2020 compared to adjusting operating income of$60 million for the nine months endedSeptember 30, 2019 . • Adjusted operating income available toGenworth 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 toGenworth 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 toGenworth Financial, Inc.'s common stockholders in our fixed annuities business increased$19 million predominantly from$31 million of unfavorable charges related to loss recognition testing in the prior year that did not recur and higher mortality in our single premium immediate annuity products, partially offset by lower net spreads in the current year. • Our Runoff segment had adjusted operating income available toGenworth Financial, Inc.'s common stockholders of$30 million and$39 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The decrease was predominantly from less favorable equity market performance and a decline in interest rates in the current year. • Corporate and Other Activities had an adjusted operating loss available toGenworth Financial, Inc.'s common stockholders of$128 million and$150 million for the nine months endedSeptember 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 . Incurred losses were$292 million for the nine months endedSeptember 30, 2020 , of which$231 million was attributable to higher new delinquencies driven mostly by borrower 92
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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. OnJune 29, 2020 , the GSEs issued both temporary and permanent amendments to PMIERs, which became effective onJune 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 ofSeptember 30, 2020 , ourU.S. mortgage insurance business had estimated available assets of 132% of the required assets under PMIERs compared to 143% as ofJune 30, 2020 . The estimated sufficiency as ofSeptember 30, 2020 was$1,074 million of available assets above the PMIERs requirements compared to$1,275 million as ofJune 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. InSeptember 2020 , the GSEs imposed certain restrictions ("GSE Restrictions") with respect to capital on ourU.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 ourU.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 ofSeptember 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 ourSeptember 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 ourU.S. mortgage insurance business . • Mortgage originations. Estimated mortgage origination volume increased during the third quarter of 2020 compared to the third quarter of 2019 primarily from low interest rates which resulted in higher refinance origination volumes. In addition, the estimated private mortgage insurance available market increased driven by higher refinance originations and higher purchase market penetration. Given the volume to date, we expect mortgage originations to remain strong for the remainder of 2020 fueled by sustained low interest rates driving refinances and by continued strength in the purchase originations market. • New insurance written and persistency. OurU.S. mortgage insurance business continued to grow its primary insurance in-force through higher new insurance written, which increased 41% in the third quarter of 2020 compared to the third quarter of 2019. The increase was primarily due to higher mortgage refinancing originations and a larger private mortgage insurance market. 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 ourU.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 existing reinsurance transactions reducing their associated PMIERs capital credit.
• Regulatory capital. As ofSeptember 30, 2020 , ourAustralia mortgage insurance business estimated its Prescribed Capital Amount ("PCA") ratio was approximately 179%, representing an increase from 177% as ofJune 30, 2020 . • Key Customers. InMay 2020 , following a request-for-proposal process, our second largest customer in ourAustralia mortgage insurance business advised us that they will not renew their contract with us. The current contract with this customer will expire inNovember 2020 . This customer represented 11% of our gross written premiums for the nine months endedSeptember 2020 . While the termination of the contract with this customer will reduce gross premiums written in 2021, it is expected to modestly 93
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Table of Contents impact future financial results of our mortgage insurance business inAustralia following the expiration of the existing contract inNovember 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 91 filing approvals from 30 states during the nine months endedSeptember 30, 2020 , representing a weighted-average increase of 29% on approximately$595 million in annualized in-force premiums, or approximately$173 million of incremental annual premiums. We also submitted 143 new filings in 30 states during the nine months endedSeptember 30, 2020 on approximately$727 million in annualized in-force premiums. • Claims reserve and assumption reviews. OurU.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 endedSeptember 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 ofSeptember 30, 2020 , the total amount accrued for profits followed by losses was$570 million .
Liquidity, Capital Resources and Intercompany Obligations
• GMHI debt offering. OnAugust 21, 2020 , GMHI issued$750 million of its 6.50% senior notes due in 2025. A dividend of$436 million was paid toGenworth 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 addressGenworth Holdings' debt maturing inFebruary 2021 . •Australia mortgage insurance debt redemption. OnAugust 24, 2020 ,Genworth Financial Mortgage Insurance Pty Limited redeemed AUD$5 million of its floating rate subordinated notes due inJuly 2025 and paid accrued interest thereon. OnOctober 6, 2020 , the remaining floating rate subordinated notes due inJuly 2025 of AUD$48 million were redeemed. • Redemption ofGenworth Holdings' June 2020 senior notes. OnJanuary 21, 2020 ,Genworth Holdings early redeemed$397 million of its 7.70% senior notes originally scheduled to mature inJune 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
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Table of Contents • Repurchase ofGenworth Holdings' 2021 senior notes. During the nine months endedSeptember 30, 2020 ,Genworth Holdings repurchased$84 million principal amount of its senior notes with 2021 maturity dates for a pre-tax gain of$4 million and paid accrued interest thereon. • Redemption of non-recourse funding obligations. InJanuary 2020 , upon receipt of approval from the Director of Insurance of theState 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. InMarch 2020 ,Genworth Holdings repaid a$200 million intercompany note due to GLIC with a maturity date ofMarch 31, 2020 . • Liquidity and contractual obligations. For additional details related toGenworth 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 OnSeptember 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) andGenworth Life Insurance Company of New York "C++" (Marginal).A.M. Best also affirmed the credit rating ofGenworth Financial andGenworth Holdings and provided a stable outlook. OnMay 15, 2020 ,Moody's Investors Service, Inc. ("Moody's") affirmed the "Baa3" (Adequate) financial strength rating ofGenworth Mortgage Insurance Corporation ("GMICO"), our principalU.S. mortgage insurance subsidiary, but changed their outlook from positive to stable. OnMay 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. OnMay 12, 2020 ,Fitch Ratings, Inc. ("Fitch") downgraded the financial strength rating ofGenworth Financial Mortgage Insurance Pty Limited ("GFMIPL"), our principal Australian mortgage insurance subsidiary, to "A" (Strong) from "A+" (Strong) and maintained a negative outlook. The downgrade reflects the pandemic-driven economic impact on GFMIPL's financial performance and earnings, which Fitch expects to fall outside its "A" financial strength rating guidelines. In addition, S&P affirmed its "A" (Strong) rating of GFMIPL but revised their outlook to negative from stable onMay 15, 2020 . OnApril 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. OnApril 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
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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. TheU.S. and international financial markets in which we operate have been significantly impacted by COVID-19, see "-COVID-19 Summary" for additional details. Varied levels of economic performance, coupled with uncertain economic outlooks, changes in government policy, global trade, regulatory and tax reforms, and other changes in market conditions, will continue to influence investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions, including as a result of COVID-19. These trends change as investor confidence in the markets and the outlook for some consumers and businesses shift. As a result, our sales, revenues and profitability trends of certain insurance and investment products as well as the value of assets and liabilities could be impacted going forward. In particular, factors such as the length of COVID-19 and the speed of the economic recovery, government responses to COVID-19 (such as government stimulus), government spending, monetary policies (such as further quantitative easing), the volatility and strength of the capital markets, changes in tax policy and/or inU.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. TheU.S. and international governments, theU.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 theU.S. economy contracted in both the first and second quarters of 2020 and the world economy was in a recession. During the third quarter of 2020, COVID-19 lockdown measures were eased and business activity resumed, which resulted in gross domestic product ("GDP") growth. It is too early to determine if GDP will continue to grow in the fourth quarter of 2020 given the risk of virus re-emergence and the potential for further actions to be taken to mitigate the spread. We have experienced the effects of the recession, which has adversely impacted our businesses, particularly our mortgage insurance businesses during the second quarter of 2020. We could be further adversely affected if theU.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." 96
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