MANAGEMENT’S DISCUSSION AND ANALYSIS
GENWORTH LIFE INSURANCE COMPANY
December 31, 2017
This Management’s Discussion and Analysis is management’s assessment of the statutory financial position, results of
operations, cash flows and liquidity for Genworth Life Insurance Company (the “Company”) and is presented to
supplement the statutory information provided in the financial statements, footnotes, interrogatories, exhibits and
schedules of the Company’s 2017 Annual Statement.
This Management’s Discussion and Analysis contains certain “forward-looking statements.” Forward-looking
statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,”
“estimates,” “will,” or words of similar meaning and include, but are not limited to, statements regarding the outlook
for the Company’s future business and financial performance. Forward-looking statements are based on management’s
current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances
thatare difficulttopredict. Actualoutcomesandresultsmaydiffer materiallyduetoglobalpolitical,economic,business,
competitive, market, regulatory and other factors and risks.
The Company is a stock life insurance company incorporated under the laws of Delaware on September 28, 1956. The
Company is licensed to do business in the District of Columbia and all states except NewYork.The Companyis wholly-
owned by Genworth North America Corporation (“GNA”), which is indirectly wholly-owned by Genworth Financial,
Inc. (“Genworth”), its ultimate parent.
The Company offers long-term care insurance products. On March 7, 2016, Genworth suspended sales of its traditional
life insurance and fixed annuity products. While the Company no longer sells these products, the Company continues
to service its existing retained and reinsured blocks of business. The Company also has other non-strategic products
which primarily include institutional and corporate-owned life insurance products. Institutional products consist of
On October 21, 2016, Genworth entered into an agreement and plan of merger (the “Merger Agreement”) with Asia
Pacific Global Capital Co., Ltd. (the “Parent”), a limited liability company incorporated in the People’s Republic of
China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect,
wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the
satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth with Genworth surviving
the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China
Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed
to acquire all of Genworth’s 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 on March 7, 2017, Genworth’s stockholders voted on and approved
a proposal to adopt the Merger Agreement.
GenworthandChina Oceanwidecontinueto worktowardssatisfyingthe closingconditionsoftheirproposedtransaction
as soon as possible. To date, Genworth has announced approvals from the Virginia State Corporation Commission
Bureau of Insurance, the North Carolina Department of Insurance, the South Carolina Department of Insurance and
the Vermont Insurance Division. In February 2018, Genworth and China Oceanwide re-filed their joint voluntary notice
with the Committee on Foreign Investment in the United States (“CFIUS”). In Genworth’s most recent joint filing,
Genworth provided an additional mitigation approach to further protect the personal data of Genworth policyholders
and customers in the United States, the structure of which includes the participation of a leading U.S. third-party data
administrator. Genworth and China Oceanwide are fully committed to developing an acceptable solution with CFIUS;
however, there can be no assurance that CFIUS will ultimately agree to clear the transaction between Genworth and
China Oceanwide on terms acceptable to the parties or at all. In addition to approval and clearance by CFIUS, the
closing of the proposed transaction remains subject to the receipt of required regulatory approvals in the U.S., China,
and other international jurisdictions and other closing conditions. Genworth and China Oceanwide also continue to be
actively engaged with the other relevant regulators regarding the pending applications.
On November 29, 2017, Genworth, the Parent and Merger Sub entered into a Waiver and Agreement pursuant to which
Genworth and the Parent each agreed to waive until April 1, 2018 its right to terminate the Merger Agreement and
abandon the merger in accordance with the terms of the Merger Agreement. This was the second waiver and agreement
extension, which extended the previous deadline of November 30, 2017, and allows additional time for regulatory
reviews of the transaction. If Genworth is unable to reach an agreement as to a further extension of the deadline or are
On March 27, 2018, Genworth, the Parent and Merger Sub entered into another Waiver and Agreement pursuant to
which Genworth and the Parent each agreed to waive until July 1, 2018 its right to terminate the Merger Agreement
extension, which extended the previous deadline of April 1, 2018. In addition, Genworth and the Parent acknowledged
that the Merger Agreement may be terminated, and the merger abandoned, at any time prior to July 1, 2018 by the
board of directions of either Genworth or the Parent, if CFIUS notifies Genworth, the Parent and Merger Sub that it
has completed its review of the Merger and the mitigation proposals presented by the parties, and intends to recommend
that the President of the United States of America act to suspend or prohibit the merger or any of the other transactions
MA AGEME T’S DISCUSSIO A D A ALYSIS
contemplated by the Merger Agreement. Genworth and China Oceanwide remain committed to satisfying the closing
conditions under the Merger Agreement as soon as possible.
SIG IFICA T REI SURA CE TRA SACTIO S
Effective December 1, 2017, River Lake Insurance Company X (“RLIC X’’) recaptured the monthly renewable term
reinsurance agreement with the Company, resulting in a $9.4 million terminal payment from the Company to RLIC X.
Effective December 1, 2017, River Lake Insurance Company VI (“RLIC VI”) recaptured the monthly renewable term
reinsurance agreement with the Company, resulting in a $6.8 million terminal payment from the Company to RLIC
Effective July 1, 2017, the Company recaptured from Genworth Life and Annuity Insurance Company (“GLAIC”) the
on a modified coinsurance (“Modco”) basis (the “GLAIC SPDAModco Treaty Recapture”). The Company recaptured
$263.4 million of modified coinsurance reserves and paid a recapture payment of $4.3 million to GLAIC.
Effective April 1, 2017, the Company ceded certain term life insurance business to GLAIC with an initial premium of
$68.9 million and received a ceding commission of $48.6 million from GLAIC. For the net settlement, the Company
transferred bonds of $7.7 million, mortgage loans of $8.2 million and cash of $4.4 million to GLAIC. Reserves ceded
as of December 31, 2017 were $69.7 million.
EffectiveApril 1, 2017, the Company ceded certain universal life insurance business to GLAIC with an initial premium
of $101.0 million and received a ceding commission of $4.9 million from GLAIC. For the net settlement, the Company
transferred bonds of $79.8 million, mortgage loans of $14.4 million and cash of $0.2 million to GLAIC resulting in a
deferred gain of $1.7 million. Reserves ceded as of December 31, 2017 were $106.7 million.
Effective April 1, 2017, the Company ceded certain single premium whole life insurance business to GLAIC with an
the Company transferred bonds of $89.8 million, mortgage loans of $26.1 million, policy loans of $14.9 million and
cash of $0.3 million to GLAIC resulting in a deferred gain of $0.7 million. Reserves ceded as of December 31, 2017
were $128.1 million.
These April 1, 2017 reinsurance agreements to cede life business to GLAIC are collectively referred to as the “GLAIC
Life April 1, 2017 Treaties.”
On;ovember 1, 2016,Genworth Life Insurance Company of ;ewYork (“GLIC;Y”) recaptured 100% of the liabilities
of its SPDAand single premium immediate annuity(“SPIA”) businesspreviously ceded to the Company (the “GLIC;Y
SPDA And SPIA Treaty Recapture”) and terminated the trust with the trustee, the Bank of ;ew York Mellon. The
Company paid GLIC;Y recapture consideration of $27.5 million and released the related reserves of $25.8 million.
On ;ovember 1, 2016, the Company transferred to GLIC;Y six securities with a lower of cost or market value of
$27.2 million and accrued interest of $0.3 million. ;o cash was exchanged.
Effective January 1, 2000, the Company assumed new universal life and term life insurance business from GLAIC.
These agreements were terminated with respect to new business in 2001. Effective September 1, 2016, most of the
universal life insurance business was recaptured by GLAIC resulting in a $100.0 million assumed reserve decrease.
Effective April 1, 2011, the Company amended and restated an existing universal life insurance treaty with GLAIC to
cede certain additional universal life insurance policies, including Total Living Coverage (“TLC”) policies. Effective
September 1, 2016, the Company recaptured most of the TLC policies, resulting in a $398.0 million ceded reserve
As part of these September 1, 2016 recaptures of the universal life insurance and TLC policies between the Company
and GLAIC, (collectively, the “GLAIC UL And TLC Recaptures”), GLAIC transferred to the Company 83 securities
with a lower of cost or market value of $273.1 million and accrued interest of $3.0 million and paid $0.1 million in
cash in September 2016.
On October 1, 2016, Brookfield Life and Annuity Insurance Company Limited (“BLAIC”), merged with and into the
Company and the Company was the surviving entity. Prior to the merger, BLAIC was a party to a reinsurance agreement
to assume certain term life insurance between 1996 and 1999 from GLAIC on a coinsurance basis and was subject to
the reserving requirements of Regulation XXX. Effective July 1, 2016, all of the liabilities of the term life insurance
policies were recaptured from GLAIC (the “GLAIC Term Life Treaty Recapture”), resulting in a decrease in assumed
reserves of $215.4 million.
Prior to the merger, BLAIC was also a party to a reinsurance agreement to assume certain universal life insurance
policies on a Modco 60% first dollar quota share basis from GLAIC. EffectiveApril 1, 2016, the universal life insurance
of $16.2 million received from GLAIC, a decrease in assumed premiums of $318.1 million and a decrease in change
in reserve/Modco reinsurance expense of $318.1 million.
SUMMARY OF CRITICALACCOU TI G ESTIMATES A D POLICIES
Management prepares the statutory financial statements of the Company in conformity with accounting practices
prescribedor permittedbytheDelawareDepartment ofInsurance (“DelawareDepartment”). These prescribedstatutory
accounting practices (“SAP”) include a variety of publications of the ;ationalAssociation of Insurance Commissioners
(“;AIC”), including Statements of Statutory Accounting Principles (“SSAP”), as well as state laws, regulations, and
general administrative rules. ;AIC SAP requires management to adopt accounting policies and make estimates and
assumptions that affect amounts reported in the statutory financial statements. The most critical estimates and
MA AGEME T’S DISCUSSIO A D A ALYSIS
assumptions include those used in determining: (i) investment impairments; (ii) the estimated fair value of investments;
(iii) accounting for derivatives; and (iv) policy reserves. In applying these policies, management makes informed
judgments and estimates that are inherently uncertain. Many of these policies, estimates and related judgments are
common in the insurance industry and others are specific to the Company’s businesses and operations. Actual results
could differ from those estimates.
The Company’s principal investments are bonds, preferred and common stocks, mortgage and contract loans, cash,
short-term investments, derivatives and securities lending reinvested collateral.
The Company regularly evaluates securities, excluding loan-backed and structured securities, in an unrealized loss
position for other-than-temporary impairments (“OTTI”). For these securities, the Company considers all available
information relevant to the collectability of the securities, including information about past events, current conditions,
and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. When
it is determined that an impairment is other than temporary because the Company has made a decision to sell the security
at an amount below its carrying value, or it is probable that the Company will not collect all amounts due based on the
contractual terms of the security, the Company will recognize that an OTTI has occurred and record a realized loss
equal to the difference between the security’s carrying value and its fair value.
For loan-backed and structured securities, the Company also utilizes performance indicators of the underlying assets
including defaults or delinquency rates, loan to collateral value ratios, third-party credit enhancements, current levels
of subordination, collateral vintage and other relevant characteristics of the underlying assets or the security to develop
its estimate of cash flows. Estimating the expected cash flows is a quantitative and qualitative process that incorporates
information received from third-party sources along with certain internal assumptions and judgments regarding the
future performance of the underlying collateral. Where possible, this data is benchmarked against third-party sources.
When it is determined that an impairment is other-than-temporary because it is probable that the Company will not
collect all amounts due based on the contractual terms of the security, even if the Company has no intent to sell and
has the intent and ability to hold to recovery, the Company will recognize a realized loss equal to the difference between
the carrying value of the security and the present value of the expected cash flows. Under circumstances whereby the
Company has the intent to sell or does not have the ability and intent to hold to recovery, the security is impaired to its
In addition, for certain asset-backed securities in an unrealized loss position, management also evaluates whether it has
the intent and ability to retain the investment for a period of time sufficient to recover the amortized cost basis.
Impaired loans are defined by SSAP ;o. 37, Mortgage Loans, as loans for which it is probable that the Company will
be unable to collect all amounts due according to original contractual terms of the loan agreement. In determining
whether it is probable that the Company will be unable to collect all amounts due, the Company considers current
payment status, debt service coverage ratios, occupancy levels and current loan-to-value. For individually impaired
loans, the Company records an impairment charge when it is probable that a loss has occurred. Impaired loans are
carried on a non-accrual status. Loans are placed on non-accrual status when, in management’s opinion, the collection
of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due. Income
on impaired loans is not recognized until the loan is sold or the cash received exceeds the carrying amount recorded.
The Company holds certain long-term bonds, common stocks, derivatives, securities held as collateral and separate
account assets which are carried at fair value. Fair value is defined as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs reflect a view of market assumptions in the absence of
observable market information. The Company utilizes valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs. All assets carried or disclosed at fair value are classified and disclosed
in one of the following three categories:
• Level 1—Quoted prices for identical instruments in active markets.
• Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar
instruments in markets that are not active; and model-derived valuations whose inputs are observable or
whose significant value drivers are observable.
• Level 3—Instruments whose significant value drivers are unobservable.
Level 1 primarily consists of separate account assets and exchange traded derivatives whose value is based on quoted
market prices of the underlying mutual fund investments.
Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or
other valuation methodologies. These models are primarily industry-standard models that consider various inputs, such
as interest rate, credit spread and foreign exchange rates for the underlying financial instruments. All significant inputs
are observable, or derived from observable information, in the marketplace or are supported by observable levels at
MA AGEME T’S DISCUSSIO A D A ALYSIS
which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain
public and private corporate bonds; government or agency securities; certain mortgage-backed and asset-backed
Level 3 is comprised of financial instruments whose fair value is estimated based on industry-standard pricing
methodologies and internally developed models utilizing significant inputs not based on, nor corroborated by, readily
available market information. In limited instances, this category may also utilize non-binding broker quotes. This
category primarily consists of certain less liquid bonds and preferred stocks, and certain derivative instruments where
the Company cannot corroborate the significant valuation inputs with market observable data.
As of each reporting period, all assets and liabilities recorded or disclosed at fair value are classified in their entirety
based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance
of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to
the asset or liability, such as the relative impact on the fair value from including a particular input. The Company reviews
the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes
may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers
in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur.
Derivative instruments used in hedging transactions that meet the criteria of a highly effective hedge are valued and
reported consistently with the hedged items. Derivative instruments used in hedging transactions that do not meet or
no longer meet the criteria of an effective hedge shall be valued at fair value with the changes in fair value recorded as
unrealized gains and losses in statutory surplus.
The Company uses interest rate swaps, credit default swaps, cross currency swaps, inflation indexed swaps and bond
purchase commitments. Interest rate swaps are used to reduce market risks from changes in interest rates and to alter
interest rate exposures arising from mismatches between assets and liabilities. Under interest rate swaps, the Company
agrees with other parties to exchange at specified intervals, the difference between fixed-rate and floating-rate interest
amounts calculated by reference to an agreed notional principal amount. The Company enters into credit default swaps
to manage the credit risk of bond investments by entering into agreements whereby the Company buys protection
against potential reductions in credit quality. The Company sells protection under single name credit default swaps
and default swap index tranches in combination with purchasing other investments to reproduce investment
characteristics of similar investments based on the credit quality and term of the credit default swap.
Cross currency swaps are used to reduce exposure to changes in foreign exchange rates and changes in interest rates.
Inflation indexed swaps are used to hedge the variable cash flows from U.S. Treasury Inflation Protected Securities
(“TIPS”). The Company uses bond purchase commitments to lock in prices of future bond purchases.
Interest rate, cross currency and inflation indexed swaps that qualify for hedge accounting and certain credit default
swaps used in replication transactions are carried at amortized cost while non-qualifying interest rate swaps and credit
default swaps are carried at fair value with changes in fair value recorded in statutory surplus. Realized investment
gains and losses from derivatives that qualify for hedge accounting are reduced by amounts transferred to interest
maintenance reserve (“IMR”) and are reflected as an element of investment income, net of investment and interest
expenses. Any fees associated with swaps are held in surplus and the full fee amount will be recognized in income at
the time of termination.
The Company calculates and maintains policy reserves for the estimated future payment of claims to its policyholders
andcontractholders basedonactuarial assumptions and inaccordance with applicablestatutory andactuarial guidelines.
Management monitors actual experience, and where circumstances warrant, will revise its assumptions. The methods
of determining such estimates and establishing the liability are reviewed continuously and any adjustments are reflected
in operations in the period in which they become known. Future developments may result in losses greater or less than
the liabilities provided.
GE ERAL TRE DS A D CO DITIO S AFFECTI G THE COMPA Y’S BUSI ESS
The Company’s business is, and is expected to continue to be, influenced by a number of industry-wide and product-
specific trends and conditions.
General trends and conditions
Financial and economic environment
The stability of both the financial markets and global economies in which Genworth and its subsidiaries operate impacts
the sales, revenue growth and profitability trends of its businesses as well as value of assets and liabilities. The U.S.
and international financial markets have been impacted by concerns regarding global economies and the rate and
strength of recovery. Slower growth and higher debt levels in China have created uncertainty for global economies,
heightened by Standard & Poor’s Financial Services, LLC’s (“S&P”) and Moody’s Investors Service, Inc. (“Moody’s”)
downgrade of the financial strength rating of China in September 2017 and May 2017, respectively. The Company
continues to operate in a challenging economic environment characterized by low interest rates, slow global growth,
MA AGEME T’S DISCUSSIO A D A ALYSIS
in spite of a moderate increase in the second half of 2017, and fluctuating oil and commodity prices. Long-term interest
rates remain at historically low levels despite the fact the U.S. Federal Reserve raised its benchmark lending rate three
timesin 2017.Additionally, during2017,the U.S.FederalReserve announced that itwould beginto normalize monetary
policy and scale back quantitative easing. As a result of the U.S. Federal Reserve’s actions, the U.S. Treasury yield
curve flattened as short-term U.S. Treasury yields rose significantly while long-term U.S. Treasury yields decreased
compared to 2016. Low interest rates continue to adversely impact the Company’s results and the portfolio yield
continues to decline as cash flows are reinvested in lower yielding assets. The U.S. equity markets increased and credit
spreads tightened during 2017 despite periods of volatility associated with geopolitical issues and natural disasters. In
the fourth quarter of 2017, credit markets and investment valuations also increased due to recently enacted U.S. tax
legislation under the Tax Cuts and Jobs Act (“TCJA”). The macroeconomic environment remains generally positive
given global growth, mostly in the second half of 2017, and positive corporate profits. U.S. fixed income market
issuances exceeded expectations and demand from foreign and domestic investors continued to support valuations.
Global equity markets were higher and the economies of the Eurozone countries continued to improve.
Varied levels of economic growth, coupled with uncertain economic outlooks, changes in government policy, regulatory
and tax reforms, and other changes in market conditions, influenced, and the Company believes 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. These trends change as investor confidence in the markets and
the outlook for some consumers and businesses shift.As a result, the Company’s sales, revenues and profitability trends
of certain products as well as the value of assets and liabilities have been and could be further impacted going forward.
In particular, factors such as government spending, monetary policies, the volatility and strength of the capital markets,
further changes in tax policy and/or in U.S. tax legislation under the TCJA, and the impact of global financial regulation
reform will continue to affect economic and business outlooks, level of interest rates and consumer behaviors moving
The U.S. government, the Federal Reserve, and other legislative and regulatory bodies have taken certain actions in
recent years to support the economy and capital markets, influence interest rates, influence housing markets and
mortgage servicing and provide liquidity to promote economic growth. These include various mortgage restructuring
programs implemented or under consideration by the government-sponsored enterprises, lenders, servicers and the U.S.
government. A U.S. or global recession or regional or global financial crisis could materially and adversely affect the
Company’s business, financial condition and results of operations.
Following downgrades of the Company in 2016 and 2017, the Company actively responded to the risk to the Company’s
derivatives portfolio arising from the right of the Company’s counterparties to terminate their bilateral over-the-counter
derivatives transactions with the Company as a result of the downgrades. The Company notified its counterparties of
the downgrades to determine whether they will exercise their rights to terminate the transactions, agree to maintain the
transactions with the Company under revised terms or permit the Company to move the transactions to clearing.
Although some counterparties have indicated that they reserve their rights to take action against the Company, none
have done so and the Company continues to discuss downgrades with its counterparties.
On December 22, 2017, President Trump signed the TCJA into law. The enactment of the new law signified the first
major overhaul of the U.S. Federal income tax system in more than 30 years. In addition to the law’s corporate income
tax rate reduction, several other provisions are pertinent to the Company’s financial statements and related disclosures
for the year ended December 31, 2017, and will have an impact on deferred taxes in future years. The TCJA impacted
the Company’s capital through a reduction in the statutory admitted deferred tax asset and impacted certain cash flow
scenario testing included in the risk-based capital calculation. Prior to the TCJA, the top U.S. corporate income tax rate
was 35% for corporations with taxable income greater than $10.0 million. The TCJAreduced the U.S. corporate income
tax rate to 21% effective for taxable years beginning after December 31, 2017. Included in the Company’s 2017 results
was a tax expense of $343.0 million, recorded as a component of statutory surplus, as a result of the reduction in tax
rate on its net deferred tax asset.
DuringFebruary2018, the StatutoryAccounting PrinciplesWorkingGroup (“SAPWG”) issued guidanceon accounting
for the TCJA regarding a limited scope exception to SSAP ;o. 9, Subsequent Events. In this guidance, the SAPWG
adopted many of the provisions issued by the U.S. Securities Exchange Commission in Staff Accounting Bulletin 118
(“SAB 118”) with regard to estimates under the TCJA. For items under the TCJA that are complete, the Company has
reflected the income tax effects in its 2017 statutory financial statements. For items under the TCJAthat are incomplete,
but a reasonable estimate has been determined, the Company has recorded a reasonable estimate. For items for which
a reasonable estimate cannot be determined at this time, the Company has applied existing guidance based on the
provisions of the tax laws that were in effect prior to the TCJA being enacted. Reasonable estimates updated and/or
established after the issuance of the 2017 statutory financial statements but before the issuance of the year end 2017
audited financial statements, shall not be recognized as Type I subsequent events. Instead, these changes, as well as
future changes in estimates shall be recognized as a change in accounting estimate, pursuant to SSAP;o. 3, Accounting
Changes and Corrections of Errors, when the information necessary to update the estimate becomes available.
Consistent with SAPWG guidance and SAB 118, the Company will be working in good faithto complete the accounting
for the changes adopted under the TCJA, and all accounting impacts will be completed within the measurement period,
not to exceed one year.
MA AGEME T’S DISCUSSIO A D A ALYSIS
Trends and conditions affecting the Company’s businesses
Results of the Company’s businesses depend significantly upon the extent to which its actual future experience is
consistent with assumptions and methodologies used in calculating its reserves. Many factors can affect the reserves
in the Company. Because these factors are not known in advance, change over time, are difficult to accurately predict
and are inherently uncertain, the Company cannot determine with precision the ultimate amounts it will pay for actual
claims or the timing of those payments. The Company will continue to monitor experience and assumptions closely
and make changes to its assumptions and methodologies, as appropriate. Even small changes in assumptions or small
deviationsof actualexperience from assumptions can have, and in the past have had, material impacts on the Company’s
reserve levels, results of operations and financial condition.
The Company will continue to migrate to a new valuation and projection platform for certain lines of business, while
it upgrades platforms for other lines of business. The migration and upgrades are part of Genworth’s ongoing efforts
to improve the infrastructure and capabilities of its information systems and routine assessment and refinement of
financial, actuarial, investment and risk management capabilities and processes enterprise wide. These efforts will also
provide the Company’s businesses with improved platforms to support emerging accounting guidance and ongoing
changes in capital regulations. Concurrently, actuarial processes and methodologies will be reviewed, and may result
in additional refinements to models and/or assumptions. Any material changes in balances, margins or income trends
substantially all of the retained long-term care insurance business to this new modeling system in 2016 and 2017. The
new modeling system values and forecasts associated liability cash flows and policyholder behavior at a more granular
level than the previous system.
Results of the Company’s businesses are also impacted by interest rates. The continued low interest rate environment
puts pressure on the profitability and returns of these businesses as higher yielding investments have matured and been
replaced with lower-yielding investments.The Company seeks to manage the impact of low interest rates through asset-
liability management as well as interest rate hedging strategies for a portion of its long-term care insurance product
cash flows. Additionally, certain products have implicit and explicit rate guarantees or optionality that are significantly
impacted by changes in interest rates.
In February 2016, Genworth announced that one of its strategic objectives was to separate, then isolate, through a series
of transactions, its long-term care insurance business from its other U.S. life insurance businesses. Genworth’s goal
under the plan was to align substantially all of its in-force life insurance and annuity business under GLAIC and all
long-term care insurance business under the Company. As part of this strategic objective, a holding company would
purchase GLAIC from the Company at fair value and GLAIC would no longer be a subsidiary of the Company, referred
to as “unstacking.” Completion of these transactions and approval of the unstacking were included as conditions to
the closing of Genworth’s proposed acquisition by China Oceanwide. In preparation for the unstacking, the Company
completed several reinsurance agreements, including the GLAIC Life April 1, 2017 Treaties, as discussed above.
In addition, effective July 1, 2017, the Company ceded certain fixed deferred annuity business, including the business
recaptured from GLAIC by the GLAIC SPDA Modco Treaty Recapture as discussed above, and certain fixed payout
annuity business to GLAIC on a modified coinsurance basis as well as ceded certain corporate-owned life insurance
business to GLAIC on a modified coinsurance basis. These reinsurance treaties had an adverse impact on the risk-based
capital ratio of the Company and GLAIC. The Company and GLAIC had anticipated that the unstacking would be
completed by December 31, 2017 and that certain capital benefits relating to the unstacking would offset the adverse
impact to its risk-based capital ratio as of year end. With the unstacking not being completed by year end and without
a target date for such completion, the Company and GLAIC mutually agreed to terminate the July 1, 2017 reinsurance
treaties. As of December 31, 2017, the Company had a net payable of $29.8 million to GLAIC related to the termination
of these treaties. The intercompany amounts were settled in cash on January 10, 2018. As discussed above, these
internal transactions are required to be completed under the Merger Agreement with China Oceanwide.
Long-term care insurance
Results of the Company’s long-term care insurance business are influenced primarily by the Company’s ability to
and reinsurance. Sales of the Company’s products are impacted by the relative competitiveness of its ratings, product
features, pricing and commission levels and the impact of in-force rate actions on distribution and consumer demand.
the Company’s long-term care insurance business either positively or negatively.
Claim reserves are reviewed quarterly and the Company conducts a detailed review of claim reserve assumptions for
the long-term care insurance business annually typically during the third quarter of each year. During the third quarter
of 2017, the Company reviewed assumptions and methodologies relating to claim reserves of the long-term care
insurance business but did not make any significant changes to the assumptions or methodologies, other than routine
updates to benefit utilization rates as the Company typically does each quarter. The updates in the third quarter of 2017
did not have a significant impact on claim reserve levels. During the fourth quarter of 2017, the Company updated its
claimsadministrationexpense assumptions, whichresulted in a claim expensereserve decreaseof $30.2 million.During
the third quarter of 2016, the Company completed its annual review of assumptions and methodologies related to long-
term care insurance claim reserves, which resulted in recording higher claim reserves of $431.9 million. In the third
quarter of 2016, the Company updated several assumptions and methodologies primarily impacting claim termination
rates, benefit utilization rates and incurred but not reported reserves.
MA AGEME T’S DISCUSSIO A D A ALYSIS
In the fourth quarter of 2017, the Company performed assumption reviews and cash flow testing. As part of the annual
testing, the Company reviewed assumptions for incidence and interest rates, among other assumptions, and considered
incremental benefits from expected future in-force rate actions. As of December 31, 2017, the Company’s cash flow
testing margins were positive but were reduced from the 2016 levels as higher costs relating primarily to changes to
expected future incidence of claims were partially offset by the higher modeled benefit of planned future in-force rate
actions. As a result, the Company determined that its reserves were adequate and no additional reserves were recorded.
Future premium rate action assumptions are based on expected future claims costs and are generally assumed to be
filed in the next 10 years (including certain currently pending filings) and implemented over the next 15 years as
regulatory approvals are received. The Company will continue to regularly review methodologies and assumptions in
light of emerging experience and may be required to make adjustments to long-term care insurance claim reserves in
the future, which could also impact cash flow testing results.
In connection with the updated assumptions and methodologies that increased claim reserves on existing claims in the
2016 review, the Company now establishes higher claim reserves on new claims, which have decreased earnings in
claim reserves for new claims are higher as the mix of claims continues to evolve, with an increasing number of policies
expects growth in new claims as the blocks of business continue to age. In addition, premiums will decline as policies
terminate from mortality and lapses.
The Company experiences volatility in loss ratios caused by variances in policy terminations, claim terminations, claim
severity and claim counts. Approved in-force rate actions may also cause fluctuations in loss ratios during the period
when reserves are adjusted to reflect policyholders taking reduced benefits or non-forfeiture options within their policy
experience, which may result in changes to claim reserves and cash flow testing results, causing volatility in operating
results and loss ratios.
The Company also manages risk and capital allocated to the long-term care insurance business through utilization of
external reinsurance in the form of coinsurance. The Company executed external reinsurance agreements to reinsure
20% of all sales of its individual long-term care insurance products that have been introduced since early 2013. External
new business reinsurance is dependent on a number of factors, including price, availability, risk tolerance and capital
levels. Over time, there can be no assurance that affordable, or any, reinsurance will continue to be available. The
Company also has external reinsurance on some older blocks of business which includes a treaty on a yearly renewable
term basis on business that was written between 1998 and 2003. This yearly renewable term reinsurance provides
coverage for claims on those policies for 15 years after the policy was written. After 15 years, reinsurance coverage
ends for policies not on claim, while reinsurance coverage continues for policies on claim until the claim ends. Since
2013, the Company has seen, and may continue to see, an increase in benefit costs as policies with reinsurance coverage
exhaust their benefits or terminate and policies which are not covered by reinsurance go on claim.
As a result of ongoing challenges in the long-term care insurance business, the Company continues pursuing initiatives
to improve the risk and profitability profile of this business including: premium rate increases and associated benefit
reductions on in-force policies; product refinements; changes to current product offerings; new distribution strategies;
refining underwriting requirements; managing expense levels; actively exploring additional reinsurance strategies;
executing investment strategies targeting higher returns; enhancing financial and actuarial analytical capabilities; and
considering other actions to improve the performance of the overall business. As part of the Company’s strategy for its
long-term care insurance business, the Company has been implementing, and expects to continue to pursue, significant
premium rate increases and associated benefit reductions on the older generation blocks of business in order to bring
those blocks closer to a break-even point over time and reduce the strain on capital. The Company is also requesting
premium rate increases on newer blocks of business, as needed, some of which may be significant, to help bring its
loss ratio back towards its original pricing. The Company received 114 filing approvals from 36 states in 2017,
representing a weighted-average increase of 28% on approximately $714 million in annualized in-force premiums. The
Company submitted 226 new filings in 45 statesin 2017 on approximately $1.3 billion in annualized in-force premiums.
As of December 31, 2017, the Company had suspended sales in Hawaii, Massachusetts, ;ew Hampshire and Vermont,
and will consider taking similar actions in the future, in other states where it is unable to obtain satisfactoryrate increases
on in-force policies and/or unable to obtain approval for new products. The Company will also consider litigation
against states that decline actuarially justified rate increases. As of December 31, 2017, the Company was in litigation
with one state that has refused to approve actuarially justified in-force rate actions. The approval process for in-force
premium rate increases and the amount and timing of the rate increases approved vary by state. In certain states, the
decision to approve or disapprove a rate increase can take a significant amount of time. After approval, insureds are
provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary
date. As a result, the benefits of any rate increase are not fully realized until the implementation cycle is complete and
are, therefore, expected to be realized over time.
The Company’s long-term care insurance sales decreased 23% in 2017 compared to 2016. Sales decreased primarily
due to the Company’s lower ratings. The Company expects that its sales will continue to be adversely impacted by its
current ratings. Future adverse ratings announcements or actions could negatively impact sales levels further.
Additionally, effective April 1, 2018, the Company plans to suspend sales of its long-term care insurance products in
Florida, which could reduce sales levels further.
MA AGEME T’S DISCUSSIO A D A ALYSIS
Results of the Company’s life insurance business are impacted primarily by mortality, persistency, investment yields,
expenses, reinsurance and statutory reserve requirements, among other factors. As previously disclosed, the Company
suspended sales of its traditional life insurance products on March 7, 2016.
The Company experienced lower mortality results in 2017 compared to 2016 resulting from changes to the Company’s
reinsurance agreements. Between 1999 and 2009, the Company had a significant increase in term life insurance sales,
as compared to 1998 and prior years. As 15-year term life insurance policies written in 1999 and 2000 transition to
their postguaranteed levelpremium rate period, the Companyhas experienced lower persistencycomparedto its pricing
and valuation assumptions. The blocks of business issued since 2000 vary in size as compared to the 1999 and 2000
blocks of business. Accordingly, in the future as additional 10-, 15-, and 20-year level premium period blocks enter
their post guaranteed level premium rate period, the Company may experience volatility in premiums and mortality
experience, which may reduce profitability or create losses in term life insurance products, in amounts that could be
material, if persistency is lower than original assumptions and if overall block mortality worsens as healthier lives
lapse. In 2017, the Company experienced higher lapses associated with its large 15-year and 20-year term life insurance
blocks entering their post guaranteed level premium rate periods. The Company anticipates this trend will continue as
larger blocks reach the end of their level premium periods through 2020, especially for the 2000 block, and will continue
as the Company’s other blocks reach their post guaranteed level premium rate period. The Company has also taken
actions to mitigate potentially unfavorable impacts through the use of reinsurance.
Resultsof the Company’sfixed annuitiesbusinessare affectedprimarilyby investmentperformance,interest rate levels,
the slope of the interest rate yield curve, net interest spreads, mortality, persistency, and expense and commission levels.
As previously disclosed, the Company suspended sales of its traditional fixed annuity products on March 7, 2016.
TheCompany monitors and changes creditingrates onfixed annuitieson a regular basisto maintainspreads and targeted
returns. However, if interest rates remain at current levels or decrease further, the Company could see declines in
Dividend Activity During 2017
The Company did not pay any shareholder dividends during 2017.
Capital Contributions and Returns of Capital During 2017
On August 28, 2017, the Company made a capital contribution to GLIC Real Estate Holdings, LLC (“GLIC RE”), of
a certain loan made by Eastgate Professional Office Park, Ltd., an Ohio limited liability company, in the original
principal amount of $8.5 million, with a market value of $6.4 million.
On June 30, 2017, the Company received a return of capital from GLIC RE in the amount of $19.6 million in cash.
MA AGEME T’S DISCUSSIO A D A ALYSIS
The highlights of the Company’s financial position as of December 31, 2017 and 2016 was as follows (in millions):
2017 2016 $ Change % Change
Cash and invested assets $ 38,936.7 $ 39,113.2 $ (176.5) (0.5)%
Amounts recoverable from reinsurers and funds held 124.1 121.0 3.1 2.6 %
Deferred tax asset 274.0 336.0 (62.0) (18.5)%
Premium tax receivable 35.2 14.4 20.8 144.4 %
Premiums and accounts receivable 190.8 193.7 (2.9) (1.5)%
Investment income due and accrued 406.7 401.9 4.8 1.2 %
Other assets 29.3 30.7 (1.4) (4.6)%
Separate account assets 15.2 14.9 0.3 2.0 %
TOTALADMITTED ASSETS $ 40,012.0 $ 40,225.8 $ (213.8) (0.5)%
LIABILITIES A D CAPITALA D SURPLUS
Aggregate reserves-life $ 2,219.5 $ 2,469.6 $ (250.1) (10.1)%
Aggregate reserves-annuity contracts 7,896.6 8,666.5 (769.9) (8.9)%
Aggregate reserves-accident and health policies 24,156.8 22,588.3 1,568.5 6.9 %
Liability for deposit-type contracts 679.5 762.8 (83.3) (10.9)%
Liability for policy and contract claims 179.7 181.2 (1.5) (0.8)%
Premiums and annuity considerations received in advance 85.1 92.9 (7.8) (8.4)%
Interest maintenance reserve 939.5 973.0 (33.5) (3.4)%
General expenses due or accrued 195.7 226.3 (30.6) (13.5)%
Asset valuation reserve 237.6 201.2 36.4 18.1 %
Other amounts payable on reinsurance 77.5 76.1 1.4 1.8 %
Payable for securities lending 193.3 345.1 (151.8) (44.0)%
Payable for collateral received from derivatives counterparties 151.7 223.8 (72.1) (32.2)%
Derivative liabilities 112.9 145.9 (33.0) (22.6)%
Other liabilities 143.7 105.3 38.4 36.5 %
Separate account liabilities 15.2 14.9 0.3 2.0 %
TOTAL LIABILITIES 37,284.3 37,072.9 211.4 0.6 %
TOTAL CAPITALA D SURPLUS 2,727.7 3,152.9 (425.2) (13.5)%
TOTAL LIABILITIES, CAPITALA D SURPLUS $ 40,012.0 $ 40,225.8 $ (213.8) (0.5)%
Cash and invested assets
Cash and invested assets decreased $176.5 million mainly attributable to a decline in assets under management for the
fixed annuity block of business, a $324.9 million decrease in affiliate common stock and a $151.8 million decrease in
securitieslendingreinvestedcollateral assets mainly driven bya decline in market demandfor corporate bond securities,
partially offset by growth of the long-term care insurance in-force block of business. The decrease in common stock
was driven by decreases in the investments in GLAIC and GLIC;Y, both of which were mostly driven by decreases
in the deferred tax asset as a result of the impact of the TCJA and the net loss on each company primarily driven by
Deferred tax asset
Deferred tax asset decreased $62.0 million mainly attributable to the impact of the TCJA.
MA AGEME T’S DISCUSSIO A D A ALYSIS
As of December 31, 2017, the Company had a $30,619.1 million bond (long and short-term) portfolio representing
78.6% of its total invested assets. Publicly traded bonds accounted for 74.2% of the bond portfolio. Of the total bond
portfolio, 3.2% mature in less than one year, 21.3% mature between one and five years, and the balance of 75.5%
mature in more than five years.
As of December 31, 2017 and 2016, the Company’s bond portfolio was invested as follows:
Category 2017 2016
;AIC Class 1 59.6% 62.2%
;AIC Class 2 34.9 32.9
;AIC Class 3 4.2 4.5
;AIC Class 4 1.3 0.4
TOTAL 100.0% 100.0%
Bond quality remained relatively stable as of December 31, 2017, when compared with December 31, 2016.
Bonds with ratings categories ranging from AAA/Aaa to BBB/Baa, as assigned by a rating service such as S&P or
Moody’s, are generally regarded as investment grade securities. Some agencies and treasuries (that is, those securities
The ;AIC regards agencies and treasuries and all A ratings as Class 1 (highest quality), BBB/Baa ratings as Class 2
(high quality), BB/Ba ratings as Class 3 (medium quality), B ratings as Class 4 (low quality), CCC/Caa ratings as Class
5 (lower quality), and CC/Ca or below ratings as Class 6 (in or near default).
The Company had impairments of $9.6 million and $24.1 million during the years ended December 31, 2017 and 2016,
Common stock represented 3.9% of total invested assets as of December 31, 2017, most of which related to investments
in the Company’s insurance company subsidiaries of $1,477.7 million.
In evaluating the credit quality of mortgage loans, the Company assesses the performance of the underlying loans using
both quantitative and qualitative criteria. Certain risks associated with mortgage loans can be evaluated by reviewing
both the loan-to-value and debt service coverage ratios to understand both the probability of the borrower not being
able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would
enable the Company to recover its unpaid principal balance in the event of default by the borrower.Ahigher debt service
coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not
be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to
payments. A lower loan-to-value indicates that its loan value is more likely to be recovered in the event of default by
the borrower if the property was sold.
The following table sets forth the average loan-to-value of mortgage loans by property type as of December 31, 2017
(amounts in millions):
Property type 0% -50% 51% - 60% 61% - 75% 76% -100%
Retail $ 513.3 $ 332.4 $ 547.7 $ — $ — $ 1,393.4
Office 294.2 273.9 357.5 6.9 1.9 934.4
Industrial 381.6 212.5 326.3 — — 920.4
Apartments 119.4 62.3 123.1 — — 304.8
Mixed use 71.7 23.1 57.9 — — 152.7
Other 31.8 10.7 174.2 — — 216.7
Total $ 1,412.0 $ 914.9 $ 1,586.7 $ 6.9 $ 1.9 $ 3,922.4
Percent of total 36.0 % 23.3 % 40.5 % % 0.0 % 100.0 %
Weighted-average debt service
2.3 1.9 1.6 (0.2) 1.0 1.9
Average loan-to-value is based on the Company’s most recent estimate of the fair value for the underlying property as of the date indicated above. Values are evaluated
at least annually and updated more frequently if necessary to better indicate risk associated with the loan.
Debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan.
;ormalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees
(such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the
As of December 31, 2017, the Company had future commitments related to its investments in commercial mortgage
loans of $12.9 million, limited partnerships of $310.9 million, bank loans of $17.8 million, and private placement
securities of $80.5 million.
MA AGEME T’S DISCUSSIO A D A ALYSIS
Aggregate reserves for accident and health policies
Aggregate reserves for accident and health policies increased $1,568.5 million related to long-term care insurance
products primarily due to growth and aging of the in-force blocks and higher severity on new claims.
Aggregate reserves for annuity contracts
Aggregate reserves for annuity contracts decreased $769.9 million due to fixed annuity products contractual liabilities
maturing and a relatively large block exiting the surrender charge period in 2017.
Aggregate reserves for life contracts
Aggregate reserves for life contracts decreased $250.1 million due to a $324.0 million decrease related to life insurance
productsmainlydriven bythe $304.5millioninreserves cededonthe GLAIC LifeApril1, 2017Treatiesasof December
31, 2017, partially offset by a $73.9 million increase in corporate-owned life insurance products due to growth in
account value, partially offset by death benefits.
Capital and Surplus
The following table sets forth the changes in capital and surplus as of and for the year ended December 31, 2017 (in
Capital and surplus as of December 31, 2016 $ 3,152.9
;et loss (39.1)
Change in net unrealized capital gains and losses (332.3)
Change in net unrealized foreign exchange capital gains and losses 2.3
Change in net deferred tax assets (296.2)
Change in nonadmitted assets 275.5
Change in liability for reinsurance in unauthorized companies 0.1
Change in asset valuation reserve (36.4)
Change in surplus as a result of reinsurance 32.4
Prior period correction - long-term care insurance reserves related to initial claim dates, net of taxes 21.6
Prior period correction - long-term care insurance due premium, net of taxes (34.4)
Prior period correction - long-term care insurance reserves related to benefit inflation coding, net of
Capital and surplus as of December 31, 2017 $ 2,727.7
The change in net unrealized capital gains and losses of $332.3 million was driven by unrealized losses on common
stocks of affiliates. The change in net deferred tax assets and nonadmitted assets primarily resulted from the impact of
the TCJA. Included in the Company’s 2017 results was a tax expense of $343.0 million, recorded as a component of
statutory surplus, as a result of the reduction in tax rate on its net deferred tax asset. The net loss of $39.1 million is
to deferring the initial ceding commission received, net of tax, related to the GLAIC LifeApril 1, 2017Treaties, partially
offset by current year amortization.
During 2017,the Company recordeda prior period correctionto its long-term care insurance reservesrelatedto recorded
initial claim dates. To record the correction, the Company decreased aggregate reserves for accident and health policies
by $27.3 million, liability for policy and contract claims by $4.8 million, general expenses due or accrued by $1.1
million (for a total decrease to claim and claim expense reserves of $33.2 million) and deferred tax assets by $11.6
million, with an offsetting increase of $21.6 million to unassigned surplus, in accordance with SSAP ;o. 3.
During 2017, the Company also recorded a prior period correction related to premium accruals on the Company’s long-
term care insurance business. To record the correction, the Company decreased premiums and accounts receivable by
$58.8 million and commissions payable by $5.9 million and increased deferred tax assets by $18.5 with an offsetting
decrease to unassigned surplus of $34.4 million, in accordance with SSAP;o. 3.Additionally, the Company decreased
thenonadmittedportionof premiumsandaccountsreceivable by$55.6million,withan offsettingincreasetounassigned
During 2017, the Company recorded a prior period correction to its long-term care insurance reserves related to benefit
inflation coding. To record the correction, the Company increased aggregate reserves for accident and health contracts
by $28.7 million and net deferred tax assets by $10.0 million, with an offsetting decrease of $18.7 million to unassigned
surplus, in accordance with SSAP ;o. 3.
MA AGEME T’S DISCUSSIO A D A ALYSIS
Off-Balance Sheet Arrangements
The table below summarizes the face amount of the Company’s financial instruments with off-balance sheet risk (in
2017 2016 2017 2016
a. Swaps $ 3,163.4 $ 2,305.0 $ 10,493.7 $ 11,658.2
b. Cross currency 21.8 21.8 — —
c. Credit default swaps 29.0 24.0 — 5.0
Total $ 3,214.2 $ 2,350.8 $ 10,493.7 $ 11,663.2
The following table sets forth credit default swaps where the Company sells protection on single name reference entities
and the fair values as of December 31, 2017 (in millions):
Reference entity credit rating and maturity otional value Assets Liabilities
Matures in less than one year $ 10.0 $ 0.1 $ —
Matures in less than one year 19.0 0.1 —
Total single name credit default swaps $ 29.0 $ 0.2 $ —
The Company is exposed to credit-related losses in the event of nonperformance by counterparties to financial
instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings.
The current credit exposure of the Company’s derivative contracts is limited to net positive fair value owed by the
counterparties, less collateral posted by the counterparties to the Company. Credit risk is managed by entering into
transactions with creditworthy counterparties and requiring the posting of collateral. In many instances, new over-the-
counter derivatives contracts will require both parties to post initial margin, thereby resulting in overcollateralization.
and monitoring overall collateral held.All of the net credit exposure for the Company from derivative contracts is with
Participation in High Yield Financings, Highly Leveraged Transactions or on-Investment Grade Loans and
The Company has not materially participated in any high yield financings, highly leveraged transactions or non-
investment grade loans and investments relating to corporate restructurings or otherwise.
The Company maintains a risk-based capital ratio at a level in excess of the authorized control level that the Company
deems appropriate for its product mix and risk profile. The Company had a total adjusted capital of $3,106.5 million
and an authorized control level risk-based capital of $549.9 million as of December 31, 2017.
Themaximumamountof shareholder dividendsthat canbepaidby theCompany withoutprior approval ofthe Delaware
Department is subject to restrictions. The maximum unrestricted dividend payout that may be made in 2018 is the
greater of 10% of the Company’s statutory capital and surplus as of December 31, 2017 or its net gain from operations
for 2017, with such dividend payout not to exceed the Company’s earned surplus. The Company has no capacity to
make a dividend payment without prior approval in 2018.
Ratings with respect to financial strength are an important factor in establishing the Company’s competitive position.
Rating agencies review the financial performance and condition of the Company and provide opinions regarding
financial strength, operating performance and ability to meet obligations to policyholders.
As of December 31, 2017, the ratings for the Company were as follows:
A.M. Best Company, Inc. (“A.M.Best”) B (Fair)
S&P B+ (Weak)
Moody’s B2 (Poor)
MA AGEME T’S DISCUSSIO A D A ALYSIS
On February 12, 2018, Moody’s downgraded its ratings of the Company to B3 (Poor) and A.M. Best downgraded its
ratings of the Company to B- (Fair).
A.M. Best states that the “B” and “B-” (Fair) ratings are assigned to those companies that have, in its opinion, a fair
ability to meet their ongoing insurance obligations. The “B” and “B-” (Fair) ratings are the seventh- and eighth-highest
of 15 ratings assigned by A.M. Best, which range from “A++” to “F.”
S&P states that insurers rated “B” (Weak) have weak financial security characteristics. The “B” range is the sixth-
highest of nine financial strength rating ranges assigned by S&P, which range from “AAA” to “R.” A plus (+) or minus
(-) shows relative standing within a major rating category.These suffixes are not added to ratings in the “AAA” category
or to ratings below the “CCC” category. Accordingly, the “B+” rating is the fourteenth-highest of S&P’s 21 ratings
Moody’s states that insurance companies rated “B” (Poor) offer questionable financial security. The “B” (Poor) range
is the sixth-highest of nine financial strength rating ranges assigned by Moody’s, which range from “Aaa” to “C.”
;umeric modifiers are used to refer to the ranking within the group, with 1 being the highest and 3 being the lowest.
These modifiers are not added to ratings in the “Aaa” category or to ratings below the “Caa” category. Accordingly,
the “B2” and “B3” ratings are the fifteenth- and sixteenth-highest of Moody’s 21 ratings categories.
A.M. Best, S&P and Moody’s review their ratings periodically and the Company cannot guarantee that it will maintain
its current ratings in the future.
MA AGEME T’S DISCUSSIO A D A ALYSIS
RESULTS OF OPERATIO S
The Company’s operating results for years ended December 31, 2017 and 2016 were as follows (in millions):
2017 2016 $ Change % Change
Premiums and annuity considerations $ 2,308.7 $ 2,084.8 $ 223.9 10.7 %
Considerations for supplementary contracts with life
contingencies 25.5 25.9 (0.4) (1.5)%
;et investment income 1,810.9 1,814.9 (4.0) (0.2)%
Amortization of interest maintenance reserve 70.0 64.3 5.7 8.9 %
Commission and expense allowances on reinsurance ceded 151.9 534.1 (382.2) (71.6)%
Reserve adjustments on reinsurance ceded (287.7) (51.6) (236.1) ;M
Other income 1.3 4.1 (2.8) (68.3)%
TOTAL REVE UES 4,080.6 4,476.5 (395.9) (8.8)%
Death benefits 140.8 164.0 (23.2) (14.1)%
Annuity benefits 503.1 485.9 17.2 3.5 %
Disability benefits and benefits under accident and health
policies 1,771.9 1,634.0 137.9 8.4 %
Surrender benefits and other fund withdrawals 569.4 473.9 95.5 20.2 %
Payments on supplementary contracts with life
contingencies 27.9 30.4 (2.5) (8.2)%
Interest and adjustments on contracts or deposit-type
contract funds 24.1 27.0 (2.9) (10.7)%
Increase in aggregate reserves – life, annuity, and accident
and health 547.1 1,567.0 (1,019.9) (65.1)%
TOTAL BE EFITS 3,584.3 4,382.2 (797.9) (18.2)%
Commissions 220.8 354.2 (133.4) (37.7)%
General insurance expenses 270.1 340.3 (70.2) (20.6)%
Insurance taxes, licenses, and fees, excluding Federal
income taxes 66.3 62.4 3.9 6.3 %
;et transfer from separate accounts (1.9) (0.7) (1.2) (171.4)%
Change in reserve/Modco adjustment reinsurance — (329.7) 329.7 100.0 %
Gains released from interest maintenance reserve related to
reinsurance — (282.4) 282.4 100.0 %
Increase in loading 0.9 14.3 (13.4) (93.7)%
TOTAL EXPE SES 556.2 158.4 397.8 ;M
TOTAL BE EFITS A D EXPE SES 4,140.5 4,540.6 (400.1) (8.8)%
Loss before Federal income taxes and realized capital
losses, net (59.9) (64.1) 4.2 6.6 %
Federal and foreign income tax (benefit) (32.9) (69.4) 36.5 52.6 %
(Loss) income before realized capital losses, net (27.0) 5.3 (32.3) ;M
Realized capital losses, net (12.1) (44.4) 32.3 72.7 %
ET LOSS $ (39.1) $ (39.1) $ — 0.0 %
(1)“;M” is defined as not meaningful for increases or decreases greater than 200%.
Total Company Overview
Premiums and annuity considerations
Premiums and annuity considerations increased $223.9 million primarily driven by increases of $318.1 million from
the impact of the GLAIC ULModco Treaty Recapture in 2016 and $263.4 million from the impact of the GLAIC SPDA
Modco Treaty Recapture in 2017, partially offset by a decrease of $304.4 million from the initial premium paid on the
GLAIC Life April 1, 2017 Treaties.
Commissions and expense allowance on reinsurance ceded
Commissionsandexpense allowanceonreinsurance cededdecreased$382.2millionprimarilyattributabletothe $376.2
million impact from the recapture of the majority of the TLC product ceded to GLAIC in the third quarter of 2016.
MA AGEME T’S DISCUSSIO A D A ALYSIS
Reserve adjustments on reinsurance ceded
Reserve adjustments on reinsurance ceded decreased $236.1 million primarily attributable to the $263.4 million impact
of the GLAIC SPDA Modco Treaty Recapture in 2017.
Increase in aggregate reserves - life, annuity, and accident and health
The increase in aggregate reserves for life, annuity and accident health policies decreased $1,019.9 million.
Long-term care insurance products decreased $506.6 million primarily driven by a $431.9 million unfavorable
adjustment in 2016 resulting from the annual claim reserve review, an $80.5 million decrease in reserves as a result of
policyholders electing reduced benefit options as a result of in-force rate actions approved and implemented, $65.8
million in unfavorable claim reserve refinements recorded in the second quarter of 2016 and higher claim terminations,
partially offset by aging and growth of the in-force block and higher severity on new claims.
Life insurance products decreased $380.1 million primarily due to the $304.5 million in reserves ceded on the GLAIC
Life April 1, 2017 Treaties as of December 31, 2017 and the $298.0 million impact from the GLAIC UL And TLC
Recaptures in 2016, partially offset by the $215.4 million impact from the GLAIC Term Life Treaty Recapture in 2016.
large block exiting the surrender charge period in 2017 and a decrease in direct premiums as a result of the suspension
of sales in 2016, partially offset by the $25.8 million impact of the GLIC;Y SPDAAnd SPIA Recapture in 2016.
Corporate-owned life insurance products increased $39.0 million mainly due to the surrender benefits paid in 2016 and
growth in account value.
Disability benefits and benefits under accident and health policies
Disability benefits and benefits under accident and health policies increased $137.9 million primarily driven by aging
and growth of the in-force block and higher severity on new claims, partially offset by higher claim terminations.
Surrender benefits and other fund withdrawals
Surrender benefits and other fund withdrawals increased $95.5 million mainly from a $125.7 million increase in fixed
annuity products as a result of a relatively large block exiting the surrender charge period in 2017, partially offset by
a $28.1 million decrease in corporate-owned life insurance from a group policy lapsing in 2016.
Change in reserve/Modco Adjustment reinsurance
Change in reserve/Modco Adjustment reinsurance decreased $329.7 million primarily due the $318.1 million impact
of the GLAIC UL Modco Treaty Recapture.
Gains released from IMR related to reinsurance
GainsreleasedfromIMRrelatedtoreinsurance decreased$282.4million.During2016,the Companyterminatedcertain
forward starting swaps and sold certain TIPS included in the Company’s long-term care insurance investment portfolio,
resulting in pre-tax net gains of $849.2 million, or $552.0 million after-tax, which were recorded to IMR. After-tax
gains of $276.0 million were released from IMR related to reinsurance in 2016.
Commissions decreased $133.4 million primarily attributable to the $100.0 million impact of the GLAIC ULAnd TLC
Recaptures in 2016 and the $27.5 million impact of the GLIC;Y SPDAAnd SPIATreaty Recapture in 2016 and lower
in 2017, partially offset by the $16.2 million impact of the GLAIC UL Modco Treaty Recapture in 2016.
Overview by product
Long-term care insurance
Loss before taxes for long-term care insurance decreased $215.1 million from a loss before taxes of $355.2 million for
the year ended December 31, 2016 compared to $140.1 million for the year ended December 31, 2017. The decrease
was primarily attributable to higher claim reserves of $431.9 million in 2016 resulting from the annual claim reserve
review completed in the third quarter of 2016, a $94.6 million increase in premiums and an $80.5 million decrease in
the change in reserves as a result of policyholders electing reduced benefit options, both as a result of in-force rate
actions approved and implemented and $65.8 million in unfavorable claim reserve refinements recorded in the second
quarter of 2016, partially offset by a $282.4 million decrease in after-tax gains released from IMR related to reinsurance
in 2016 as described above and higher severity on new claims.
MA AGEME T’S DISCUSSIO A D A ALYSIS
Income before taxes for life insurance decreased $215.6 million from income before taxes of $232.8 million for the
year ended December 31, 2016 compared to $17.2 million for the year ended December 31, 2017. The decrease was
primarily attributable to a $215.4 million impact of the GLAIC Term Life Treaty Recapture in 2016.
Income before taxes for fixed annuities decreased $3.1 million from income before taxes of $60.4 million for the year
endedDecember 31,2016 compared to$57.3 millionfor the year ended December 31,2017.The decreasewas primarily
driven by the $4.3 million impact of the GLAIC SPDA Modco Treaty Recapture in 2017.
Institutional had a loss before taxes of $3.5 million for the year ended December 31, 2017 compared to income before
taxes of $1.2 million for the year ended December 31, 2016. The $4.7 million change was primarily due to a decrease
in net investment income.
Corporate-owned life insurance
Income before taxes for corporate-owned life insurance increased $6.3 million from income before taxes of $14.0
million for the year ended December 31, 2016 compared to $20.3 million for the year ended December 31, 2017. The
increase was driven by lower death benefits paid and lower general insurance expenses.
Loss before taxes for corporate decreased $6.6 million from a loss before taxes of $17.6 million for the year ended
December 31, 2016 compared to $11.0 million for the year ended December 31, 2017. The decrease was due to a
decrease in net investment losses and a decrease in insurance taxes, licenses and fees.
Other accident and health insurance
Other accident and health had a loss before taxes of $0.1 million for the year ended December 31, 2017 compared to
income before taxes of $0.3 million for the year ended December 31, 2016. The $0.4 million change was primarily
driven by a decrease in net investment income due to runoff of the in-force block.
CASH FLOWS A D LIQUIDITY
The Company’s cash flow for the years ended December 31, 2017 and 2016 are summarized below (in millions):
2017 2016 $ Change % Change
;et cash provided by operations $ 599.6 $ 626.5 $ (26.9) (4.3)%
;et cash applied to investment activities (215.4) (669.8) 454.4 67.8 %
;et cash applied to financing and miscellaneous sources (370.5) (109.0) (261.5) ;M
;et change in cash, cash equivalents and short-term investments $ 13.7 $ (152.3) $ 192.9 109.0 %
(1) “;M” is defined as not meaningful for increases or decreases greater than 200%.
The Company’s cash flow needs are generally met by cash provided by operations. Premiums are invested in assets
that generally have durations similar to the Company’s liabilities. Principal sources of funds include premiums and
other consideration received, contract charges earned and net investment income received. Investment proceeds
generated from securities called, redeemed, prepaid, matured and sold, in addition to principal and interest payments
received are generally reinvested. The Company maintains a primarily liquid investment portfolio. The Company has
no material liquidity or capital commitments coming due in the next 12 months. Furthermore, the Company has no
material long-term commitments impacting liquidity or capital other than those related to normal business operations.
The Company’s subsidiaries have no capacity to make a dividend payment without prior approval in 2018.
The decrease of $26.9 million in net cash provided by operations was mainly due to a $282.2 million increase in
commissions, expenses paid and aggregate write-ins for deductions, higher benefit and loss related payments of $259.9
million and a $12.7 million decrease in miscellaneous income. These were partially offset by a $242.6 million increase
in premiums collected net of reinsurance, a $240.3 decrease in Federal taxes paid, and a $44.2 million increase in net
The decrease of $454.4 million in net cash applied to investment activities was mainly from a $1,961.0 million decline
in investments acquired and an $82.5 million lower net increase in contract loans, partially offset by a decrease in
investment proceeds of $1,589.1 million.
The increase of $261.5 million in net cash applied to financing and miscellaneous sources was primarily attributable
to a $148.0 million increase in cash applied to net deposits on deposit-type contracts and a $142.7 million increase in
other cash applied.
The Company participates in a program managed by an unaffiliated financial institution in which it lends securities to
brokers or other parties. The securities are re-registered but remain beneficially owned by the Company. As collateral
for the loan, the borrower provides cash or government securities, on a daily basis, in amounts equal to or exceeding
MA AGEME T’S DISCUSSIO A D A ALYSIS
102% of the fair value of the applicable securities loaned. ;one of the collateral is restricted. Cash collateral received
is recorded in securities lending reinvested collateral and the offsetting liabilities are recorded in payable for securities
lending. There were no securities lending collateral for transactions that extend beyond one year from the reporting
date and there were no securities loaned in the Company’s separate accounts. As of December 31, 2017 and 2016, the
fair value of loaned securities was $186.4 million and $334.4 million, respectively, and the fair value of the collateral
held was $193.3 million and $345.1 million, respectively.
Federal Home Loan Bank (“FHLB”) Funding Agreements
The Company is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB Pittsburgh”). As of December 31,
2017, the Company had outstanding funding agreements with FHLB Pittsburgh of $254.0 million which related to total
liabilities of $254.6 million. As of December 31, 2016, the amount of funding agreements issued to FHLB Pittsburgh
was $254.0 million, which related to total liabilities of $254.4 million. The Company uses these funds in an investment
spread strategy, consistent with its other investment spread programs. The Company records the funds under SSAP
;o. 52, Deposit Type Contracts, consistent with its accounting for other deposit type contracts. It is not part of the
Company’s strategy to utilize these funds for operations, and any funds obtained from the FHLB Pittsburgh for use in
general operations would be accounted for under SSAP ;o. 15, Debt and Holding Company Obligations, as borrowed
money. The Company has determined the actual or estimated maximum borrowing capacity in accordance with FHLB
Pittsburgh regulatory and or specific borrowing limits.