(18) Insurance Subsidiary Financial Information and Regulatory Matters

Dividends

Our insurance company subsidiaries are restricted by state and foreign laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders or contractholders, not stockholders. Any dividends in excess of limits are deemed “extraordinary” and require approval. Based on estimated statutory results as of December 31, 2015, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $140 million to us in 2016 without obtaining regulatory approval, and the remaining net assets are considered restricted. While the $140 million is unrestricted, our insurance subsidiaries may not pay dividends to us in 2016 at this level if they need to retain capital for growth and to meet capital requirements and desired thresholds. As of December 31, 2015, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $12.7 billion and $12.8 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 credit and financial strength ratings and such other factors as the Board of Directors deems relevant.

Our domestic insurance subsidiaries paid dividends of $41 million (none of which were deemed “extraordinary”), $108 million (none of which were deemed “extraordinary”) and $418 million (none of which were deemed “extraordinary”) during 2015, 2014 and 2013, respectively. Our international insurance subsidiaries paid dividends of $640 million, $630 million and $317 million during 2015, 2014 and 2013, respectively.

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”), River Lake Insurance Company X ((“River Lake X”), together with River Lake VI, River Lake VII, River Lake VIII and River Lake IX, the “SPFCs”) and Genworth Life Insurance Company of New York (“GLICNY”). 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 practices, these entities could be subject to regulatory action. Accordingly, we believe that the permitted practices will remain in effect for so long as we maintain the SPFCs. The permitted practices were as follows:

•

River Lake IX and River Lake X were granted a permitted accounting practice from the State of Vermont to carry its excess of loss reinsurance agreement with Brookfield Life and Annuity Insurance Company Limited (“BLAIC”) and Hannover Life Reassurance Company Of America, respectively, as an admitted asset.

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River Lake VII and River Lake VIII were granted a permitted accounting practice from the State of Vermont to carry their reserves on a basis similar to U.S. GAAP.

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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 as an admitted asset.

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GLICNY received a permitted practice from New York to exempt certain of its investments from a NAIC structured security valuation and ratings process.

The impact of these permitted practices on our combined U.S. domiciled life insurance subsidiaries’ statutory capital and surplus was $120 million and $365 million as of December 31, 2015 and 2014, respectively. If permitted practices had not been used, no regulatory event would have been triggered.

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


	Years ended December 31,
(Amounts in millions)	2015			2014			2013
Combined statutory net income (loss):
Life insurance subsidiaries, excluding captive life reinsurance subsidiaries	$	(330	)	$	(179	)	$	359
Mortgage insurance subsidiaries		287			198			85

Combined statutory net income (loss), excluding captive reinsurance subsidiaries		(43	)		19			444
Captive life insurance subsidiaries		(276	)		(281	)		(102	)

Combined statutory net income (loss)	$	(319	)	$	(262	)	$	342


	As of December 31,
(Amounts in millions)	2015		2014
Combined statutory capital and surplus:
Life insurance subsidiaries, excluding captive life reinsurance subsidiaries	$	2,548	$	2,560
Mortgage insurance subsidiaries		1,722		1,792

Combined statutory capital and surplus	$	4,270	$	4,352

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, funded through the issuance of surplus notes (non-recourse funding obligations) to third parties or secured by a third-party letter of credit or excess of loss reinsurance treaties with third parties. Accordingly, 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 $671 million and $1,057 million as of December 31, 2015 and 2014, respectively. Capital and surplus of our captive life reinsurance subsidiaries, excluding River Lake VI, River Lake VII, River Lake VIII, River Lake IX and River Lake X, include surplus notes (non-recourse funding obligations) as further described in note 12.

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, 2015 and 2014, each of our life insurance subsidiaries exceeded the minimum required RBC levels. The consolidated RBC ratio of our U.S. domiciled life insurance subsidiaries was approximately 393% and 435% of the company action level as of December 31, 2015 and 2014, respectively.

On September 11, 2013, the New York Department of Financial Services announced that it would require New York licensed companies to use an alternative interpretation of Actuarial Guideline 38 (more commonly known as “AG 38”) for universal life insurance products with secondary guarantees from the NAIC interpretation. We did not record any additional statutory reserves as of December 31, 2015 and we recorded $70 million of additional statutory reserves as of December 31, 2014 in our life insurance subsidiary domiciled in New York. As of December 31, 2015, this subsidiary had a total of $150 million of additional AG 38 reserves recorded.

As of December 31, 2015, we established $198 million of additional statutory reserves resulting from updates to our universal life insurance products with secondary guarantees in our Virginia and Delaware licensed life insurance subsidiaries.

In addition, as a result of our annual statutory cash flow testing of our long-term care insurance business, our New York insurance subsidiary recorded $89 million and $39 million of additional statutory reserves in the fourth quarters of 2015 and 2014, respectively, and expects to record an aggregate of $267 million of additional statutory reserves over the next three years.

For regulatory purposes, our U.S. mortgage insurance subsidiaries are required to maintain a statutory contingency reserve. Annual additions to the statutory contingency reserve must equal the greater of: (i) 50% of earned premiums or (ii) the required level of policyholders position, as defined by state insurance laws. These contingency reserves generally are held until the earlier of: (i) the time that loss ratios exceed 35% or (ii) 10 years. However, approval by the North Carolina Department of Insurance (“NCDOI”) is required for contingency reserve releases when loss ratios exceed 35%. The statutory contingency reserve for our U.S. mortgage insurance subsidiaries was approximately $500 million and $193 million, respectively, as of December 31, 2015 and 2014 and, was included in the table above containing combined statutory capital and surplus balances.

Mortgage insurers are not subject to the NAIC’s RBC requirements but certain states and other regulators impose another form of capital requirement on mortgage insurers requiring maintenance of a risk-to-capital ratio not to exceed 25:1. Fifteen other states maintain similar risk-to-capital requirements. As of December 31, 2015, GMICO’s risk-to-capital ratio under the current regulatory framework as established under North Carolina law and enforced by the NCDOI, GMICO’s domestic insurance regulator, was approximately 16.4:1, compared with a risk-to-capital ratio of approximately 14.3:1 as of December 31, 2014.

In May 2014, Genworth Mortgage Holdings, LLC, a U.S. mortgage insurance holding company contributed $300 million to GMICO, our primary U.S. mortgage insurance subsidiary.

Effective December 31, 2015, each GSE adopted revised private mortgage insurer eligibility requirements (“PMIERs”) which set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible. By March 1, 2016, an approved insurer must certify as to its compliance with PMIERs as of December 31, 2015. If an approved insurer meets all of PMIERs except the financial requirements that approved insurer may submit by March 31, 2016 a transition plan that each GSE in its sole and absolute discretion may approve or disapprove. If approved, the GSEs will permit a transition period deemed by the GSEs to be reasonably sufficient for the approved insurer to meet the financial requirements, which in any case may not extend beyond June 30, 2017. If an approved insurer is unable to certify as to its compliance with the non-financial requirements of PMIERs, then by March 1, 2016, it may submit a corrective action plan detailing how it expects to achieve compliance. An approved insurer will retain its ability to write insurance on loans eligible for delivery to the GSEs from December 31, 2015 until a transition plan or corrective action plan, as the case may be, has been specifically approved or disapproved, subject to the approved insurer continuing to meet all other PMIERs requirements. As of the December 31, 2015 effective date of PMIERs, our U.S mortgage insurance business met the PMIERs operational and financial requirements, based in part on: (i) our entry during 2015 into three separate excess of loss reinsurance transactions with three panels of reinsurers covering our 2009 through 2015 book years that we believe, based on indications from the GSEs, provide up to approximately $535 million of PMIERs credit; (ii) the intercompany sale during 2015 by our U.S. mortgage insurance business of its ownership interest in affiliated preferred securities for approximately $200 million; and (iii) an internal restructuring of legal entities during 2015.

International insurance subsidiaries—statutory financial information

Our international insurance subsidiaries also prepare financial statements in accordance with local regulatory requirements. As of December 31, 2015 and 2014, combined local statutory capital and surplus included in continuing operations for our international insurance subsidiaries, excluding our lifestyle protection insurance and European mortgage insurance businesses, was $5,249 million and $5,773 million, respectively. Combined local statutory net income (loss) included in continuing operations for our international insurance subsidiaries, excluding our lifestyle protection insurance business, was $412 million, $(66) million and $573 million for the years ended December 31, 2015, 2014 and 2013, respectively. The regulatory authorities in these international jurisdictions generally establish supervisory solvency requirements. Our international insurance subsidiaries, excluding our lifestyle protection insurance and European mortgage insurance businesses, had combined surplus levels included in continuing operations that exceeded local solvency requirements by $1,673 million and $1,642 million as of December 31, 2015 and 2014, respectively.

Our international insurance subsidiaries do not have any material accounting practices that differ from local regulatory requirements other than one of our insurance subsidiaries domiciled in Bermuda, which was granted approval from the Bermuda Monetary Authority to record a parental guarantee as statutory capital related to an internal reinsurance agreement. The amount recorded as statutory capital is equal to the excess of NAIC statutory reserves less the economic reserves up to the amount of the guarantee resulting in an increase in statutory capital of $205 million as of December 31, 2015 and 2014.

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 guarantees discussed in notes 17 and 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, other than the Rivermont I guarantee, were $25 million and $28 million as of December 31, 2015 and 2014, respectively. We provide a limited guarantee to Rivermont I, an indirect subsidiary, which is accounted for as a derivative carried at fair value and is eliminated in consolidation. As of December 31, 2015 and 2014, the fair value of this derivative was $4 million and $5 million, respectively.

Genworth Holdings provides a guarantee for the benefit of policyholders for the payment of valid claims by our mortgage insurance subsidiary located in the United Kingdom. This guarantee is unlimited while we own the business. As of December 31, 2015, the risk in-force of the business subject to the Genworth Holdings guarantee was approximately $2.0 billion. Following the sale of this U.K. subsidiary to AmTrust Financial Services, Inc., the guarantee would be 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. The transaction is expected to close in the first quarter of 2016 and is subject to customary conditions, including requisite regulatory approvals.

Fifty percent of our in-force long-term care insurance business (excluding policies assumed from a non-affiliate third-party reinsurer) of GLIC, a Delaware insurance company and our indirect wholly-owned subsidiary, is reinsured to BLAIC, a Bermuda insurance company and our indirect wholly-owned subsidiary. Genworth Financial International Holdings, LLC (“GFIH”), our indirect wholly-owned subsidiary, has entered into a capital maintenance agreement whereby GFIH has agreed to provide capital to BLAIC to fund payment obligations of BLAIC to GLIC or GLAIC, as applicable, under certain reinsurance agreements, including the one covering our long-term care insurance business. As of December 31, 2015, GFIH directly or indirectly owns 52.0% of our Australian mortgage insurance subsidiaries and 40.6% of our Canadian mortgage insurance subsidiary. As a result of GFIH’s capital maintenance agreement, adverse developments in our reinsured long-term care insurance business (including the recent increases in our reserves of that business) have adversely impacted BLAIC’s financial condition, which could, in turn, adversely impact GFIH’s willingness or ability to pay dividends to Genworth Holdings.