Genworth Mortgage Insurance Australia Limited ABN 72 154 890 730 genworth.com.au Genworth Annual Report 2016 2 Genworth Mortgage Insurance Australia Genworth is the leading provider of Lenders Mortgage Insurance (LMI) in Australia. LMI has been an important part of the Australian residential mortgage lending market since Housing Loan Insurance Corporation (HLIC) was founded by the Australian Government in 1965. Contents Genworth overview Chairman’s message CEO’s report Our strategy Board of Directors Senior Leadership Team Annual Financial Report 2 4 6 8 10 12 15 Annual Report 2016 1 Genworth overview All data as at 31 December 2016 unless otherwise stated NT 1% SA 6% WA 12% QLD 23% Portfolio of insured loans by state* *Total may not sum due to rounding. NSW 28% NZ 2% VIC 23% ACT 3% TAS 2% Gross Written Premium (GWP) 2 Genworth Mortgage Insurance Australia $0m$100m$200m$300m$400m$500m$600m$700m$800m201620152014201320122011Gross Written Premium$382m Dividends (cents per share) Ordinary Special Ordinary payout ratio (RHS) Residential mortgage market trends Loans approved LVR <80% Loans approved LVR >80% Note: 2016 data is for 9 months to 30 September only. HLVR Loans (% of New Residential loan Approved) Snapshot Almost 1.5m policies in force 77,335 policies written in 2016 $1.7 billion market capitalisation $3.5 billion investment portfolio Annual Report 2016 3 05101520Dividends (cents per share)Cents per share1H142H141H152H151H162H16Ordinary payout ratio50%55%60%65%70%75%200820102009201120122013201420152016138.380.8173.189.236.9%$billions34.0%30.5%33.3%31.1%26.9%26.7%23.7%22.1%166.873.3161.480.5176.779.6219.480.9245.789.5283.1214.287.760.7Residential mortgage market trends Chairman’s message Ian MacDonald Chairman Having joined the Genworth Board in March 2012, it is now my pleasure to write to you as Chairman of Genworth. At Genworth, our vision is to be a leading provider of customer focused capital and risk management solutions in residential mortgage markets. We work with our lender customers, regulators and policy leaders to promote a stronger and more sustainable housing market in Australia. We believe that the provision of Lenders Mortgage Insurance (LMI) to our lender customers contributes significantly to supporting the Australian dream of homeownership. I am pleased to say that in 2016 alone we helped over 77,000 Australians purchase a residential property. Genworth Board changes During the year, I was pleased to welcome Ms Gai McGrath and Mr David Foster to the board as Non-Executive Directors. This follows the retirement of Mr Richard Grellman as Chairman and Mr Samuel Marsico as Non-Executive Director. Ms Georgette Nicholas, the Chief Executive Officer, was appointed as Managing Director in May 2016 following her appointment as CEO in February 2016. I would particularly like to recognise Richard’s leadership of the Company since 2012. He was instrumental in establishing an independent Board, preparing the Company for listing on the ASX and managing the transition to the requirements of a listed company. On behalf of my fellow Directors, I thank him for his commitment, guidance and contributions to the Company during his tenure. I look forward to working with Ms Nicholas, Ms McGrath and Mr Foster in the future and I believe their appointments further enhance the Board’s capability and experience. Diversity At Genworth, we champion diversity in the workplace. The Workplace Gender Equality Agency (WGEA) recognises our work in this area and awarded us the WGEA Employer of Choice for Gender Equality citation for the second consecutive year. The Board has resolved to adopt best practice regarding Board diversity by setting a target of having 30% female 4 Genworth Mortgage Insurance Australia representation on the Board by the end of 2018. I am pleased to say that we have met that target with 33% women on the Board currently. In addition, management has set a goal of maintaining female representation of at least 33% on the Senior Leadership Team and is striving for diverse slates for all leadership roles. As of today, 43% of the Senior Leadership Team are women. Genworth strategy Over the course of 2016, we undertook a program of work to deliver a refined strategic plan that will ensure we are achieving sustainable long term shareholder returns. We are focused on addressing the strategic needs of our customers through product innovation, being a strong risk management partner, providing insights across the mortgage market given our data and information and using technology to be efficient and agile in our operations. In meeting the strategic needs of our customers, our focus will also be on delivering a sustainable return on equity for our shareholders. Financial position The Company’s financial position is strong. At the end of 2016, we maintained a regulatory capital base of $2.2 billion and a coverage ratio of 1.57 times the Prescribed Capital Amount (PCA) on a Group (Level 2) basis. This is in excess of the Board’s targeted range of 1.32 – 1.44 times the PCA. We also have a high quality investment portfolio. As at 31 December 2016, the cash and investment portfolio had a market value of $3.5 billion, with 92% invested in Australian dollar denominated cash, cash equivalents and fixed income securities that are rated A- or above by the major ratings agencies. Capital management The Company actively manages its capital position as part of its strategy to deliver sustainable long term shareholder returns. In 2016, I am pleased that we were able to reward shareholders with a total of 74.5 cents per share (equivalent to $403.6 million) of capital management initiatives. Since the IPO in May 2014, the Company has returned more than $1 billion of excess capital to shareholders. Looking ahead Our vision is to be a leading provider of customer focused capital and risk management solutions. We have a strong value proposition to customers. We provide capital support, reduce risk exposures and deliver underwriting and loss mitigation services that help lenders maintain quality residential lending standards. Current market conditions are challenging with reduced high loan-to-value lending and areas of pressure as the economy continues to transition away from the mining investment boom. In this environment, our focus is on our risk management discipline and on finding new and innovative ways to address the strategic needs of our customers. In closing I would like to thank our CEO, Ms Georgette Nicholas, her Senior Leadership Team and all those who work at Genworth for their hard work throughout the year. I also extend my thanks to my fellow Directors for their continued commitment to the Company. Finally, to our shareholders, I thank you for your ongoing support. Yours sincerely, Ian MacDonald Our vision is to be a leading provider of customer focused capital and risk management solutions. We work with our lender customers, regulators and policy leaders to promote a stronger and more sustainable housing market in Australia. Annual Report 2016 5 Chief Executive Officer’s report Genworth is focused on the strategic needs of our customers and on delivering a sustainable return on equity for our shareholders. I am pleased to report that the Company delivered another year of strong financial performance in which it met key financial performance measures despite the more challenging market conditions. Our profitability is strong, our business model is resilient and we are strongly capitalised. Underlying Net Profit After Tax (excluding mark-to-market movements in the investment portfolio) was $212.2 million in 2016, down 19.8% from 2015. Current market dynamics continue to be challenging with reduced high loan-to-value ratio (LVR) lending as a proportion of total mortgage originations. In response to these trends, and with the inclusion of the loss of business from one of our largest customers in mid 2015, New Insurance Written (NIW) declined 18.4% to $26.6 billion and Gross Written Premium (GWP) was down 24.8% at $381.9 million. Total revenue, as measured by Net Earned Premium (NEP), fell 3.6% to $452.9 million, reflecting the pattern of revenue recognition from prior book years. The 2016 loss ratio rose to 35.1% from 24.0% in 2015 and was in line with the company’s expectations. New South Wales and Victoria performed strongly, reflecting strong employment and property prices in those states. However, the higher loss ratio reflects a rise in mortgage delinquencies and the expectation of higher average paid claim amounts in resources-exposed regional economies, particularly in Queensland and Western Australia. Capital management In 2016, we undertook a number of capital management initiatives to ensure our capital base is at a level that balances our objectives of meeting our policyholder obligations, delivering long term shareholder returns and having flexibility to grow the business in the future. These initiatives included: • A fully franked special dividend of 12.5 cents per share • A $202.4 million (or 34 cents per share) distribution to shareholders and associated share consolidation • A restructure of the reinsurance program with qualifying reinsurance of $950 million as at 1 January 2017. The Board also declared fully franked ordinary dividends totalling 28 cents per share representing an ordinary dividend payout ratio of 67.2% in 2016. Looking ahead, we will continue evaluate potential uses of excess capital in 2017 to manage to the Board target range of 1.32 to 1.44 times PCA. 6 Genworth Mortgage Insurance Australia Strategy The business is operating in a competitive and dynamic market where expectations of consumers and lenders are evolving as technology develops and information becomes more available. Bank capital requirements are new, requiring lenders to evaluate old and new solutions to address the increased capital requirements and cost pressures. As we continue to compete in this environment, we strive to be the leading provider of customer-focused capital and risk management solutions. Georgette Nicholas Chief Executive Officer We have begun a program of work to redefine our core business model, to address our customers’ capital and risk management needs further and to deliver a sustainable return on equity for shareholders. In particular, we are focused on improving our underwriting efficiency, enhancing our product offerings and, where appropriate, leveraging our data and partnerships along the mortgage value chain. We will also continue to work with regulators to ensure our role in supporting stability in the housing market remains strong. Customers Genworth has commercial relationships with over 100 lender customers across Australia and has Supply and Service Contracts with 10 of its key customers. Our top three customers accounted for 78% of our total NIW and 71% of GWP in 2016. The Group estimates that it had approximately 34% of the Australian LMI market by NIW in 2016. In November 2016, we announced that we had renewed our Supply and Service Contract with our largest customer, the Commonwealth Bank of Australia, for the provision of LMI for a further three years through to 31 December 2019. This contract represented 47% of GWP in 2016. Ratings Genworth’s credit ratings were unchanged in 2016. The ratings reflect the financial strength of the company and demonstrate to stakeholders its claim paying ability. Standard & Poor’s Ratings Services (S&P) affirmed the Genworth Financial Mortgage Insurance Pty Limited financial strength and issuer credit rating at ‘A+’ and outlook ‘Stable’. Moody’s affirmed the insurance financial strength rating of Genworth Financial Mortgage Insurance Pty Limited at ‘A3’ with an outlook of ‘Negative’. Fitch Ratings affirmed its insurer financial strength rating of Genworth Financial Mortgage Insurance Pty Limited, assigning an ‘A+’ rating with outlook ‘Stable’. Georgette Nicholas Chief Executive Officer Genworth is focused on the strategic needs of our customers and on delivering a sustainable return on equity for our shareholders. Our profitability is strong, our business model is resilient and we are strongly capitalised. in New South Wales and Victoria offset by weaker activity in Queensland and, in particular, Western Australia. Although the national unemployment rate has been relatively steady recently, key labour market indicators remain mixed. Employment growth is being primarily driven by an increase in part-time employment. The under-employment rate remains elevated and at near-record highs, implying a greater degree of spare capacity in the economy than indicated by the unemployment rate alone. Wage growth is also subdued, especially due to the transition away from mining-led activity and low actual and expected inflation. These labour market dynamics are increasing the instance of mortgage stress in certain regional economies and Genworth expects these trends to drive elevated mortgage delinquencies in these regions in 2017. House price growth is likely to moderate in 2017, with Sydney and Melbourne continuing to outperform the other major cities. There may be a wider variance in price movements of single dwellings compared to high density properties, particularly in east coast capital cities. Genworth expects 2017 NEP to decline by approximately 10 to 15% and for the full year loss ratio to be between 40 and 50%. The Board continues to target an ordinary dividend payout ratio range of 50 to 80%. The full year outlook is subject to market conditions as well as unforeseen circumstances or economic events. We remain committed to supporting Australians in realising their dream of homeownership through the provision of capital and risk management solutions to mortgage lenders. Thank you I would like to thank the Chairman and my fellow Directors for their commitment to the company and their support to management during 2016. To all our Genworth people, thank you for your dedication and commitment throughout the year. You continually put our customers first in everything you do and that provides the solid foundation for our business. I look forward to leading the team in the coming year as we execute on our strategic objectives. To our customers and other partners, thank you for your ongoing support and I look forward to continuing these strong relationships. Finally, I would like to thank our shareholders for your loyalty. Yours sincerely, Georgette Nicholas Annual Report 2016 7 Regulatory environment Genworth remains engaged with regulators, rating agencies and other industry participants to promote legislative and regulatory policies that support homeownership and continued responsible credit growth. Throughout 2016, APRA maintained its focus on upholding sound residential mortgage lending standards and ensuring appropriate capital requirements for the residential mortgage industry. Genworth is leading industry efforts to develop solutions with policy makers and regulators that emphasise the importance of LMI to the stability of the Australian financial system, especially its value as a loss absorption and capital management tool. Community Genworth seeks to make a meaningful contribution to the communities in which we operate. We make it a priority to contribute to causes that are aligned to our mission and vision of supporting the dream of homeownership by helping Australians get into their home sooner and keeping them there. In 2016, 38% of Genworth employees dedicated time to volunteering programs with our community partners. This is well above the sector benchmark of 10%. The enthusiasm of our employees and the impact of their efforts continues to be truly remarkable as they offer their time, energy, creativity and expertise to help our community partners and the clients they serve. In addition to a variety of volunteer opportunities, Genworth offers a number of programs including milestone anniversary donations, Make-A-Difference day and, new in 2017, employee-sponsored donations that allow employees to support a community partner of their choice. As an organisation we will continue to focus on our ongoing social responsibility in the year ahead. 2017 outlook Australian economic conditions have moderated recently as the economy continues to transition away from the mining investment boom. There is considerable variation in economic activity across the country with continued growth Our strategy Genworth’s primary business activity is the provision of LMI to our lender customers. Our mission is to support Australian homeownership. The Group’s strategy is to provide capital and risk management solutions to more customers, while investing in technology so we can offer our customers flexible product options, greater value, better service and sharper insights. The strategy aims to deliver a sustainable Return on Equity (ROE) above the cost of capital by executing on the following priorities: A customer focused approach to solutions and service • Focusing on strategic alignment with our customers • Offering innovative capital and risk management solutions • Providing relevant mortgage market insights to customers and industry bodies. Targeting appropriate risk-adjusted returns and optimal capital structure • Pricing NIW to achieve low to mid-teens ROE over the long term • Ongoing capital optimisation initiatives • Maintaining strong balance sheet and stable credit ratings. 1 2 8 Genworth Mortgage Insurance Australia Investing in our core business model Maintaining strong risk management discipline Regulatory advocacy • Investing in our technology platform for more flexibility and responsiveness to operational and customer needs • Enhancing our competitive position by improving our underwriting capabilities and implementing cost optimisation initiatives. • Effective risk decision making • Continuing to enhance our modelling and analytical capabilities • Leveraging data and analytics to add value across the mortgage chain. • Continuing to engage with regulators to reinforce the value proposition of LMI • Providing value-added insights to regulators. 3 4 5 Annual Report 2016 9 Board of Directors David Foster Director, Independent, Genworth Financial designee David was appointed to the Board on 30 May 2016. He is Chairman of the Remuneration & Nominations Committee and a member of the Audit Committee, Risk Committee and Capital & Investment Committee. David has over 25 years of financial services experience, specifically in banking, insurance and wealth management. David previously held numerous positions with Suncorp Bank including various senior executive roles from 2003 – 2007 and was the Chief Executive Officer from 2008 – 2013. Prior to Suncorp Bank, David held various management roles at Westpac. David is a Senior Fellow of the Financial Services Institute of Australasia and a Graduate of the Australian Institute of Company Directors. David is currently a Director of Thorn Group Limited, G8 Education Limited, Kina Securities Limited and Motorcycle Holdings Limited. Gai McGrath Director, Independent Gai was appointed to the Board on 31 August 2016. She is a member of the Audit Committee, Risk Committee, Capital & Investment Committee and Remuneration & Nominations Committee. Gai has over 20 years of financial services experience, specifically in retail banking and wealth management. Gai previously held numerous senior executive positions with the Westpac Group including: • General Manager, Retail Banking, Westpac Australia from 2012 – 2015 • General Manager, Retail Banking, Westpac New Zealand from 2010 – 2012 • General Manager, Customer Service and General Manager, Risk Solutions at BT Financial Group. Prior to the Westpac Group, Gai was General Counsel & Company Secretary at Perpetual Limited and a partner at a Sydney-based law firm. Gai is a Graduate of the Australian Institute of Company Directors. Gai is currently a director of IMB Bank, UrbanGrowth NSW and Toyota Finance Australia Limited. She is also a member of the Council of the State Library of New South Wales, a trustee and director of the State Library of New South Wales Foundation and a member of the Fundraising and Appeals Committee of The Salvation Army (Eastern Territory). Anthony (Tony) Gill Director, Independent Tony was appointed to the Board on 20 February 2012. He is the Chairman of the Capital & Investment Committee and a member of the Audit Committee, Risk Committee and Remuneration & Nominations Committee. Tony has over 30 years of financial services experience having served on a number of boards over that period. Previously Tony was Group Head, Banking and Securitisation Group at Macquarie Group. He has held senior executive roles in Macquarie Group from 1991– 2008. Prior to Macquarie, Tony was a Chartered Accountant and then held various management roles in mortgage banking and treasury in Australia. Tony is currently the Chairman of Australian Finance Group and a director of First American Title Insurance Company of Australia Ltd and First Mortgage Services Pty Ltd. Tony is also a member of ASIC’s External Advisory Panel. Tony was previously Chairman of the Australian Securitisation Forum and National President of the Mortgage Finance Association of Australia. Ian MacDonald Chairman, Independent Ian was appointed to the Board on 19 March 2012 and was appointed as Chairman of the Board on 31 August 2016. Ian has over 40 years of financial services experience in Australia, the UK and Japan, specifically in banking, insurance, wealth management and technology. He previously held numerous positions with National Australia Bank including various senior executive roles from 1999–2006, Chief Operating Officer Yorkshire Bank from 1997–1999, and head of Retail Services Clydesdale Bank, Glasgow UK from 1994–1997. Ian is a Senior Fellow and past President of the Financial Services Institute of Australasia and a member of the Australian Institute of Company Directors. Since 2006, Ian has held a number of directorships including publicly-listed companies, and is currently a director of Arab Bank Australia Ltd and Tasmanian Public Finance Corporation. 10 Genworth Mortgage Insurance Australia Stuart Take Director, Genworth Financial designee Stuart was appointed to the Board on 20 February 2012. Stuart has over 25 years’ experience, primarily at Genworth and General Electric. Stuart joined GE Capital in 1987 and has since held a number of senior management positions in Genworth’s mortgage insurance platform both domestically and overseas, including President/ CEO of Genworth’s Canadian mortgage insurance business, and Senior Vice President of Asia. Stuart is currently President of the Board of Directors of Genworth Seguros de Credito a la Vivienda S.A. de C.V. (Mexico) and also serves as a Director of India Mortgage Guarantee Corporation (a Genworth joint venture with the International Finance Corporation, the Asian Development Bank and the National housing Bank of India). He was previously Head of Financial Institutions at Deutsche Bank, Asia ex- Japan. Leon Roday Director, Genworth Financial designee Leon was appointed to the Board on 19 March 2012 and is a member of the Remuneration & Nominations Committee. Leon was Executive Vice President, General Counsel and Secretary for Genworth Financial to February 2015. Prior to this position, he held the same role at GE Financial since 1996. Prior to Genworth and GE Financial, Leon was a partner at LeBoeuf, Lamb, Greene & McRae for 14 years, and he is a member of the New York Bar Association. Gayle Tollifson Director, Independent Gayle was appointed to the Board on 20 February 2012. She is Chairman of the Audit Committee and Risk Committee and a member of the Capital & Investment Committee. Gayle has over 35 years of financial services experience and has been an Independent Director since 2006. Prior to this she worked with QBE Insurance Group in senior executive roles including Chief Risk Officer and Group Financial Controller from 1994 – 2006. Prior to QBE, Gayle held various roles in public accounting firms in Australia, Bermuda and Canada. Gayle is a fellow of the Australian Institute of Company Directors and the Institute of Chartered Accountants in Australia. Gayle is currently Chairman of Munich Holdings of Australasia Pty Limited and subsidiaries and a director of RAC Insurance Pty Limited. Jerome Upton Director, Genworth Financial designee Jerome was appointed to the Board on 20 February 2012 and is a member of the Audit Committee and the Capital & Investment Committee. Jerome was appointed as Senior Vice President and Chief Financial and Operations Officer, Global Mortgage Insurance for Genworth Financial in 2012. Previously, Jerome was the Senior Vice President and Chief Operating Officer, Genworth Financial International Mortgage Insurance from 2009. Prior to this Jerome has had a variety of roles at Genworth including Senior Vice President and CFO, Genworth Financial International – Asia Pacific, Canada and Latin America from 2007 – 2009, Head of Global Financial Planning & Analysis from 2004 –2007, International Finance Manager from 2002 – 2004, and Mortgage Insurance Global Controller from 1998 – 2002. Prior to Genworth, Jerome served in a number of accounting positions at KPMG Peat Marwick, culminating in his role as Senior Manager – Insurance in Raleigh, North Carolina. He obtained the status of Certified Public Accountant whilst the Controller and Director of Financial Reporting for Century American Insurance Company in Durham, North Carolina Annual Report 2016 11 Senior Leadership Team Senior Leadership Team Luke Oxenham Chief Financial Officer Luke joined Genworth Australia as Director Corporate Finance & Investor Relations in March 2012 and became Chief Financial Officer in February 2016 following four months as Acting Chief Financial Officer. Luke brings 20 years of financial services experience to his role as Chief Financial Officer, across the banking, finance and insurance industries. Most recently Luke was directly responsible for a number of finance functions including the planning, development and management of Genworth Australia’s capital requirements, the reinsurance program, investment portfolio, product pricing and investor relations activities. Before joining Genworth, Luke was the Chief Financial Officer of Intoll Group, which was formed from the demerger of Macquarie Infrastructure Group (MIG), where Luke was the Head of Investor Relations. Prior to Macquarie Group, Luke was General Manager, Corporate Affairs & Budgeting at Promina Group having joined prior to the Initial Public Offering in 2003 and being a key member of the management team that oversaw the takeover of Promina by Suncorp in 2007. In his earlier career, Luke spent almost 10 years with National Australia Bank in various roles both in Australia and the UK, as well as a number of years at Metway Bank in Brisbane. Luke has a Bachelor of Commerce from Griffith University Brisbane and a Graduate Diploma in Advanced Finance and Investment from the Securities Institute, as well as a Graduate Diploma in Psychology from Monash University. Andrew Cormack Chief Risk Officer Andrew joined Genworth Australia as Chief Risk Officer in October 2015. Andy brings more than 20 years of experience to his role as CRO having held senior financial as well as risk roles in the mortgage insurance industry. Andy is a seasoned leader, having had senior management responsibility for teams in commercial, product development and risk for multiple markets across Europe. He is passionate about delivering best in class risk and actuarial business models and building and developing high achieving teams engaged in delivering business objectives. Before joining Genworth Australia, Andy worked with Genworth Financial Mortgage Insurance in Europe, where most recently he held the role of Chief Risk Officer with responsibility for the risk and actuarial teams. Prior to this he held various positions including Senior Vice President (SVP) Technical Director, SVP Commercial Leader, SVP Product Development & Marketing and Chief Financial Officer. Earlier in his career, Andy spent three years with JP Morgan where he focused on emerging market fixed income derivatives and prior to this worked at Neville Russell Accountants (now Mazars) as an auditor responsible for Lloyds syndicates. Andy has a BA(Hons) in Accounting and Finance from Lancaster University and is a qualified Chartered Accountant (ACA)- (ICAEW). Georgette Nicholas Chief Executive Officer and Managing Director, Genworth Financial designee Georgette became Chief Executive Officer in February 2016 after four months as Acting Chief Executive Officer following joining the business as Chief Financial Officer in February 2014. Georgette was appointed Managing Director in May 2016. Georgette brings more than 30 years of financial and industry experience to the role including her extensive global experience in lenders mortgage insurance. Georgette has effectively leveraged her financial acumen, industry experience and leadership skills across finance, audit, controllership, strategy, actuarial and investor relations. She has a deep understanding of the mortgage insurance business both in international markets as well as the United States having worked with Genworth for over 10 years. Previously, Georgette held senior roles with Genworth Financial as Senior Vice President, Investor Relations, Public Relations and Rating Agencies, as Chief Financial Officer, US Mortgage Insurance where she was a key member of the management team leading the business through the economic downturn in the US housing market and the GFC, and as Global Controller for both US Mortgage Insurance and International Segments. Prior to Genworth, she spent over 19 years in public accounting, including being a Firm Director at Deloitte. Georgette has a Bachelor of Science in Accounting from the University of Bridgeport, Connecticut and is a Certified Public Accountant and Chartered Global Management Accountant. 12 Genworth Mortgage Insurance Australia Prudence Milne General Counsel and Company Secretary Prue joined Genworth as General Counsel in September 2016. Prue brings over 30 years’ experience in private practice, in-house corporate counsel and company secretary roles. She is a highly experienced senior lawyer with deep financial services experience. Before joining Genworth, Prue worked in private practice at Ashurst and then held a variety of senior legal and company secretary roles at AMP and AMP Capital Investors. In her nearly 18 year career with AMP, she oversaw and facilitated considerable change and transition in the AMP businesses and had considerable exposure to senior executives and boards. Prue has a Bachelor of Economics and Laws from Monash University, a Master of Laws from the University of Sydney, a Graduate Diploma in Secretarial Practice from Chartered Secretaries Australia and is a Graduate of the Australian Institute of Company Directors. Tobin Fonseca Chief Operations Officer Tobin joined Genworth Australia as Chief Operations Officer in February 2012. Tobin brings more than 35 years of experience to his role as COO across a range of areas in the financial services industry. In his current role Tobin is responsible for underwriting, loss mitigation, collections, the project management office and the Technology team. Before joining Genworth, Tobin worked at Advantedge Financial Services, a subsidiary of National Australia Bank, where he held the role of General Manager Advantedge Services overseeing the whole lending lifecycle. Prior to National Australia Bank, he was with the Challenger Group holding the Managing Director role with Synergy Capital Management in Hobart and the CEO Role with Challenger Corporate Superannuation Services. Earlier in his career, Tobin spent 20 years with Merrill Lynch in various leadership roles both in Australia and the US including Chief Administrative Officer/Project Director for Merrill Lynch HSBC Australia and Vice President/Program Manager International Private Client Group in Australia. Kate Svoboda Chief Human Resources Officer Kate was appointed as Chief Human Resources Officer in September 2016 after six months as Acting Chief Human Resources Officer. Kate joined Genworth as Human Resources Director in 2015. Kate brings to the role more than 16 years professional experience working in human resources, the majority of which has been in financial services. Kate is responsible for leading culture enhancement, organisational development, employee relations, workforce planning, recruitment, learning and talent development, diversity and remuneration and benefits. Prior to joining Genworth, Kate was HR Business Partner at Challenger and before that worked in various HR roles at Commonwealth Bank of Australia. Kate has also worked in various management and clinical roles in public health. Kate has a Masters of Business Administration (University of New England) and a Bachelor of Speech Pathology (University of Queensland). Annual Report 2016 13 14 Genworth Mortgage Insurance Australia Annual Financial Report for the year ended 31 December 2016 Contents Corporate Governance Statement 16 Directors’ report Remuneration report Lead Auditor’s independence declaration Financial Statements Directors’ declaration Independent Auditor’s report Shareholder information Glossary Corporate directory 17 30 48 49 98 99 103 107 109 Annual Report 2016 15 Corporate Governance Statement The Corporate Governance Statement is available on the Genworth website. Please visit investor.genworth.com.au/investor-centre/ 16 Genworth Mortgage Insurance Australia Directors’ report The Directors present their report together with the financial statements of the Group comprising the Company and its controlled entities for the year ended 31 December 2016 and the Auditor’s Report thereon. Directors The Directors of the Company as at 31 December 2016 were as follows: Name and title Biography Ian MacDonald Chairman, Independent Ian was appointed to the Board on 19 March 2012 and was appointed as Chairman of the Board on 31 August 2016. Georgette Nicholas Managing Director, Genworth Financial designee Ian has over 40 years of financial services experience in Australia, the UK and Japan, specifically in banking, insurance, wealth management and technology. He previously held numerous positions with National Australia Bank including various senior executive roles from 1999 – 2006, Chief Operating Officer Yorkshire Bank from 1997 – 1999, and Head of Retail Services Clydesdale Bank, Glasgow UK from 1994 – 1997. Ian is a Senior Fellow and past President of the Financial Services Institute of Australasia and a member of the Australian Institute of Company Directors. Since 2006, Ian has held a number of directorships including publicly-listed companies, and is currently a director of Arab Bank Australia Ltd and Tasmanian Public Finance Corporation. Georgette was appointed Managing Director on 30 May 2016. Georgette became Chief Executive Officer in February 2016 after four months as Acting Chief Executive Officer following joining the business as Chief Financial Officer in February 2014. Georgette brings more than 30 years of financial and industry experience to the role including her extensive global experience in lenders mortgage insurance. In her prior role as Chief Financial Officer, Georgette has effectively leveraged her financial acumen, industry experience and leadership skills across finance, audit, controllership, strategy, actuarial and investor relations. She has a deep understanding of the mortgage insurance business both in international markets as well as the United States having worked with Genworth for over ten years. Previously, Georgette worked as Senior Vice President, Investor Relations, Public Relations and Rating Agencies with Genworth Financial Inc. Other senior roles she has held at Genworth include Chief Financial Officer, US Mortgage Insurance where she was a key member of the management team leading the business through the economic downturn in the US housing market and the GFC, and Global Controller for both US Mortgage Insurance and International Segments. Before joining Genworth in 2005, Georgette was a Director at Deloitte & Touche providing services to companies in the insurance, real estate and broadcasting industries. Earlier in her career, Georgette worked with Freed Maxick Sachs & Murphy, a top 100 accounting firm, in Buffalo, New York where she focused on audit, acquisitions and mergers, tax and strategic financial planning and prior to this as an Internal Auditor at ITT Corporation. Georgette has a Bachelor of Science in Accounting from the University of Bridgeport, Connecticut and is a Certified Public Accountant and Chartered Global Management Accountant. Anthony (Tony) Gill Director, Independent Tony was appointed to the Board on 20 February 2012. He is the Chairman of the Capital & Investment Committee and a member of the Audit Committee, Risk Committee and Remuneration & Nominations Committee. Tony has over 30 years of financial services experience having served on a number of boards over that period. Previously Tony was Group Head, Banking and Securitisation Group at Macquarie Group. He has held senior executive roles in Macquarie Group from 1991– 2008. Prior to Macquarie, Tony was a Chartered Accountant and then held various management roles in mortgage banking and treasury in Australia. Tony is currently the Chairman of Australian Finance Group (since 28 August 2008) and a director of First American Title Insurance Company of Australia Ltd and First Mortgage Services Pty Ltd. Tony is also a member of ASIC’s External Advisory Panel. Tony was previously Chairman of the Australian Securitisation Forum and National President of the Mortgage Finance Association of Australia. Annual Report 2016 17 Directors’ report (continued) Directors (continued) Name and title Biography Gai McGrath Director, Independent Gai was appointed to the Board on 31 August 2016. She is a member of the Audit Committee, Risk Committee, Capital & Investment Committee and Remuneration & Nominations Committee. Gai has over 20 years of financial services experience, specifically in retail banking and wealth management. Gai previously held numerous senior executive positions with the Westpac Group including: • General Manager, Retail Banking, Westpac Australia from 2012 – 2015 • General Manager, Retail Banking, Westpac New Zealand from 2010 – 2012 • General Manager, Customer Service and General Manager, Risk Solutions at BT Financial Group. Prior to the Westpac Group, Gai was General Counsel & Company Secretary at Perpetual Limited and a partner at a Sydney-based law firm. Gai is a Graduate of the Australian Institute of Company Directors. Gai is currently a director of IMB Bank, UrbanGrowth NSW and Toyota Finance Australia Limited. She is also a member of the Council of the State Library of New South Wales, a trustee and director of the State Library of New South Wales Foundation and a member of the Fundraising and Appeals Committee of The Salvation Army (Eastern Territory). Gayle Tollifson Director, Independent Gayle was appointed to the Board on 20 February 2012. She is Chairman of the Audit Committee and Risk Committee and a member of the Capital & Investment Committee. Gayle has over 35 years of financial services experience and has been an Independent Director since 2006. Prior to this she worked with QBE Insurance Group in senior executive roles including Chief Risk Officer and Group Financial Controller from 1994 – 2006. Prior to QBE, Gayle held various roles in public accounting firms in Australia, Bermuda and Canada. Gayle is a fellow of the Australian Institute of Company Directors and the Institute of Chartered Accountants in Australia. Gayle is currently Chairman of Munich Holdings of Australasia Pty Limited and subsidiaries and a director of RAC Insurance Pty Limited. David was appointed to the Board on 30 May 2016. He is Chairman of the Remuneration & Nominations Committee and a member of the Audit Committee, Risk Committee and Capital & Investment Committee. David has over 25 years of financial services experience, specifically in banking, insurance and wealth management. David previously held numerous positions with Suncorp Bank including various senior executive roles from 2003 – 2007 and was the Chief Executive Officer from 2008 – 2013. Prior to Suncorp Bank, David held various management roles at Westpac. David is a Senior Fellow of the Financial Services Institute of Australasia and a Graduate of the Australian Institute of Company Directors. David is currently a Director of Thorn Group Limited (since 1 November 2014), G8 Education Limited (since 1 February 2013), Kina Securities Limited (since 30 July 2013) and Motorcycle Holdings Limited (since 8 March 2015). Leon was appointed to the Board on 19 March 2012 and is a member of the Remuneration & Nominations Committee. Leon was Executive Vice President, General Counsel and Secretary for Genworth Financial to February 2015. Prior to this position, he held the same role at GE Financial since 1996. Prior to Genworth and GE Financial, Leon was a partner at LeBoeuf, Lamb, Greene & McRae for 14 years, and he is a member of the New York Bar Association. David Foster Director, Independent, Genworth Financial designee Leon Roday Director, Genworth Financial designee 18 Genworth Mortgage Insurance Australia Name and title Biography Stuart Take Director, Genworth Financial designee Stuart was appointed to the Board on 20 February 2012. Stuart has over 25 years’ experience, primarily at Genworth and General Electric. Jerome Upton Director, Genworth Financial designee Stuart joined GE Capital in 1987 and has since held a number of senior management positions in Genworth’s mortgage insurance platform both domestically and overseas, including President/ CEO of Genworth’s Canadian mortgage insurance business, and Senior Vice President of Asia. Stuart is currently President of the Board of Directors of Genworth Seguros de Credito a la Vivienda S.A. de C.V. (Mexico) and also serves as a Director of India Mortgage Guarantee Corporation (a Genworth joint venture with the International Finance Corporation, the Asian Development Bank and the National housing Bank of India). He was previously Head of Financial Institutions at Deutsche Bank, Asia ex- Japan. Jerome was appointed to the Board on 20 February 2012 and is a member of the Audit Committee and the Capital & Investment Committee. Jerome was appointed as Senior Vice President and Chief Financial and Operations Officer, Global Mortgage Insurance for Genworth Financial in 2012. Previously, Jerome was the Senior Vice President and Chief Operating Officer, Genworth Financial International Mortgage Insurance from 2009. Prior to this Jerome has had a variety of roles at Genworth including Senior Vice President and CFO, Genworth Financial International – Asia Pacific, Canada and Latin America from 2007 – 2009, Head of Global Financial Planning & Analysis from 2004 – 2007, International Finance Manager from 2002 – 2004, and Mortgage Insurance Global Controller from 1998 – 2002. Prior to Genworth, Jerome served in a number of accounting positions at KPMG Peat Marwick, culminating in his role as Senior Manager – Insurance in Raleigh, North Carolina. He obtained the status of Certified Public Accountant whilst the Controller and Director of Financial Reporting for Century American Insurance Company in Durham, North Carolina. The Directors of the Company who ceased to be a Director during the financial year are as follows: • Richard Grellman (ceased to be a Director on 31 August 2016) • Samuel Marsico (ceased to be a Director on 5 May 2016) Principal activity The principal activity of the Group during the reporting period was the provision of lenders mortgage (LMI) insurance under authorisation from APRA. In Australia, LMI facilitates residential mortgage lending by transferring risk from lenders to LMI providers, predominately for high loan to value ratio residential mortgage loans. Operating and financial review Organisation overview and business model About Genworth Genworth is the leading LMI provider in the Australian LMI market. The Group estimates that it had approximately 34% of the Australian LMI market by NIW for the 12 months ended 31 December 2016. The Company was incorporated on 21 December 2011 with $1 share capital and had nil operating activity until 19 May 2014 when the Group was formed and the Company gained 100% control of all the Genworth subsidiaries as part of the IPO restructure. The Company was listed on the ASX on 20 May 2014 under ticker code ‘GMA’ at an issue price of $2.65 per share, raising $583 million from the offer which represented 33.85% of the issued share capital of the Company with the remaining 66.15% of the share capital indirectly held by Genworth Financial. On 15 May 2015, Genworth Financial sold 92.3 million shares in the Company, reducing its ownership to approximately 52%. The Company commenced an on-market buyback program on 16 November 2015 as part of the Group’s capital management initiatives. As at 8 December 2015, 54.6 million shares in the amount of $150 million were successfully purchased from the market. Genworth Financial participated in the on-market sale transactions during the program to maintain the approximately 52% stake in the Group. On 1 June 2016, the Group completed a $202.4 million capital reduction and consolidation of shares. As at 2 June 2016, the number of Genworth shares on issue was 509.4 million. Annual Report 2016 19 Directors’ report (continued) Operating and financial review (continued) Organisation overview and business model (continued) The Group has the following corporate structure: Public 244,730,497 ordinary shares (48.05%) 509,365,050 ordinary shares (100%) Genworth Financial, Inc.* Genworth Mortgage Insurance Australia Ltd ABN 72 154 890 730 264,634,553 ordinary shares (51.95%) Genworth Financial Australia Holdings, LLC ARBN 140 792 570 Genworth Financial Mortgage Insurance Finance Holdings Pty Ltd ABN 91 106 972 883 Genworth Financial Mortgage Insurance Finance Pty Ltd ABN 62 106 975 188 Genworth Financial New Holdings Pty Ltd ABN 74 140 219 101 Genworth Financial Mortgage Insurance Holdings Pty Ltd ABN 89 106 972 874 Genworth Financial Services Pty Ltd ABN 78 116 067 424 Genworth Financial Mortgage Insurance Pty Ltd ABN 60 106 974 305 Genworth Financial Mortgage Indemnity Ltd ABN 55 001 825 725 Non-Operating Companies * Genworth Financial, Inc’s interest in the Company is held indirectly through the Genworth Financial Group. In November 2016, the Group completed an internal reorganisation under which Genworth Financial Mortgage Insurance Pty Limited became a wholly-owned subsidiary of the Company. It is proposed that in 2017 the Group will voluntarily deregister six wholly owned entities (the ‘Non-Operating Companies’ identified in the chart) to simplify the current corporate structure. The actions taken will not impact any operational capabilities of the Group’s insurance subsidiaries, but are intended to provide for a more efficient administration. Business model Genworth’s business activities As an LMI Provider, Genworth’s profitability is driven primarily by its ability to earn premiums and generate financial income in excess of net claims and operating expenses (being underwriting and other costs). The diagram below illustrates how Genworth creates value. Products and Income Costs Distribution Genworth shareholder value chain Financial Income Claims • Interest rates • Capital levels • Delinquencies • Reserving • Payment of claims Premium Income from writing LMI • LMI usage • Customers • NIW • Premium rates • GWP • Revenue recognition Underwriting and other costs • Underwriting fees • Amortisation of customer acquisition related costs • Marketing costs • Staff and IT costs Strategy, Risk and Capital Management Dividends Retained Earnings • Underlying net profit after tax • Payout ratio 20 Genworth Mortgage Insurance Australia Products and customers The Group continued to offer three LMI products in 2016, being Standard LMI, Homebuyer Plus and Business Select/Low Doc. In FY16, Standard LMI produced 99% of total GWP. The Group underwrites LMI through flow and portfolio channels. In FY16, 98% of the business was generated from the flow channel. During 2016, Genworth maintained commercial relationships with over 100 lender customers across Australia. Genworth has Supply and Service Contracts with 10 of its key lender customers. In 2016, Genworth’s top three customers accounted for 78% of its NIW and 71% of its GWP. The largest customer accounted for 36% of its NIW and 47% of its GWP in FY16, as illustrated below. Lender customer Lender customer 1 Lender customer 2 Lender customer 3 Lender customers 4 – 10 All other lender customers FY16 NIW FY16 GWP 36% 33% 9% 15% 7% 47% 14% 10% 20% 9% Strategic priorities Genworth’s strategy is to be the leading provider of customer focused capital and risk management solutions in the Australian residential mortgage market. The Group is focused on delivering a sustainable return on equity for its shareholders as it executes on its strategy. The strategic priorities of the Group include: A customer focused approach to solutions and service Targeting appropriate risk- adjusted returns and optimal capital structure Investing in our core business model Maintaining strong risk management discipline Regulatory advocacy • Focusing on • Pricing NIW to • strategic alignment with our customers • Offering innovative capital and risk management solutions • Providing relevant mortgage market insights to customers and industry bodies achieve low to mid- teens ROE over the long term • Ongoing capital optimisation initiatives • Maintaining strong balance sheet and stable credit ratings Investing in our technology platform for more flexibility and responsiveness to operational and customer needs • Enhancing our competitive position by improving our underwriting capabilities and implementing cost optimisation initiatives • Continuing to engage with regulators to reinforce the value proposition of LMI • Providing value- added insights to regulators • Effective risk decision making • Continuing to enhance our modelling and analytical capabilities • Leveraging data and analytics to add value across the mortgage chain. 1 2 3 4 5 Annual Report 2016 21 Directors’ report (continued) Operating and financial review (continued) Risk management Genworth maintains a disciplined approach to risk management and underwrites to a defined set of underwriting policies that determine which residential mortgage loans it will insure. Genworth’s risk management strategy forms an integral part of its risk management framework, ensuring the risk management framework remains relevant and aligned to the Board’s approved strategies. The key business risks are those that could impact the successful execution of the strategy. Key risk Key control / mitigation The value proposition of LMI in the market may be challenged over the medium term Customers may explore different risk transfer product structures • Genworth has a project team dedicated to working on strategies and products to broaden its product set and enhance its value proposition • Continue to work with regulators and the industry to recognise LMI Increased competitive pressure and market disruptions. Changing customer dynamics, new entrant in the mortgage risk transfer market, regulatory changes or other factors may lead to reduced new insurance written in risk and capital models. • Genworth is working with regulators and the LMI industry to address actual and expected legislative and regulatory changes • Genworth maintains a forward looking government relations plan • Customer plans are in place to monitor the execution of priority areas and key activities of key customers • Flexible product suite includes standard and non-standard product offerings. Adverse legislative or regulatory changes • Monitoring of regulatory environment and changes Adverse regulation may impact Genworth’s business model, new business volumes and/or profitability. Unexpected macroeconomic event results in deterioration in financial and capital performance A deterioration in macroeconomic conditions or outlook could result in a flow on impact to the financial and capital profile of Genworth. • Continue to work with stakeholders to demonstrate the LMI value proposition • Active regulatory engagement strategy • Continue to work with government and regulators. • Product, location and segment risk responses • Continue to enhance reserving and loss forecasting processes • Risk Appetite Statement, review, monitor and report • Contingency impact plans designed and monitored through dashboard • Risk portfolio monitoring • Macroeconomic Contingency Plan • ICAAP and stress testing processes. Capital relief for LMI • Genworth seeks to work with customers in relation to their capital LMI may continue to not be explicitly recognised in AIRB lenders’ capital models or there may be reduction or removal of capital relief for ADIs that utilise LMI and are currently able to obtain capital relief. positions • Genworth continues to work with regulators and other industry participants to recognise LMI • Management maintains an active engagement plan with government and opposition. Changes in financial strength ratings • Genworth has a Contingency Plan to address ratings downgrade Genworth’s financial strength rating may be downgraded. • The listing of the Company on the ASX provides for additional capital flexibility if required. Reinsurance renewals • Capital management strategy including reinsurance management Failure to renew reinsurance contracts as and when they fall due for renewal. strategy • Ongoing active management of the reinsurance program • Ability to leverage external reinsurance experience. 22 Genworth Mortgage Insurance Australia Key risk Key control / mitigation Risks related to Supply and Service Contracts with customers • Customer contract renewal and extension process; contractual avenue to address any improvements required • Termination before the expiry of the contractual • A Contingency Plan is maintained for the loss or potential loss of a term • Change of control of a customer • A ratings downgrade of Genworth • Material breach or force majeure. customer • Contractual safeguards are included in customer contracts. Change in interest rate cycle and risk of mark to market loss exposure Lower yield environment continues to pressure both financial and pricing returns. Mark to market adjustments may have an adverse impact on profitability and financial position. • Execution of the Derivatives strategy • Diversification of investment portfolio within the boundaries set by the Risk Appetite Statement • Investment Committee governance and oversight • Risk Assessment prior to any change to Risk Appetite and related changes to the investment policy. Performance review and outlook Financial results The Group’s key financial measures are summarised in the below table. All measures are presented on reported basis. Financial performance measures (A$ million) Gross earned premium Net earned premium NPAT Underlying NPAT1 Non-IFRS performance metrics Loss Ratio2 Expense Ratio3 Combined Ratio4 Insurance Margin5 Investment Return6 ROE7 Underlying ROE8 FY16 524.7 452.9 203.1 212.2 FY16 35.1% 25.7% 60.8% 48.1% 3.4% 9.7% 10.4% FY15 549.6 469.9 228.0 264.7 FY15 24.0% 26.2% 50.2% 58.1% 3.7% 9.7% 11.6% The underwriting performance in FY16 reflects the following key factors: (a) GWP fell 24.8% due to a lower average LVR mix of business, as well as the full impact of the changes in customers in 2015; (b) The loss ratio for FY16 was 35.1% compared to 24.0% in FY15 due to an increase in delinquencies, especially in the mining regions; (c) The expense ratio decreased from 26.2% in FY15 to 25.7% in FY16 as a consequence of the ongoing expense management; (d) The insurance margin decreased to 48.1% compared with 58.1% for FY15, driven by higher net claims incurred. 1 Underlying NPAT excludes the after-tax impact of unrealised gains/(losses) and impairment losses on the investment portfolio. 2 The Loss Ratio is calculated by dividing the net claims incurred by the Net Earned Premium. 3 The Expense Ratio is calculated by dividing the sum of the acquisition costs and the other underwriting expenses by the Net Earned Premium. 4 The Combined Ratio is the sum of the Loss Ratio and the Expense Ratio. 5 The Insurance Margin is calculated by dividing the profit from underwriting and interest income on Technical Funds (including realised gains) by the Net Earned Premium. 6 The Investment Return is calculated as the interest income on Technical Funds plus the interest income on Shareholder Funds (excluding realised and unrealised gains/ (losses)) divided by the average balance of the opening and closing cash and investments balance for each financial year. 7 The ROE is calculated by dividing NPAT by the average of the opening and closing equity balance for each financial year. 8 The Underlying ROE is calculated by dividing Underlying NPAT by the average of the opening and closing equity balance for each financial year excluding the impact of after tax changes to the cash and investments balance on the balance sheet. Annual Report 2016 23 Directors’ report (continued) Operating and financial review (continued) Review of financial condition Financial position Financial position (A$ million) 31 Dec 16 31 Dec 15 Cash and investments Deferred acquisition costs Total assets Trade and other payables Outstanding claims reserve Unearned premium Interest bearing liabilities Total liabilities Net assets 3,522.6 142.0 3,833.4 35.0 355.5 1,177.8 196.0 1,866.0 1,967.4 3,925.9 145.1 4,232.0 77.7 277.0 1,320.6 244.4 2,013.2 2,218.7 The total assets of the Group as at 31 December 2016 were $3,833.4 million compared to $4,232.0 million at 31 December 2015. The movement was mainly driven by $403.3 million decrease in investments as a result of cash outflows from the $202.4 million capital reduction and dividend payments. The total liabilities of the Group as at 31 December 2016 were $1,866.0 million compared to $2,013.2 million at 31 December 2015. Notable movements contributing to the $147.2 million decrease over the period include: • $42.6 million decrease in other trade and other payables, mainly related to an increase in income tax payments made in FY16; • $78.5 million increase in outstanding claims reserve driven by a rise in reported delinquencies; • $142.8 million decrease in unearned premium reflecting relatively lower level of new premium written in 2016, offset by seasoning of prior years’ in-force premium; and • $48.4 million decrease in interest bearing liabilities, mainly related to redemption of $49.6 million of the subordinated notes. The Group’s equity decreased by $251.4 million over the period, mainly reflecting the dividends and capital reduction paid in FY16, partially offset by current year earnings. Investments As at 31 December 2016, the Group had a $3,522.6 million cash and investments portfolio, invested 92% in Australian denominated cash, cash equivalents and fixed income securities rated A- or higher. Significant movements in investments since 31 December 2015 include: • $187.7 million investment in Australian equities in line with the Group’s investment strategy to improve investment returns within acceptable risk tolerances; and • Decreased funds reflecting the capital management initiatives including the $202.4 million capital reduction and dividend payments. Capital Mix The Group measures its capital mix on a net tangible equity basis, i.e. after deduction of goodwill and intangibles, giving it strong alignment with regulatory and rating agency models. At 31 December 2016, the Group’s capital mix was: • Ordinary equity (net of goodwill and intangibles) 90%; and • Debt 10%. 24 Genworth Mortgage Insurance Australia Capital Management The Group’s capital position was solid at 31 December 2016, reflected in the Group’s regulatory capital solvency level of 1.57 times the Prescribed Capital Amount (PCA) and a Common Equity Tier 1 (CET1) capital ratio of 1.42 times. The regulatory solvency position continues to be above the Board’s targeted solvency range of 1.32 – 1.44 times the PCA. The table below illustrates the capital position as at 31 December 2016 compared with the capital position as at 31 December 2015. PCA coverage ratio (Level 2) (A$ in millions), as at CET1 capital (incl. excess technical provisions) Tier 2 capital Regulatory Capital Base LMI Concentration Risk Charge (LMICRC) Asset risk charge Insurance risk charge Operational risk charge Aggregation benefit PCA PCA coverage ratio (times) 31 Dec 16 31 Dec 15 2,012.8 200.0 2,212.8 1,095.3 111.0 229.8 30.0 (52.2) 1,413.9 1.57x 2,351.2 249.6 2,600.8 1,344.2 76.9 226.6 27.7 (37.1) 1,638.3 1.59x The decrease in CET1 capital in FY16 mainly reflects the $249.9 million dividends paid in FY16, the $202.4 million capital reduction and an $86.5 million decrease in the excess technical provisions, offset by $203.1 million reported NPAT. Tier 2 capital decreased following the redemption of $49.6 million of the $140.0 million notes issued in 2011. The PCA coverage ratio was consistent with FY15. Full year 2017 outlook Australian economic conditions have moderated recently as the economy continues to transition away from the mining investment boom. There is considerable variation in economic activity across the country with continued growth in New South Wales and Victoria offset by weaker activity in Queensland and, in particular, Western Australia. The national unemployment rate has increased slightly to 5.8% in December 2016 and key labour market indicators remain mixed. Employment growth is being primarily driven by an increase in part-time employment. The under-employment rate remains elevated and at near-record highs, implying a greater degree of spare capacity in the economy than indicated by the unemployment rate alone. Wage growth is also subdued, especially due to the transition away from mining-led activity and low actual and expected inflation. These labour market dynamics are increasing the instance of mortgage stress in certain regional economies and Genworth expects these trends to drive elevated mortgage delinquencies in these regions in 2017. House price growth is likely to moderate in 2017, with Sydney and Melbourne continuing to outperform the other major cities. There may be a wider variance in price movements of single dwellings compared to high density properties, particularly in east coast capital cities. Genworth remains engaged with other existing and potential customers about the provision of LMI and other risk management solutions and will continue to actively pursue new agreements over the course of 2017. Overall, the Company expects GWP in 2017 to be down between 10 and 15% from 2016, subject to the timing and extent of any changes in the customer portfolio. Genworth expects 2017 NEP to decline by approximately 10 to 15% and for the full year loss ratio to be between 40 and 50%. The Board continues to target an ordinary dividend payout ratio range of 50 to 80% of underlying NPAT. The full year outlook is subject to market conditions as well as unforeseen circumstances or economic events. Dividends Details of the dividends paid or resolved to be paid by the Group and the dividend policy employed by the Group are set out in the dividends note within the financial statements. Environmental regulations The Group’s operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. Annual Report 2016 25 Directors’ report (continued) Operating and financial review (continued) Market capitalisation The market capitalisation of the Company as at 31 December 2016 was $1.67 billion based on the closing share price of $3.27. Events subsequent to reporting date Detail of matters subsequent to the end of the financial year is set out below and in the events subsequent to reporting date note within the financial statements. • On 8 February 2017, the Directors declared a 100% franked final dividend of 14 cents per share totalling $71,300,000. Likely developments Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years have not been included in this report because the directors believe it would be likely to result in unreasonable prejudice to the Group. Company Secretary Prudence Milne Ms Prudence Milne was appointed as General Counsel and Company Secretary on 5 September 2016. Between 1998 and 2015, Prudence held Executive Legal Counsel and Company Secretary positions at AMP, with significant exposure across superannuation, life insurance and investment management. Prior to AMP, Prudence worked at Ashurst, Hambros Australia and Herbert Smith Freehills. She brings to Genworth more than 30 years of experience across a range of areas including corporate governance, mergers and acquisitions, litigation, compliance and legal risk management. Prudence holds a Bachelor of Economics and a Bachelor of Laws from Monash University, a Masters of Laws from the University of Sydney. She is a Graduate of the Australian Institute of Company Directors and holds a Graduate Diploma in Company Secretarial Practice from the Governance Institute. Assistant Company Secretary Brady Weissel Mr Brady Weissel was appointed as Assistant Company Secretary on 10 March 2016. Brady joined Genworth as a Corporate Counsel in July 2014. Prior to joining Brady was a lawyer at Ashurst with experience acting on a range of corporate and commercial matters including, private and public mergers and acquisitions, schemes of arrangement and takeovers, on initial public offerings, equity raisings and joint ventures. Brady holds a Bachelor of Commerce and Bachelor of Laws from the University of Sydney. 26 Genworth Mortgage Insurance Australia Directors’ meetings The number of Directors’ meetings (including meetings of Committees of Directors) and the number of meetings attended by each of the Directors of the Company during the financial year are: Director Board meetings Ian MacDonald David Foster (appointed as a Director on 30 May 2016) Anthony Gill Richard Grellman (ceased to be a Director on 31 August 2016) Samuel Marsico (ceased to be a Director on 5 May 2016) Gai McGrath (appointed as a Director on 31 August 2016) Georgette Nicholas (appointed as Managing Director on 3 February 2016) Leon Roday Stuart Take Gayle Tollifson Jerome Upton A 10 4 10 7 5 3 9 10 10 10 10 B 10 4 10 7 6 3 9 10 10 10 10 Audit Committee meetings B A 5 5 Risk Committee meetings B A 3 3 Capital & Investment Committee meetings B A 4 4 Remuneration & Nominations Committee meetings B A 5 5 3 7 - - 2 - - - 7 7 3 7 - - 2 - - - 7 7 4 6 - 2 3 - - - 6 - 4 6 - 2 3 - - - 6 - 4 7 - - 3 - - - 7 7 4 7 - - 3 - - - 7 7 3 8 - - 3 - 8 - - - 3 8 - - 3 - 8 - - - A - Number of meetings attended B - Number of meetings held during the time the Director held office during the year Note: All Directors are normally invited to attend all Committee meetings. This register only records attendance of Committee members. Indemnification and insurance of officers and Directors During the financial year, a controlled entity paid premiums to insure Directors and certain officers of the Company for the year ended 31 December 2016 and, since the end of the financial year, the controlled entity has paid or agreed to pay premiums in respect of such insurance contracts for the year ending 31 December 2017. Such insurance contracts insure against liability (subject to certain exclusions) persons who are or have been Directors or officers of the Group. The Directors have not included details of the nature of the liabilities covered or the amount of the premium paid as such disclosure is prohibited under the terms of the contracts. The Group has not indemnified or made a relevant agreement for indemnifying against a liability any person who is or has been an auditor of the Group. Directors’ interests and benefits Other than the aggregate remuneration paid to or receivable by Directors included in the financial report, and remuneration as an executive paid or payable by the related body corporate, no Director has received or become entitled to receive any benefit because of a contract made by the Group or a related body corporate with a Director or with a firm of which a Director is a member or with an entity in which the Director has a substantial interest. Rounding off The Group is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and, in accordance with that Class Order, amounts in the consolidated financial statements and Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. Annual Report 2016 27 Directors’ report (continued) Non-audit services The Directors are satisfied that the provision of non-audit services during the year by the Auditor of $43,000 is compatible with the general standard of independence for auditors imposed by the Corporations Act and in accordance with Genworth’s Auditor Independence Policy, noting that: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the Auditor; and • none of the services undermine the general principles relating to auditor independence as set out in the Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the Auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing risks and rewards. Details of the amounts paid to the Auditor of the Group, KPMG, and its network firms, for audit and non-audit services provided during the year are set out below: Audit and review of financial statements Regulatory audit services Non-assurance services Total paid/payable to KPMG 2016 $ 654,165 76,480 43,000 773,645 28 Genworth Mortgage Insurance Australia This page has been intentionally left blank. Annual Report 2016 29 Remuneration report Dear Shareholder, I am pleased to present our remuneration report for the year ended 31 December 2016, and my first as Chairman of the Remuneration & Nominations Committee. The guiding principle of our remuneration programs is that remuneration should reflect a balance of Genworth’s overall performance, individual performance, and the experience of our shareholders. This principle manifests in the way the Committee and Board determine performance-based remuneration; so while Genworth has performed solidly in the face of a dynamic and challenging market, performance against financial objectives was below target. This is reflected in a reduction in bonus pool funding and resulting awards. Another reflection of this balance is in how remuneration is delivered. The Board and Committee remain committed to delivering remuneration through shares via both short term and long term incentive programs which, over a long term timeframe, align Key Management Personnel (KMP) with shareholders. This report clearly and concisely explains how the Committee and Board have determined remuneration outcomes across all the Company’s remuneration programs which reflect this balance. David Foster Chairman – Remuneration & Nominations Committee Contents 1. Executive summary 2. Remuneration governance, policy and programs 3. Relationship between company performance and remuneration 4. Remuneration outcomes for executive KMP 5. Contractual arrangements for executive KMP 6. KMP remuneration tables 7. Non-executive director remuneration 8. Other tables PAGE 31 32 38 39 39 40 44 46 30 Genworth Mortgage Insurance Australia 1. Executive summary This report provides shareholders with an overview of the Group’s remuneration governance, strategy, programs and outcomes for KMP for the year ended 31 December 2016. The table below provides a concise summary of the remuneration received by Executive KMP in 2016. This table is for general information, and is supplementary to the statutory requirements contained in sections 6 and 7. It is not prepared in accordance with accounting standards, as it includes both contracted and actual remuneration received over the calendar year and excludes long service leave accruals, fringe benefit tax attributed to insurances/car parking and other non-monetary benefits. Table 1a – 2016 Remuneration summary table (unaudited) as at 31 December 2016 Name and position - Executive KMP At-risk/performance remuneration Fixed remuneration Short term incentive (STI) Long term incentive (LTI) Contract TFR1 Actual TFR received2 STI target Actual STI awarded3 LTI target4 LTI vested5 Georgette Nicholas Chief Executive Officer (CEO) 2016 2015 $850,000 $817,981 $744,662 $645,000 $850,000 $467,844 $465,186 $300,140 $400,000 $207,792 $14,966 $73,321 Luke Oxenham 2016 $450,000 $446,351 $225,000 $260,000 $225,000 Chief Financial Officer (CFO) Andrew Cormack Chief Risk Officer (CRO) Tobin Fonseca Chief Operating Officer (COO) Former Executive KMP Bridget Sakr6 Former Chief Commercial Officer 2015 2016 2015 2016 2015 2016 2015 $383,250 $83,407 $27,292 $42,496 - $485,000 $483,378 $145,500 $145,000 $237,500 $475,000 $125,555 $42,631 $52,895 - $450,000 $433,979 $220,493 $150,000 $202,500 $27,117 $405,000 $401,641 $202,500 $230,000 $195,000 $101,488 $435,000 $435,000 $217,500 $227,700 $217,500 $25,082 $435,000 $433,595 $217,500 $230,000 $212,500 $157,235 - - - - Throughout this report, KMP refers to those responsible for planning, directing and controlling the activities of the Company, made up of Non-Executive Directors, the Executive Director and nominated executives. Please refer to section 7 for details relating to Non-Executive Directors. Table 1b Executive KMP in 2016 Name Executive KMP G Nicholas L Oxenham A Cormack T Fonseca Former Executive KMP B Sakr Position Term as KMP CEO CFO CRO COO CCO Full year Full year Full year Full year 1 Jan – 14 Dec 1 Contract total fixed remuneration (TFR) shows the fixed remuneration an individual is entitled to receive for a full year of service under their employment contract as at the end of the reporting period. 2 Actual total fixed remuneration received shows the fixed remuneration earned throughout 2016 as a KMP, and is different to contract TFR due to increases as part of the annual review effective 1 March. 3 Actual STI awarded reflects 2016 STI awards (including any amounts delivered as deferred STI, see section 4 for more details). 4 The 2016 LTI Target reflects the dollar value of the LTI grant awarded for the performance period starting January 1 2016. 5 The dollar value of legacy Genworth Financial equity that vested during the reporting period (calculated using the share price and exchange rate at date of vesting). No Genworth LTI plans have vested as at the end of the reporting period. 6 Ms Sakr ceased as a KMP effective 14 December 2016. Ms Sakr’s employment with the Company ceases 14 March 2017. All payments made in 2017 relating to Ms Sakr’s employment are disclosed in this reporting period. Annual Report 2016 31 Remuneration report (continued) 2. Remuneration governance, policy and programs 2.1 Governance overview The Remuneration & Nominations Committee (the Committee) was established to assist the Board in fulfilling its responsibilities to shareholders and regulators in relation to remuneration, succession planning, board effectiveness and renewal, diversity and inclusion. The Board’s final approval is required for any decision relating to the Committee’s responsibilities. The Committee liaises as required with the Audit Committee and Risk Committee. 2.2 Use of independent remuneration advisors The Board and the Committee received advice from external advisers Aon Hewitt in 2016. Services included the provision of market data and market practices. All advice provided was accompanied with confirmation from Aon Hewitt that the advice was free from the undue influence of the KMP to whom it may pertain. No remuneration recommendations as defined under the Corporations Act were received in relation to KMP throughout this period. 2.3 Remuneration policy and strategy Genworth’s remuneration policy details the governance, structure and overall strategy through which Genworth compensates employees. Genworth’s remuneration strategy is to provide market competitive remuneration programs that help attract, retain and motivate highly competent employees who are dedicated to achieving Genworth’s objectives in a manner that is consistent with the long-term interests of the Company and its shareholders. This strategy is reflected in specific remuneration programs which, subject to Board (and, where applicable, shareholder) approval, deliver remuneration which aligns performance, outcomes, timeframes, shareholder, company and employee interests over the long-term. 2.4 Executive KMP remuneration programs Genworth’s Executive KMP remuneration programs are designed to align executive and shareholder interests by: • using appropriate delivery vehicles (e.g. cash, equity and non-monetary benefits) and pay mix; • measuring performance and delivering resulting remuneration over an appropriate time frame; • using appropriate measures of competitiveness (e.g. median of appropriate comparator group); and • operating within Genworth’s risk management framework and relevant regulatory requirements (in particular, APRA Prudential Standard CPS 510 Governance). Genworth’s Executive KMP remuneration programs consist of a TFR component, an STI component and an LTI component. Executive KMP participated in Genworth Financial’s global remuneration programs prior to listing in May 2014. Summary table 2.4a presents the link between Genworth’s strategy and remuneration programs and outcomes. Table 2.4a Remuneration Framework and linkage to Genworth’s strategy and performance Business vision Remuneration strategy To be the leading provider of customer focused capital and risk management solutions in residential mortgage markets. To attract, retain and motivate the best people dedicated to achieving the Genworth’s objectives in line with the Genworth’s long term interests. Measures of success Actual performance • Enhance profitability within risk adjusted return • Underlying NPAT $212m compared with target parameters by pricing NIW to achieve low to mid- teens ROE over the long term, focusing on loss mitigation and expenses Improve productivity while maintaining strong risk management discipline and customer experience • Know our customers to deliver market leading capital • and risk management solutions • A high performing, engaged workforce focused on execution • Be the leading provider of LMI in the market. 32 Genworth Mortgage Insurance Australia of $225m. Underlying ROE was 10.4% compared with target of 10.7%. Expense ratio maintained at 25.7% compared with target range of 26% - 28%. Implemented enhanced loss mitigation models • Piloted DUA with various mutual customers to streamline underwriting process while maintaining risk discipline and implemented continuous technology integration and release automation Implemented alternative risk management solutions with customers • • Engagement level 4% below benchmark. Diversity and inclusiveness responses extremely favourable • Retained market leading position. Vision and strategy reflected in remuneration programs and actual outcomes TFR TFR • Individual performance (execution of individual and Genworth objectives and behaviours), size and scope of the role and appropriate benchmark data drive fixed pay outcomes. • Average pay increases to Executive KMP were 2.24% in the 2016 remuneration review (excludes changes made to Ms Nicholas and Mr Oxenham as a result of their appointments as CEO and CFO respectively). STI STI • Awards reflect combination of individual performance and Genworth’s performance (including operating within risk management framework and behaviours as measured against Genworth’s values). Underlying NPAT, Underlying ROE, core business model improvement, renewal of key customer contracts, expense ratio management, loss ratio management and product enhancement. • Performance resulted in 87% STI funding. STI awards to Executive KMP ranged from 34% - 58% of the maximum. LTI LTI • Awards reflect Genworth’s performance against ROE and relative Total Shareholder Return (TSR) targets. • As at 31 December 2016, no LTI plans have completed their performance period. Table 2.4b 2016 target mix of pay (relative weight of each component as a % of total remuneration as at 31 December 2016) Target Pay Mix by Executive KMP Role 33.3% 36.2% 22.2% 18.3% 11.1% 9.2% 33.3% 36.2% 50.0% 48.1% 55.6% 55.6% 50.0% 54.5% 50.0% 49.4% 16.7% 18.5% 8.3% 9.3% 25.0% 24.1% 11.1% 11.1% 5.6% 5.5% 16.7% 8.3% 12.1% 6.1% 16.6% 17.2% 8.3% 8.6% 70% 27.8% 27.8% 25.0% 27.3% 25.0% 24.7% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% TFR STI cash STI deferred LTI The actual mix of pay delivered in any year is based on an assessment of individual and company performance, applicable regulations and plan rules and, as such, may differ from the targeted mix of pay. 2.5 Total fixed remuneration (TFR) TFR is the sum of base salary and the value of guaranteed employee benefits such as superannuation and car parking. TFR for Executive KMP roles is reviewed annually and approved by the Board with reference to a number of factors, including but not limited to the size and scope of the role, the performance of the individual and appropriate benchmark data. Benchmark data for each Executive KMP role is individually sourced from a peer group of comparable roles in comparable organisations primarily from the Australian financial services sector. The median TFR figure from the benchmark data is used for comparative purposes. As part of the 2016 remuneration review, the Board approved increases to TFR for Executive KMP. For details of these increases, please refer to table 1a. Annual Report 2016 33 Georgette Nicholas1 CEO Target CEO 2016 Actual Luke Oxenham CFO Target CFO 2016 Actual Andrew Cormack2 CRO Target CRO 2016 Actual Bridget Sakr COO Target COO 2016 Actual Tobin Fonseca CCO Target Former CCO 2016 Actual Remuneration report (continued) 2.6 Short term incentive (STI) Executive KMP roles have an STI target, expressed as a percentage of TFR, which is based on internal and external benchmarking utilising the same peer group used for TFR benchmarking. Details of the maximum STI amount that can be awarded are provided in table 2.6a. In determining individual STI awards, the CEO provides recommendations to the Committee in respect of her direct reports (which includes all Executive KMP except herself). The Committee reviews these recommendations and evaluates the CEO’s performance, and recommends to the Board awards which take into account the STI pool funding percentage and the performance of the Executive KMP against individual and business performance goals. These individual goals align to the financial and operational objectives used to determine STI pool funding. Table 2.6a STI 2016 key characteristics STI 2016 features Detail Purpose of STI plan Motivate and retain employees by providing STI outcomes that balance individual and Genworth’s performance, reflect the ability of the role to influence Genworth’s performance, and operate within the Genworth’s risk management framework. STI % by role Executive KMP Target % (of TFR) Maximum % (of TFR) CEO: CFO, CCO & COO: CRO: 100% 50% 30% 200% 100% 60% Performance objectives Financial objectives Strategic objectives Aggregate objective weighting Underlying NPAT (35%) Underlying ROE (35%) Financial objectives 70% Execute key strategic priorities (30%) Strategic objectives 30% Performance period 1 January 2016 - 31 December 2016. Performance assessment In Q1 2017, Genworth’s performance against each individual objective was evaluated to determine the STI pool funding percentage. Award determination Combination of STI pool funding and individual performance. Awards determined via Board and Committee review, recommendation and approval process. The Board and Committee have authority and discretion to adjust STI funding and individual awards (including to $0 if appropriate). Payment date Payment method Q1 2017. STI - 2/3 of the award paid in cash (inclusive of superannuation). Deferral period Deferred STI component deferred for 12 months from 1 March 2017. Deferred STI - 1/3 of the dollar value of award converted to a grant of share rights (subject to vesting conditions). Deferred STI vesting conditions Share rights grant calculation Continuous active employment for 12 months from grant date. Board and Committee satisfaction that adverse outcomes have not arisen that were not apparent when performance was assessed, and satisfaction that there was not excessive risk taking in achievement of results. The number of share rights is determined by dividing the deferred STI dollar value by a 10-day Volume Weighted Average Price (VWAP) as at 31 December 2016. The Committee believes using a VWAP (instead of the share price at a single point in time or a discounted fair value methodology) reduces the impact daily volatility may have on the number granted and provides greater transparency around the value of share rights granted. 34 Genworth Mortgage Insurance Australia STI 2016 features Detail Treatment of dividends calculation Treatment upon vesting Dividends, or the value of any dividends, are not received on unvested share rights. Notional dividend equivalents accrue during the deferral period and are delivered through an adjustment to the number of vested share rights at the end of the deferral period. This is calculated by taking the value of dividends distributed during the deferral period and dividing by a 10-day VWAP as at the vesting date, in whole share rights. Vested share rights entitle the holder to ordinary shares in the Company for nil consideration. The Company retains discretion to satisfy vested share rights delivered through the STI plan via the issuance of new shares or via an on-market purchase. Treatment of terminating Executive KMP Eligibility for an STI award is contingent on active, continuous employment throughout the performance period. In the event of resignation or termination, the Executive KMP are ineligible for an STI award, and unvested share rights lapse. In the event of termination with ‘Good Leaver’ status (retirement, redundancy, death or permanent disability or as determined by the Board) – a pro rated portion of STI may be awarded at the Board and Committee’s discretion. Treatment of unvested STI share rights is at the Board and Committee’s discretion and may be pro rated, remain subject to the original vesting schedule, be subject to accelerated vesting, or converted to cash. Change of control Board has discretion. Table 2.6b 2017 STI performance objectives STI performance objective & weighting Rationale Underlying NPAT (32.5%) Underlying NPAT will be used as it excludes the impact of volatile unrealised gains and losses on the investment portfolio (which are generally outside of the control of management). Underlying ROE (32.5%) For similar reasons as described above in relation to Underlying NPAT, ROE is measured via Underlying ROE. Strategic objectives (35%) 2017 strategic objectives are core business model improvement, renewal of key customer contracts, expense ratio management, loss ratio management and product enhancement. 2.7 Long term incentive (LTI) Prior to listing in May 2014, Executive KMP participated in the Genworth Financial LTI program. Grants to Australian participants were delivered as Restricted Share Units in Genworth Financial, 25% of which vest on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant. These grants were part of Genworth Financial’s global remuneration programs and reinforced the link between executive remuneration outcomes and Genworth Financial shareholder outcomes over a longer timeframe. Genworth Financial LTI grants will continue to vest until 2018 and are detailed in the statutory tables. Beginning in 2015, Executive KMP roles have had an LTI target, expressed as a percentage of TFR, which is based on internal and external benchmarking utilising the same peer group used for TFR and STI benchmarking. LTI dollar targets are calculated by multiplying the individual’s LTI percentage by their TFR at the start of the relevant performance period (1 January 2016 for the 2016 LTI plan). LTI is provided via an annual grant of share rights which are subject to vesting conditions. Vesting conditions for the 2016 plan include performance based vesting scales in respect of company performance against Underlying ROE and relative TSR. Relative TSR has been introduced given the Group’s strategic priorities and TSR’s ability to drive behaviours over the long-term that align shareholder return and executive reward. The comparator group (ASX top 200 excluding resources companies) has been chosen because out-performance against this group represents an important part of our value proposition to shareholders. Annual Report 2016 35 Remuneration report (continued) 2. Remuneration governance, policy and programs (continued) 2.7 Long term incentive (LTI) (continued) Table 2.7a LTI 2016 key characteristics LTI 2016 features Detail Purpose of LTI plan LTI % and grant value by Executive KMP role Motivate and retain employees by providing LTI outcomes that align with longer term company performance, reflect the ability of the role to influence Genworth’s performance and operate within the Genworth’s risk management framework. Executive KMP CEO Other KMP Target % (of TFR) 100% 50% Performance metrics Underlying ROE: 50% of the 2016 LTI grant. Calculated as the average of three year underlying net profit after tax (excluding unrealised gains or losses from investments) divided by the three year average equity (excluding mark to market value of investments). Relative TSR: 50% of the 2016 LTI grant. Calculated as the total return to shareholders (share price movement including value of dividends) over the performance period, expressed as a percentage of the starting share price. Dividends are reinvested on the ex-dividend date closing price and franking credits are excluded. Comparator group for TSR metric ASX top 200 excluding resources companies. Vesting scales summary Vesting % Underlying ROE Relative TSR 0% <9.5% <50th 50% 9.5% 50th 60% 10.2% 55th 70% 10.9% 60th 80% 11.6% 65th 90% 12.3% 70th 100% 12.3% 75th Vesting summary Vesting occurs on a straight line basis between summary points above and each performance metric is measured and vests (as applicable) independently of the other. Performance period 1 January 2016 - 31 December 2018. Performance assessment Performance to be assessed in Q1 2019. There is no retesting of grants. Deferral period 12 months from the end of the relevant performance period. Vesting period/date Award determination Four years in total from the start of relevant performance period (three year performance period with an additional year deferral). Performance period and final vesting percentages determined via Board and Committee review, recommendation and approval process. Payment method The Board and the Committee have authority and discretion to adjust LTI vesting % and individual awards (including to 0% of grant if appropriate). Grant of share rights. Vested share rights entitle the holder to ordinary shares in the Company for nil consideration. The Company retains discretion to satisfy vested share rights delivered through the LTI plan via the issuance of new shares or via an on-market purchase. Vesting Conditions Continuous active employment for four years from grant date. Share rights grant calculation Board and Committee satisfaction that adverse outcomes have not arisen that were not apparent when performance was assessed, and satisfaction that there was not excessive risk taking in achievement of results. The number of share rights is determined by dividing the grant value by a 10-day VWAP following the release of full-year results for 2016. The Committee believes using a VWAP (instead of the share price at a single point in time or a discounted fair value methodology) reduces the impact daily volatility may have on the number granted and provides greater transparency around the value of share rights granted. 36 Genworth Mortgage Insurance Australia LTI 2016 features Detail Treatment of dividends Treatment of terminating Executive KMPs Dividends, or the value of any dividends, are not received on unvested share rights. Notional dividend equivalents accrue during the vesting period and are delivered through an adjustment to the number of vested share rights at the end of the vesting period. This is calculated by taking the value of dividends distributed during the vesting period, applying the final vesting percentage and dividing by a 10-day VWAP as at the vesting date, in whole share rights. Eligibility for an LTI grant or award is contingent on active, continuous employment throughout the vesting period. In the event of resignation/termination, unvested share rights lapse except as provided at the discretion of the Board for a ‘Good Leaver’ (see table 2.6a for details: ‘treatment of terminating Executive KMPs’). Change of control Board has discretion. Table 2.7b LTI 2017 key characteristics LTI 2017 features Detail Performance metrics Underlying ROE: 50% of the 2017 LTI grant. Calculated as the average of three year underlying net profit after tax (excluding unrealised gains or losses from investments) divided by the three year average equity (excluding mark to market value of investments). Relative TSR: 50% of the 2017 LTI grant. Calculated as the total return to shareholders (share price movement including value of dividends) over the performance period, expressed as a percentage of the starting share price. Dividends are reinvested on the ex-dividend date closing price and franking credits are excluded. Vesting scales summary Vesting % Underlying ROE Relative TSR 0% <9.5% <50th 50% 9.5% 50th 60% 10.2% 55th 70% 10.9% 60th 80% 11.6% 65th 90% 12.3% 70th 100% 13.0% 75th Relative TSR comparator group Top 200 ASX excluding resources companies. 2.8 Share ownership requirement for Executive KMP To strengthen the alignment between Executive KMP and shareholders, Executive KMP are required to accumulate and maintain a minimum value of shares in the Company. The CEO is required to hold two times, and other Executive KMP one times their TFR (the measurement date for TFR is as at listing or appointment date, as applicable). The value of shares is calculated by using the greater of the preceding 12 month average price or retail price at listing. Executive KMP must meet the share ownership requirements within five years of appointment to their current role. Executive KMP who were in their current role at the time of the IPO must meet the share ownership requirements within five years of the listing. Share ownership requirements are tested each time share rights vest. Until the ownership requirements are met, 25% of shares vested via equity plans (deferred STI component and LTI) must be retained. 2.9 Appointment of CEO As reported in 2015 and until her appointment as CEO, Ms Nicholas was an expatriate of Genworth Financial. Her remuneration arrangements, while aligned with the Genworth’s remuneration strategy, fell under Genworth Financial’s expatriate programs. Accordingly, from the period 1 January 2016 – 16 March 2016, components of her remuneration differed in some respects from those of other Executive KMP. These included a base salary and other remuneration paid in USD, which has been converted to AUD for the purposes of this report using the 2016 average exchange rate (AUD/USD 1/0.7443). Ms Nicholas received an Acting CEO Allowance of $33,672 between the start of the reporting period and her becoming CEO and her 2016 STI target was calculated by pro rating her participation in each respective role. Annual Report 2016 37 Remuneration report (continued) 3. Relationship between company performance and remuneration 3.1 Performance overview Whilst operating in challenging conditions, Genworth delivered a strong overall NPAT result, maintained dividend payouts and executed capital actions. However, Genworth’s performance was below target across the financial measures of net earned premium growth, return on equity and full year loss ratio. This performance is reflected in a reduced bonus pool and resulting awards to Executive KMP. Table 3.1a Summary of Genworth’s performance (2016) Financial results Gross Written Premium (A$million) Net Investment Income (A$million) Underlying NPAT (A$million) Expense Ratio Underlying ROE Dividends paid Share price at start of reporting period Share price at end of reporting period 2014 (unaudited1) $634.2 $226.9 $279.4 26.5% 12.2% $0.274 $2.65 $3.64 2015 $507.6 $107.9 $264.7 26.2% 11.6% $0.503 $3.64 $2.76 2016 $381.9 $126.0 $212.2 25.7% 10.4% $0.405 $2.76 $3.27 3.2 Link between performance and STI outcomes The link between remuneration outcomes and business performance is both explicit and fundamental to the design, administration and outcomes of the Genworth’s remuneration programs. In light of Genworth’s performance against 2016’s STI objectives (see below for more detail), the Board determined the STI pool funding level to be 87% of the sum of STI targets. Table 3.2a 2016 STI performance objectives and Board assessment of performance STI performance objective & weighting Underlying NPAT (35%) Rationale Assessment of 2016 performance As the headline figure of the various components that make up overall company performance, an annual profit measure is a key performance objective. Underlying NPAT for 2016 was $212m compared with a target of $225m. Key contributors to this result: • GWP pressure due to a lower average LVR mix of business, as well as the full impact of the changes in customers in 2015; • loss ratio at the upper end of the forecast range; and • strong expense management performance. Underlying ROE (35%) ROE is a key measure of the Genworth’s ability to convert equity into returns (profit). 2016 Underlying ROE results were challenging, delivering 10.4% compared with a target of 10.7%. Execute key strategic objectives (30%) Key strategic priorities for each performance period may vary year-to-year based on Genworth’s priorities. For the 2016 performance period, this list included renewal of key customer contracts, customer and LMI value proposition and process simplification. The Board determined overall performance against key strategic objectives to be slightly below target. 1 2014 results are presented in full calendar year pro-forma basis to enable meaningful comparison. As a result, the 2014 figures are unaudited. 38 Genworth Mortgage Insurance Australia 4. Remuneration outcomes for Executive KMP Table 4a STI outcomes Executive KMP G Nicholas CEO L Oxenham CFO A Cormack CRO T Fonseca COO Former Executive KMP B Sakr former CCO Target STI % (of TFR) Target STI $ Max STI $ 100% $744,667 $1,489,334 $450,000 $291,000 $440,986 50% $225,000 30% $145,500 50% $220,493 Cash STI awarded1 $430,000 $173,333 $96,667 $100,000 Deferred STI awarded2 Deferred STI share rights $215,000 $86,667 $48,333 $50,000 67,341 27,145 15,138 15,660 Total STI awarded $ $645,000 $260,000 $145,000 $150,000 Actual STI awarded (% of TFR) Actual STI awarded (% of max) STI not awarded (% of max) 76% 58% 30% 33% 43% 58% 50% 34% 57% 42% 50% 66% 50% $217,500 $435,000 $151,800 $75,900 23,772 $227,700 52% 52% 48% 5. Contractual arrangements for Executive KMP Table 5a Summary of contract details Executive KMP Term of agreement Notice period Termination payments CEO Ongoing Four months either party Immediate for misconduct, breach of contract or bankruptcy. Other Executive KMP Ongoing Three months either party Immediate for misconduct, breach of contract or bankruptcy. Statutory entitlements only for termination with cause. Payment in lieu of notice at Company discretion. For Company termination “without cause”, 12 months fixed remuneration or as limited without shareholder approval under the Corporations Act. Statutory entitlements only for termination with cause. Payment in lieu of notice at Company discretion. For Company termination “without cause”, no more than six months fixed remuneration, pro rata STI is payable for time worked. All Executive KMP are subject to a non-solicitation undertaking and a non-compete restraint for a maximum period of 12 months after ceasing employment. 1 Cash STI awarded figure is inclusive of superannuation. 2 Deferred STI awarded is the one-third portion of total STI award deferred for 12 months. The deferred STI award is converted to share rights using a 10-day VWAP as at 31 December 2016 ($3.1927) and will vest on 1 March 2018 subject to continuous active service and Board and Committee satisfaction that adverse outcomes have not arisen that were not apparent when performance was assessed, and satisfaction that there was not excessive risk taking in achievement of results. Annual Report 2016 39 Remuneration report (continued) 6. KMP remuneration tables Table 6a Statutory remuneration table – 1 January to 31 December 2016 Short term remuneration Long term/post-employment benefits KMP Executive KMP G Nicholas CEO L Oxenham CFO A Cormack CRO T Fonseca COO Former Executive KMP B Sakr Former CCO Cash salary1 Other benefits2 $190,839 $286,420 $5,280 $11,219 $42,1718 $109,601 $0 $0 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 $755,503 $465,186 $405,083 $75,955 $440,266 $106,746 $396,829 $360,813 $390,256 $388,971 Non- monetary benefits3 $115,159 $276,774 $18,959 $144 $5,351 $35,738 $3,998 $17,871 Cash STI awarded4 Deferred STI5 Sub-total $430,000 $400,000 $173,333 $42,496 $96,667 $35,264 $100,000 $153,333 $101,633 $0 $40,968 $0 $22,847 $3,320 $23,635 $37,762 $1,593,134 $1,428,380 $643,623 $129,814 $607,302 $290,669 $524,462 $569,780 $5,166 $2,750 $20,231 $18,552 $151,800 $153,333 $35,877 $37,762 $603,330 $601,369 Table 6b Share option holdings for the reporting period ended 31 December 2016 Executive KMP Name & Position G Nicholas CEO A Cormack CRO Grant detail Grant date Issue price Vesting date # Held 31/12/15 Granted Forfeited Vested Exercised Expired 31/12/16 Fair value GFI Equity ‘09 GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘09 GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 19 Aug ‘09 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 19 Aug ‘09 19 Aug ‘09 19 Aug ‘09 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 $9.41 $16.20 $12.61 $8.31 $8.79 $9.41 $9.41 $9.41 $16.20 $12.61 $8.31 $8.79 $16.90 19 Aug ‘11, ‘12, ‘13 10 Feb ‘11, ‘12, ‘13, ‘14 9 Feb ‘12, ‘13, ‘14, ‘15 14 Feb ‘13, ‘14, ‘15, ‘16 15 Feb ‘14, ‘15, ‘16, ‘17 19 Aug ‘10, ‘11, ‘12 19 Aug ‘10, ‘11, ‘12 19 Aug ‘10, ‘11, ‘12, ‘13 10 Feb ‘11, ‘12, ‘13, ‘14 9 Feb ‘12, ‘13, ‘14, ‘15 14 Feb ‘13, ‘14, ‘15, ‘16 15 Feb ‘14, ‘15, ‘16, ‘17 20 Feb ‘15, ‘16, ‘17, ‘18 1 Cash salary consists of base salary and any salary sacrifice arrangements. 2 Other benefits include annual health reimbursement offered to all employees, cash and acting allowances, and a cash payment in lieu of a salary increase for 2016 for Ms Sakr. 3 Non-monetary benefits include insurance premiums, executive health benefits, other non-cash benefits (such as car parking) and related Fringe Benefits Tax (FBT). 4 Cash STI awarded is the actual STI cash payment relating to 2016 performance, inclusive of super, accrued for in 2016. Actual payment made in March 2017. 5 Deferred STI awarded is the one-third portion of total STI award deferred for 12 months. The value disclosed is the portion of the value of the equity instruments recognised as an expense in this reporting period. The value of each share right granted under the 2016 deferred STI plan has been calculated using the share price at 31 December 2016 ($3.27). 6 Long Service Leave accruals are presented as the expense movement for the reporting period. 7 The fair value of equity instruments calculated at the date of grant using the Black Scholes model and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the equity instruments recognised as an expense in this reporting period. The fair value of 2016 LTI grants provided to Ms Nicholas, Mr Oxenham, Mr Cormack, Ms Sakr, Mr Fonseca in the period are $2.84 for share rights relating to the ROE performance condition and $1.97 relating to the TSR performance condition. 8 Figure includes an incentive retention payment agreement between Mr Cormack and Genworth Financial (his previous employer). Genworth Financial paid for the complete award. 9 The 2015 report incorrectly identified the number of options held by Mr Cormack as 3,799. The correct number is 3,738. 40 Genworth Mortgage Insurance Australia Long service payments Termination Share-based Super benefits Leave6 RSUs7 benefits Total % of total that is performance related % of total that are options $193,802 $55,347 $38,279 $7,452 $45,776 $16,945 $35,865 $33,418 $37,742 $37,214 $18,712 $0 $26,713 $1,086 $5,095 $3,123 $26,610 $14,733 $11,278 $13,887 $453,670 $339,043 $141,105 $26,977 $122,492 $20,516 $321,563 $342,630 $228,417 $359,829 $0 $0 $0 $0 $0 $0 $0 $0 $0 $2,259,318 $1,822,770 $849,720 $165,330 $780,665 $331,254 $908,500 $960,562 $1,212,912 $1,012,299 $332,135 33% 24% 32% 26% 23% 22% 19% 20% 20% 20% Movement during the year 2,550 15,000 18,000 20,400 18,000 2,000 2,450 3,7389 12,000 8,500 11,700 13,500 14,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,100 4,500 2,925 3.375 3,500 0 0 0 0 0 0 0 0 0 0 0 0 0 2,000 0 0 0 0 0 0 0 0 0 0 0 0 # Held 2,550 15,000 18,000 20,400 18,000 0 2,450 3,738 12,000 8,500 11,700 13,500 14,000 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% $20.88 $11.99 $3.09 $2.36 $2.40 $41.98 $33.99 $20.88 $11.99 $3.09 $2.36 $2.40 $3.40 6. KMP remuneration tables Table 6a Statutory remuneration table – 1 January to 31 December 2016 Executive KMP G Nicholas KMP CEO CFO CRO L Oxenham A Cormack T Fonseca COO B Sakr Former CCO Former Executive KMP Executive KMP Name & Position G Nicholas CEO A Cormack CRO Short term remuneration Non- Cash salary1 Other benefits2 monetary benefits3 Cash STI awarded4 Deferred STI5 Sub-total 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 $755,503 $465,186 $405,083 $75,955 $440,266 $106,746 $396,829 $360,813 $390,256 $388,971 $190,839 $286,420 $5,280 $11,219 $42,1718 $109,601 $0 $0 $115,159 $276,774 $18,959 $144 $5,351 $35,738 $3,998 $17,871 $430,000 $400,000 $173,333 $42,496 $96,667 $35,264 $100,000 $153,333 $101,633 $40,968 $0 $0 $22,847 $3,320 $23,635 $37,762 $1,593,134 $1,428,380 $643,623 $129,814 $607,302 $290,669 $524,462 $569,780 $5,166 $2,750 $20,231 $18,552 $151,800 $153,333 $35,877 $37,762 $603,330 $601,369 Long term/post-employment benefits Super benefits Long service Leave6 Share-based payments RSUs7 Termination benefits % of total that is performance related Total % of total that are options $193,802 $55,347 $38,279 $7,452 $45,776 $16,945 $35,865 $33,418 $37,742 $37,214 $18,712 $0 $26,713 $1,086 $5,095 $3,123 $26,610 $14,733 $11,278 $13,887 $453,670 $339,043 $141,105 $26,977 $122,492 $20,516 $321,563 $342,630 $228,417 $359,829 $0 $0 $0 $0 $0 $0 $0 $0 $2,259,318 $1,822,770 $849,720 $165,330 $780,665 $331,254 $908,500 $960,562 $332,135 $0 $1,212,912 $1,012,299 33% 24% 32% 26% 23% 22% 19% 20% 20% 20% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Table 6b Share option holdings for the reporting period ended 31 December 2016 Grant detail Grant date Issue price Vesting date # Held 31/12/15 Granted Forfeited Vested Exercised Expired # Held 31/12/16 Fair value Movement during the year GFI Equity ‘09 GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘09 GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 19 Aug ‘09 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 19 Aug ‘09 19 Aug ‘09 19 Aug ‘09 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 $9.41 $16.20 $12.61 $8.31 $8.79 $9.41 $9.41 $9.41 $16.20 $12.61 $8.31 $8.79 $16.90 19 Aug ‘11, ‘12, ‘13 10 Feb ‘11, ‘12, ‘13, ‘14 9 Feb ‘12, ‘13, ‘14, ‘15 14 Feb ‘13, ‘14, ‘15, ‘16 15 Feb ‘14, ‘15, ‘16, ‘17 19 Aug ‘10, ‘11, ‘12 19 Aug ‘10, ‘11, ‘12 19 Aug ‘10, ‘11, ‘12, ‘13 10 Feb ‘11, ‘12, ‘13, ‘14 9 Feb ‘12, ‘13, ‘14, ‘15 14 Feb ‘13, ‘14, ‘15, ‘16 15 Feb ‘14, ‘15, ‘16, ‘17 20 Feb ‘15, ‘16, ‘17, ‘18 2,550 15,000 18,000 20,400 18,000 2,000 2,450 3,7389 12,000 8,500 11,700 13,500 14,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5,100 4,500 0 0 0 0 0 2,925 3.375 3,500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2,000 0 0 0 0 0 0 0 2,550 15,000 18,000 20,400 18,000 0 2,450 3,738 12,000 8,500 11,700 13,500 14,000 $20.88 $11.99 $3.09 $2.36 $2.40 $41.98 $33.99 $20.88 $11.99 $3.09 $2.36 $2.40 $3.40 Annual Report 2016 41 Remuneration report (continued) 6. KMP remuneration tables (continued) Table 6c Share right holdings for the reporting period ended 31 December 2016 Executive KMP Name & Position G Nicholas CEO L Oxenham CFO A Cormack CRO T Fonseca COO Former Executive KMP B Sakr Former CCO Grant detail Grant date Issue price Vesting date # Held 31/12/151 Number granted Forfeited Vested Exercised # Held 31/12/16 Movement during the year GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant LTI ‘15 LTI ‘16 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant Equity ‘15 Grant LTI ‘16 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 LTI ‘16 Deferred STI ‘15 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant LTI ‘15 LTI ‘16 Deferred STI ‘15 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant LTI ‘15 LTI ‘16 Deferred STI ‘15 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 Jan ‘15 1 Jan ‘16 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 March ‘15 1 Jan ‘16 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 1 Jan ‘16 1 March ‘16 1 March ‘12 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 Jan ‘15 1 Jan ‘16 1 March ‘16 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 Jan ‘15 1 Jan ‘16 1 March ‘16 $8.31 $8.79 $16.90 $2.65 $3.47 $2.33 $16.91 $16.90 $2.65 $3.47 $2.33 $8.31 $8.79 $16.90 $2.33 $2.59 $8.73 $8.79 $16.90 $2.65 $3.47 $2.33 $2.59 $8.31 $8.79 $16.90 $2.65 $3.47 $2.33 $2.59 14 Feb ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 31 Dec ‘18 31 Dec ‘19 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 1 March ‘16, ‘17, ‘18, ‘19 31 Dec ‘19 14 Feb ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 31 Dec ‘19 1 March ‘17 1 March ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 31 Dec ‘18 31 Dec ‘19 1 March ‘17 14 Feb ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 31 Dec ‘18 31 Dec ‘19 1 March ‘17 1,133 4,000 8,287 188,679 59,943 0 3,124 2,962 75,471 12,981 0 650 3,000 2,700 3,750 7,300 6,900 188,679 56,253 3,625 8,324 7,200 188,679 61,301 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 364,119 96,384 101,739 6,817 86,746 29,644 101,739 29,644 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,133 2,000 2,763 62,893 1,562 988 25,157 3,245 0 650 1,500 900 3,750 3,650 2,300 62,893 3,625 4,162 2,400 62,893 0 0 0 0 0 0 0 0 0 0 1,133 2,000 2,763 62,893 1,562 988 25,157 3,245 0 650 1,500 900 3,750 3,650 2,300 62,893 3,625 4,162 2,400 62,893 0 0 0 0 0 0 0 0 0 0 0 2,000 5,524 125,786 59,943 364,119 1,562 1,974 50,314 9,736 96,384 0 1,500 1,800 101,739 6,817 0 3,650 4,600 125,786 56,253 86,746 29,644 0 4,162 4,8002 125,7863 61,3014 101,7395 29,644 Notes for share right and option tables: Issue Price is the share price of the instrument at the date of grant. All GFI grant issue prices and fair values have been converted from USD to AUD using the exchange rate as at the date of grant. 1 The 2014 and 2015 reports incorrectly identified the number of IPO Special Grant share rights held by Ms Nicholas, Mr Fonseca and Ms Sakr as 188,949. The correct number was 188,679. 2 2,400 share rights will be forfeit upon cessation of employment on 14 March 2017. 3 74,438 share rights will be forfeit upon cessation of employment on 14 March 2017. 4 61,301 share rights will be forfeit upon cessation of employment on 14 March 2017. 5 101,739 share rights will be forfeit upon cessation of employment on 14 March 2017. 42 Genworth Mortgage Insurance Australia 6. KMP remuneration tables (continued) Table 6c Share right holdings for the reporting period ended 31 December 2016 Executive KMP Name & Position G Nicholas CEO L Oxenham CFO A Cormack CRO T Fonseca COO Former Executive KMP B Sakr Former CCO GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant LTI ‘15 LTI ‘16 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant Equity ‘15 Grant LTI ‘16 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 LTI ‘16 Deferred STI ‘15 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant LTI ‘15 LTI ‘16 Deferred STI ‘15 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 IPO Special Grant LTI ‘15 LTI ‘16 Deferred STI ‘15 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 Jan ‘15 1 Jan ‘16 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 March ‘15 1 Jan ‘16 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 1 Jan ‘16 1 March ‘16 1 March ‘12 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 Jan ‘15 1 Jan ‘16 1 March ‘16 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 21 May ‘14 1 Jan ‘15 1 Jan ‘16 1 March ‘16 $8.31 $8.79 $16.90 $2.65 $3.47 $2.33 $16.91 $16.90 $2.65 $3.47 $2.33 $8.31 $8.79 $16.90 $2.33 $2.59 $8.73 $8.79 $16.90 $2.65 $3.47 $2.33 $2.59 $8.31 $8.79 $16.90 $2.65 $3.47 $2.33 $2.59 1 March ‘16, ‘17, ‘18, ‘19 14 Feb ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 31 Dec ‘18 31 Dec ‘19 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 31 Dec ‘19 14 Feb ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 31 Dec ‘19 1 March ‘17 1 March ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 31 Dec ‘18 31 Dec ‘19 1 March ‘17 14 Feb ‘16 15 Feb ‘16, ‘17 20 Feb ‘16, ‘17, ‘18 20 May ‘16, ‘17, ‘18 31 Dec ‘18 31 Dec ‘19 1 March ‘17 Grant detail Grant date Issue price Vesting date # Held 31/12/151 Number granted Forfeited Vested Exercised # Held 31/12/16 Movement during the year 1,133 4,000 8,287 188,679 59,943 0 3,124 2,962 75,471 12,981 0 650 3,000 2,700 0 0 3,750 7,300 6,900 188,679 56,253 0 0 3,625 8,324 7,200 188,679 61,301 0 0 0 0 0 0 0 364,119 0 0 0 0 96,384 0 0 0 101,739 6,817 0 0 0 0 0 86,746 29,644 0 0 0 0 0 101,739 29,644 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1,133 2,000 2,763 62,893 0 0 1,562 988 25,157 3,245 0 650 1,500 900 0 0 3,750 3,650 2,300 62,893 0 0 0 3,625 4,162 2,400 62,893 0 0 0 1,133 2,000 2,763 62,893 0 0 1,562 988 25,157 3,245 0 650 1,500 900 0 0 3,750 3,650 2,300 62,893 0 0 0 3,625 4,162 2,400 62,893 0 0 0 0 2,000 5,524 125,786 59,943 364,119 1,562 1,974 50,314 9,736 96,384 0 1,500 1,800 101,739 6,817 0 3,650 4,600 125,786 56,253 86,746 29,644 0 4,162 4,8002 125,7863 61,3014 101,7395 29,644 Annual Report 2016 43 Remuneration report (continued) 7. Non-Executive Director remuneration Table 7a Key Management Personnel in 2016 – Non-Executive Directors KMP Non-Executive Directors Ian MacDonald David Foster Tony Gill Gai McGrath Gayle Tollifson Leon Roday Stuart Take Jerome Upton Former Non-Executive Directors Richard Grellman Samuel Marsico Position Term as KMP Independent Director - Genworth Financial designated Chairman Independent Director Independent Director Independent Director Director - Genworth Financial designated Director - Genworth Financial designated Director - Genworth Financial designated Former Chairman Former Director Full Period 30 May – 31 Dec Full Period 31 Aug – 31 Dec Full Period Full Period Full Period Full Period 1 Jan – 31 Aug 1 Jan – 5 May Non-Executive Directors (NEDs) are entitled to such remuneration as determined by the Board, provided the aggregate maximum annual amount (referred to as the aggregate fee cap) approved by shareholders is not exceeded. Throughout the reporting period the aggregate fee cap was $1.5 million per annum, inclusive of superannuation obligations. NEDs who are executives of Genworth Financial (Mr Take and Mr Upton) were paid by Genworth Financial in the ordinary course of their duties and were not paid fees by Genworth Australia. Mr Marsico and Mr Roday retired from their roles as executives of Genworth Financial in 2015 and were paid fees as set out in table 7c. Table 7b NED fee table Non-Executive Directors (excluding S Take and J Upton) Board Chairman Director1 Committee Chairman (per Committee) Committee member (per Committee) Annual fee $265,000 $115,000 $24,000 $12,000 Director fees are reviewed annually and may be adjusted in line with market standards within the aggregate fee cap. Following the review undertaken in late 2015, Committee Chairman and member fees were increased from $20,000 and $10,000 respectively effective 1 January 2016. The focus of NEDs is principally the stewardship, strategic direction and medium to long term performance of Genworth. Accordingly remuneration programs for NEDs are neither performance based or at risk. While there are no specific share ownership requirements for NEDs, they are encouraged to own one times their annual base fees in Company shares. The current Independent Directors support this approach and intend to achieve this shareholding over time. 1 Mr Roday is paid by Genworth Financial for serving on the Genworth Canada and Genworth Australia Boards. The amount reflected in the statutory tables is the portion of his remuneration attributable to the Genworth Australia Board and Remuneration & Nominations Committee. 44 Genworth Mortgage Insurance Australia Table 7c Statutory remuneration table – 1 January to 31 December 2016 KMP Non-Executive Directors I MacDonald Chairman D Foster1 Director T Gill2 Director G McGrath3 Director G Tollifson4 Director L Roday5 Director S Take Director J Upton6 Director Former Non-Executive Directors R Grellman S Marsico Fees Non-monetary benefits7 Superannuation benefits 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 $187,435 $150,685 $85,798 - $175,000 $165,000 $50,020 - $159,817 $150,685 $127,000 $104,167 $0 $0 $0 $0 $161,339 $242,008 $44,027 $125,000 $0 $0 $0 - $0 $0 $0 - $0 $0 $0 $0 $0 $0 $0 $0 $11,677 $19,179 $0 $0 $17,806 $14,315 $8,151 - $0 $0 $4,752 - $15,183 $14,315 $0 $0 $0 $0 $0 $0 $15,327 $22,991 $0 $0 Total $205,241 $165,000 $93,949 - $175,000 $165,000 $54,772 - $175,000 $165,000 $127,000 $104,167 $0 $0 $0 $0 $188,343 $284,178 $44,027 $125,000 1 Mr Foster is Chairman of the Remuneration & Nominations Committee and a member of the Audit Committee, Risk Committee and Capital & Investment Committee. 2 Mr Gill is Chairman of the Capital & Investment Committee and a member of the Audit Committee, Risk Committee and Remuneration & Nominations Committee. 3 Ms McGrath is a member of the Audit Committee, Risk Committee, Capital & Investment Committee and Remuneration & Nominations Committee. 4 Ms Tollifson is Chairman of the Audit Committee and Risk Committee and a member of the Capital & Investment Committee. 5 Mr Roday is a member of the Remuneration & Nominations Committee. 6 Mr Upton is a member of the Audit Committee and the Capital & Investment Committee. 7 Non-monetary benefits include executive health benefits and other non-cash benefits (such as car parking) and related Fring Benefits Tax (FBT). Annual Report 2016 45 Remuneration report (continued) 8. Other tables Table 8a KMP and their related parties direct, indirect and beneficial shareholdings (including movements during the period ending 31 December 2016) Executive KMP G Nicholas - CEO L Oxenham - CFO A Cormack - CRO T Fonseca - COO Former Executive KMP B Sakr – Former CCO Non-Executive Directors I MacDonald - Chairman D Foster - Director T Gill - Director G McGrath - Director G Tollifson - Director L Roday - Director S Take - Director J Upton - Director Former Non-Executive Directors R Grellman S Marsico Movement during the period Balance at 31 December 2015 Received via vesting/ exercising Other changes Balance at 31 December 2016 0 0 0 0 0 75,471 0 138,679 0 56,603 19,609 9,699 19,534 36,665 0 62,893 28,402 0 62,893 (9,088) (28,402) 0 (62,893) 53,805 0 0 0 62,893 (59,088) 3,805 0 0 0 0 0 0 0 0 0 0 (10,906) 0 (20,039) 0 (8,179) (2,834) (1,402) (2,823) (267) 0 64,565 0 118,640 0 48,424 16,775 8,297 16,711 36,398 0 Table 8b Relevant interest of each Director in Genworth and its related bodies corporate (unaudited) Company balance held directly or indirectly at 31 Dec 2016 Genworth Financial balance directly or indirectly at 31 Dec 2016 Genworth MI Canada Inc. balance directly or indirectly at 31 Dec 2016 Director I MacDonald G Nicholas D Foster T Gill G McGrath G Tollifson L Roday S Take Shares: 64,565 Shares: 53,805 Share rights: 549,848 None Shares: 118,640 None Shares: 48,424 Shares: 16,775 Shares: 8,297 J Upton Shares: 16,711 46 Genworth Mortgage Insurance Australia None Shares: 11,047 Restricted Stock Units: 7,542 Options: 17,550 Stock Appreciation Rights: 56,400 None None None None Restricted Stock Units: 577,983 Performance Stock Units: 19,000 Shares: 23,034 Restricted Stock Units: 55,800 Options: 32,600 Stock Appreciation Rights: 53,200 Shares: 14,188 Restricted Stock Units: 65,399 Performance Stock Units: 4,050 Options: 24,150 Stock Appreciation Rights: 88,000 None None None None None None Shares: 3,020 None Shares: 906 Directors’ report (continued) The lead Auditor’s independence declaration is set out on page 48 and forms part of the Directors’ report. Signed in accordance with a resolution of the Directors: Ian MacDonald Chairman Dated at Sydney, 24 February 2017 Annual Report 2016 47 Lead Auditor’s independence declaration Lead Auditor’s independence declaration under Section 307C of the Corporations Act 2001 To: the Directors of Genworth Mortgage Insurance Australia Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2016 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit KPMG David Kells Partner Dated 24 February 2017 48 Genworth Mortgage Insurance Australia Financial statements Contents Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Section 1 Basis of preparation 1.1 1.2 Reporting entity Basis of preparation Section 2 Risk management 2.1 Financial risk management Section 3 Results for the year 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Gross written premium Investment income Other underwriting expenses Net cash provided by operating activities Income taxes Dividends Earnings per share Section 4 Insurance contracts 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 Net claims incurred Deferred reinsurance expense Deferred acquisition costs Outstanding claims Non reinsurance recoveries Unearned premium Liability adequacy test Accounting estimates and judgements Actuarial assumptions and methods Capital adequacy Section 5 Capital management and financing 5.1 5.2 5.3 5.4 5.5 Capital management Interest bearing liabilities Equity Capital commitments and contingencies Other reserves Section 6 Operating assets and liabilities 6.1 6.2 6.3 6.4 6.5 6.6 Intangibles Goodwill Employee benefits provision Trade and other receivables Trade and other payables Cash and cash equivalents Section 7 Other disclosures 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 Parent entity disclosures Auditor’s remuneration Key management personnel disclosures Related party disclosures Controlled entities Share based payments Deed of cross guarantee Events subsequent to reporting date 50 51 52 53 54 54 54 56 56 64 64 64 65 65 66 67 68 70 70 71 71 72 74 75 75 76 77 79 80 80 81 82 83 83 84 84 85 85 86 86 86 87 87 87 88 88 89 89 96 97 Annual Report 2016 49 Consolidated statement of comprehensive income For the year ended 31 December 2016 Gross written premium Movement in unearned premium Outward reinsurance premium expense Net earned premium Net claims incurred Acquisition costs Other underwriting expenses Underwriting result Investment income on assets backing insurance liabilities Insurance profit Investment income on equity holders’ funds Financing costs Profit before income tax Income tax expense Profit for the year Note 3.1 4.1 3.3 3.5(a) 2016 $’000 381,910 142,790 (71,824) 452,876 (158,783) (52,505) (64,045) 177,543 40,353 217,896 85,641 (14,205) 289,332 (86,238) 203,094 2015 $’000 507,563 42,042 (79,729) 469,876 (112,710) (54,536) (68,525) 234,105 39,048 273,153 68,836 (16,545) 325,444 (97,462) 227,982 Total comprehensive income for the year 203,094 227,982 Earnings per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 3.7 3.7 37.2 37.1 35.3 35.2 The consolidated statement of comprehensive income is to be read in conjunction with the notes to the financial statements. 50 Genworth Mortgage Insurance Australia Consolidated statement of financial position As at 31 December 2016 Assets Cash Accrued investment income Investments including derivatives Trade and other receivables Prepayments Deferred reinsurance expense Non-reinsurance recoveries Deferred acquisition costs Plant and equipment Deferred tax assets Intangibles Goodwill Total assets Liabilities Trade and other payables Reinsurance payable Outstanding claims Unearned premium Employee benefits provision Interest bearing liabilities Total liabilities Net assets Equity Share capital Share based payment reserve Other reserves Retained earnings Total equity Note 2.1(f) 6.4 4.2 4.5 4.3 3.5(b) 6.1 6.2 6.5 4.4 4.6 6.3 5.2 5.3(a) 5.3(b) 5.5 2016 $’000 57,634 28,754 2015 $’000 78,114 34,621 3,464,951 3,847,759 1,592 2,326 80,163 34,414 2,831 2,179 71,040 28,770 141,997 145,075 472 9,963 2,006 9,123 828 10,593 1,026 9,123 3,833,395 4,231,959 34,954 95,328 355,546 77,658 86,753 276,983 1,177,801 1,320,590 6,413 195,972 6,810 244,416 1,866,014 2,013,210 1,967,381 2,218,749 1,354,034 1,556,470 3,389 (476,559) 1,086,517 1,967,381 5,521 (476,559) 1,133,317 2,218,749 The consolidated statement of financial position is to be read in conjunction with the notes to the financial statements. Annual Report 2016 51 Consolidated statement of changes in equity For the year ended 31 December 2016 Balance at 1 January 2015 Profit after taxation Dividends declared and paid Share based payment expense recognised Share based payment settled - - - - Buy-back of shares, net of transaction costs Share based payment expense to be recharged back to majority shareholder (149,997) - Share capital $’000 Other reserves $’000 Retained earnings $’000 1,706,467 (476,559) 1,266,735 Share based payment reserve $’000 3,832 - - 2,515 (1,293) Total $’000 2,500,475 227,982 (361,400) 2,515 (1,293) - (149,997) 467 467 - - - - - - 227,982 (361,400) - - - - Balance at 31 December 2015 1,556,470 (476,559) 1,133,317 5,521 2,218,749 Balance at 1 January 2016 1,556,470 (476,559) 1,133,317 5,521 2,218,749 Profit after taxation Dividends declared and paid Share based payment expense recognised Share based payment settled Capital reduction Share based payment expense to be recharged back to majority shareholder - - - - (202,436) - - - - - - - 203,094 (249,894) - - 203,094 (249,894) - - - - 1,441 (3,514) 1,441 (3,514) - (202,436) (59) 3,389 (59) 1,967,381 Balance at 31 December 2016 1,354,034 (476,559) 1,086,517 The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements. 52 Genworth Mortgage Insurance Australia Consolidated statement of cash flows For the year ended 31 December 2016 Note 2016 $’000 2015 $’000 Cash flows from operating activities Premiums received Interest and other income Claims paid Financial expense on long term borrowings Cash payments in the course of operations Income tax paid Net cash provided by operating activities Cash flows from investing activities Payment for plant and equipment and intangibles Payments for investments Proceeds from sale of investments Net cash used in investing activities Cash flows from financing activities Repayment of long term borrowings Net proceeds from long term borrowings Dividends paid Capital reduction Payments for on-market buy-back of shares Net cash provided by financing activities 3.4 Net (decrease)/increase in cash held Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 6.6 381,910 133,908 (85,864) (11,527) (205,881) (110,319) 102,227 507,563 156,835 (78,959) (13,893) (199,915) (155,263) 216,368 (1,520) (251) (896,886) (822,238) 1,277,648 1,002,856 379,242 180,367 (49,619) - (249,894) (202,436) - (501,949) (20,480) 78,114 57,634 - 104,180 (361,400) - (149,997) (407,217) (10,482) 88,596 78,114 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements. Annual Report 2016 53 Notes to the financial statements Section 1 Basis of preparation 1.1 Reporting entity This general purpose consolidated financial report is for the year ended 31 December 2016 and comprises the consolidated financial statements for Genworth Mortgage Insurance Australia Limited and its controlled entities (together referred to as the Group). The Company is a for-profit entity domiciled in Australia and its shares are publicly traded on ASX. The Group operates in one business and geographical segment conducting loan mortgage insurance business in Australia; hence no segment information is presented. The annual financial report was authorised for issue by the Board of Directors on 24 February 2017. 1.2 Basis of preparation (a) Statement of compliance This report has been prepared in accordance with the Corporations Act, Australian Accounting Standards adopted by the Australian Accounting Standards Board and the ASX listing rules. International Financial Reporting Standards form the basis of Australian Accounting Standards adopted by the AASB, being Australian equivalents to IFRS. The financial report also complies with IFRSs and interpretations adopted by the International Accounting Standards Board. Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the financial position and performance of the Group. Basis of preparation (b) The consolidated financial report is presented in Australian dollars. The consolidated statement of financial position has been prepared using the liquidity format of presentation, in which the assets and liabilities are presented broadly in order of liquidity. The assets and liabilities comprise both current amounts (expected to be recovered or settled within 12 months after the reporting date) and non-current amounts (expected to be recovered or settled more than 12 months after the reporting date). For those assets and liabilities that comprise both current and non-current amounts, information regarding the respective current and non-current amounts is disclosed in the relevant note to the financial statements. The consolidated financial report is prepared on the historical cost basis except for investments being stated at fair value and outstanding claims and related reinsurance recoveries on unpaid claims being stated at present value. 54 Genworth Mortgage Insurance Australia Changes in accounting policies (c) New and amended standards adopted by the Group The Group has adopted the following accounting standards which became effective for the annual reporting period commencing on 1 January 2016. These standards have introduced new disclosures but did not materially affect the amounts recognised in the financial statements. AASB 2014-4 AASB 2015-1 AASB 2015-2 AASB 1057 AASB 2015-9 AASB 2015-3 New standards, amendments and interpretations Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation Amendments to Australian Accounting Standards - Annual improvement to Australian Accounting Standards 2012-2014 Cycle Amendments to Australian Accounting Standards - Disclosure Initiative: Amendment to AASB 101 Application of Australian Accounting Standard Amendments to Australia Accounting Standards - Scope and Application Paragraphs Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality Operative date 1 January 2016 1 January 2016 1 January 2016 1 January 2016 1 January 2016 1 July 2015 New accounting standards and amendments issued but not yet effective A number of new standards, amendments to standards and interpretations noted below are effective for annual periods beginning on or after 1 January 2017, and have not been applied in preparing these consolidated financial statements. The application of these standards is not expected to have a material impact on the Group’s accounting policies. The adoption of AASB 9 Financial Instruments and AASB 15 Revenue from contracts with customers which becomes mandatory for the Group’s 2018 financial statements are not expected to result in significant changes to accounting for investments and revenue recognition respectively. An initial assessment of the AASB 16 Leases has been undertaken and it is not expected to have a material impact on the financial statements. AASB 9 AASB 15 AASB 16 AASB 2014-1 AASB 2015-8 AASB 2016-1 AASB 2016-2 AASB 2016-3 AASB 2016-5 New standards, amendments and interpretations Financial Instruments Revenue from contracts with customers Leases Amendments to Australian Accounting Standards – Financial instruments Part E Amendments to Australian Accounting Standards – Effective date of AASB 15 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets for Unrealised Losses Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 Amendments to Australian Accounting Standards – Clarifications to AASB 15 Amendments to Australian Accounting Standards - Classification and Measurement of Share-based Payment Transactions Operative date 1 January 2018 1 January 2018 1 January 2019 1 January 2018 1 January 2018 1 January 2017 1 January 2017 1 January 2018 1 January 2018 Rounding off (d) The Group is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016 and, in accordance with that Class Order, amounts in the consolidated financial statements and Directors’ Report have been rounded off to the nearest thousand dollars, unless otherwise stated. Annual Report 2016 55 Notes to the financial statements (continued) Section 1 Basis of preparation (continued) 1.2 Basis of preparation (continued) (e) Use of estimates and judgements The preparation of a financial report requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable in the circumstances, the results of which form the basis of making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and underlying assumptions are reviewed on an ongoing basis and actual results may vary from estimates. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods. Judgements made by management in the application of Australian Accounting Standards that have a significant effect on the financial report and estimates with a significant risk of material adjustment are discussed in Note 4.8. Mortgage insurance business is seasonal in nature. While net premiums earned, investment income and underwriting and administrative expenses are relatively stable from quarter to quarter, premiums written and losses may vary each quarter. The variations in premium written are driven by the level of mortgage origination and related mortgage policies written, which are typically lowest in the first quarter each year. Delinquencies and losses on claims vary from quarter to quarter primarily as the result of prevailing economic conditions as well as the characteristics of the insurance in-force portfolio such as size and age. All revenue and expenses are recognised in accordance with the accounting policies. The accounting policies have been applied consistently by the Group. Principles of consolidation (f) The Group incorporates the assets and liabilities of the Company and all subsidiaries as at the reporting date and the results of the Company and all subsidiaries for the period set out in note 1.2(b) as if they had operated as a single entity. Transactions eliminated on consolidation Unrealised gains and losses and inter-entity balances resulting from transactions with or between controlled entities are eliminated in full on consolidation. Section 2 Risk management The Group has exposure to credit, liquidity and market risks relating to its use of financial instruments. This note presents information about the Group’s exposure to each of these risks, the Group’s objectives, policies and processes for measuring and managing risk. 2.1 Financial risk management (a) Risk management framework The Board has overall responsibility for the establishment and oversight of the risk management framework. The Board has established a Risk Committee as well as an Audit Committee and Capital & Investment Committee. The Risk Committee is responsible for developing and monitoring the Group’s risk management policies, and reports regularly to the Board on its activities. Furthermore, the Committee assists the Board in providing an objective non-executive review and oversight of the implementation and on-going operation of the Company’s Risk Management Framework. The Committee works closely with other Board Committees that have oversight of some material risks to ensure that all risks are identified and adequately managed. The Audit Committee assists the Board in providing an objective non-executive review of the effectiveness of the Risk Management Framework, in relation to the management of material financial risks. Similarly, the Capital & Investment Committee assists the Board in monitoring compliance with the Risk Management Framework, in relation to the execution of the Group’s capital and investment strategy. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market conditions and the Group’s activities. The Group, through its management policies and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. 56 Genworth Mortgage Insurance Australia Risk concentration (b) Risk is managed primarily through appropriate pricing, product design, risk selection, appropriate investment strategies, financial strength ratings and reinsurance. It is vital that the Group closely monitors and responds to any changes in the general economic and commercial environment in which it operates. Due to the nature of the Australian economy, the majority of mortgages are originated through the country’s four largest banks. The Group’s top three lender customers accounted for approximately 71% of the Group’s gross written premium, as outlined in the table below: Lender customer Lender customer 1 Lender customer 2 Lender customer 3 FY16 GWP FY15 GWP 47% 14% 10% 44% 12% 10% (c) Market risk Market risk is the risk that the market price of assets change and the potential for such change to result in the actual market value of Genworth’s assets being adversely impacted. Currency risk (i) Currency risk is the risk of loss arising from an unfavourable movement in market exchange rates. The Group is exposed to currency risk on its investments in receivables and payables denominated in a currency other than Australian dollars and the net investment in foreign branch operations. The currency giving rise to the risk is New Zealand dollars. The NZ currency risk exposure to the Group is not material. The potential impact on the Group’s profit and loss and equity as a result of a 10% depreciation/appreciation of the Australian dollar at the reporting date, assuming all other variables remain constant, is shown below. 2016 +10% $’000 -10% $’000 2015 +10% $’000 -10% $’000 Impact to profit and loss and equity of 10% depreciation/ appreciation of Australian Dollar on New Zealand assets and liabilities. 954 (1,165) 185 (226) Cash flow and fair value interest rate risk (ii) The Group is exposed to interest rate risk primarily arising from interest bearing assets. Assets with floating rate interest expose the Group to cash flow interest rate risk. Fixed interest rate assets expose the Group to fair value interest rate risk. The Group’s strategy is to invest in high quality, liquid fixed interest securities and cash and to actively manage the duration. The Group used derivative financial instruments in the form of interest rate swaptions to mitigate interest rate risk arising from fixed interest securities. The risk management processes over these derivative financial instruments include close senior management scrutiny, including appropriate board approval. Derivatives are used only for approved purposes and are subject to delegated authority levels provided to management. The level of derivative exposure is reviewed on an ongoing basis. Appropriate segregation of duties exists with respect to derivative use and compliance with policy, limits and other requirements is closely monitored. The investment portfolios are actively managed to achieve a balance between cash flow interest rate risk and fair value interest rate risk bearing in mind the need to meet the liquidity requirements of the insurance business. The Group has exposure to interest rate risk on its term subordinated notes. The interest rate on these notes is reset quarterly. The Group manages the level of assets with similar maturities to offset this exposure. Annual Report 2016 57 Notes to the financial statements (continued) Section 2 Risk management (continued) 2.1 Financial risk management (continued) Cash flow and fair value interest rate risk (continued) (ii) The potential impact of movements in interest rates on the Group’s profit and loss and equity as a result of 1% increase/ decrease in interest rates on interest bearing assets, assuming all other variables remain constant, are shown below. Interest bearing assets 2016 2015 +1% $’000 51,067 -1% $’000 (40,437) +1% $’000 59,174 -1% $’000 (49,761) Equity price risk (iii) Price risk is the risk that the fair value of a financial asset will fluctuate because of changes in market prices, rather than changes in interest rates and/or exchange rates. These price movements may be caused by factors specific to the individual financial asset or its issuer, or factors affecting all similar financial assets traded on the market. The Group has exposure to equity price risk through investment in equities. During the year, the Group purchased equity securities as a return enhancing investment for the shareholder funds portfolio. The equity investment also provides a diversification benefit to the overall investment portfolio. The investment is structured to provide a lower volatility return outcome than a market-weighted allocation to Australian equities. The equity investment targets a volatility of 10% by allocating dynamically between cash and a portfolio of shares which replicate the S&P ASX 200 Index. The potential impact of movements in price risk on the Group’s profit and loss and equity as a result of a 10% increase/ decrease in value of equity securities at reporting date are shown below. Investments – equity securities 2016 2015 +10% $’000 13,136 -10% $’000 (13,136) +10% $’000 - -10% $’000 - (d) Credit risk exposures Credit risk is the risk of default by borrowers and transactional counterparties as well as the loss of value of assets due to deterioration in credit quality. The Group’s credit risk arises predominantly from investment activities and the amounts are as indicated by the carrying amounts of the financial assets. The Group’s investment portfolio comprises 97% (2015: 96%) of total securities and cash with counterparties having a rating of A- or better. The Group does not expect any investment counterparties to fail to meet their obligations given their strong credit ratings. The credit quality of financial assets that are neither past due nor impaired is assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates. As at balance date there were no assets past due. 58 Genworth Mortgage Insurance Australia The ratings in the following table are the lower equivalent rating of either Standard & Poor’s or Moody’s. Cash at bank and short term bank deposits AAA AA A BBB BB Investments AAA AA A BBB Accrued interest receivable AAA AA A BBB BB 2016 $’000 41,359 315,293 16,450 15,000 3,000 391,103 2015 $’000 37,534 547,188 5,000 8,800 3,000 601,522 1,532,210 1,621,255 766,319 548,031 97,266 884,749 677,320 141,027 2,943,826 3,324,351 12,789 9,845 5,289 418 10 28,351 14,808 11,437 6,487 1,879 10 34,621 Receivables without external credit rating 1,592 2,831 Annual Report 2016 59 Notes to the financial statements (continued) Section 2 Risk management (continued) 2.1 Financial risk management (continued) Liquidity risk (e) Liquidity risk is the risk that there are insufficient cash resources to meet payment obligations to policyholders and creditors without affecting the daily operations or the financial condition of the Group. Management of liquidity risk includes asset and liability management strategies. The assets held to back insurance liabilities consist predominantly of highly rated fixed income securities which can generally be readily sold or exchanged for cash. The assets are managed so as to effectively match the interest rate maturity profile with the expected pattern of claims payments. 2016 Financial liabilities Payables Reinsurance payable Outstanding claims provision 2015 Financial liabilities Payables Reinsurance payable Outstanding claims provision Less than 1 year 1 - 5 years $’000 34,954 83,689 273,250 391,893 $’000 - 11,639 82,296 93,935 Less than 1 year 1 - 5 years $’000 68,138 75,396 202,181 345,715 $’000 9,520 11,357 74,802 95,679 Total $’000 34,954 95,328 355,546 485,828 Total $’000 77,658 86,753 276,983 441,394 Fair value measurements (f) Accounting policies Financial assets backing general insurance liabilities The assets backing general insurance liabilities are those assets required to cover the technical insurance liabilities (outstanding claims and unearned premiums) plus an allowance for capital adequacy. The Group has designated the assets backing general insurance activities based on its function. Initially insurance technical balances are offset against the required assets, with any additional assets required being allocated based on liquidity. In accordance with the Group’s investment strategy, the Group actively monitors the average duration of the notional assets allocated to insurance activities to ensure sufficient funds are available for claim payment obligations. The Group accounts for financial assets and any assets backing insurance activities at fair value through profit and loss, with any unrealised profits and losses recognised in the statement of comprehensive income. The valuation methodologies of assets valued at fair value are summarised below: • Cash assets and bank overdrafts are carried at face value of the amounts deposited or drawn; and • Fixed interest securities are initially recognised at fair value, determined as the quoted cost at date of acquisition. They are subsequently remeasured to fair value at each reporting date. For securities traded in an active market, fair value is determined by reference to published bid price quotations. For securities not traded and securities traded in a market that is not active, fair value is determined using valuation techniques with the most common technique being reference to observable market data using the fair values of recent arm’s length transactions involving the same or similar instruments. In the absence of observable market information, unobservable inputs which reflect management’s view of market assumption are used. Valuation techniques maximise the use of observable inputs and minimise the use of unobservable inputs • Listed equity securities are designated as financial assets at fair value through profit and loss upon initial recognition. They are initially recorded at fair value, determined as the quoted cost at date of acquisition and are subsequently remeasured to fair value at each reporting date. 60 Genworth Mortgage Insurance Australia Financial assets not backing general insurance liabilities Investments not backing insurance liabilities are designated as financial assets at fair value through profit and loss on the same basis as those backing insurance liabilities. Derivative financial instruments Derivatives are used solely to manage risk, not for trading or speculation. Derivatives are initially recognised at trade date at fair value; attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value through profit and loss. Investments Fixed interest rate Short term deposits Government and semi-government bonds Corporate bonds Floating interest rate Short term deposits Corporate bonds Government and semi-government bonds Equity securities Listed Derivatives Investment related derivatives Total investments Current Non-current Equity 2016 $’000 2015 $’000 149,738 929,739 1,504,132 2,583,609 183,731 480,131 26,936 690,798 496,574 870,166 1,962,917 3,329,657 26,834 489,714 - 516,548 187,655 - 2,889 1,554 3,464,951 3,847,759 821,766 2,455,530 187,655 1,103,268 2,744,491 - 3,464,951 3,847,759 The Group’s financial assets and liabilities are carried at fair value. The Group investments carried at fair value have been classified under the three levels of the IFRS fair value hierarchy as follows: Level 1 - Quoted prices in an active market: Fair value investments which are quoted in active and known markets. The quoted prices are those at which transactions have regularly and recently taken place within such markets. Level 2 - Valuation techniques with observable parameters: Fair value investments using inputs other than quoted prices within Level 1 that are observable either directly or indirectly. Level 3 - Valuation techniques with significant unobservable parameters: Fair value investments using valuation techniques that include inputs that are not based on observable market data. Annual Report 2016 61 Notes to the financial statements (continued) Section 2 Risk management (continued) 2.1 Financial risk management (continued) (f) Accounting policies (continued) Fair value measurements (continued) 31 December 2016 Financial instruments Government and semi-government bonds Corporate bonds Short term deposits Derivatives Equity investments Total Level 1 $’000 Level 2 $’000 - - 956,675 1,984,263 333,469 - 187,655 521,124 - - - Level 3 $’000 - - - 2,889 - Total $’000 956,675 1,984,263 333,469 2,889 187,655 2,940,938 2,889 3,464,951 There is an insignificant proportion of investments, less than 1% (2015: 1%), for which a valuation methodology is used to determine the fair value. These assets are effectively marked to model rather than fair value. Reasonable changes in the judgement applied in conducting these valuations would not have a significant impact on the statement of financial position. 31 December 2015 Financial instruments Government and semi-government bonds Corporate bonds Short term deposits Derivatives Total Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 - - 870,166 2,404,131 - 870,166 48,500 2,452,631 523,408 - - - 523,408 3,274,297 - 1,554 50,054 523,408 1,554 3,847,759 62 Genworth Mortgage Insurance Australia The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy: Financial instruments Corporate bonds Derivatives Total Financial instruments Government and semi-government bonds Corporate bonds Derivatives Total Balance at 1 January 2016 Purchases Disposals Movement in fair value Balance at 31 December 2016 $’000 $’000 $’000 $’000 $’000 48,500 1,554 50,054 - (48,500) 1,568 1,568 - (48,500) - (233) (233) - 2,889 2,889 Balance at 1 January 2015 Purchases Disposals Movement in fair value $’000 $’000 $’000 $’000 962 48,500 - 49,462 - - 2,502 2,502 (962) - - (962) - - (948) (948) Balance at 31 December 2015 $’000 - 48,500 1,554 50,054 Interest bearing liabilities are initially measured at fair value (net of transaction costs) but are subsequently measured at amortised cost. The Company considers the fair value of the interest bearing liabilities to be approximate to that of the carrying value. The interest bearing liabilities have been classified as Level 2 under the three levels of the IFRS fair value hierarchy. Derivative financial instruments The Group purchased interest rate swaptions to mitigate interest rate risk arising from fixed interest securities. An interest rate swaption is an option to enter into an interest rate swap. Each option exists for a period of time and the purchaser pays a one-time, up-front premium to acquire the options. The purchaser has a right, but not an obligation, to exercise the option if interest rates reach a particular level. Interest rate swaptions are valued using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, which is generally considered an observable input, forward interest rate volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate volatility input, these derivatives are classified as Level 3. Reporting date positions The notional amount and fair value of derivative financial instruments, together with their maturity profile, are provided below: Within 1 year Maturity profile 1 to 5 years 2016 Maturity profile over 5 years 2015 Notional contract amount Fair value asset Notional contract amount Fair value asset $’000 $’000 $’000 $’000 $’000 $’000 $’000 Investment related derivatives Interest rate swaptions 1,650,000 - - 1,650,000 2,889 1,700,000 1,554 Annual Report 2016 63 Notes to the financial statements (continued) Section 3 Results for the year 3.1 Gross written premium Accounting policies Gross written premium comprises amounts charged to policyholders (direct premium) or other insurers (inward reinsurance premium) for insurance contracts. Premium charged to policyholders excludes stamp duties and goods and services tax (GST) collected on behalf of third parties. Direct premium Inward reinsurance premium 2016 $’000 381,361 549 381,910 2015 $’000 506,488 1,075 507,563 Investment income 3.2 Accounting policies Interest revenue Interest revenue is recognised as it accrues, taking into account the coupon rate on investments, and interest rates on cash and cash equivalents, net of withholding tax paid or payable. Dividend revenue Dividend is recognised on the date the dividends/distributions are declared, which for listed equity securities is deemed to be the ex-dividend date. Gains/(losses) in fair value of investments Refer to Note 2.1(f) Accounting policies and fair value estimations for further details. 2016 $’000 120,927 7,113 (12,525) 11,010 (531) 125,994 40,353 85,641 125,994 2015 $’000 150,530 - (52,436) 9,790 - 107,884 39,048 68,836 107,884 Interest Dividend revenue Gains/(losses) in fair value of investments Unrealised Realised Impairments Total investment income Represented by Investment income on assets backing insurance liabilities Investment income on equity holders’ funds 64 Genworth Mortgage Insurance Australia 3.3 Other underwriting expenses Depreciation and amortisation expense Employee expenses: – Salaries and wages – Superannuation contributions – Employee benefits Occupancy expenses Marketing expenses Administrative expenses 2016 $’000 895 27,772 1,768 (218) 2,820 566 30,442 64,045 2015 $’000 2,329 33,465 2,100 (338) 3,192 776 27,001 68,525 3.4 Net cash provided by operating activities This note reconciles the operating profit to the cash provided by operating activities per the cash flow statement. Profit after income tax Less items classified as investing/financing activities: – Gain on sale of investments – Unrealised loss/(gains) on investments Add non-cash items: – Share based payments – Loss on disposal of plant and equipment – Depreciation, amortisation and impairment 2016 $’000 2015 $’000 203,094 227,982 (10,478) 12,525 (2,132) 1 895 (9,789) 52,449 1,689 104 2,329 Net cash provided by operating activities before change in assets and liabilities 203,905 274,764 Change in assets and liabilities during the financial year: (Increase)/Decrease in receivables Increase in outstanding claims liability (Increase)/Decrease in payables and borrowings Decrease/(Increase) in deferred acquisition costs (Decrease)/Increase in provision for employee entitlements (Decrease)/Increase in unearned premiums Decrease/(Increase) in deferred tax asset balances Net cash provided by operating activities (7,809) 78,563 (32,954) 3,078 (396) (142,790) 630 102,227 4,368 46,109 (43,237) (20,605) (607) (42,042) (2,382) 216,368 Annual Report 2016 65 Notes to the financial statements (continued) Income taxes Section 3 Results for the year (continued) 3.5 Accounting policies Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the statement of comprehensive income except to the extent that it relates to items recognised directly in equity. Current tax is expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the statement of financial position date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the statement of financial position method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes; the initial recognition of assets or liabilities that affect neither accounting or taxable profit; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities using tax rates enacted or substantively enacted at the statement of financial position date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend. The Group’s subsidiaries constitute a tax consolidated group of which the Company is the head entity. Under the tax consolidation system, the head entity is liable for the current income tax liabilities of that group. Entities are jointly and severally liable for the current income tax liabilities of the Group where the head entity defaults, subject to the terms of a valid tax sharing agreement between the entities in the Group. Assets and liabilities arising from the Company under the tax funding arrangement are recognised as amounts receivable from or payable to other entities in the Group. (a) Income tax expense Current tax Deferred tax (Over)/under provision in prior year Current tax Deferred tax (i) Reconciliation of income tax expense to prima facie tax payable Prima facie income tax expense calculated at 30% on profit Increase in income tax expense due to: Foreign tax rate differential (Over)/under provision in prior year Other non-taxable items Income tax expense on the profit 66 Genworth Mortgage Insurance Australia 2016 $’000 85,247 462 361 168 86,238 2016 $’000 86,800 (59) 529 (1,032) 86,238 2015 $’000 98,293 (718) 1,551 (1,664) 97,462 2015 $’000 97,633 - (113) (58) 97,462 (ii) Current tax liabilities The Company is liable for the current income tax liabilities of the tax consolidated group. The Group’s liability includes the income tax payable by all members of the tax consolidated group. (b) Deferred tax assets and liabilities Deferred tax asset balance comprises temporary differences attributable to: Employee benefits Share based payments and accrued expenses Fixed assets and intangibles, including Research & development Provision for indirect claims handling costs Net deferred tax Balance at 1 January (Debited)/credited to the statement of comprehensive income Under/(over) provision of prior year tax Closing balance at 31 December 2016 $’000 3,224 400 - 6,339 9,963 10,593 (462) (168) 9,963 2015 $’000 3,951 1,063 166 5,413 10,593 8,211 718 1,664 10,593 3.6 Dividends Accounting policy A provision for dividends is made in respect of ordinary shares when dividends have been declared on or before the reporting date but have not yet been distributed at that date. Restrictions that may limit the payment of dividends (a) There are currently no restrictions on the payment of dividends by the Company other than: • • the provisions of the Corporations Act and the Company’s constitution; and the payment of dividends is generally limited to profits subject to ongoing solvency obligations noting that, under the APRA Level 2 Group supervision requirements, the Company is required to obtain approval from APRA before payment of dividends on ordinary shares that exceeds the Group’s after tax earnings as defined by APRA. Cents per share Total amount $m Payment date Tax rate for franking credit Percentage franked 2015 final dividend 2015 special dividend 2016 interim dividend 2016 special dividend 14.0 5.3 14.0 12.5 83.4 31.5 71.3 63.7 4 March 2016 4 March 2016 31 August 2016 31 August 2016 30% 30% 30% 30% 100% 100% 100% 100% The Board normally resolves to pay dividends for a period after the relevant reporting date. In accordance with the accounting policy, dividends for a six monthly period are generally recognised in the following six month period. Dividends not recognised at reporting date (b) In addition to the above dividends, the Board determined to pay the following dividend after the reporting date but before finalisation of this financial report and it has not been recognised in this financial report. Cents per share Total amount $m Expected payment date Tax rate for franking credit Percentage franked 2016 final dividend 14.0 71.3 8 March 2017 30% 100% Annual Report 2016 67 Notes to the financial statements (continued) Section 3 Results for the year (continued) 3.6 Dividends (continued) Accounting policy (continued) (c) Dividend franking account The balance of the franking account arises from: • • franked income received or recognised as a receivable at the reporting date; income tax paid, after adjusting for any franking credits which will arise from the payment of income tax provided for in the financial statements; and • franking debits from payment of dividends recognised as a liability at the reporting date. Franking account balance at reporting date at 30% Franking credits to arise from payment of income tax payable Franking credits available for future reporting periods Franking account impact of dividends determined before issuance of financial report but not recognised at reporting date Franking credits available/(deficits) for subsequent financial periods based on a tax rate of 30% 2016 2015 28,552,903 5,225,329 7,665,088 21,834,947 36,217,991 27,060,276 (30,561,903) (49,248,086) 5,656,088 (22,187,810) In accordance with the tax consolidation legislation, the Company as the head entity in the tax consolidated group has assumed the benefit of available franking credits. The Company actively manages the franking account to ensure the balance remains positive at each reporting date, in accordance with tax legislation. 3.7 Earnings per share Accounting policies Basic earnings per share is calculated by dividing the profit after tax by the weighted average number of shares on issue during the reporting period. Diluted earnings per share is calculated by dividing the profit after tax adjusted for any costs associated with dilutive potential ordinary shares by the weighted average number of ordinary shares and dilutive potential ordinary shares. Basic and diluted earnings per share have been calculated using the weighted average and dilutive number of shares outstanding during the year of 545,276,000. The difference between basic and diluted earnings per share is caused by the granting of potentially dilutive securities such as share rights, options and restricted share units (RSUs). Basic earnings per share (cents per share) Diluted earnings per share (cents per share) (a) Reconciliation of earnings used in calculating earnings per share Profit after tax Profit used in calculating basic and diluted earnings per share 2016 37.2 37.1 2016 $’000 203,094 203,094 2015 35.3 35.2 2015 $’000 227,982 227,982 68 Genworth Mortgage Insurance Australia (b) Reconciliation of weighted average number of ordinary shares used in calculating earnings per share Weighted average number of ordinary shares on issue Weighted average number of shares used in the calculation of basic earnings per share Weighted average number of dilutive potential ordinary shares Bonus element of shares Weighted average number of shares used in the calculation of diluted earnings per share 2016 ’000 545,276 545,276 1,673 546,949 2015 ’000 645,532 645,532 2,056 647,588 Annual Report 2016 69 Notes to the financial statements (continued) Insurance contracts Section 4 4.1 Net claims incurred Accounting policies Classification of insurance contracts Contracts under which an entity accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary are classified as insurance contracts. Insurance risk is risk other than financial risk. (a) Claims analysis Gross claims incurred Reinsurance and other recoveries revenue Borrower recoveries recognised Net claims incurred (b) Claims development 2016 $’000 166,536 (6,853) (900) 158,783 2015 $’000 133,206 (8,696) (11,800) 112,710 Gross claims expense Direct Inwards reinsurance Current year $’000 2016 Prior years $’000 Total $’000 Current year $’000 2015 Prior years $’000 Total $’000 254,952 (94,234) 160,718 204,013 (72,360) 131,653 9,863 (4,045) 5,818 7,689 (6,136) 1,553 Gross claims incurred – undiscounted 264,815 (98,279) 166,536 211,702 (78,496) 133,206 Reinsurance and other recoveries revenue Reinsurance and other recoveries – undiscounted Borrower recoveries recognised (812) (107) (6,041) (793) (6,853) (900) (1,321) (1,331) Net claims incurred 263,938 (105,155) 158,783 209,050 (7,375) (10,469) (96,340) (8,696) (11,800) 112,710 70 Genworth Mortgage Insurance Australia 4.2 Deferred reinsurance expense Accounting policies Reinsurance expense Premium ceded to reinsurers is recognised as an expense in accordance with the pattern of reinsurance coverage received. Accordingly, a portion of outwards reinsurance premium is treated at the balance date as a deferred reinsurance expense. Balance at 1 January Deferral of reinsurance premium on current year contracts Expensing/reversing of reinsurance premium previously deferred Balance as at 31 December Current Non-current 2016 $’000 71,040 147,638 (138,515) 80,163 68,524 11,639 80,163 2015 $’000 80,602 70,165 (79,727) 71,040 59,683 11,357 71,040 4.3 Deferred acquisition costs Accounting policies Costs associated with obtaining and recording mortgage insurance contracts are referred to as acquisition costs and are capitalised when they relate to the acquisition of new business or the renewal of existing business. These are presented as deferred acquisition costs (DAC) and amortised using the same basis as the earning pattern of premium over the period of the related insurance contracts. The balance at the reporting date represents the capitalised acquisition costs relating to unearned premium and is stated at cost subject to a liability adequacy test. The Group reviews all assumptions underlying DAC and tests DAC for recoverability annually. If the balance of unearned premiums is less than the current estimate of future losses and related expenses a charge to income is recorded for additional DAC amortisation. Refer to Note 4.8 Accounting estimates and judgements for further detailed information. Balance at 1 January Acquisition costs incurred in year Amortisation charge Balance as at 31 December Current Non-current 2016 $’000 145,075 52,864 (55,942) 141,997 51,273 90,724 141,997 2015 $’000 124,470 70,879 (50,274) 145,075 51,940 93,135 145,075 Annual Report 2016 71 Notes to the financial statements (continued) Insurance contracts (continued) Section 4 4.4 Outstanding claims Accounting policies Claims expense and a liability for outstanding claims are recognised in respect of direct and inward reinsurance business. The liability covers claims reported and outstanding, IBNR and the expected direct and indirect costs of settling those claims. Outstanding claims are assessed by estimating the ultimate cost of settling delinquencies, which includes IBNR and settlement costs, using statistics based on past experience and trends. Changes in outstanding claims are recognised in profit or loss in the reporting period in which the estimates are changed. The provision for outstanding claims contains a risk margin to reflect the inherent uncertainty in the central estimate, the central estimate being the expected value of outstanding claims. Refer to Note 4.8 Accounting estimates and judgements and Note 4.9 Actuarial assumptions and methods for further detailed information. Central estimate Risk margin Gross outstanding claims (a) Reconciliation of changes in outstanding claims Balance at 1 January Current period net claims incurred Movement in non-reinsurance and borrower recoveries Claims paid Balance at 31 December Current Non-current 2016 $’000 314,428 41,118 355,546 2016 $’000 276,983 158,783 5,644 (85,864) 355,546 273,251 82,295 355,546 2015 $’000 242,938 34,045 276,983 2015 $’000 230,874 112,710 12,358 (78,959) 276,983 202,181 74,802 276,983 72 Genworth Mortgage Insurance Australia (b) Claims development 2016 Underwriting years At end of year of underwrite Prior years1 $’000 2007 $’000 2008 $’000 2009 $’000 2010 $’000 2011 $’000 2012 $’000 2013 $’000 2014 $’000 2015 $’000 2016 $’000 Total $’000 One year later 150,229 39,265 44,511 19,629 7,004 6,668 204,459 9,302 8,438 4,393 701 992 1,079 7,805 1,021 778 6,825 12,917 1,424 6,803 Two years later 129,761 61,383 47,593 36,755 15,005 10,997 11,246 20,871 20,319 Three years later 106,407 45,635 52,954 47,621 9,744 9,989 24,535 29,722 Four years later 42,476 50,058 79,244 24,386 8,108 15,925 43,917 Five years later 34,904 61,174 31,875 16,589 23,971 23,182 Six years later 48,439 29,491 22,638 40,761 11,717 Seven years later 12,446 10,197 23,698 12,537 Eight years later (1,819) (11,264) 8,579 Nine years later (40,129) 4,116 All future years (2,970) 860 233,447 301,656 353,930 326,607 264,114 191,695 153,046 58,878 (4,504) (36,013) (2,970) Net incurred to date 684,203 299,357 319,530 202,671 76,250 67,753 88,582 58,439 34,014 8,227 860 1,839,886 Net paid to date 663,010 273,774 283,637 165,886 51,900 31,997 27,654 15,497 4,849 550 0 1,518,754 Outstanding claims provision at 31 December 2016 Recoveries on Paid Claims at 31 December 2016 2015 Underwriting years At end of year of underwrite 23,358 26,741 37,388 38,155 25,182 36,922 62,879 44,313 30,088 7,919 887 333,832 2,165 1,158 1,494 1,371 833 1,166 1,951 1,370 923 242 27 12,700 Prior years1 $’000 2007 $’000 2008 $’000 2009 $’000 2010 $’000 2011 $’000 2012 $’000 2013 $’000 2014 $’000 2015 $’000 Total $’000 One year later 150,229 39,265 44,511 19,629 7,004 6,668 6,825 12,917 204,831 9,303 8,438 4,393 701 992 1,021 777 1,424 232,959 1,079 7,805 Two years later 129,761 61,383 47,593 36,755 15,006 10,997 11,246 20,870 Three years later 106,406 45,634 52,954 47,621 9,744 9,990 24,535 Four years later 42,476 50,059 79,244 24,386 8,107 15,925 Five years later 34,904 61,174 31,875 16,589 23,971 Six years later 48,439 29,491 22,638 40,761 Seven years later 12,446 10,196 23,698 Eight years later (1,819) (11,264) All future years (40,129) 294,853 333,611 296,884 220,197 168,513 141,329 46,340 (13,083) (40,129) Net incurred to date 687,544 295,241 310,951 190,134 64,533 44,572 44,665 28,716 13,694 1,424 1,681,474 Net paid to date 660,996 267,051 269,299 149,983 43,410 23,024 14,617 4,284 558 39 1,433,261 Outstanding claims provision at 31 December 2015 Recoveries on Paid Claims at 31 December 2015 28,285 29,470 43,543 41,974 22,082 22,526 31,412 25,541 13,732 1,448 260,013 1,737 1,280 1,891 1,823 959 978 1,364 1,109 596 63 11,800 1 Prior 2007 underwriting years Annual Report 2016 73 Notes to the financial statements (continued) Insurance contracts (continued) Section 4 4.4 Outstanding claims (continued) (c) Reconciliation of claims development table to outstanding claims provision Closing outstanding claims provision per claims development table Non reinsurance recoveries Gross closing outstanding claims provision 2016 $’000 333,832 21,714 355,546 2015 $’000 260,013 16,970 276,983 4.5 Non-reinsurance recoveries Accounting policies Reinsurance and non-reinsurance recoveries Reinsurance and other recoveries receivable on paid claims, reported claims not yet paid and IBNR claims are recognised as revenue. Recoveries receivable on paid claims are presented as part of non-reinsurance recoveries receivable net of any provision for impairment based on objective evidence for individual receivables. Recoveries receivable are assessed in a manner similar to the assessment of outstanding claims. Reinsurance does not relieve the Group of its liabilities to policyholders and reinsurance recoveries are, if applicable, presented as a separate asset on the statement of financial position. Opening balance Movement of non-reinsurance recoveries Borrower recoveries receivable recognised Closing balance 2016 $’000 28,770 4,744 900 34,414 2015 $’000 16,412 558 11,800 28,770 When claims are paid, Genworth typically obtains a legally enforceable judgement against borrowers for the amount of the loss incurred. Genworth actively engages in collection activities to recover monies from borrowers under these judgements. Based on a history of successful collection activities over the last few years and current economic conditions, an expected recovery rate was established and a recovery accrual related to claims paid was recorded. This resulted in a $11.8 million recorded in non-reinsurance recoveries receivable and a corresponding decrease in net claims incurred in 2015. 74 Genworth Mortgage Insurance Australia 4.6 Unearned premium Accounting policies Earned and unearned premium revenue Premiums have been brought to account as income from the date of attachment of risk over periods up to ten years based on an actuarial assessment of the pattern and period of risk. The earned portion of premium received is recognised as revenue. The balance of premium received is recorded as unearned premium. Refer to Note 4.8 Accounting estimates and judgements for further detailed information. Balance at 1 January Premiums incepted during the year Premiums earned during the year Balance as at 31 December Current Non-current 2016 $’000 2015 $’000 1,320,590 1,362,632 381,910 (524,699) 507,563 (549,605) 1,177,801 1,320,590 377,680 800,121 423,944 896,646 1,177,801 1,320,590 4.7 Liability adequacy test Accounting policies The liability adequacy test is an assessment of the carrying amount of the unearned premium liability and is conducted at each reporting date. If current estimates of the present value of the expected cash flows relating to future claims plus an additional risk margin to reflect the inherent uncertainty in the central estimate exceed the unearned premium liability less related deferred reinsurance and deferred acquisition costs, then the unearned premium liability is deemed to be deficient. The test is performed at the portfolio level of contracts that are subject to broadly similar risks and that are managed together as a single portfolio. Any deficiency is recognised in the statement of comprehensive income, with a corresponding impact in the statement of financial position, recognised first through the write down of related deferred acquisition costs and any remaining balance being recognised as an unexpired risk liability. The liability adequacy test has identified a surplus in the portfolio of contracts that are subject to broadly similar risks. The probability of adequacy adopted in performing the liability adequacy test is set at the 70th percentile (2015: 75th percentile), includes a risk margin of 14% (2015: 29%). The 70% PoA represented by the LAT differs from the 75% represented by the outstanding claims liability as the former is reflective of experience, whereas the latter is a measurement accounting policy used in determining the carrying value of the outstanding claims liability. Annual Report 2016 75 Notes to the financial statements (continued) Insurance contracts (continued) Section 4 4.8 Accounting estimates and judgements Critical accounting estimates and judgements The Group makes judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The areas where critical accounting estimates and judgements are applied are noted below. Estimation of premium revenue/unearned premium/deferred acquisition costs (Note 3.1, Note 4.3 and Note 4.6) Premium is earned over periods of up to 10 years. The principle underlying the earning recognition is to derive a premium earning scale which recognises the premium in accordance with the incidence of claims risk. The review of the premium earning scale is based on an analysis of the historical pattern of claims incurred and the pattern of policy cancellations. The estimate for unearned premiums is established on the basis of this earning scale. Assumptions recommended by the Appointed Actuary recognise that the unearned premium relating to cancelled policies is brought to account immediately. Deferred acquisition costs are amortised under the same premium earnings scale as the related insurance contract. Estimation of outstanding claims liabilities (Note 4.4) Provision is made for the estimated claim cost of reported delinquencies at the reporting date, including the cost of delinquencies incurred but not yet reported to the Group. The estimated cost of claims includes direct expenses to be incurred in settling claims gross of expected third party recoveries. The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims exposure. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. A risk margin is added to the central estimate as an additional allowance for uncertainty in the ultimate cost of claims over and above the central estimate. The overall margin adopted by the Group is determined after considering the uncertainty in the portfolio, industry trends, the Group’s risk appetite and the margin corresponding with that appetite. The estimation of IBNR is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the Group, where more information about the claim event is generally available. IBNR claims may often not be apparent to the insured until some time after the events giving rise to the claims have happened. In calculating the estimated cost of unpaid claims, the Group uses a variety of estimation techniques, generally based upon statistical analysis of historical experience, which assumes that the development pattern of the current claims will be consistent with past experience. Allowance is made, however, for changes or uncertainties which might create distortion in the underlying statistics or cause the cost of unsettled claims to increase or decrease when compared with the cost of previously settled claims. Provisions are calculated gross of any recoveries. A separate estimate is made of the amounts that will be recoverable from lenders under specified arrangements. Estimates are also made for amounts recoverable from borrowers and property valuers, based upon the gross provisions. 76 Genworth Mortgage Insurance Australia 4.9 Actuarial assumptions and methods The Group internally values the outstanding claims liabilities at the reporting date. The valuation approach is consistent with that recommended by the Appointed Actuary. The valuation methods used are based on the underlying attributes of the claims portfolio. The Group establishes provisions for outstanding claims in two parts: • delinquent loans advised to the Group; and • IBNR. For loans where the mortgagee is in possession and a claim has been submitted, the claimed amount adjusted for amounts not eligible to be claimed is provided. For loans where there is a MIP but a claim has not yet been submitted, case estimate based approach is used using the current outstanding loan balance including accumulated arrears adjusted for selling costs, the most recent property valuation, or an estimate thereof, and any amounts not eligible to be claimed. The provision in respect of delinquent loans not in possession by the mortgagee is determined according to the following formula: • outstanding loan amount multiplied by frequency factor multiplied by severity factor. In applying this formula: • • the outstanding loan amount insured is the total outstanding amount on those loans advised to the Group by the lenders as being delinquent; the frequency and severity factors are based on a review of historical claims and delinquency experience performed by the Appointed Actuary and adopted by the Group. Actuarial assumptions and process Historical information relating to arrears and claims history for the Group is provided to the Appointed Actuary in order to determine the underlying assumptions. The Appointed Actuary examines all past underwriting years, including the mix of business by loan to value ratio and loan size band, the region in which the mortgaged property is located, product types, loan purpose and arrears duration. Statistical modelling is used to identify significant explanatory factors affecting outcomes for frequency and severity based on historical claims experience. The Appointed Actuary identifies significant explanatory factors affecting outcomes and incorporates this information into models for frequency and severity. The models incorporate past and anticipated movements in key variables to determine appropriate assumptions for reserving. The actuarial assumptions used in determining the outstanding claims liabilities other than MIPs are: Frequency While the propensity for a delinquent loan to become a claim varies for many explanatory factors (as determined by the Appointed Actuary’s analyses), the frequency basis is summarised on any given balance date and expressed so that it varies by LVR band and number of payments in arrears taking into account the average mix of effects of the other explanatory factors on the balance date. Additional loadings may be placed on these factors according to the geographic location, loan balance, External Dispute Resolution (those borrowers accessing ombudsman services or seeking legal representation) and the lender, to adjust for shorter term expectations of frequency. Severity Claim severity varies according to the number of payments in arrears and the geographic region of the properties secured by the mortgages. Claim severity is expressed as a percentage of the outstanding loan amount at the arrears date. The following average frequency and severity factors were used in the measurement of outstanding claims: • Average frequency factor is 34% (2015: 36%) • Average severity factor is 24% (2015: 25%) IBNR The IBNR provision is estimated by analysing the historical pattern of reported delinquencies. Annual Report 2016 77 Notes to the financial statements (continued) Insurance contracts (continued) Section 4 4.9 Actuarial assumptions and methods (continued) Risk margin The risk margin is an additional allowance for uncertainty in the ultimate cost of claims over and above the central estimate determined on the bases set out above. The overall margin adopted by the Group is determined after considering the uncertainty in the portfolio, industry trends, the Group’s risk appetite and the margin corresponding with that appetite. The Appointed Actuary reviews the factors impacting the portfolio to establish a recommended risk margin at the level required by the Group and APRA. Factors considered include: • variability of claims experience of the portfolio; • quality of historical data; • uncertainty due to future economic conditions; • diversification within the portfolio; and • increased uncertainty due to future legislative changes. A risk margin for outstanding claims of 14% (2015: 15%) of net central estimate has been assumed and is intended to achieve a 75% PoA. No discounting has been applied to non-current claims on the basis that the effect is immaterial. The weighted average term to settlement is approximately 19 months (2015: 23 months). Sensitivity analysis The valuation of outstanding claims incorporates a range of factors that involve interactions with economic indicators, statistical modelling and observed historical claims development. Certain variables are expected to impact outstanding claims liabilities more than others and consequently a greater degree of sensitivity to these variables is expected. Future economic conditions and, in particular, house prices, interest rates and unemployment (for new delinquencies) impact frequency and, to a lesser extent, severity. The actuarial result is based on the central estimate of the net outstanding claim liabilities. The impact on the profit and loss before income tax to changes in key actuarial assumptions is set out in the table below. The upper and lower bounds of a 95% confidence interval of frequency and severity outcomes are applied as sensitivity factors. The impact of applying the sensitivities is asymmetric around the central estimate due to the assumed asymmetry of the distribution of outcomes of the net outstanding claim liabilities. Impact on outstanding claims liabilities to changes in key variables. Frequency factor – upper 97.5th Frequency factor – lower 2.5th Severity factor – upper 97.5th Severity factor – lower 2.5th Impact on outstanding claims liabilities 2016 $’000 68,572 (57,148) 101,751 (78,437) Change in variable 2016 10% (9%) 10% (8%) Impact on outstanding claims liabilities 2015 $’000 98,021 –71,367 58,633 –48,807 Change in variable 2015 18% –13% 7% –6% Claims handling expenses Claims handling expenses are estimated after considering historical actual expenses and management’s projected costs of handling claims over the weighted average term to settlement. 78 Genworth Mortgage Insurance Australia 4.10 Capital adequacy APRA’s Prudential Standard GPS 110 Capital Adequacy requires additional disclosure in the annual financial statements to improve policyholder and market understanding of the capital adequacy of the companies in the Group. When an insurer is a controlled entity of an authorised non-operating holding company (NOHC), the Level 2 Group comprises the authorised NOHC and its controlled entities. The Company became the authorised NOHC for the Level 2 Group after acquiring 100% ownership of all Australian subsidiaries as a result of the IPO reorganisation structure. The following companies comprise the APRA Level 2 Group: Genworth Financial Mortgage Insurance Finance Pty Limited Genworth Financial New Holdings Pty Ltd Genworth Financial Mortgage Insurance Holdings Pty Limited Genworth Financial Mortgage Insurance Pty Limited Genworth Financial Services Pty Limited Genworth Financial Mortgage Indemnity Limited Genworth Financial Australia Holdings, LLC The calculation for Prescribed Capital Amount (PCA) for the APRA Level 2 Group provided below is based on the APRA Level 2 Group requirements. Tier 1 capital Paid-up ordinary shares Other reserves Retained earnings Less: Deductions Net surplus relating to insurance liabilities Net Tier 1 capital Tier 2 capital Total capital base Insurance risk charge Insurance concentration risk charge Asset risk charge Operational risk charge Aggregation benefit Total PCA PCA coverage ratio (times) 2016 $’000 2015 $’000 1,354,034 1,556,470 (473,171) 1,086,517 (20,826) 66,223 2,012,777 200,000 2,212,777 229,807 1,095,275 111,002 29,954 (52,158) (471,038) 1,133,316 (20,258) 152,720 2,351,210 249,600 2,600,810 226,642 1,344,181 76,930 27,679 (37,086) 1,413,880 1,638,346 1.57x 1.59x Annual Report 2016 79 Notes to the financial statements (continued) Section 5 Capital management and financing 5.1 Capital management The capital management strategy plays a central role in managing risk to create shareholder value, whilst meeting the crucial and equally important objective of providing an appropriate level of capital to protect both policyholders’ and lenders’ interests and satisfy regulators. Capital finances growth, capital expenditure and business plans and also provides support in the face of adverse outcomes from insurance and other activities and investment performance. The determination of the capital amount and mix is built around three core considerations. The Group aims to hold capital to meet the highest requirements derived from these three considerations: Regulatory capital (a) The regulated controlled entities are subject to APRA’s prudential standards, which set out the basis for calculating the Prescribed Capital Requirement, the minimum level of capital that the regulator deems must be held to meet policyholder obligations. The capital base is expected to be adequate for the size, business mix, complexity and risk profile of the business and, as such, the PCR utilises a risk based approach to capital adequacy. The PCR is the sum of the capital charges for insurance, investments and other assets, investment concentration, operational and catastrophe concentration risk plus any supervisory adjustment imposed by APRA. It is the Group’s policy to hold regulatory capital levels in excess of the PCR. The Group maintains sufficient capital to support the PCR, which is APRA’s derivation of the required capital to meet a 1 in 200 year risk of absolute ruin, and has at all times during the current and prior financial year complied with the externally imposed capital requirements to which it is subject. Capital calculations for regulatory purposes are based on a premium liabilities model which is different from the deferral and matching model which underpins the measurement of assets and liabilities in the financial statements. The premium liabilities model estimates future expected claim payments arising from future events insured under existing policies. This differs from the measurement of the outstanding claims liabilities on the statement of financial position, which considers claims relating to events that have occurred up to and including the reporting date. On 1 June 2016, the Company undertook a capital reduction of $202,436,000. Refer to Note 5.3 Equity for further information. On 30 June 2016, the Company’s wholly owned subsidiary, GFMI redeemed the remaining $49,619,000 of its existing 2011 subordinated notes. Refer to Note 5.2 Interest bearing liabilities for further information Ratings (b) The controlled entities maintain their capital strength by reference to a target financial strength rating from an independent ratings agency. The ratings help to reflect the financial strength of these entities and demonstrate to stakeholders their ability to pay claims. Standard & Poor’s On 4 November 2016, S&P reaffirmed Genworth Financial Mortgage Insurance Pty Limited’s financial strength rating at ‘A+’ and outlook ‘stable’. Moody’s On 11 March 2016, Moody’s reaffirmed the insurance financial strength rating of Genworth Financial Mortgage Insurance Pty Limited at ‘A3’ with an outlook of ‘Negative’. On 14 March 2016, Moody’s withdrew the financial strength and credit ratings on Genworth Financial Mortgage Indemnity Ltd at Genworth’s request following Genworth’s review of the benefits of continuing to having this run-off entity rated. Fitch Ratings On 25 September 2016, Fitch reaffirmed Genworth Financial Mortgage Insurance Pty’s financial strength rating at ‘A+’ and outlook ‘stable’. Economic capital (c) The Group uses an economic capital model (ECM) to assess the level of capital required for the underwriting, claims estimation, credit, market, liquidity, operational and group risk to which it is exposed. Economic capital is determined as the level of capital the Group needs to ensure that it can satisfy its ultimate policyholder obligations in relation to all insurance contracts issued on or before the end of the business plan year. The ECM is used by management to help in the determination of strategic capital allocation, business planning, underwriting performance, pricing and reinsurance arrangements. The Group reviews its capital structure on an ongoing basis to optimise the allocation of capital whilst minimising the cost of capital. Active management of the business and its capital has enabled the Group to maintain its insurer financial strength and credit rating. 80 Genworth Mortgage Insurance Australia Interest bearing liabilities 5.2 Accounting policies Interest bearing liabilities are initially recognised at fair value less transaction costs that are directly attributable to the transaction. After initial recognition the liabilities are carried at amortised cost using the effective interest rate method. Finance related costs include interest, which is accrued at the contracted rate and included in payables, and amortisation of transaction costs which are capitalised, presented together with borrowings, and amortised over the life of the borrowings. This cost also includes the write off of capitalised transaction costs and premium paid on the early redemption of borrowings. Subordinated notes $140 million subordinated notes $200 million subordinated notes Less: capitalised transaction costs (A) (B) 2016 $’000 2015 $’000 - 200,000 (4,028) 195,972 49,619 200,000 (5,203) 244,416 (A) On 30 June 2016, GFMI redeemed the remaining $49,619,000 of its existing $140,000,000 subordinated notes issued on 30 June 2011. (B) On 3 July 2015, GFMI issued $200,000,000 of 10 year, non-call five year subordinated notes. The notes qualified as Tier 2 Capital under the APRA’s capital adequacy framework. Key terms and conditions are: • Interest is payable quarterly in arrears, with the rate each calendar quarter being the average of the 90 day bank bill swap rate at the end of the prior quarter plus a margin equivalent to 3.5% per annum; and • The notes mature on 3 July 2025 (non-callable for the first five years) with the issuer having the option to redeem at par from 3 July 2020. Redemption at maturity, or any earlier date provided for in the terms and conditions of issue, is subject to prior approval by APRA. Annual Report 2016 81 Notes to the financial statements (continued) Section 5 Capital management and financing (continued) 5.3 Equity (a) Share capital Issued fully paid capital Balance at 1 January Buy-back shares, net of transaction costs Capital reduction Balance at 31 December 2016 $’000 2015 $’000 1,556,470 1,706,467 - (149,997) (202,436) - 1,354,034 1,556,470 The Company’s issued shares do not have a par value. All ordinary shares are fully paid. Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Company. Capital reduction and share consolidation On 1 June 2016, $202.4 million of capital was returned to shareholders as part of the Group’s capital management initiatives. As a result of the capital reduction, the Company consolidated its share capital through the conversion of every one share into 0.8555 shares. Following the completion of the share consolidation the total number of shares on issue is 509,365,050 ordinary shares. On-market buy-back On 30 October 2015, the Company announced its intention to commence, with effect from 16 November 2015, an on-market share buy-back program for shares up to a maximum equivalent value of $150 million. In 2015 the Company bought back and cancelled 54,600,000 shares for a total consideration of $150 million. (b) Share based payment reserve Balance at 1 January Share-based payment expense Share-based payment settled Share-based payment expense to be recharged back to the major shareholder Balance as at 31 December Refer to Note 7.6 Share based payments for further detailed information. 2016 $’000 5,521 1,441 (3,514) (59) 3,389 2015 $’000 3,832 2,515 (1,293) 467 5,521 82 Genworth Mortgage Insurance Australia 5.4 Capital commitments and contingencies Accounting policies The Group leases property and equipment under operating leases where the lessor retains substantially all the risks and benefits of ownership of the leased items, expiring from one to five years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rentals are based on movements in the Consumer Price Index. Lease payments are recognised as an expense in profit and loss on a straight line basis over the term of these leases. Lease incentives received are recognised as an integral part of the total lease expense over the term of the lease. Operating lease commitments The estimated future amounts of operating lease commitments not provided for in the financial statements are payable: Within one year One year or later and no later than five years Contingencies There were no contingent liabilities as at 31 December 2016. 5.5 Other reserves Other reserves 2016 $’000 2015 $’000 6,362 3,773 10,135 6,491 9,988 16,479 2016 $’000 2015 $’000 (476,559) (476,559) Under the pre IPO Group structure, there was no single Australian company with 100% control of Genworth’s Australian subsidiaries. As part of the reorganisation plan, a corporate reorganisation was undertaken to reorganise the intragroup debt and equity funding arrangements and to facilitate the repayment of funding arrangements with the Genworth Financial Group. The following steps were applied to reflect the reorganisation plan: • $450 million of preference shares issued by Genworth Financial New Holdings Pty Ltd and held by GFI were transferred to the Group. As a result, the Preference Shares were eliminated in the consolidated statements of financial position; • The receivable associated with a loan provided by GFI to Genworth Financial Australia Holdings, LLC was transferred to the Group. As a result, the loan receivable was eliminated in the consolidated statements of financial position; and • $720 million short term note provided by GFI to the Group was repaid with the proceeds of the Offer. Following the implementation of the reorganisation plan, the Company became the holding company of the Group and the following entities were consolidated to form the Group: • Genworth Financial Mortgage Insurance Pty Limited; • Genworth Financial Mortgage Indemnity Limited; • Genworth Financial Services Pty Limited; • Genworth Financial Mortgage Insurance Holdings Pty Limited; • Genworth Financial Mortgage Insurance Finance Holdings Limited; • Genworth Financial Mortgage Insurance Finance Pty Limited; • Genworth Financial New Holdings Pty Limited; and • Genworth Financial Australia Holdings, LLC. The Group has determined that the reorganisation represents a business combination involving entities under common control and therefore the Group is not required to account for the reorganisation as a business combination under AASB 3 Business combinations. The reorganisation involved transactions with owners from which no goodwill arises; therefore any difference in these transactions is recognised directly in equity as other reserves. Annual Report 2016 83 Notes to the financial statements (continued) Section 6 Operating assets and liabilities 6.1 The intangibles balance represents software development expenditure. Intangibles Accounting policies Acquired intangible assets Acquired intangible assets are initially recorded at their cost at the date of acquisition, being the fair value of the consideration provided and, for assets acquired separately, incidental costs directly attributable to the acquisition. All intangible assets acquired have a finite useful life and are amortised on a straight line basis over the estimated useful life of the assets, being the period in which the related benefits are expected to be realised (shorter of legal benefit and expected economic life). Software development expenditure Software development expenditure that meets the criteria for recognition as an intangible asset is capitalised in the statement of financial position and amortised over its expected useful life, subject to impairment testing. Costs incurred in researching and evaluating a project up to the point of formal commitment to a project is expensed as incurred. Only software development projects with total budgeted expenditure of more than $250,000 are considered for capitalisation. Smaller projects and other costs are treated as maintenance costs, being an ongoing part of maintaining effective technology, and are expensed as incurred. All capitalised costs are deemed to have an expected useful life of five years unless it can be clearly demonstrated for a specific project that the majority of the net benefits are to be generated over a longer or shorter period. The capitalised costs are amortised on a straight line basis over the period following completion of a project or implementation of part of a project. Impairment assessment The recoverability of the carrying amount of the asset is reviewed at each reporting date by determining whether there is an indication that the carrying value may be impaired. If such indication exists, the item is tested for impairment by comparing the recoverable amount, or value in use, of the asset to the carrying value. An impairment charge is recognised when the carrying value exceeds the calculated recoverable amount and recognised in the income statement. The impairment charges can be reversed if there has been a change in the estimate used to determine the recoverable amount. There was no impairment charge recognised during the year. Reconciliations Reconciliations of the carrying amounts for intangibles are set out below: Cost Balance at 1 January Additions Disposals Balance at 31 December Accumulated amortisation and impairment losses Balance at 1 January Amortisation Disposals Balance at 31 December Total net intangibles 84 Genworth Mortgage Insurance Australia 2016 $’000 24,754 1,513 (19) 26,248 2016 $’000 (23,728) (532) 18 (24,242) 2015 $’000 25,472 176 (894) 24,754 2015 $’000 (22,670) (1,848) 790 (23,728) 2,006 1,026 6.2 Goodwill Accounting policies Business combinations are accounted for by applying the purchase method. Goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Goodwill is stated at deemed cost less any accumulated impairment losses. The carrying value of goodwill is tested for impairment at each reporting date. The impairment test involves the use of accounting estimates and assumptions. The recoverable amount of the cash generating unit is determined on the basis of value in use calculation which is performed on a pre-tax basis. The present value of future cash flow projections is based on the most recent management approved budgets, which generally do not forecast beyond five years. The carrying value of identifiable intangible assets is deducted from the value generated in the cash flow projections to arrive at a recoverable value for goodwill, which is then compared with the carrying value of goodwill. Goodwill – at deemed cost 6.3 Employee benefits provision Accounting policies The carrying amount of provisions for employee entitlements approximates fair value. 2016 $’000 9,123 2015 $’000 9,123 Wages, salaries and annual leave The accruals for employee entitlements to wages, salaries and annual leave represent present obligations resulting from employees’ services provided up to the statement of financial position date, calculated at undiscounted amounts based on wage and salary rates that the entity expects to pay as at reporting date including related on-costs. Long service leave The Company’s net obligation in respect of long term benefits other than pension plans is the amount of future benefit that employees have earned in return for their service in the current and prior periods. A liability for long service leave is recognised as the present value of estimated future cash outflows to be made in respect of services provided by employees up to the reporting date. The estimated future cash outflows are discounted using interest rates on national government guaranteed securities which have terms to maturity that match, as closely as possible, the estimated future cash outflows. Factors which affect the estimated future cash outflows such as expected future salary increases including related on-costs and expected settlement dates are incorporated in the measurement. Superannuation commitments The Group has a defined contribution superannuation plan. Employees are entitled to varying levels of benefits on retirement based on accumulated employer contributions and investment earnings thereon as well as benefits in the event of disability or death. Contributions by the Group are, as a minimum, in accordance with the Superannuation Guarantee Levy. Annual leave Long service leave Current Non-current As at the balance date there were 223 employees (2015: 259) 2016 $’000 2,493 3,920 6,413 4,711 1,702 6,413 2015 $’000 2,666 4,144 6,810 4,760 2,050 6,810 Annual Report 2016 85 Notes to the financial statements (continued) Section 6 Operating assets and liabilities (continued) 6.4 Trade and other receivables Accounting policies The collectability of receivables is assessed at balance date and an impairment loss is made for any doubtful accounts. Other debtors Current 2016 $’000 1,592 1,592 2015 $’000 2,831 2,831 Carrying amounts of receivables reasonably approximate fair value at the reporting date. None of the receivables are impaired or past due. 6.5 Trade and other payables Accounting policies Liabilities are recognised for amounts to be paid in the future for goods or services received. Trade accounts payable are normally settled within 30-60 days. The carrying amount of accounts payable approximates fair value. Accrued expenses Related party (receivables)/payables Interest payable Trade creditors and other payables Current Non-current 2016 $’000 22,983 (2,157) 32 14,096 34,954 34,954 - 34,954 2015 $’000 41,452 22,479 2,711 11,016 77,658 68,138 9,520 77,658 Included in the related party payables are the balances related to taxes (receivable)/payable to the head entity of $2,877,000 (2015: $21,835,000). Under the tax consolidation system, current tax liabilities recognised for the year by the Group are assumed by the head entity in the tax consolidated group. 6.6 Cash and cash equivalents Accounting policies Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and other short-term and highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value. Cash and cash equivalents are measured at fair value, being the principal amount. Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash assets 2016 $’000 57,634 2015 $’000 78,114 86 Genworth Mortgage Insurance Australia Section 7 Other disclosures 7.1 Parent entity disclosures Result of the parent entity Profit for the year Total comprehensive income for the year Financial position of parent entity Current assets Total assets Current liabilities Total liabilities Net assets Total equity of the parent entity comprising of: Share capital Retained earnings Share based payment Other reserves Total equity 7.2 Auditor’s remuneration Audit and review of financial statements Regulatory audit services Non assurance services 2016 $’000 2015 $’000 220,644 220,644 263,977 263,977 128,778 1,942,162 32,034 32,034 213,061 2,149,534 18,752 18,752 1,910,128 2,130,782 1,354,034 1,556,470 119,344 2,075 434,675 1,910,128 148,595 3,264 422,453 2,130,782 2016 $ 654,165 76,480 730,645 43,000 773,645 2015 $ 688,655 56,810 745,465 35,000 780,465 Annual Report 2016 87 Notes to the financial statements (continued) Section 7 Other disclosures (continued) 7.3 Key management personnel disclosures The following were key management personnel of the Group at any time during the reporting period, and unless otherwise indicated, were key management personnel for the entire period. Directors of the Company Ian MacDonald David Foster (appointed on 30 May 2016) Anthony (Tony) Gill Richard Grellman (resigned on 31 August 2016) Executive KMP Andrew Cormack Tobin Fonseca Georgette Nicholas Luke Oxenham Samuel Marsico (resigned on 5 May 2016) Bridget Sakr (resigned 14 December 2016) Gai McGrath (appointed on 31 August 2016) Georgette Nicholas (appointed on 30 May 2016) Leon Roday Stuart Take Gayle Tollifson Jerome Upton The aggregate key management personnel compensation is: Short-term employee benefits Post-employment benefits Equity compensation benefits 2016 $’000 5,306 501 1,267 7,074 2015 $’000 5,841 349 2,100 8,290 7.4 Related party disclosures Transactions with related parties are undertaken on normal commercial terms and conditions. Corporate overhead On settlement of the Company‘s IPO, the Group entered into certain agreements with Genworth Financial and its affiliates. Under the agreements GFI will provide certain services to the Group, with most services being terminated if GFI ceases to beneficially own more than 50% of the common shares of the Company or at the request of either party at annual successive renewal terms after the initial term ends on 31 December 2016. The services rendered by GFI and affiliated companies consist of finance, human resources, legal and compliance, investments services, information technology and other specified services. These transactions are in the normal course of business and accordingly are measured at fair value. Payment for these service transactions are non-interest bearing and are settled on a quarterly basis. The Group incurred net charges of $5,462,000 (2015: $5,581,000) for the year ended 31 December 2016. There is a payable balance of $452,000 (2015: $468,000) as at 31 December 2016. Other related party transactions Certain non-executive directors of the Group were employed by the major shareholder, GFI, during the financial year. Costs of services provided by these directors were not charged to the Group. Majority shareholder and its ultimate parent entity The majority shareholder of the Group is Genworth Financial International Holdings, LLC & Genworth Holdings, Inc. (as partners of the Genworth Australian General Partnership) representing 51.95% ownership. The ultimate parent entity of AGP is GFI which is incorporated in Delaware, United States of America. GFI and China Oceanwide have entered into a definitive agreement under which China Oceanwide has agreed to acquire all of the outstanding shares of GFI, subject to approval by GFI stockholders as well as other closing conditions. Upon completion of the transaction GFI will be a standalone subsidiary of China Oceanwide 88 Genworth Mortgage Insurance Australia 7.5 Controlled entities Accounting policies Subsidiaries are entities controlled by the Company. Control exists when the Company is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the Company considers the purpose and design of each entity in order to identify the relevant activities, how decisions about the relevant activities are made, who has the ability to direct those activities and who receives the returns from those activities. The financial statements of controlled entities are included from the date control commences until the date control ceases. The consolidated financial statements incorporate the assets, liabilities and results of the following controlled entities. Name of entity Genworth Financial Mortgage Insurance Holdings Pty Limited Genworth Financial Mortgage Insurance Pty Limited Genworth Financial Services Pty Limited Genworth Financial Mortgage Indemnity Limited Genworth Financial Mortgage Insurance Finance Pty Limited Genworth Financial Mortgage Insurance Finance Holdings Pty Limited Genworth Financial New Holdings Pty Limited Genworth Financial Australia Holdings, LLC Country of incorporation Class of shares 2016 2015 Equity holding (%) Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Australia Ordinary Australia Australia USA Ordinary Ordinary Ordinary 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 7.6 Share based payments Accounting policies Share-based payment transactions Share based remuneration is provided in various forms to eligible employees and executive Directors of the Group in compensation for services provided to the Group. The fair value at the grant date, being the date both the employee and the employer agree to the arrangement, is determined using a valuation model based on the share price at grant date and the vesting conditions. The fair value does not change over the life of the instrument. At each reporting period during the vesting period and upon final vesting or expiry of the equity instruments, the total accumulated expense is revised based on the fair value at grant date and the latest estimate of the number of equity instruments that are expected to vest based on the vesting conditions, and taking into account the expired portion of the vesting period. The movement in the total of accumulated expenses from the previous reporting date is recognised in the profit and loss with a corresponding movement in the share based payment reserve. To satisfy obligations under the various share based remuneration plans, shares are generally expected to be equity settled. Annual Report 2016 89 Notes to the financial statements (continued) Section 7 Other disclosures (continued) 7.6 Share based payments (continued) Accounting policies (continued) Share rights plan On 21 May 2014, the Group granted restricted share rights to a number of key employees including executive KMP. The aggregate amount of these share rights was $7,265,000. One third of the share rights granted during the year vest on each of the second, third and fourth anniversaries of the grant date. If at any time an employee ceases continuous service with the Group, any unvested share rights are immediately cancelled, except in cases of retirement, redundancy, total and permanent disability or death. In addition to the grants to key employees, other employees were granted an amount of share rights in the aggregate amount of $276,000. All share rights granted to other employees vest on the third anniversary of the grant date. If at any time an employee ceases continuous service with the Group, any unvested share rights vest immediately. The aggregate amount of $276,000 was expensed during the year ended 31 December 2014. On 7 May 2015, the Group granted additional share rights in the aggregate amount of $509,967 to 16 employees. One fourth of the share rights vest on each of the four vesting dates, which are 1 March 2016, 1 March 2017, 1 March 2018 and 1 March 2019. On 6 May 2016, the Group granted share rights in the aggregate amount of $499,030 to nominated employees. One fourth of the share rights vest on each of the four vesting dates, which are 1 March 2017, 1 March 2018, 1 March 2019 and 1 March 2020. The fair value of the share rights is calculated as at the grant date using a Black Scholes valuation. The factors and assumptions used for the valuation are summarised in the below table: Grant date Share price on grant date ($) Dividend yield Risk free rate (%) 2016 6 May 2016 $3.00 11.36% 2015 7 May 2015 $3.09 11.16% 2014 21 May 2014 $2.95 7.8% Tranche 1: 1.57% Tranche 1: 2.03% Tranche 1: 2.60% Tranche 2: 1.57% Tranche 3: 1.57% Tranche 4: 1.80% Tranche 2: 2.03% Tranche 3: 2.20% Tranche 4: 2.35% Tranche 2: 2.71% Tranche 3: 3.08% Vesting dates Tranche 1: 1 March 2017 Tranche 1: 1 March 2016 Tranche 1: 20 May 2016 Tranche 2: 1 March 2018 Tranche 2: 1 March 2017 Tranche 2: 20 May 2017 Tranche 3: 1 March 2019 Tranche 3: 1 March 2018 Tranche 3: 20 May 2018 Tranche 4: 1 March 2020 Tranche 4: 1 March 2019 90 Genworth Mortgage Insurance Australia Key terms and conditions: • The rights are granted for nil consideration. • Holders do not receive dividends and do not have voting rights until the rights are exercised. Details of the number of employee share rights granted, exercised and forfeited or cancelled during the year were as follows: 2016 Grant date 21 May 2014 21 May 2014 7 May 2015 6 May 2016 Total Balance at 1 January 2016 Granted in the year Exercised in the year (*) Cancelled/ forfeited in the year Balance at 31 December 2016 Number Number Number Number 2,554,698 70,876 139,904 - 2,765,478 - - - 280,2811 280,281 (840,969) (869,709) (16,211) (34,967) - - (5,409) (8,567) Number 844,020 54,665 99,528 271,714 (892,147) (883,685) 1,269,927 Vested and exercisable at end of the year Number - - - - - 1 * The number of share rights granted in the year includes 66,105 shares rights, representing the deferred short-term incentive component under the 2015 remuneration program. included employees who ceased service with the Group, any unvested share rights vested immediately. 2015 Grant date 21 May 2014 21 May 2014 7 May 2015 Total Balance at 1 January 2015 Granted in the year Exercised in the year (*) Cancelled/ forfeited in the year Balance at 31 December 2015 Vested and exercisable at end of the year Number Number Number Number Number Number 2,703,775 99,250 - 2,803,025 - - 147,115 147,115 (11,278) (28,374) - (137,779) 2,554,698 - (7,211) 70,876 139,904 39,652 (144,990) 2,765,478 - - - - included employees who ceased service with the Group, any unvested share rights vested immediately. * Long term incentive plan The Group implemented a long term incentive plan for executive KMP which is performance oriented and reflects local market practice. On 7 May 2015, the Group granted share rights in the aggregate amount of $1,822,777 to senior management employees. On 6 May 2016, the Group granted share rights in the aggregate amount of $1,729,230 to senior management employees. Annual Report 2016 91 Notes to the financial statements (continued) Section 7 Other disclosures (continued) 7.6 Share based payments (continued) Accounting policies (continued) Key terms and conditions: • The rights are granted for nil consideration • Holders are entitled to receive notional dividend equivalents during the vesting period but do not have voting rights • Each allocation is split equally into two portions which are subject to different performance hurdles with a twelve month deferral period after the performance period ends. The first vesting condition is not market related and requires continuous active employment for four years from grant date. The second set of vesting conditions are as follows: – – 50% is subject to a return on equity performance condition (ROE). The Group’s three year average ROE is tested against target ROEs over a three year period 50% is subject to a relative total shareholder return performance condition (TSR). The Group’s TSR is tested against comparator group, the ASX 200 excluding resource companies over a three year period. • The number of share rights offered is determined by dividing the grant value of the 2016 long term incentive plan by $2.33, being the 10 day volume weighted average price (VWAP) of the Company share price following the release of full-year results for 2015, rounded down to the nearest whole share right. Each share right is a right granted to acquire a fully paid ordinary share of the Company • The fair value of the share rights is the share price as at the grant date. If an employee ceases employment with the Group before the performance conditions are tested, their unvested rights will generally lapse. The fair value of the share rights for LTI 2016 is calculated as at the grant date using Monte Carlo simulation. The factors and assumptions used for the valuation are summarised in the below table. Grant date Share price on grant date ($) Dividend yield Volatility Correlation Risk free rate (%) Vesting date 2016 6 May 2016 $3.00 11.36% 35.00% A correlation matrix for the ASX 200 (excluding resource companies) has been used 1.57% 31 December 2019 Details of the number of employee share rights granted, exercised and forfeited or cancelled during the year were as follows: Grant date 7 May 2015 22 June 2015 6 May 2016 Total Balance at 1 January 2016 Number 525,834 7,737 - 533,571 Granted in the year Exercised in the year Cancelled/ forfeited in the year Balance at 31 December 2016 Vested and exercisable at end of the year Number Number Number Number Number - - 742,159 742,159 - (348,337) (1,934) - - - (1,934) (348,337) 177,497 5,803 742,159 925,459 - - - - 92 Genworth Mortgage Insurance Australia Grant date 7 May 2015 22 June 2015 Total Balance at 1 January 2015 Number - - - Granted in the year Exercised in the year Cancelled/ forfeited in the year Balance at 31 December 2015 Number 525,834 7,737 533,571 Number Number - - - - - - Number 525,834 7,737 533,571 Vested and exercisable at end of the year Number - - - Omnibus Incentive Plan GFI, GFMI and LLC entered into a Cost Agreement on 15 July 2005 (as varied from time to time) pursuant to which GFI agreed to offer its 2004 Omnibus Incentive Plan and its 2012 Omnibus Incentive Plan (Omnibus Incentive Plans) to certain employees of GFMI and LLC. Under the Omnibus Incentive Plans, GFI issues stock options, stock appreciation rights, restricted stock, restricted stock units, other stock based awards and dividend equivalent awards with respect to its common stock to employees of its affiliates throughout the world. Under the Cost Agreement, GFMI and LLC have agreed to bear the costs for their employees’ participation in the Omnibus Incentive Plans from time to time. Employees of GFMI and LLC will not, following the IPO, receive any further awards under the Omnibus Incentive Plans. Any incentives after that date will be provided through the Group’s share rights plan. However, GFMI and LLC will continue to bear the costs of past awards under the Omnibus Incentive Plans. The Group has reserved for such costs and the amount of the reserve is marked to market to reflect the Group’s exposure to those costs having regard to the price of GFI shares. Details of the number of employee options granted, exercised and forfeited or cancelled during the year were as follows: 2016 Grant date Expiry date Exercise price Balance at 1 January 2016 Granted in the year Exercised in the year Cancelled/ forfeited in the year Balance at 31 December 2016 Vested and exercisable at end of the year Number Number Number Number Number Number 09/08/2006 09/08/2016 13/02/2008 13/02/2018 12/02/2009 12/02/2019 19/08/2009 09/08/2016 19/08/2009 31/07/2017 19/08/2009 13/02/2018 10/02/2010 10/02/2020 09/02/2011 09/02/2021 14/02/2012 14/02/2022 15/02/2013 15/02/2023 20/02/2014 20/02/2024 Total Weighted average exercise price 47.30 31.60 3.41 10.81 10.81 10.81 19.65 17.67 12.31 12.56 21.11 6,600 7,800 17,500 3,049 2,450 6,288 48,600 38,500 46,800 46,500 14,000 238,087 $16.11 - - - - - - - - - - - - - - - 17,500 - - - - - - - - 17,500 $3.41 6,600 - - 3,049 - - 18,000 12,000 14,700 15,000 - 69,349 $18.46 - 7,800 - - 2,450 6,288 30,600 26,500 32,100 31,500 14,000 151,238 $16.51 - 7,800 - - 2,450 6,288 30,600 38,500 35,100 23,250 3,500 147,488 $16.41 Annual Report 2016 93 Notes to the financial statements (continued) Section 7 Other disclosures (continued) 7.6 Share based payments (continued) Accounting policies (continued) Omnibus Incentive Plan (continued) 2015 Grant date Expiry date Exercise price Balance at 1 January 2015 Granted in the year Exercised in the year Cancelled/ forfeited in the year Balance at 31 December 2015 Vested and exercisable at end of the year Number Number Number Number Number Number 20/07/2005 20/07/2015 09/08/2006 09/08/2016 13/02/2008 13/02/2018 12/02/2009 12/02/2019 19/08/2009 20/07/2015 19/08/2009 09/08/2016 19/08/2009 31/07/2017 19/08/2009 13/02/2018 10/02/2010 10/02/2020 09/02/2011 09/02/2021 14/02/2012 14/02/2022 15/02/2013 15/02/2023 20/02/2014 20/02/2024 Total Weighted average exercise price 44.04 46.82 31.28 3.37 10.70 10.70 10.70 10.70 19.45 17.49 12.18 12.43 20.89 2,400 6,600 7,800 20,500 99 3,049 2,450 6,288 48,600 38,500 46,800 46,500 14,000 243,586 $16.07 - - - - - - - - - - - - - - - - - - 3,000 - - - - - - - - - 2,400 - - - 99 - - - - - - - - - 6,600 7,800 17,500 - 3,049 2,450 6,288 48,600 38,500 46,800 46,500 14,000 - 6,600 7,800 17,500 - 3,049 2,450 6,288 48,600 38,500 35,100 23,250 3,500 3,000 3.37 2,499 42.72 238,087 $15.95 192,637 $16.34 Balance at 1 January 2015 is adjusted for options granted in prior periods to employees who transferred into/out of the Group during the year. 94 Genworth Mortgage Insurance Australia Details of the number of employee RSUs granted, exercised and forfeited or cancelled during the year were as follows: 2016 Grant date 03/01/2012 06/01/2012 11/01/2012 14/02/2012 15/02/2013 1/10/2013 2/12/2013 20/02/2014 20/03/2015 Total 2015 Grant date 07/02/2007 01/03/2011 02/09/2011 03/01/2012 06/01/2012 11/01/2012 14/02/2012 15/02/2013 1/08/2013 1/10/2013 2/12/2013 20/02/2014 20/03/2015 Total Balance at 1 January 2016 Granted in the year Exercised in the year Cancelled/ forfeited in the year Balance at 31 December 2016 Vested and exercisable at end of the year Number Number Number Number Number Number 3,750 1,250 6,250 17,681 68,984 3,000 5,000 91,942 1,350 199,207 - - - - - - - - - - 3,750 1,250 - 16,306 32,693 - 2,500 29,870 - - - 6,250 1,375 15,396 3,000 - 28,632 - 86,369 54,653 - - - - 20,895 - 2,500 33,440 1,350 58,185 - - - - - - - - - - Balance at 1 January 2015 Granted in the year Exercised in the year Cancelled/ forfeited in the year Balance at 31 December 2015 Vested and exercisable at end of the year Number Number Number Number Number Number 2,500 5,000 10,477 7,500 2,500 12,500 37,863 111,666 5,625 4,500 7,500 126,550 - 334,181 - - - - - - - - - - - - 1,350 1,350 2,500 5,000 10,477 3,750 1,250 6,250 18,933 37,234 - 1,500 2,500 31,646 - - - - - - - 1,249 5,448 5,625 - - 2,962 - - - - 3,750 1,250 6,250 17,681 68,984 - 3,000 5000 91,942 1,350 121,040 15,284 199,207 - - - - - - - - - - - - - - Balance at 1 January 2015 is adjusted for RSUs granted in prior periods to employees who transferred into/out of the Group during the year. Annual Report 2016 95 Notes to the financial statements (continued) Section 7 Other disclosures (continued) 7.7 Deed of cross guarantee The following entities are parties to a deed of cross guarantee under which each party to the deed guarantees the debts of each other party to the deed. Under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission (ASIC), the Australian incorporated subsidiaries that are parties to the Deed have been relieved from the requirement to prepare, have audited and lodge with ASIC financial reports and Directors’ reports under the Corporations Act. The subsidiaries of the Company that are parties to the Deed are: • Genworth Financial Australia Holdings, LLC • Genworth Financial Mortgage Insurance Finance Pty Ltd • Genworth Financial Mortgage Insurance Finance Holdings Pty Ltd • Genworth Financial New Holding Pty Ltd • Genworth Financial Mortgage Insurance Holdings Pty Ltd • Genworth Financial Services Pty Ltd. A consolidated statement of comprehensive income and consolidated statement of financial position, comprising the Company and its controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee for the year ended 31 December 2016 is set out as follows: Consolidated statement of comprehensive income Income Expenses Financial income Profit before income tax Income tax expense Profit for the year Total comprehensive income for the year 2016 $’000 2,039 (2,091) 2,534 2,482 (1,008) 1,474 1,474 2015 $’000 2,471 (3,121) 2,450 1,800 618 1,182 1,182 96 Genworth Mortgage Insurance Australia Consolidated statement of financial position Assets Cash Investments Trade and other receivables Prepayments Deferred tax asset Total assets Liabilities Trade and other payables Employee benefits provision Total liabilities Net assets Equity Share capital Share based payment reserve Other reserves Retained earnings Total equity 2016 $’000 2015 $’000 6,701 121,979 - 98 - 128,778 1,565 - 1,565 869 212,924 1,004 102 184 215,083 610 214 824 127,213 214,259 1,354,034 2,075 (476,559) (752,337) 127,213 1,556,470 3,264 (476,558) (868,917) 214,259 On 1 December 2016, a deed of revocation in respect of the entities participating in the deed of cross guarantee was lodged with the ASIC. This is as a result of a reorganisation taken by the Group to simplify the current corporation structure. The revocation will not be effective until mid-2017. 7.8 Events subsequent to reporting date As the following event occurred after reporting date and did not relate to conditions existing at reporting date, no account has been taken in the financial statements for the current reporting year ended 31 December 2016. • On 8 February 2017, the Directors declared a 100% franked final dividend of 14 cents per share totalling $71,300,000. Annual Report 2016 97 Directors’ declaration In the opinion of the Directors of Genworth Mortgage Insurance Australia Limited (the Company): (a) the consolidated financial statements and notes set out on pages 50 to 97 are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2016 and of its performance, as represented by the results of its operations, and its cash flows for the period ended on that date; and (ii) complying with Australian Accounting Standards in Australia and the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (b) the financial statements and notes comply with International Financial Reporting Standards; and (c) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. Signed in accordance with a resolution of the Directors Ian MacDonald Chairman Dated at Sydney, 24 February 2017. 98 Genworth Mortgage Insurance Australia Independent Auditor’s report To the shareholders of Genworth Mortgage Insurance Australia Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Genworth Mortgage Insurance Australia Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group’s financial position as at 31 December 2016 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises. • Consolidated Statement of financial position as at 31 December 2016 • Consolidated Statement of comprehensive income, Consolidated Statement of changes in equity, and Consolidated Statement of cash flows for the year then ended • Notes including a summary of significant accounting policies • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year end or from time to time during the financial year. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters The Key Audit Matters we identified are: • Valuation of Gross Outstanding Claims Liability • Net Earned Premium and Unearned Premium Liability. Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Annual Report 2016 99 Independent Auditor’s report (continued) Valuation of Gross Outstanding Claims Liability - $356m The key audit matter How the matter was addressed in our audit Refer to the accounting policy in Note 4.4 Outstanding Claims, Note 4.8 Accounting estimates and judgments, Note 4.9 Actuarial assumptions and methods, Note 2.1(e) Liquidity risk and Note 4.1 Net claims incurred. The outstanding claims liability is a key audit matter due to the complexity of the valuation methodology. This complexity requires us to exercise judgment when evaluating the methodologies and assumptions adopted. Genworth’s insurance policies are very similar in nature and as a result our audit focused on the way in which the Group used common characteristics to segment the stages of claim emergence when applying frequency and severity (size) factors to calculate the outstanding claims liability. These common characteristics include region, loan originator, outstanding loan size and loan to value ratio. The outstanding claims liability reflects an assessment of future expected outcomes. These outcomes are influenced by a number of factors, including macroeconomic ones, which are subject to a wide range of views and interpretations. The valuation methodology requires assumptions to be made in respect of these factors including: • • the uncertainty in the timing of claim payments and recoveries; the frequency at which claims emerge, and the subsequent severity of those claims. Frequency and severity may be influenced by changes in macroeconomic factors such as interest rates, unemployment, property prices, house price movements and performance of industry and geographic segments; • the timing of receipt of information from lenders indicating that a delinquency or claim has occurred; • whether past claims experience is a reasonable predictor of future experience. The assumptions adopted have a significant impact on the financial performance of the Group. As a result, this key audit matter involved more senior audit team members, including actuarial specialists, who understand the valuation methodologies, the Group’s business, its industry and the economic environment it operates in. Our audit procedures included testing the key controls designed and operated by the Group for the outstanding claims liabilities. Alongside our IT specialists, we assessed the key controls for significant data inputs used to determine the outstanding claims liability. Our assessment included testing specific reconciliation controls and output from key IT systems used in the actuarial valuation processes. We focused on the assumptions and valuation methodology used by management in estimating the Group’s outstanding claims liability. In so doing we challenged the methodology and the assumptions used in the valuation, including the Group’s approach to segmenting the portfolio using common characteristics. We were assisted by KPMG actuarial specialists in this and in our consideration of the work and findings of the Group’s Appointed Actuary. Our detailed testing included considering the Group’s valuation methodology and assumptions for consistency between reporting periods, as well as indicators of possible management bias. Our challenge focused on the assumptions applied to delinquencies and claims. We did this by: • evaluating the underlying documentation for the assumptions. For example we considered actual versus expected claims data and the timing of claims payments and recoveries (using historical data) • considering external information available (e.g. macroeconomic assumptions such as forecast interest rates, unemployment, property prices, house price movements) and investigating significant variances • identifying and analysing key changes from previous periods • assessing the consistency of information (such as claims experience and trends) across the Group’s operations. 100 Genworth Mortgage Insurance Australia Net Earned Premium - $453m and Unearned Premium Liability - $1,178m Key Audit Matters How the matter was addressed in our audit Refer to the accounting policy in Note 4.6 and Note 4.8 Accounting estimates and judgments. Genworth receives payment for all insurance policies upfront however recognises this premium revenue over time. The timing pattern for recognition of premiums, and the resulting valuation of the unearned premium liability (the proportion of the premium revenue not yet recognised), was determined by applying actuarial modelling techniques to develop an earnings curve. In this way the timing of revenue recognition is dependent on the way in which claims are expected to emerge. Net earned premiums and the unearned premium liability are a key audit matter due to the complexity of the actuarial methodology used to model the earnings curve and the significant level of judgment applied in assessing the assumptions adopted. The earnings curve and the timing of revenue recognition is dependent on an assessment of future claim emergence. As a result the complexities discussed in the key audit matter ‘Outstanding Claims Liabilities’ are also relevant to our work over net earned premiums and the valuation of the unearned premium liability. The assumptions adopted have a significant impact on the financial performance of the Group. Accordingly, we involved more senior audit team members, including actuarial specialists, who understand the Group’s business, its industry and the economic environment it operates in. We tested the key controls designed and operated by the Group for the unearned premium liability and net earned premiums. Working with our IT specialists, this included testing specific reconciliation controls, the data used in the actuarial modelling processes and output from key IT systems used in the valuation of the unearned premium liability. Working alongside KPMG Actuarial Specialists we focused on the assumptions and valuation methodology used by management. Our detailed testing included the procedures outlined in the key audit matter ‘Valuation of gross outstanding claims liability’ as timing of revenue recognition is dependent upon future claim emergence. Additional procedures were performed for each key segment of the portfolio, reflecting underwriting year, loan type and policy type and considered indicators of possible management bias. These included: • an assessment of consistency in the adopted pattern of risk emergence • an assessment of the historical accuracy of the assumptions (using actual versus expected analysis of the earnings curve) and analysis of key changes from previous periods • consideration of the impact of changes in the products and operations of the Group to the assumptions adopted. Other Information Other Information is financial and non-financial information in Genworth Mortgage Insurance Australia Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. This includes the Investor Report and Investor Presentation as at 8 February 2017. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinions. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Annual Report 2016 101 Independent Auditor’s report (continued) Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and • to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the Audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion In our opinion, the Remuneration Report of Genworth Mortgage Insurance Australia Limited for the year ended 31 December 2016, complies with Section 300A of the Corporations Act 2001. Director’s Responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 30 to 46 of the Director’s report for the year ended 31 December 2016. Our responsibility is to express an opinion on the Remuneration Report, based on our Audit conducted in accordance with Australian Auditing Standards. KPMG David Kells Partner Sydney 24 February 2017 102 Genworth Mortgage Insurance Australia Shareholder information Unless otherwise stated, the information in this section is current as at 1 February 2017. Annual General Meeting The 2017 Annual General Meeting (AGM) of Genworth Mortgage Insurance Australia Limited will be held on Thursday, 11 May 2017, at The Mint, 10 Macquarie Street, Sydney NSW 2000. The AGM will be webcast live on the internet at http://investor. genworth.com.au and an archive version will be placed on the website to enable the AGM to be viewed at a later time. Genworth Mortgage Insurance Australia Limited is listed on ASX and its ordinary shares are quoted under the ASX code “GMA”. Annual Report The default option for receiving annual reports is in electronic format via Genworth’s website at genworth.com.au. To request a copy of the Annual Report, please contact the Share Registry. Online voting Shareholders can lodge voting instructions electronically either as a direct vote or by appointing a proxy for the 2017 AGM at investorcentre.linkmarketservices.com.au. The information required to log on and use online voting is shown on the voting form distributed to shareholders with the Notice of AGM. Voting rights At a general meeting, a shareholder present in person or by proxy, attorney or representative has one vote on a show of hands and on a poll has one vote for each fully paid share held. A person who holds a share which is not fully paid is entitled, on a poll, to a fraction of a vote equal to the proportion which the amount paid bears to the total issue price of the share. Voting at any meeting of shareholders is by a show of hands unless a poll is demanded in the manner described in the Company’s Constitution. If there are two or more joint holders of a share and more than one of them is present at a general meeting, in person or by proxy, attorney or representative, and tenders a vote in respect of the share, the Company will count only the vote cast by, or on behalf of, the shareholder by the joint holder whose name appears first in the Company’s register of shareholder. The quorum required for a meeting of members is two shareholders. If the votes are equal on a proposed resolution, the matter is decided in the negative. Shareholder questions Shareholders can submit a written question to the Company or the Company’s Auditor in relation to the AGM or any of the proposed resolutions to be considered at the AGM, using the form supplied with the Notice of AGM distributed to shareholders. Forms should be returned to the Company with the personalised voting form in the pre-addressed envelope provided or by fax to +61 1300 366 228. Shareholders may also submit questions after completing online voting instructions online at investorcentre.linkmarketservices.com.au Questions for the Company’s auditor must be received by 5pm on Thursday, 4 May 2017. Members will also be given a reasonable opportunity to ask questions of the Company and the auditor at the AGM. During the course of the AGM, the Company intends to answer as many of the frequently asked questions as practicable but will not be responding to individual questions. Responses to the most commonly asked questions will be added to the website at genworth.com.au. Manage your holding Questions regarding shareholdings can be directed to the Company’s Share Registry. Your Securityholder Reference Number (SRN) or Holder Identification Number (HIN) will be required to verify your identity. Share Registry contact information can be found in the Corporate Directory of this report. Shareholders that are broker (CHESS) sponsored should direct queries relating to incorrect registrations, name changes and address changes to their broker. Annual Report 2016 103 Shareholder information (continued) Information about Genworth Information about Genworth Mortgage Insurance Australia Limited, including company announcements, presentations and reports can be accessed at investor.genworth.com.au Shareholders can register to receive an email alert advising of new Genworth media releases, financial announcements or presentations. Registration for email alerts is available on Genworth’s website at http://investor.genworth.com.au under the Investor Services section. If information is not directly available on Genworth’s website, shareholders may contact the Company directly at investorrelations@genworth.com Important dates * Company financial year end Full year results and dividend announced Record date for dividend Dividend payment date Annual Report and Notice of AGM mail out commences AGM * Note: dates may be subject to change. Ordinary shares and share rights As at 1 February 2017, the Company had on issue the following equity securities: • 509,365,050 Shares • 2,195,386 Share Rights. 31 December 2016 8 February 2017 22 February 2017 8 March 2017 31 March 2017 11 May 2017 Ordinary shares information Substantial holders of ordinary shares Name Genworth Financial International Holdings, LLC and Genworth Holdings, Inc. (as partners of the Genworth Australian General Partnership), and their related bodies corporate Asia Pacific Global Capital Co., Ltd. and Asia Pacific Global Capital USA Corporation Number of shares Voting power (%) Date of notice 337,700,000 52.0 2 October 2015 264,634,553 51.95 25 October 2016 Note: substantial holder details are as disclosed in substantial holding notices given to the Company. 104 Genworth Mortgage Insurance Australia Twenty largest holders of ordinary shares Rank Name Number of shares % of issued shares 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Genworth Financial International Holdings, LLC and Genworth Holdings, Inc. (as partners of the Genworth Australian General Partnership) HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Nominees Pty LtdBNP Paribas Nominees Pty Ltd Brazil Farming Pty Ltd Argo Investments Limited AMP Life Limited BNP Paribas Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited-GSCO ECA RBC Investor Services Australia Nominees Pty Limited Sandhurst Trustees Ltd Mr Stephen Craig Jermyn Brispot Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited – A/C 3 National Nominees Limited HSBC Custody Nominees (Australia) Limited – A/C 2 Total for Top 20 Distribution schedule of holders of ordinary shares 264,634,553 88,681,367 36,129,021 32,746,774 14,660,898 6,242,772 5,421,604 4,850,000 3,208,901 1,789,446 1,774,000 1,591,897 1,400,679 1,282,363 1,271,599 1,026,600 919,555 713,814 687,145 642,342 51.95 17.42 7.10 6.43 2.88 1.23 1.06 0.95 0.63 0.35 0.35 0.31 0.27 0.25 0.25 0.20 0.18 0.14 0.13 0.13 469,675,330 92.21 Range 1-1000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Shareholders with less than a marketable parcel of 148 ordinary shares ($3.39 on 1 February 2017) is 145 and they hold 4,109 ordinary shares Number of holders 1,087 1,719 849 765 59 4,479 Number of shares 556,004 4,759,687 6,344,755 18,331,183 479,373,421 509,365,050 % of issued shares 0.11 0.93 1.25 3.60 94.11 100.00 Dividend details Share class Ordinary Ordinary Ordinary Dividend Interim Special Final Franking Amount per share Payment date Fully franked Fully franked Fully franked 14.0 cents 12.5 cents 14.0 cents 31 August 2016 31 August 2016 8 March 2017 Annual Report 2016 105 Shareholder information (continued) Share rights information Distribution schedule of holders of share rights Range 1-1000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Number of holders 145 20 20 27 6 218 Number of share rights 54,665 79,074 157,790 934,855 969,002 2,195,386 % of total share rights 2.49% 3.60% 7.19% 42.58% 44.14% 100.00% Voting rights Share Rights do not carry any voting rights. Ordinary shares issued or transferred to participants on the vesting of Share Rights carry the same rights and entitlements as other issued shares. Shares purchased on-market for the purposes of the Genworth share rights plan 899,962 shares were purchased on-market for the purposes of the Genworth Share Rights Plan during the period from 1 January 2016 to 31 December 2016 at an average price of $2.64 per share. On-market buy-back There is no current on-market buy-back. 106 Genworth Mortgage Insurance Australia Glossary AASB AGP AIFRS APRA ASX Australian Subsidiaries Book Year CET1 or Tier 1 Capital China Oceanwide Combined ratio Corporations Act DUA EPS Expense ratio FBT Genworth or the Group Genworth Financial Group Genworth Financial or GFI GFMI GMA or the Company Gross earned premium or GEP GWP HLVR IBNR ICAAP IFRS Indemnity Insurance margin Investment return IPO KMP Level 2 and Level 2 Group LLC LMI LMI market LMI provider LMI subsidiary Australian Accounting Standards Board Genworth Australian General Partnership Australian equivalents to IFRS Australian Prudential Regulation Authority Australian Securities Exchange Genworth Financial’s 100% owned Australian subsidiaries prior to the IPO The calendar year an LMI policy is originated As defined by GPS 112, Tier 1 Capital comprises the highest quality components of capital that fully satisfy all of the following essential characteristics: • provide a permanent and unrestricted commitment of funds; • are freely available to absorb losses; • do not impose any unavoidable servicing charge against earnings; and • rank behind the claims of policyholders and creditors in the event of winding up China Oceanwide Holdings Group Co., Ltd The sum of the loss ratio and the expense ratio Corporations Act 2001 (Cth) Delegated underwriting authority Earnings per share Calculated by dividing the sum of the acquisition costs and the other underwriting expenses by the net earned premium Fringe benefit tax The Company and its subsidiaries Genworth Financial and its subsidiaries, excluding Genworth Genworth Financial, Inc. and, where relevant, its predecessors Genworth Financial Mortgage Insurance Pty Limited Genworth Mortgage Insurance Australia Limited ABN 72 154 890 730 The earned premium for a given period prior to any outward reinsurance expense Gross written premium High loan to value ratio. Generally, a residential mortgage loan with an LVR in excess of 80% is referred to as an HLVR loan Delinquent loans that have been incurred but not reported Internal Capital Adequacy Assessment Process International Financial Reporting Standards Genworth Financial Mortgage Indemnity Ltd Calculated by dividing the profit from underwriting and interest income on technical funds (including realised and unrealised gains or losses) by the net earned premium Calculated as the interest income on technical funds plus the interest income on shareholder funds (excluding realised and unrealised gains/(losses)) divided by the average balance of the opening and closing cash and investments balance for each financial year Initial Public Offering Key Management Personnel, as the term is defined in the Corporations Act 2001 (Cth) “Level 2 insurance group” as defined by APRA under Prudential Standard GPS 001, referring to a consolidated insurance group Genworth Financial Australia Holdings, LLC Lenders Mortgage Insurance The market for LMI provided by external LMI Providers and LMI subsidiaries but excluding the retention of risk by Lenders and other forms of risk mitigation or risk transfer by Lenders in relation to the credit risk of residential mortgage loans A provider of LMI, excluding LMI subsidiaries A provider of LMI owned or controlled by the insured or a member of its corporate group Annual Report 2016 107 Glossary (continued) Loss ratio LTI LVR Major Banks MIP NED Calculated by dividing the net claims incurred by the net earned premium Long term incentive Loan to value ratio. This percentage is calculated by dividing the gross value of a loan (excluding capitalisation of LMI premium) by the value of the property securing the loan. The value is based on the lower of the valuation of the underlying property accepted or externally obtained by the lender at origination or the price paid Australia and New Zealand Banking Group Limited ABN 11 005 357 522, Commonwealth Bank of Australia ABN 48 123 123 124, National Australia Bank Limited ABN 12 004 044 937 and Westpac Banking Corporation ABN 33 007 457 141 and each of their affiliated brokers and other residential lending distribution channels Mortgagee in possession Non-executive director Net earned premium or NEP The earned premium for a given period less any outward reinsurance expense NIW NOHC NPAT New insurance written Non-operating holding company Net profit after tax Omnibus Incentive Plans The Genworth Financial 2004 Omnibus Incentive Plan and 2012 Omnibus Incentive Plan PCA PCA coverage PCR PCP PDR PoA Prescribed capital amount Calculated by dividing the regulatory capital base by the prescribed capital amount The PCA plus any supervisory adjustment determined by APRA Prior corresponding period Performance and Development Review Probability of adequacy Regulatory capital base The sum of Tier 1 Capital and Tier 2 Capital ReMS Return on Equity (ROE) Reinsurance Management Strategy Calculated by dividing NPAT by the average of the opening and closing equity balance for a financial period Rights Plan Genworth Australia Share Rights Plan RMF RMS RSU S&P Risk Management Framework Risk Management Strategy Restricted share units Standard & Poor’s Ratings Services Shareholder Agreement The agreement between the Company, Genworth Holdings, Inc., Genworth Financial International Holdings, LLC and Genworth Financial dated 21 May 2014, as amended SLT STI Senior Leadership Team Short term incentive Supply and Service Contract A contract between a lender customer and Genworth Australia for the supply of LMI and related services Technical Funds TFR Tier 2 Capital Underlying Equity Underlying NPAT Underlying ROE VWAP WGEA Investments held to support unearned premium and outstanding claims reserves Total fixed remuneration As defined by GPS 112, Tier 2 Capital comprises components of capital that fall short of the quality of Tier 1 Capital but nonetheless contribute to the overall strength of a regulated institution and its capacity to absorb losses Total equity excluding the after-tax impact of unrealised gains or losses on the investment portfolio. For 2014, this has been calculated on a pro forma basis Underlying NPAT excludes the after-tax impact of unrealised gains or losses on the investment portfolio Calculated by dividing Underlying NPAT by the average of opening and closing Underlying equity for a financial period Volume weighted average price Workplace Gender Equality Agency 108 Genworth Mortgage Insurance Australia Corporate directory Registered office Genworth Mortgage Insurance Australia Limited Level 26 101 Miller Street North Sydney NSW 2060 Telephone: +61 1300 655 422 Fax: +61 1300 366 228 Website: genworth.com.au Company Secretary Ms Prudence Milne, General Counsel & Company Secretary Assistant Company Secretary Mr Brady Weissel, Corporate Counsel & Assistant Company Secretary Share registry Link Market Services Limited Level 12 680 George Street Sydney NSW 2000 Telephone: +61 1300 554 474 Fax: +61 2 9287 0303 Email: registrars@linkmarketservices.com.au Website: linkmarketservices.com.au Link Investor Centre investorcentre.linkmarketservices.com.au Australian Securities Exchange Genworth Mortgage Insurance Australia Limited is listed under the ASX code “GMA”. Annual Report To request a copy of the Annual Report, please contact the Share Registry. Electronic versions of the Annual Report are available at investor.genworth.com.au The cover has been printed on Pacesetter Coated which is made from elemental chlorine free bleached pulp sourced from well-managed forests and controlled sources. It is manufactured by an ISO 14001 certified mill. The text has been printed Pacesetter Laser Recycled which is 30% recycled and made up from elemental chlorine free bleached pulp which is PEFC certified sourced from sustainably managed sources. It is manufactured by an ISO 14001 certified mill.