GNW FY20 Annual Report - Highlights for GMA

These are the most relevant passages from GNW’s recent FY20 annual report. Have included some headers and a key ‘so what’ for each.

Parent’s Debt Repayments (“such as asset sales, including our mortgage insurance business in Australia”)
Our existing cash resources are not sufficient to repay all outstanding debt as it becomes due. Furthermore, absent accessing additional liquidity through third party sources, we would not have a projected ability to meet our financial obligations with existing cash on hand and from expected cash inflows through normal business course for one year following the issuance of our 2020 consolidated financial statements. Therefore, we will be required to rely on a combination of other potential liquidity sources to repay or refinance debt and meet our financial obligations as they become due, including existing and future cash resources, new borrowings, and/or other potential sources of liquidity such as asset sales, including our mortgage insurance business in Australia and/or a possible partial initial public offering of our U.S. mortgage insurance business, or issuing additional debt or equity, including the issuance of convertible or equity-linked securities. The availability of additional funding, including an equity transaction through our U.S. mortgage insurance business or the issuance of debt, convertible or equity-linked securities, will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the level of activity and availability of reinsurance, our credit ratings and credit capacity and the performance of and outlook for our U.S. mortgage insurance business. Market conditions and a variety of other factors may make it difficult or impracticable to generate additional liquidity on favorable terms or at all. In addition, even if we are successful with additional strategic asset sales or other transactions, we could have potential adverse actions taken against us, including litigation. Any failure to repay or refinance our debt or meet our financial obligations as they become due would have a material adverse effect on our business, financial condition and results of operations.

LMI Competition (“the additional competitor did not have a significant impact”)

On January 17, 2019, APRA authorized a third private mortgage insurance company to conduct business in Australia, but the additional competitor did not have a significant impact on our market share during the year ended December 31, 2020.

Basle (“rules could discourage the use of mortgage insurance”)

Under APRA rules, ADIs in Australia that are accredited as standardized, receive reduced capital recognition for using mortgage insurance for high loan-to-value mortgage loans in Australia. ADIs that are considered to be advanced accredited and determine their own capital estimates, are currently working with the mortgage insurers and APRA to determine the appropriate level of recognition mortgage insurance will provide for high loan-to-value mortgage loans. The rules also provide that ADIs would be able to acquire mortgage insurance covering less of the exposure to the loan than existing requirements with reduced capital recognition. Accordingly, lenders in Australia may be able to reduce their use of mortgage insurance for high loan-to-value ratio mortgages or limit their use to the higher risk portions of their portfolios, which may have an adverse effect on our mortgage insurance business in Australia.

Uncertainty remains surrounding the implementation of the Basel framework. In March 2020, the Basel Committee revised the target date for implementation to January 1, 2023. It is too early to determine the ultimate impact these regulatory changes will have on our mortgage insurance business in Australia, but it is possible that its rules could discourage the use of mortgage insurance.

China Oceanwide (“pursue strategic alternatives that would materially impact our business, including a transaction with respect to our U.S. mortgage insurance business and/or our mortgage insurance business in Australia”)

There is no assurance that the conditions to the transaction will be satisfied in the near future, on the terms set forth in our existing agreement with China Oceanwide or at all. If the transaction is not completed, we would likely suffer a number of consequences that could adversely affect our stock price, business, results of operations and financial condition, including:

• greater difficulty in executing alternative strategic plans to effectively address our near-term liabilities and financial obligations, including the risks that we will be unable to raise additional debt financing and/or sell a percentage of our ownership interest in our U.S. mortgage insurance business to repay/refinance debt maturities in 2021 and beyond and the promissory note to AXA;

• inability to reduce costs through alignment of our current expense structure with anticipated business needs;

• stabilizing our U.S. life insurance businesses without additional capital contributions and preserving capital;

• increased pressure on and potential further downgrades of our credit and financial strength ratings, particularly for our mortgage insurance businesses, which could have an adverse impact on our mortgage insurance businesses and could result in a reduction or elimination of dividends to our holding company; and

• we would likely pursue strategic alternatives that would materially impact our business, including a transaction with respect to our U.S. mortgage insurance business and/or our mortgage insurance business in Australia.

AXA (“AXA does not have the right to sell or repledge the collateral”)

To secure our obligation under the promissory note, we granted a 19.9% security interest in the outstanding common stock of GMHI and Genworth Australia to AXA. AXA does not have the right to sell or repledge the collateral and is not entitled to any voting rights. The collateral will be released back to us upon full repayment of the promissory note. Accordingly, the collateral arrangement has no impact on our consolidated financial statements. In the event AXA recovers amounts from third parties related to the mis-selling losses, including from the distributor responsible for the sale of the policies, we have certain rights to share in those recoveries to recoup payments for the underlying mis-selling losses. As of December 31, 2020, we have not recorded any amounts associated with recoveries from third parties.