Level 26 101 Miller Street North Sydney NSW 2060 Australia Tel 1300 655 422 genworth.com.au 26 February 2020 Companies Announcements Office Australian Securities Exchange 20 Bridge Street SYDNEY NSW 2000 Genworth Mortgage Insurance Australia Limited (ASX:GMA) 2019 Annual Report We attach a copy of the Annual Report for Genworth Mortgage Insurance Australia Limited and its controlled entities for the year ended 31 December 2019. The release of this announcement was authorised by the Board. Yours faithfully Prudence Milne General Counsel and Company Secretary For more information, analysts, investors and other interested parties should contact: Iwona (Evi) Falkiner Head of Corporate Affairs and Investor Relations M: +61 428 059 965 Keshvar Seale Corporate Affairs and Investor Relations Manager M: +61 499 088 640 Genworth Mortgage Insurance Australia Limited ABN 72 154 890 730 ® Registered Trade Mark of Genworth Financial, Inc. 2019 ANNUAL REPORT Contents SECTION 1 Overview Our vision 2019 at a glance Supporting the dream of home ownership Sustainability: Community and our people Chairman’s review Chief Executive Officer’s report Our strategy Risk management SECTION 2 Directors’ report Principal activity Organisation overview Business model Products and customers Board of directors Senior leadership team Operating and financial review Remuneration report SECTION 3 Financial report Financial statements Directors’ declaration Independent auditor’s report 1 2 4 5 6 8 12 14 18 18 19 19 20 22 24 30 51 93 94 SECTION 4 Other information Shareholder information Glossary Corporate directory 98 101 104 Genworth is a leading provider of Lenders Mortgage Insurance (LMI) in Australia and a capital and risk management solutions provider. 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. Genworth Mortgage Insurance Australia Limited and its controlled entities ABN 72 154 890 730 One step closer to your dream of home ownership. At Genworth, our vision is to help Australians achieve the dream of home ownership by being a leading provider of risk and capital 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. 1 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW 2019 at a glance 66,895 new policies written Valued at $26.7b 1.3m policies in‑force Valued at $307b Market capitalisation Dividends (cents per share) ~$1.5b Share buy‑back $63.9m 50 40 30 20 10 0 e r a h s r e p s t n e C 80 60 40 20 o i t a r t u o y a p y r a n d r O i FY14 FY15 FY16 FY17 FY18 FY19 Ordinary Special Ordinary payout ratio All figures as at 31 December 2019. 2 Portfolio of insured home loans by state WA 12.6% NT 1.2% SA 6.1% QLD 23.1% ACT 2.7% NSW 27.4% VIC 22.6% NZ 2.1% TAS 2.2% Insurance in‑force by home loan type Investment 24.9% Owner-occupied 75.1% All figures as at 31 December 2019. 3 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Supporting the dream of home ownership 50+ years of facilitating home ownership Currently supporting 100+ lenders in Australia 62,669 borrowers experiencing financial stress and hardship assisted since 2013 1 1 Via our lender customers. 4 Sustainability: Community and our people Commitment to female representation on the Board 1 Genworth fundraising initiatives $215,000+ Total time spent on volunteering 1,250+ hours 2019 highlights Number of volunteer events in corporate calendar 36 Employees participating in volunteering programs 61% Borrower hardship cases assisted 10,020 Diversity and inclusion (%) Board 56% Male (56% in 2018) 44% Female (44% in 2018) Senior Leadership Team (CEO and direct reports) 56% Male (57% in 2018) 44% Female (43% in 2018) Other management roles (excl. the Senior Leadership Team) 66% Male (62% in 2018) 34% Female (38% in 2018) Overall 55% Male (56% in 2018) 45% Female (44% in 2018) All figures as at 31 December 2019. 1 The 30% Club was formed by the Australian Institute of Company Directors to recognise those companies with greater than 30% female representation on the Board that are committed to achieving better gender balance in organisations. GENWORTH Annual Report 2019 5 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Chairman’s review Genworth’s portfolio today includes more than $300 billion of underwritten residential mortgages, representing 1.3 million policies that have enabled people to purchase homes in Australia. Our significant efforts in 2019 were aligned to and supported the Company’s strategic vision of positioning itself as the leading provider of customer focused capital and risk management solutions in the Australian residential mortgage market. Genworth’s strategy Our Company operates in a dynamic market where it is subject to shifts in technological, regulatory and competitive frameworks. As lender and borrower expectations change, our organisation is focused on addressing their evolving expectations by leveraging our strong core competencies and extensive experience in managing credit default risk. We are committed to our work with lender customers, regulators and policy leaders to promote a stronger and more sustainable housing market in Australia. In 2019, we began transitioning our strategic focus to leveraging our capabilities to launch new products and enhance our customers’ experience. By launching the regular (monthly) premium LMI offering, onboarding new and existing customers onto our automated underwriting decision platform and data-only submission channel (eLMI portal), we continued to utilise our data and technology capabilities to deliver operational efficiencies to our customers. Genworth has improved its modelling capabilities over the last two years to include the use of external data sources such as credit score and individual automated property valuations in its actuarial calculations. This has improved the accuracy of reserves and provided us with the ability to more accurately forecast losses, as well as providing increased rigour to pricing and product innovation. We expect to realise the benefits of this new capability over the next few years. Financial position Our company’s financial position remains strong. At the end of 2019, Statutory net profit after tax was $120.1 million (2018: $75.7 million) and Underlying net profit after tax was $97.0 million (2018: $93.9 million). We maintained a regulatory capital base of $1.66 billion and a coverage ratio of 1.91 times the prescribed capital amount (PCA) on a Group (Level 2) basis. This ratio continues to be above the Board’s target capital range of 1.32 to 1.44 times PCA. As at 31 December 2019, Genworth’s cash and investment portfolio had a market value of $3.1 billion, of which 81% was held in cash and highly rated fixed interest securities. The Company had $82.8 million invested in equities and $571.9 million invested in non-Australian dollar income securities, reflecting our strategy to diversify and improve investment returns on the portfolio within acceptable risk tolerances. Capital management We remained focused on managing Genworth’s capital position and the Company’s PCA in 2019 and pursued various capital management initiatives with the aim of bringing the solvency ratio more in line with the Board’s target range of 1.32 to 1.44 times PCA. Initiatives implemented include: • $63.9 million returned to shareholders through an on-market share buy-back; • $76.4 million distributed through fully franked ordinary dividends (interim and final); • $190.2 million distributed through unfranked special dividends totalling 46.1 cps for 2019; and • Renewal of $800 million reinsurance program. The combined ordinary and special dividends paid during the 2019 financial year equate to a yield of 17.6% on a Genworth share price of $3.65 as at 31 December 2019. Dear Shareholders, I am pleased to present Genworth Mortgage Insurance Australia’s 2019 Annual Report. As Australia’s leading lenders mortgage insurer for over 50 years, 2019 was another strong year for Genworth as we extended our track record of supporting the strength of the Australian residential mortgage market by issuing 66,895 insurance policies that secured home loans valued at $26.7 billion. 6 The Board and management continue to proactively evaluate excess capital and its potential uses and look forward to keeping you updated on our progress. Outlook Partnerships In our pursuit to leverage our data and add value along the mortgage chain, we released three Thought Leadership pieces in 2019, two in partnership with our lender customers. The inaugural Genworth First Home Buyer Sentiment Report based on a survey undertaken in June and July 2019 of 2,000 prospective first home buyers (FHBs) and 1,000 recent FHBs was released as part of a “First Home Buyer” special report published nationally by NewsCorp on 22 September 2019 and featured in The Sunday Telegraph (NSW), The Sunday Herald Sun (Vic) and the Sunday Courier Mail (Qld) with further coverage over the following two weeks in The Sydney Morning Herald (NSW), The Age (Vic), The Daily Telegraph, The Courier Mail and a number of trade publications. In April 2019, Genworth in partnership with Teachers Mutual Bank prepared and launched a Thought Leadership research report titled The Deposit Gap Dilemma – The Impact on Key Workers. The report attracted extensive national media coverage across mainstream print, digital, radio and television and trade publications, Banking Day, Mortgage Business, and Your Mortgage. This was followed up in October 2019 by The Gateway and Genworth Millennial Home Ownership research report, a successful collaboration with Gateway Bank. The research looked into millennial attitudes on home ownership and their perceptions of the housing market and received widespread media coverage. All reports were given further coverage through social media campaigns and most importantly, the commercial insights were shared with our lender customers and utilised to identify growth opportunities for our respective businesses. Pleasingly, these initiatives delivered tangible benefits as evidenced in our Company’s financial performance which is explained in greater detail in our Chief Executive Officer’s (CEO) report. Sustainability The Board places significant importance on managing sustainability and believes sustainability-related issues extend beyond climate to include corporate social responsibility, culture, governance and accountability. We are committed to ensuring that high corporate governance standards are upheld by the Company. Details of Genworth’s corporate governance policies and practices are set out in our Corporate Governance Statement that can be found on the Genworth website. The Board believes that to have a sustainable business, Genworth needs to continue to make a positive contribution to Australia’s social fabric. We remain committed to supporting the Australian housing market in good times and in times of stress not only by helping people buy homes sooner but also by helping to keep them in their homes. This commitment is embedded in our sustainability framework that is founded on four pillars: Environment; Our People; Community and Marketplace. The Board is committed to the continual development and review of targets based on this framework and will provide annual reporting on our insights and progress. Since 2000, our Company has issued over 3.3 million insurance policies facilitating loans that have enabled home purchases in Australia. In 2019, Genworth assisted 10,020 (2018: 9,873) borrowers experiencing financial stress and hardship via our lender customers. Diversity and inclusion in the workplace is another key area of focus for the Board. In 2019, Genworth was a finalist for the Diversity and Inclusion Award at the Australian Insurance Industry Awards and was named as an Employer of Choice for the fifth consecutive year by the Australian Government’s Workplace Gender Equality Agency. As we look ahead to 2020, we expect Australian economic fundamentals to remain sound and the national house price recovery seen in 4Q19 to continue. We anticipate variations in mortgage interest rates and credit standards but expect lenders to look for opportunities to grow their business by attracting borrowers. The bushfires that commenced in late 2019 and continued into early 2020 have had a devastating impact on many communities. I would like to acknowledge the selfless contribution from the dedicated emergency services personnel, volunteers and their rescue efforts who battled through an extremely dangerous and challenging bushfire season. In partnership with our lender customers, we are currently providing support to individuals impacted by the bushfires. The effect of bushfires in affected regions and the potential temporary disruption to those regional economies is still being counted but within this environment, Genworth’s commitment to assisting lenders and borrowers remains strong. We expect the uncertainty arising from the impact of the bushfires and the coronavirus (COVID‑19) on GDP to potentially offset the positive momentum into 2020. Our Company’s role in facilitating the Australian dream of home ownership and supporting the strength and stability of the Australian financial system through our lender customers is of great importance. Our management team is proactively engaged with lender customers to identify growth opportunities, provide capital support, reduce risk exposures and deliver underwriting and loss mitigation services that help our customers maintain quality residential lending standards. I would like to acknowledge Georgette Nicholas, who retired as CEO and Managing Director (MD) and as a member of the Board effective 31 December 2019 and sincerely thank Georgette for her leadership and significant contribution to Genworth over the past six years. In addition to supporting the Company to become publicly listed, she has driven a strategic program of work to position Genworth as the leading provider of risk and capital management solutions in the Australian residential mortgage market. Since Georgette’s retirement was first announced, the Board commenced an Australian and international executive search and were delighted to announce the appointment of Pauline Blight‑Johnston who we welcome as CEO and MD on 2 March 2020. Pauline comes to Genworth with a depth of experience in life insurance and wealth management and has a proven capability to drive strategy and lead people. Duncan West who had been appointed by the Board to act as CEO continues to serve as an independent, non‑executive director and we thank him for his time as acting CEO during this transition period. Our continued success would not be possible without our Senior Leadership Team and our team of employees. I would like to formally acknowledge and thank them for their efforts. I would also like to thank my fellow Directors for their contribution and commitment to Genworth’s success. Importantly I would like to thank our shareholders for their continued support and for entrusting us with stewardship of the Company. Yours sincerely, Ian MacDonald Chairman 7 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Chief Executive Officer’s report Genworth continued to support home ownership by facilitating home loans in 2019 and saw tangible benefits by maintaining the momentum of its Strategic Program of Work as we leveraged our data and technology to add value across the mortgage value chain. Economic growth continued to be below the long-term trend through 2019 and we saw house prices continue their recovery in the latter half of the year led by the metropolitan centres with Sydney and Melbourne recording strong growth, which we expect to continue in 2020. Importantly, our 2019 financial performance reflects that our core business continues to perform well. During 2019, we remained focused on optimising our capital structure, having distributed over $330.5 million to shareholders through a combination of fully franked ordinary dividends and unfranked special dividends and completed a $63.9 million on-market buy-back of shares as part of our capital management program. Strategic update The Company’s strategic vision is to position itself as the leading provider of customer-focused capital and risk management solutions in the Australian residential mortgage market. Over the last few years our objectives have been to refine our core business model by implementing various strategic initiatives to better meet customer needs in a dynamic market environment whilst pricing at our target return on equity (ROE). Over 2019, we launched our new regular (monthly) premium LMI offering, onboarded new and existing customers onto our automated underwriting decision platform and data-only submission channel (eLMI portal), and continued to leverage data and technology capabilities to deliver risk management insights and operational efficiencies to our customers. In executing our Strategic Program of Work in the year ahead, we will continue to leverage data and technology capabilities to deliver further underwriting risk insights and operating efficiencies across the mortgage value chain. Financial performance Financial position Our 2019 financial performance reflects that our core business continues to perform well. Our result reflects more high loan to value ratio (HLVR) loans being written during 2019 as we continued to see a recovery in consumer confidence in the housing market across all major capital cities except Perth. Within this environment 2019 Statutory net profit after tax was $120.1 million (2018: $75.7 million) and Underlying net profit after tax was $97.0 million (2018: $93.9 million). New insurance written (NIW) increased 20.3% to $26.7 billion (from $22.2 billion in 2018). Gross written premium (GWP) decreased 5.9% to $433.2 million in 2019, noting the 2018 GWP includes GWP written in 1Q18 pursuant to a customer contract entered into by Genworth’s Bermudian insurance entity. Excluding this transaction, GWP for 2019 increased 17.1%. This result reflects the higher volume growth in traditional LMI flow business across Genworth lender customers as property prices continued to rebound over the last quarter of 2019, reflecting improved home buyer confidence and affordability particularly in Sydney and Melbourne. Net earned premium (NEP) increased 6.0% from $281.3 million in 2018 to $298.2 million in 2019. This is a result of the continued seasoning of 2017 and 2018 book years and policy cancellation initiatives in 2019. New Delinquencies decreased 2.7% (2019: 10,414 versus 2018: 10,697) as we continued to see signs of improvement in mining regions. The number of paid claims increased 3.1% (2019: 1,352 versus 2018: 1,311) although the average paid per claim declined from $112,800 in 2018 to $96,600 in 2019. This year-on-year decrease is a result of the stabilisation of mining regions. However, the average paid per claim is still elevated as subdued market conditions remain across areas such as Perth and its specific sub-regions. Net claims incurred for the year was $150.9 million (2018: $145.9 million). The increase is mainly attributable to additional reserving from pressure emerging in Perth in response to 8 continued house price depreciation over 2019, notwithstanding the market is now showing early signs of house price stabilisation. The 2019 Loss Ratio was 50.6% (versus 51.9% in 2018) and in line with the Company’s 2019 guidance range of between 45% and 55%. 2019 losses were impacted by reduced cure activity that was offset by increased earned premium from policy cancellations initiatives. Investment income (net of investment expense) in 2019 was $139.1 million (2018: $77.9 million), with $28.7 million in unrealised losses in 4Q19 as a result of the movement in market yields partially offsetting strong performance for the year. 2019 investment income included an unrealised gain of $35.2 million or $24.6 million after-tax (2018: unrealised loss of $26.1 million or $18.3 million after-tax). The after-tax realised gain of $20.1 million in 2019 is predominantly due to the transition of the equity portfolio to a new external manager in 3Q19 and rebalancing within the fixed interest securities portfolio. After adjusting for realised and unrealised gains and losses, the 2019 investment return was 2.4% per annum, (2018: 2.6% per annum) reflecting that returns continue to be pressured by the low interest rate environment. Capital management Since listing on the Australian Securities Exchange in 2014, we have maintained our focus on ensuring we have an optimal capital structure. Over that time, Genworth has returned 100% of after-tax profits by way of ordinary and special dividends to shareholders and implemented other capital management initiatives such as buy-backs and capital reductions. Looking ahead to 2020, we will continue to actively optimise our capital structure and evaluate potential uses for excess capital with a view to ensuring that our capital base meets our objectives of balancing policyholder obligations, delivering long-term shareholder returns and having flexibility to grow the business in the future. Customers Genworth has commercial relationships with over 100 lender customers across Australia with a majority of the mortgage insurance business concentrated in a small number of key customers. We take pride in our strong and long-standing relationships with the major and regional banks, building societies, credit unions and non-bank mortgage originators. Our strategic focus on expanding our product suite and enhancing our technological capability is driven by the desire to provide a better experience for our customers. As announced in 4Q19, we renewed our Supply and Service Contract with Commonwealth Bank of Australia (CBA) for the provision of LMI for three years with effect from 1 January 2020. We also announced and implemented changes to our pricing structure in 2019 and expect these changes to flow through to GWP in 2020. Regulatory capital base $1.66b 2019 Fully franked ordinary dividends 16.5cps Share buy‑back $63.9m Unfranked special dividends 46.1cps 9 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Chief Executive Officer’s report (continued) Ratings Our credit ratings reflect the financial strength of Genworth and demonstrate to stakeholders our claim paying ability. On 25 July 2019, Standard & Poor’s Ratings Services (S&P) announced that due to revisions to its ratings criteria it had changed Genworth Financial Mortgage Insurance Pty Limited’s (GFMI) financial strength rating to an “A” with a stable outlook. On 18 June 2019, Fitch Ratings reaffirmed the insurer financial strength ratings (IFSR) of GFMI financial strength rating at “A+” but revised its outlook from stable to negative. Regulatory environment Genworth remains committed to working with policymakers, ratings agencies and other industry participants to promote legislative and regulatory policies that support home ownership and responsible credit growth. During 2019, we continued to work to identify and recommend policy solutions that would set suitable capital requirements for the residential mortgage industry. Genworth is leading industry efforts to inform policymakers about the importance of LMI to the Australian mortgage market and ensuring the wider financial system remains stable. In particular, we are focused on informing regulators and policymakers about the value of our risk and capital management solutions as loss absorption and capital tools. The First Home Loan Deposit Scheme (FHLDS) announced by the Australian Government on 1 September 2019 commenced on 1 January 2020. The Scheme is designed to assist eligible first-home buyers by providing a government guarantee to participating lenders on eligible loans equal to the difference between the deposit (of at least 5%) and 20% of the purchase price. Borrower income and regional property value caps apply, and the program is intended to support up to 10,000 eligible first-time home buyers per Australian Government financial year (from 1 July to 30 June). Although we expect the full 10,000 quota to be exhausted by 30 June 2019, it is too early to determine what impact the FHLDS will have on Genworth’s mortgage insurance business. Sustainability Our Strategic Program of Work reflects the importance we place on making a positive contribution to the social, economic and environmental wellbeing of the communities we are part of. The bushfires of late 2019 that continued into early 2020 have had a devastating impact on many communities, and we continue to work with our lender partners to support them in providing hardship packages to those borrowers impacted by the bushfires and will continue to monitor any broader based economic impacts into the future, should they arise. We have a broad range of stakeholders and believe we have a role to play in facilitating the Australian dream of home ownership and supporting the strength and stability of the Australian financial system. To enable us to achieve this, we have established a sustainability framework covering four key pillars: Environment, Our People, Community and Marketplace. We report on an annual basis in our Sustainability Report on our performance against each of these pillars. We continue to be committed to contributing to community causes that are aligned to our mission and vision of supporting the dream of home ownership. In 2019, Genworth provided sponsored grants totalling $106,000 to its four community partners: St. Vincent de Paul Society, CREATE Foundation, OzHarvest Limited and Father Chris Riley’s Youth Off the Streets. Throughout the year, we also donated $109,000 to charitable fundraising initiatives and continued our “Milestone Anniversary Donation” program. Pursuant to this program our Company makes a $1,000 donation to a registered charity selected by an employee celebrating their 10, 15 or 20 year anniversary with Genworth. In addition to corporate charitable donations, we have established staff volunteering and donation programs for our employees. These include “Workplace Giving”, “Make-a-Difference Day”, “Employee Sponsored Donations” and “Employee Aware & Care”. During 2019, more than 61% of our employees participated in volunteering programs with our community partners, contributing 1,256 hours to programs such as OzHarvest’s “Cooking for a Cause”, Youth Off The Street’s “Working Bee” and programs run by St. Vincent de Paul for the homeless. Diversity and inclusion in the workplace is another integral component of our Sustainability program. We value the contribution that people with different backgrounds, experience and perspectives bring to our organisation. Importantly, we believe that our people should reflect the diversity of our customers and the communities they serve. Management has set a goal of maintaining female representation of at least 40% on the Senior Leadership Team and is striving for diversity across all leadership roles. As at 31 December 2019, 44% of the Senior Leadership Team was female and 34% of other management roles were filled by females. Our commitment to diversity and inclusion has been recognised by the Workplace Gender Equality Agency (WGEA), which awarded Genworth the WGEA Employer of Choice for Gender Equality for the fifth consecutive year. 10 Conclusion We are committed to maintaining the momentum of our Strategic Program of Work leveraging data and technology to add value across the mortgage value chain. We also remain focused on working with our customers to implement our regular (monthly) premium LMI offering as a complement to the upfront single premium product, as well as other initiatives that grow GWP and diversify our revenue streams. Our Company is well capitalised and has a solid balance sheet with net tangible assets of $3.66 per share as at 31 December 2019 and remains committed to actively managing our capital position to continue delivering solid profits and attractive returns for shareholders. Thank you I would like to acknowledge our previous CEO and MD, Georgette Nicholas, for her valuable contribution to Genworth and thank the Chairman and my fellow Directors for their stewardship of the business. To all our Genworth people, thank you for your hard work and commitment throughout the year. To our customers and other partners, thank you for your support and I look forward to continuing these strong relationships. Finally, I would like to thank you for your loyalty as shareholders. Yours sincerely, Duncan West Acting Chief Executive Officer 11 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Our strategy Genworth’s strategic objective over the last three years has been to redefine and then enhance our core business model. The strategic initiatives we implemented allow Genworth to better meet customer needs in a dynamic market environment and deliver profitable growth. Over 2019, we began transitioning our focus to leveraging our new capabilities to launch new products and enhance customer experience. A refined strategic plan to deliver profitable growth over the medium‑term Value proposition Product innovation and technology will underpin Genworth’s value proposition. Focus To be a leading provider of customer focused capital and risk management solutions in residential mortgage markets and deliver sustainable shareholder returns. Strategic enablers People, organisation and cultural change 12 Data and analytics Technology Stakeholder management 2020 priorities In 2020, we will continue our focus on leveraging data and technology to add value across the mortgage value chain. Initiatives include scaling up alternative offerings to diversify the product mix and meet customer needs for additional mortgage risk management options. In addition, we will enhance the customer experience, leveraging our HLVR expertise of over 50 years and focusing on seamless interactions with all lender customers, including new digital lenders. Goal areas 1. Enhance capabilities across the mortgage value chain: • Enhance customer experience; • Scale-up new offerings; • Broaden development of alternative pricing capabilities; • Leverage data and technology to evolve expert insights. 2. Maximise core business performance: • Continue assessment of strategic asset allocation; • Focused risk management activities utilising data and technology; • Manage core business with selective investment in building capabilities; • Maintain capital flexibility. 3. Continue to develop capabilities to grow the business: • Pursue opportunities for diversification of risk and revenue; • Expand our service offering; • Leverage new products and partnerships. Delivered initiatives Regular (monthly) premium option for LMI Advanced connectivity with our customers Insurance entity in Bermuda Real time automated decision platform Micro markets LMI Bespoke risk management solutions Investment in fintech Tic:Toc Data-only submission channel (eLMI portal) 13 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW 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 or portfolios of loans we will insure or reinsure. Genworth’s risk management strategy forms an integral part of the risk management framework, ensuring the framework remains relevant and aligned to the Board approved strategies. The key medium-term business risks are those that could impact the successful execution of the strategy. Genworth maintains active risk mitigation strategies to manage key business risks. Genworth’s risk management processes seek to identify emerging risks being those which may develop over the medium to longer term, or which already exist but are difficult to quantify and may have a high loss potential. Emerging risks are typically characterised by having a high degree of uncertainty and where even basic information, which would help assess the frequency and severity of a given risk, is often lacking. Key material and emerging risks Key controls/mitigation Evolving mortgage risk and capital solutions landscape Evolving market for mortgage risk and capital solutions gives rise to opportunities and risks. • Execution of strategy to leverage new core foundational capabilities – new underwriting and product capabilities; • Products and services designed to enhance the Genworth value proposition in the market; • Active responses to customer needs through working collaboratively with customers on products such as excess of loss cover and micro markets LMI; • Ongoing assessment of risks and market opportunities; • Work with regulators and industry to recognise LMI in risk and capital models; and • Contractual protections to mitigate adverse risk selection and to ensure credit quality is within policy and pricing parameters. Business model risk Risk that Genworth is limited in responding to the business and economic cycle due to its monoline operating model. • Execution of strategy to leverage new core foundational capabilities including the regular (monthly) premium product; • Products and services designed to enhance the Genworth value proposition in the market; and • Enhanced product diversification across the mortgage and capital management solutions landscape. Genworth counterparty risk Risk that Lender counterparty risk settings may limit their exposure to Genworth and serve as an inhibitor of growth. • Working with Lenders on risk and capital management solutions and counterparty risk mitigation strategies; • Genworth’s reinsurance program assists in mitigating counterparty concerns; • Genworth’s balance sheet strength; and • Balmoral entity and reinsurance provide alternative structured options. 14 Key material and emerging risks Key controls/mitigation Concentration risk Risk that Genworth’s GWP is concentrated with IRB Lenders, and the loss or partial loss of these Lenders will adversely impact financial performance. • Successful conclusion of commercial opportunities across major and non-major bank segments; • Active Genworth growth potential in the neo-bank segment and non-ADI segment; and • First mover advantage on regular (monthly) premium could impact distribution and borrower preferences – pilot implementation with specific customers expected in 2020. Increased competition for LMI and other risk transfer products Risk that a new or existing provider of mortgage risk transfer products may disrupt the Lender market and impact Genworth’s share of the market. • Exclusivity contractual protections with Lenders; • Broader product set offering a suite of alternative products; • Simplification of business processes and operating structure to support efficiencies and ease of doing business; and • Strong contractual position with existing customer base with key renewals and extensions secured. Regulatory change risk Risk that adverse or neutral regulatory changes have the potential to impact Genworth’s business model and medium-term profitability. • Monitoring of the regulatory environment and changes; • Active regulatory engagement strategy – APRA, ASIC and other regulators; • Continue to work with stakeholders to demonstrate the LMI value proposition; and • Strategic engagement with Federal and State Governments, Treasuries and Regulators. Compliance risk Risk of legal or regulatory sanctions, increased regulatory oversight or loss to reputation as a result of a failure to comply with laws, regulations, rules, standards, and codes of conduct applicable to Genworth as a publicly listed entity and authorised general insurer. • Compliance obligations monitored and embedded in Genworth’s first and second lines of defence; • Compliance updates to senior leadership and functional areas; • Regulatory compliance risk and control attestations; • Annual enterprise-wide compliance risk assessment; and • Regular compliance training and monitoring. Macroeconomic deterioration and potential deterioration in financial and capital performance of Genworth Risk relating to a deterioration in the Australian economy and housing market impacting the financial strength and performance outlook of Genworth. • Product, diversified geographic location and segment risk responses; • Mature reserving and loss forecasting processes; • Active risk portfolio monitoring and responses; • The Board and senior leadership team regularly review the risk appetite statement, internal capital settings and responses to the macroeconomic environment; • Genworth maintains a recovery plan to guide and facilitate its responses to a macroeconomic stress event; and • Loss management strategies and responses. 15 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Risk management (continued) Key material and emerging risks Changes in financial strength ratings Risk relating to a downward change in Genworth’s financial strength rating by rating agencies. Underwriting risk Poor underwriting quality due to inappropriate policy settings and/or practices. Key controls/mitigation • Recovery plan provides options to recover Genworth’s financial condition and for other contingency scenarios; • Relationship management model ensures strong and sustainable customer outcomes; • Annual rating reviews provide a view of risk emergence and responses required; • Vigilance on combined ratio (Fitch); • Reduced contractual renewal risk (major Lenders); • Strong capital position, above the Board approved internal and regulatory capital buffer range; and • Reinsurance program strengthens claims paying ability. • Rolling program of second line reviews of underwriting quality including specific focus on data quality; • Use of bureau data for credit risk assessment; • All new deals assessed through the underwriting rules and scorecard allowing for improved underwriting risk controls; • Serviceability methodology is reviewed at least annually; and • Changes to lender serviceability to be approved by Genworth. Reinsurance renewals Risk that Genworth fails to renew reinsurance contracts as and when they fall due to be renewed. • Active reinsurance management strategy; • Active management of the reinsurance program by experienced team including leveraging global reinsurance expertise; • Ability to leverage external reinsurance experience; and • Reinsurer engagement and roadshows. Mark‑to‑market risk (incl. Liquidity risk) Risk relating to changing investment market dynamics (such as a change in the interest rate cycle, equity and foreign exchange markets), driving mark-to-market losses. • Diversification of investment portfolio within the boundaries set by the risk appetite statement; • Capital and Investment Committee governance and oversight; • Risk assessment prior to any change to risk appetite and related changes to Genworth’s investment policy; and • Execution of the derivatives strategy as required. Conduct risk Risk relating to the inappropriate, unethical or unlawful behaviour and practices caused by deliberate or inadvertent actions, which may have significant ramifications for the organisation, shareholders, customers and the end borrower. • Active leadership role representing the value proposition of LMI in the mortgage industry; • Work collaboratively with Lenders to ensure LMI and the provisions of the Master Policy are well understood by the Lender; • Communications in relation to LMI are clear and concise; • Adherence to the new General Insurance Code of Practice; • Reporting and root cause analysis; and • Greater focus on applying a borrower lens as part of business to business operating model. 16 Key material and emerging risks Key controls/mitigation Data risk – accuracy and integrity of data Failure to ensure that data quality is “fit for purpose” giving rise to the potential risk that Genworth may make poor business critical and operational decisions based on inadequate and/or poor data. • Adherence to Genworth’s data governance framework; • Continued sourcing of data aligned to technology changes; • Leverage external vendors as part of Genworth’s data sourcing strategy; and • Leverage new and additional data sources as part of Comprehensive Credit Reporting and Open Banking. Information security risk including cyber security • Contractual protections in contracts with key providers; • Information security policy framework and governance; Risk of loss from theft or unauthorised access to systems through hacking, social engineering, disabling or damaging systems. Risk relating to a deliberate act through cyber space to manipulate, destruct, deny, degrade or destroy computers or networks, or the information resident in them. Climate change risk (Emerging risk) Risk of failing to adopt good practice environmental standards, as articulated in the Sustainability Policy, and failing to effectively manage the adverse impacts of climate change on our in-force and investment portfolios. Digitisation and disruption risk (Emerging risk) Risk relating to the inability to effectively and efficiently respond to changing technologies and disruption impacting responsiveness to a changing market. • Vulnerability management program; • Independent audit of security controls; • Cyber risk forms part of the recovery plan; • Cyber risk insurance coverage; and • Robust IT and data governance model. • Project team to coordinate its responses to climate change and a roadmap of key project milestones has been developed; • Assessing the impact and potential impact of climate change on insurance risk in force and investment portfolios and mitigation strategies to manage the risks and opportunities; and • Participation in the Insurance Council of Australia’s ICA Climate Change Action Committee. • Alignment of business and technology strategies; • Ongoing assessment of risks and market opportunities by strategy function; and • Technology roadmap execution to ensure Genworth technology capabilities keep pace with the environmental changes. 17 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW 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 2019 and the auditor’s report thereon. Principal activity The principal activity of the Group during the reporting period was the provision of LMI under authorisation from APRA. In Australia, LMI facilitates residential mortgage lending by transferring risk from lenders to LMI providers, predominantly for HLVR residential mortgage loans. Organisation overview About Genworth Genworth is the leading LMI provider in the Australian LMI market and a provider of capital and risk management solutions in the Australian residential mortgage market. The Group estimates that it had approximately 32% of the Australian HLVR LMI market 1 by NIW for the 12 months ended 31 December 2019. Genworth is listed on the Australian Securities Exchange (ASX: GMA). During 2019, 25 million shares were purchased for a total consideration of $63.9 million, as part of the Group’s on-market share buy-back program. Genworth Financial, Inc. participated in these on-market share buy-back programs to maintain its approximately 52% stake in the Group. As at 31 December 2019, the number of Genworth shares on issue was 412.5 million. Genworth corporate structure as at 31 December 2019 Public 198,197,346 ordinary shares (48.0%) 412,514,184 ordinary shares (100%) Genworth Financial, Inc. 2 214,316,838 ordinary shares (52.0%) Genworth Mortgage Insurance Australia Limited ABN 72 154 890 730 Genworth Financial Mortgage Insurance Pty Limited Balmoral Insurance Company Limited ABN 60 106 974 305 (Bermuda) Registration No. 53069 Genworth Financial Mortgage Indemnity Limited ABN 55 001 825 725 Estimates based on flow market. 1 2 Genworth Financial, Inc.’s interest in the Company is held indirectly through the Genworth Financial Group. 18 Business model Genworth’s business activities Our mission is to support Australian home ownership by providing capital and risk management solutions to our customers in residential mortgage lending. Genworth’s primary business activity is the provision of LMI to our lender customers. As an LMI provider, Genworth’s profitability is driven primarily by the 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 shareholder value. Genworth shareholder value chain Genworth shareholder value chain Products and income Costs Distribution Premium income Financial income Claims Underwriting and other costs Dividends Retained earnings • Customers • Interest rates • Delinquencies • Underwriting • Underlying NPAT • NIW • GWP • Revenue recognition • Investment • Reserving income • Payment of claims • Payout ratio • Special dividends • Share buy-backs fees • Amortisation of customer acquisition related costs • Marketing costs • Staff and IT costs Strategy, risk and capital management Products and customers In 2019, Genworth launched a first in market, regular (monthly) premium LMI product as a complement to its traditional upfront LMI offering (Standard LMI, Homebuyer Plus and Business Select). Genworth also onboarded new and existing customers onto a new automated underwriting decision platform and data-only submission channel (eLMI portal) and continued to leverage data and technology to deliver risk management insights and operational efficiencies to customers. In 2019, GWP was predominantly generated from insurance written on a flow and portfolio basis. During 2019, Genworth renewed its Supply and Service Contract with Commonwealth Bank (CBA) for the provision of LMI for three years with effect from 1 January 2020. The Company maintains commercial relationships with over 100 lender customers across Australia, with a majority of its mortgage insurance business concentrated in a small number of key customers. In 2019, Genworth’s top two customers accounted for 67.0% of its GWP. The largest customer accounted for 55.0% of its GWP in 2019, as illustrated below. Lender customer Largest customer Second largest customer Largest customers 3–10 All others 1 Includes excess of loss insurance. 2019 GWP 1 55.0% 12.0% 24.3% 8.7% 19 Corporate governance statement The corporate governance statement is available on the Genworth website.Please visit: investor.genworth.com.au/investor-centre/GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Board of directors 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. Qualifications and experience: 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. Ian is also a member of the 30% Club, a group formed by the Australian Institute of Company Directors who are committed to achieving better gender balance on Boards and in organisations. Since 2006, Ian has held a number of directorships including publicly-listed companies, and is currently a director of Arab Bank Australia Ltd. Special responsibilities (including Committee memberships): Board – Chairman; Risk Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): None. Duncan West Acting CEO and Director, Genworth Financial designee Duncan was appointed to the Board on 1 September 2018 and as Acting CEO on 1 January 2020. Qualifications and experience: Duncan has more than 30 years of insurance industry experience having held senior executive positions at Royal Sun Alliance Group PLC, Promina Group Limited, CGU Limited and MLC Limited. He is currently a Director of Challenger Limited, Chairman of Hollard Insurance Company Pty Limited, Lawcover Insurance Pty Ltd, Habitat for Humanity Australia and is a Director of Avant Group Holdings Limited. Duncan is a Graduate of the Australian Institute of Company Directors, a Fellow of the Chartered Insurance Institute and a Senior Associate of the Australia and New Zealand Institute of Insurance and Finance. He holds a Bachelor of Science (Economics) from the University of Hull, UK. Special responsibilities (including Committee memberships): None. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): Challenger Limited (since 10 September 2018). David Foster Director, Independent, Genworth Financial designee David was appointed to the Board on 30 May 2016. Qualifications and experience: David has over 25 years of financial services experience, specifically in banking, insurance and wealth management. David previously held numerous positions with Suncorp Group including various senior executive roles from 2003 – 2007 and was the Chief Executive Officer of Suncorp Bank 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 the Chairman of Motorcycle Holdings Limited, and a director of Bendigo and Adelaide Bank Limited and G8 Education Limited. Special responsibilities (including Committee memberships): Capital and Investment Committee – Chair; Remuneration and Nominations Committee – Chair; Technology Committee – Chair. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): Current: Bendigo and Adelaide Bank Limited (since 4 September 2019); Motorcycle Holdings Limited (Director since 8 March 2015, Interim Chairman since 25 July 2016 and Chairman since 23 August 2016); G8 Education Limited (since 1 February 2013). Former: Thorn Group Limited (from 1 November 2014 to 23 October 2019); Kina Securities Limited (from 30 July 2013 to 23 May 2018). 20 Gai McGrath Director, Independent Gai was appointed to the Board on 31 August 2016. Qualifications and experience: 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, Toyota Finance Australia Limited, Steadfast Group Limited and HBF Health Limited. She is also Chair of Humanitix and a member of the Red Shield Appeal Development Council of The Salvation Army. Special responsibilities (including Committee memberships): Audit Committee – Chair; Risk Committee – Member; Remuneration and Nominations Committee – Member; Technology Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): Investa Listed Funds Management Limited as responsible entity of Investa Office Fund (from 17 October 2017 to 14 December 2018). Steadfast Group (since 1 June 2018). Christine Patton Director, Independent, Genworth Financial designee Christine was appointed to the Board on 1 September 2018. Qualifications and experience: Christine began her career as a tax lawyer and recently returned to Australia after 26 years working in Bermuda in roles including Group General Counsel of NYSE listed reinsurer PartnerRe Ltd and Senior Legal Counsel and Assistant Secretary to the Board at Bank of NT Butterfield & Son Ltd. She has more than 30 years’ career experience in capital markets, banking and reinsurance. Christine has a Bachelor of Laws and a Bachelor of Commerce from the University of Queensland and is a Graduate of the Australian Institute of Company Directors. Special responsibilities (including Committee memberships): Audit Committee – Member; Capital and Investment Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): None. Stuart Take Director, Genworth Financial designee Stuart was appointed to the Board on 20 February 2012. Qualifications and experience: Stuart has over 30 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. Special responsibilities (including Committee memberships): Risk Committee – Member; Remuneration and Nominations Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): None. Gayle Tollifson Director, Independent Gayle was appointed to the Board on 20 February 2012. Qualifications and experience: Gayle has over 40 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 Chartered Accountants Australia and New Zealand. Gayle is currently a director of RAC Insurance Pty Limited, RAA Insurance Holdings Limited and RAA Insurance Limited. Special responsibilities (including Committee memberships): Risk Committee – Chair; Audit Committee – Member; Capital and Investment Committee – Member; Remuneration and Nominations Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): None. Jerome Upton Director, Genworth Financial designee Jerome was appointed to the Board on 20 February 2012. Qualifications and experience: 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 was formerly a Certified Public Accountant and the Controller and Director of Financial Reporting for Century American Insurance Company in Durham, North Carolina. Special responsibilities (including Committee memberships): Audit Committee – Member; Capital and Investment Committee – Member; Risk Committee – Member; Technology Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2017 – 31 December 2019): None. 21 21 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Senior leadership team Duncan West Acting Chief Executive Officer and Director Duncan was appointed to the Board on 1 September 2018 and as Acting CEO on 1 January 2020. Duncan has more than 30 years of insurance industry experience having held senior executive positions at Royal Sun Alliance Group PLC, Promina Group Limited, CGU Limited and MLC Limited. He is currently a Director of Challenger Limited, Chairman of Hollard Insurance Company Pty Limited, Lawcover Insurance Pty Ltd, and Habitat for Humanity Australia and is a Director of Avant Group Holdings Limited. Duncan is a Graduate of the Australian Institute of Company Directors, a Fellow of the Chartered Insurance Institute and a Senior Associate of the Australia and New Zealand Institute of Insurance and Finance. He holds a Bachelor of Science (Economics) from the University of Hull, UK. Michael Bencsik Chief Financial Officer Michael joined Genworth as Chief Financial Officer (CFO) in February 2019. Michael has over 30 years of financial and strategic experience in banking and insurance across Australia, New Zealand, United Kingdom, Europe, the Middle East, and Asia Pacific. Prior to joining Genworth, Michael held the role of Deputy Chief Financial Officer, Bank of Queensland and Chief Financial Officer, St Andrew’s Insurance Australia. Prior to this he held various senior finance and strategy roles across leading financial service institutions including Lloyds TSB Bank (UK), Westpac Banking Corporation, HSBC Bank Australia Limited, HSBC Holdings (UK), Commonwealth Bank of Australia and First Abu Dhabi Bank (UAE). Michael is a Fellow Certified Practising Accountant and Fellow Chartered Certified Accountant (UK) with a Bachelor of Commerce from the University of NSW and a Master of Business Administration from Macquarie University. He is a Fellow of the Financial Services Institute of Australasia and a Graduate of the Australian Institute of Company Directors. Andrew Cormack Chief Risk Officer Andy joined Genworth Australia as Chief Risk Officer (CRO) in October 2015. Andy brings more than 25 years of experience to his role as CRO having held senior management responsibility for teams in finance, commercial, product development and risk for markets across Europe. He is passionate about delivering best in class risk and actuarial models and building and developing high achieving teams engaged in delivering business objectives. Before joining Genworth Australia, Andy worked with Genworth’s Mortgage Insurance business in Europe, where he held the role of CRO with responsibility for the risk and actuarial teams. Prior to this he held various senior management positions including Senior Vice President Risk, SVP Commercial, SVP Product Development & Marketing and Chief Financial Officer. Earlier in his career, Andy spent 3 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 a specialist auditor responsible for Lloyds Insurance Market. Andy has a BA(Hons) in Accounting and Finance from Lancaster University (UK) and is a qualified Chartered Accountant (ACA)-(ICAEW). Brad Dean Head of Strategy and Innovation Brad joined Genworth in August 2002 and was appointed Head of Strategy and Innovation in October 2018. Brad is a seasoned leader, bringing more than 20 years of experience to his role from across a range of insurance, health care equipment and distribution businesses with responsibility for new business development, mergers and acquisitions, strategic planning, and financial management and controls. Prior to his current role, Brad held the positions of Head of Product Development and Corporate Development Leader at Genworth where he was responsible for formulating and executing product and corporate development strategies, including leading Genworth’s IPO project which resulted in Genworth Australia being listed on the Australian Securities Exchange in 2014. Between 2002 and 2007, Brad held the position of Chief Financial Officer of Genworth Australia. Prior to his roles at Genworth, Brad worked at a chartered accounting firm for five years followed by a further five years at GE in multiple finance roles. Brad is a Chartered Accountant and has a Bachelor of Commerce from Wollongong University with a double major of Accounting and Economics. 22 Steven Degetto Chief Commercial Officer Steven joined Genworth as Chief Commercial Officer in July 2017. He has over 25 years’ experience in banking and insurance. With a strong track record of developing partnerships across a broad range of financial institutions, Steven’s strategic thinking, deep understanding of customer opportunities and challenges coupled with his commercial acumen have enabled him to consistently deliver customer value and insights. Prior to joining Genworth, Steven was Head of Bank Intermediaries with the Suncorp Group where he managed all intermediary relationships across Australia supporting over 14,000 mortgage brokers in the provision of Suncorp Group products and services. Most recently he was Head of Wealth and Life Intermediaries at Suncorp and led the sales and retention strategy across the life insurance and wealth management businesses. Steven has also held various leadership roles within financial services at both Macquarie Group and Commonwealth Bank of Australia. Steven holds a Bachelor of Business from the University of Tasmania, a Graduate Diploma of Applied Finance and Investment and an Advanced Diploma in Financial Planning. He is a Fellow of both the MFAA and FINSIA. Steven is also currently undertaking a Global Leadership program through Tuck Business School at Dartmouth College. Cameron McDonald Head of Technology Cameron joined Genworth in 2012, establishing the Data Management Office and assuming responsibility for technology services to the business in July 2016. Cameron has 30 years’ experience in a variety of operational and technology leadership roles in investment management, mortgage lending and insurance in Europe and Australia. Prior to joining Genworth, Cameron held positions with National Australia Bank, Challenger Financial Services Group, HSBC Australia and State Street Corporation in technology leadership, program management and operations. Cameron is a Member of the Australian Institute of Company Directors and holds a Bachelor of Business (Accounting) degree from Monash University and additional certifications in Enterprise Architecture and cloud computing services. 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. Erica Pickford Head of Operations Erica joined Genworth in November 2014 as New Business leader and was appointed Head of Operations in July 2017. With over 20 years of financial experience in both banking and insurance, Erica brings international experience having worked in South Africa, the United Kingdom and Australia. Before joining Genworth, Erica worked at Commonwealth Bank of Australia where she was Executive Manager, Head of Loss Mitigation and Customer Assist. During her career with Commonwealth Bank, she oversaw and lead the collections transformation across all secured and unsecured products. Prior to Commonwealth Bank she held various leadership roles in Credit Risk management and was Operations leader at Provident Credit in the United Kingdom. Prior to immigrating to the United Kingdom in 1998, Erica held the position of Operations Manager within ABSA Bank (52% owned by Barclays Bank) in South Africa. Erica holds a Diploma in Business through Swindon College (UK) and a Certificate IV in Credit Management. Kate Svoboda Chief People and Culture Officer Kate was appointed as Chief Human Resources Officer in September 2016 after 6 months as Acting Chief Human Resources Officer. Kate joined Genworth as Human Resources Director in 2015. Kate brings to the role more than 19 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 Master of Business Administration (University of New England) and a Bachelor of Speech Pathology (University of Queensland). 23 GENWORTH Annual Report 2019342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEW Operating result for the financial year The Group’s key financial measures are summarised in the below table. Financial performance measures ($ millions) Gross written premium Gross earned premium Net earned premium Statutory NPAT Underlying NPAT Non‑AASB performance metrics Loss ratio (%) Expense ratio (%) Combined ratio (%) Insurance margin (%) Investment return (%) ROE (%) Underlying ROE (%) 2019 433.2 368.4 298.2 120.1 97.0 2019 50.6% 35.3% 85.9% 36.2% 2.4% 7.4% 6.0% 2018 460.2 356.3 281.3 75.7 93.9 2018 51.9% 33.6% 85.4% 28.3% 2.6% 4.1% 5.2% The underwriting performance in 2019 reflects: (a) GWP decreased 5.9%. Excluding the bespoke transaction written through the Group’s Bermudian insurance entity in 2018, GWP increased 17.1%. (b) NEP increased 6.0%, slightly above the Group’s guidance range of -5% to 5% mainly reflecting the seasoning of 2017 and 2018 Book Years and policy cancellation initiatives in 2019. (c) The loss ratio decreased by 1.3% reflecting higher NEP in the current year and in line with Group’s guidance of 45.0% to 55.0%. (d) The expense ratio increased from 33.6% in 2018 to 35.3% in 2019 reflecting higher acquisition costs from growth in NEP relating to LMI flow business and higher other underwriting expenses in the current year. (e) The insurance margin increased to 36.2% compared to 28.3% for 2018 mainly driven by investment income on assets backing insurance liabilities. 24 Operating and financial review Review of financial condition Financial position Financial position ($ millions) Cash and investments Deferred acquisition costs Trade and other receivables Total assets Outstanding claims reserve Unearned premium Interest bearing liabilities Total liabilities Net assets 2019 3,131.1 181.2 47.1 3,477.4 360.9 1,280.5 199.4 1,949.9 1,527.5 2018 3,224.4 166.8 80.6 3,590.1 339.1 1,214.2 198.2 1,852.8 1,737.3 Total assets of the Group as at 31 December 2019 of $3,477.4 million decreased $112.7 million from 31 December 2018. The movement includes: • $93.3 million decrease in investments (including cash), primarily to fund the share buy-back and dividends partially offset by strong positive operating cash flows and unrealised gains on our investment portfolio. • $14.4 million increase in deferred acquisition costs reflecting current year expenditure associated with obtaining and recording mortgage insurance contracts partially offset by the amortisation of current and prior period deferred acquisition costs. • $33.5 million decrease in trade and other receivables predominantly relating to lower premiums receivable pursuant to a contract issued in 2018 by Genworth’s Bermudian insurance entity and lower unsettled investment trades. The total liabilities of the Group as at 31 December 2019 were $1,949.9 million, up from $1,852.8 million at 31 December 2018. The movement includes: • $66.3 million increase in unearned premium resulting from strong performance in gross written premium during the year. • $21.8 million increase in outstanding claims due to an increase in the stock of delinquencies and a higher average reserve per delinquency. The equity of the Group as at 31 December 2019 of $1,527.5 million decreased $209.8 million from 31 December 2018. The movement is mainly attributable to various capital management initiatives during 2019, including the payment of $266.6 million of dividends and $63.9 million to fund an on-market share buy-back. This was offset by $120.1 million in current year earnings. Capital mix The Group measures its capital mix on a net tangible equity basis, i.e. after deduction of goodwill and intangibles, providing strong alignment with regulatory and rating agency models. At 31 December 2019, the Group’s capital mix was: • Net tangible equity (net of goodwill and intangibles) 88.3%. • Debt 11.7%. 25 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Operating and financial review (continued) Capital management The Group remains strongly capitalised with regulatory capital of $1,659.6 million at 31 December 2019 (2018: $1,948.1 million). The Group has solvency of 1.91 times the prescribed capital amount (PCA) and a CET1 ratio of 1.68, which continues to be above the Board’s targeted solvency range of 1.32 to 1.44 times the PCA on a level 2 basis. The table below illustrates the capital position as at 31 December 2019 compared with 31 December 2018. PCA coverage ratio (Level 2) ($ millions), as at Common Equity Tier 1 Capital (including net (deficit)/excess technical provisions) Tier 2 Capital Regulatory capital base Insurance concentration risk charge (ICRC) Asset risk charge Insurance risk charge Operational risk charge Aggregation benefit PCA PCA coverage ratio (times) 31 Dec 2019 31 Dec 2018 1,459.6 200.0 1,659.6 479.1 125.7 284.4 35.7 (55.7) 869.3 1.91x 1,748.1 200.0 1,948.1 660.7 124.8 245.5 31.7 (56.4) 1,006.3 1.94x The decrease in CET1 capital in 2019 mainly reflects $266.6 million dividends paid in the year, $63.9 million related to an on-market share buy-back, a $76.4 million decrease in the net excess technical provisions offset by $120.1 million in current period earnings. Dividends Details of the dividends paid or determined to be paid by the Group and the dividend policy employed by the Group are set out in the dividends note 3.6 within the financial statements. Environmental regulations The Group’s operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. Market capitalisation The market capitalisation of the Company as at 31 December 2019 was $1,505.7 million based on the closing share price of $3.65. 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 7.7 within the financial statements. On 24 January 2020, the Company announced the appointment of Pauline Blight-Johnson as Chief Executive Officer and Managing Director effective 2 March 2020. On 5 February 2020, the Directors declared a 100% franked final dividend of 7.5 cents per share totalling $30.9 million. On 18 February 2020, the Company announced the retirement of Gayle Tollifson from the Board of Genworth effective 15 March 2020 and the appointment of Andrea Waters to the Board effective 16 March 2020. These changes were made as part of Genworth’s Board renewal program. 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. 26 Operating and financial review (continued) Directors The directors of the Company at any time during, or since the end of, the financial year up to the date of this report are: Current directors: Ian MacDonald Duncan West David Foster Gai McGrath Christine Patton Stuart Take Gayle Tollifson Jerome Upton Former directors Georgette Nicholas (ceased to be a Director on 31 December 2019) Company Secretary Prudence Milne Prudence Milne was appointed General Counsel and Company Secretary on 5 September 2016. Between 1998 and 2015, Prue held Executive Legal Counsel and Company Secretary positions at AMP, with significant exposure across superannuation, life insurance and investment management. Prior to AMP, Prue worked at Ashurst, Hambros Australia and Herbert Smith Freehills. Prue 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. Prue holds a Bachelor of Economics and a Bachelor of Laws from Monash University, a Master of Laws from the University of Sydney and 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 Brady Weissel was appointed 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. Economic overview and outlook The Australian economy continued to moderate through 2019, driven by lower household consumption coupled with cost of living pressures and continued subdued business confidence. Unemployment levels remained reasonably stable through the year, although excess capacity in the labour market continued to impact wages growth but has shown signs of improvement compared to 2018. National house prices continued to recover in 4Q19 led by the metropolitan centres with Sydney and Melbourne both recording strong growth, which Genworth expects to continue in 2020. The Perth market, which has experienced challenging market conditions since mid-2014, is showing early signs that prices have begun to stabilise into 2020, aided by a gradual recovery of the Western Australian economy. As we look ahead, Australian economic fundamentals remain sound with the effect of stimuli on multiple fronts including a historically low cash rate, tax cuts, continued infrastructure investment, recovering housing markets, and a generally brighter outlook for the resources sector providing positive momentum in 2020. Strong export growth in commodities combined with steady growth of service and manufactured exports supported by a weaker Australian dollar are also providing foundational support for the economy. Australia’s terms of trade remain strong with a strong Australian trade surplus recorded each month since the beginning of 2018. Counterbalancing these positive factors is geopolitical uncertainty and the impact of trade tensions between the United States and China which may weigh on global economic growth over 2020. The economic impact on GDP over 2020 from the severe ongoing drought, recent bushfires in late 2019 and early 2020 across Australia, and the coronavirus (COVID-19), is uncertain. Genworth expects its financial performance in 2020 to be influenced by a number of factors including the ongoing housing market appreciation – particularly in the capital cities of Sydney, Melbourne and Perth; unemployment and labour market capacity and the effect on household income growth and the level of consumer confidence; variations in mortgage interest rates and credit standards; the impact of the Australian Government First Home Loan Deposit Scheme and the effect of recent bushfires on delinquencies in affected regions and the potential temporary disruption to those regional economies. Accordingly, 2020 NEP is expected to be within the range of -5% to 5% of 2019 NEP and the 2020 loss ratio is expected to be between 45% and 55%. Genworth 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 (including volatility in investment markets) as well as the impact of unforeseen circumstances such as the recent bushfires, global events including health emergencies such as the outbreak of coronavirus (COVID-19). 27 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Operating and financial review (continued) Directors’ meetings The number of directors’ meetings (including meetings of committees of directors) and number of meetings attended by each of the directors of the Company during the financial year are set out below. Board Director Scheduled Meetings Unscheduled Meetings Subcommittee Meetings Audit Committee 1 Risk Committee 1 Capital & Investment Committee 1 Remuneration & Nomination Committee 1 Technology Committee 1 Ian MacDonald Georgette Nicholas David Foster Gai McGrath Christine Patton Stuart Take Gayle Tollifson Jerome Upton Duncan West A 9 9 9 9 9 9 9 9 9 H 2 9 9 9 9 9 9 9 9 9 A 4 2 2 4 1 2 4 2 3 H 2 4 2 2 4 1 2 4 2 3 A – 5 – 4 – – – – 1 H 2 – 5 – 4 – – – – 1 A – – – 6 6 – 6 6 – H 2 – – – 6 6 – 6 6 – A – – – 5 – 5 5 5 5 H 2 – – – 5 – 5 5 5 5 A – – 5 – 5 – 5 5 5 H 2 – – 5 – 5 – 5 5 5 A – – 5 5 – 5 5 – – H 2 – – 5 5 – 5 5 – – A – – 6 6 – – – 6 6 H 2 – – 6 6 – – – 6 6 1 All directors are invited to and regularly attend committee meetings. This table reflects attendance of directors who are members of the relevant committee. 2 Number of meetings held during the period that the director held office. 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 2019 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 2020. 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 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. 28 Operating and financial review (continued) 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. Non‑audit services The directors are satisfied that the provision of non-audit services during the year by the auditor of $Nil (2018: $35,000), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 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. • None of the services undermine the general principles relating to auditor independence 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 are provided in note 7.2 within the financial statements. Officers of the Company who are former partners of KPMG No officer of the Company who is a former partner of KPMG was a partner of KPMG at a time when KPMG undertook an audit of the Company. 29 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Operating and financial review (continued) Remuneration report Dear Shareholder, On behalf of your Board, I am pleased to present our annual remuneration report for the year ended 31 December 2019. Genworth’s approach to remuneration Our strategic vision is to position Genworth as the leading provider of customer-focused risk and capital management solutions in the Australian residential mortgage market. The design of Genworth’s remuneration framework promotes our strategic objectives through the delivery of competitive remuneration via cash and share-based short-term and long-term incentive programs that: 1. Drive alignment between the Company’s management and its shareholders; 2. Provide a clear link between Company and individual performance and remuneration outcomes; 3. Ensure remuneration outcomes are aligned with Genworth’s short and long-term objectives; 4. Support strong governance, culture and accountability across Genworth; 5. Enable proactive management of our capital structure to optimise returns for shareholders; and 6. Recognise the importance of executing on the Company’s strategy to evolve the business model and deliver a sustainable future for the Company. The linkage between our remuneration framework and company strategy and performance is set out in more detail in section 2.5 – Executive KMP remuneration programs. The 2019 year in review Having previously laid the foundations of our redefined core business model, in 2019 we leveraged these capabilities to deliver pricing flexibility; broaden our suite of product offerings (including a new regular (monthly) premium LMI offering) and utilised data and technology to drive business efficiencies. In 2019, as foreshadowed in last year’s Annual Report, the Board adjusted variable remuneration metrics and weightings to more closely align to business objectives and improve line of sight for management. A summary of Genworth’s 2019 financial performance against short-term incentive objectives includes: • Performance net profit after tax (NPAT) of $77 million; • Capital management – return of $330.5 million of capital to shareholders in 2019 through $63.9 million share buy-back, fully-franked ordinary dividends and unfranked special dividends; and • Gross written premium of $433 million. For the 2019 performance period, short-term incentive plan strategic priorities included leveraging technology and underwriting efficiencies, product enhancement and renewal of key customer contracts, driving efficiency via digitalisation of underwriting and enhancing our loss forecasting capabilities. The outcomes for variable remuneration in 2019 reflect financial performance slightly below target for Performance NPAT related to higher incurred losses. Conversely, there was above target performance on Gross Written Premium and capital management actions were in line with plan. Our Strategic Program of Work and our focus on culture and the engagement of our people which will continue to deliver benefits into the future, continue to progress. These achievements have translated into strong returns for shareholders, with absolute total shareholder return (TSR) for 2019 of 101.7% and dividend returns of 62.6 cents per share (including special dividends of 46.1 cents per share). More details are provided in section 3.2 – Link between performance and STI outcomes. The 2017 LTI grant relative TSR component exceeded the upper quartile of the comparison market, driven by strong share price growth and dividend returns. Conversely the Underlying ROE component performance was below threshold. The grant remains subject to an additional one-year deferral period. More details on these outcomes in 2019 are provided in section 3.3 – Link between performance and LTI outcomes. The Board has worked to deliver remuneration outcomes for 2019 that appropriately reflect performance outcomes for participants and the value delivered to shareholders: • Fixed Remuneration adjustments for executive KMP averaged 1.9% for 2020; • 2019 short-term incentive funding was determined to be 98% of target (section 3.2); • The 2017 long-term incentive grant will partially vest in early 2021 (section 3.3). Genworth’s remuneration approach for 2020 The Board is satisfied that the revised incentive plan structure implemented in 2019 supports Genworth’s business strategy and drives alignment with shareholders and, as such, has made only minor adjustments for 2020. The 2020 STI metrics have been changed from 65% financial metrics/35% non-financial metrics to 60% financial metrics/40% non-financial metrics. This provides slightly increased weighting to our people and culture objectives that contribute to the longer-term strategic transformation of the business. The Board continues to oversee an ongoing program of work to embed governance, culture and accountability that supports the long-term sustainability of the organisation and promotes behaviour that is aligned to Genworth’s values. This includes complementing the enhanced Board discretion over deferred remuneration and clawback provisions and enhanced risk governance reporting as part of Genworth’s broader cultural transformation. More detail on these initiatives is provided in section 2.4 – Alignment of risk and remuneration. This report provides additional detail as to how the Committee and Board have determined remuneration outcomes across all the Company’s remuneration programs to achieve our remuneration objectives. David Foster Chairman – Remuneration and Nominations Committee 30 30 Remuneration report 1. Executive summary This report provides shareholders with an overview of Genworth’s remuneration governance, strategy, programs and outcomes for Key Management Personnel (KMP) for the year ended 31 December 2019. The table below provides a concise summary of the remuneration received by executive KMP in 2019. 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 and car parking and other non-monetary benefits. Table 1a: 2019 Remuneration summary table (unaudited) as at 31 December 2019 Name and position Executive KMP Georgette Nicholas Chief Executive Officer (CEO) Michael Bencsik 6 Chief Financial Officer (CFO) Andrew Cormack Chief Risk Officer (CRO) Steven Degetto Chief Commercial Officer (CCO) Former executive KMP William Milner 7 Acting Chief Financial Officer Tobin Fonseca 8 Chief Operating Officer (COO) 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Fixed remuneration Contract TFR 1 Actual TFR received 2 Short‑term incentive (STI) Long‑term incentive (LTI) STI target Actual STI awarded 3 LTI target 4 LTI vested 5 At‑risk/performance remuneration $890,000 $890,000 $500,000 – $507,375 $495,000 $450,225 $435,000 $322,040 $322,040 $460,000 $460,000 $890,079 $878,683 $456,357 – $505,428 $493,333 $447,776 $432,024 $29,928 $312,914 $26,172 $458,333 $890,000 $890,000 $226,712 – $202,950 $198,000 $225,113 $217,500 $14,999 $146,622 – $230,000 $872,200 $623,000 $222,178 – $179,002 $138,600 $253,702 $175,088 $10,380 $87,240 – $161,000 $890,000 $870,000 $120,000 – $247,500 $242,500 $217,500 $217,500 – – – $225,000 $424,255 $211,242 $187,062 – $111,029 $3,350 – – $10,572 $9,924 $25,222 $207,179 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 TFR received shows the fixed remuneration earned throughout 2019 as a KMP and may be different to contract TFR due to increases as part of the annual remuneration review effective 1 March and partial years served. 3 Actual STI awarded reflects 2019 STI awards (including any amounts delivered as deferred STI, see section 4 for more details). 4 The 2019 LTI Target reflects the dollar value of the LTI grant awarded for the performance period commencing 1 January 2019. 5 Represents the dollar value of the Genworth 2016 LTI plan as at the date of vesting, the notional dividend payment associated with vested awards from the 2015 LTI plan, a sign-on equity award for Mr Bencsik and vesting under a grandfathered employee equity scheme for Mr Milner. There was no vesting of US equity grants during 2019 (refer to table 6c). 6 Mr Bencsik’s target and actual STI is pro-rated from commencement in the CFO role on 4 February 2019. 7 Mr Milner’s actual TFR, target and actual STI is pro-rated for the period 1 January – 3 February 2019 served as Acting CFO. 8 Mr Fonseca’s role was made redundant effective 31 January 2019. Termination payment arrangements are detailed in table 6a, and treatment of outstanding equity grants is detailed in table 6c. 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 2019 Name Executive KMP G Nicholas M Bencsik A Cormack S Degetto Former executive KMP W Milner T Fonseca 1 Position CEO CFO CRO CCO Acting CFO COO Term as KMP Full year 4 February – 31 December Full year Full year 1 January – 3 February 1 January – 31 January 1 Mr Fonseca’s role was made redundant effective 31 January 2019. Termination payment arrangements are detailed in table 6a, and treatment of outstanding equity grants is detailed in table 6c. In May 2019 Ms Georgette Nicholas announced her intention to retire from Genworth and she stepped down as CEO and as a member of the Board effective 31 December 2019. Ms Nicholas will remain with Genworth as an employee until the end of March 2020 to ensure a smooth handover and orderly transition. Termination payments associated with the CEO’s retirement are below the termination benefit limits prescribed in the Corporations Act and will be fully disclosed in the 2020 Genworth annual report. The Board asked Mr Duncan West, a current Genworth non-executive director with extensive insurance industry experience, to serve as Acting CEO effective 1 January 2020 until a permanent CEO appointment was made. The Board appointed Ms Pauline Blight-Johnston as CEO and Managing Director effective from 2 March 2020. The terms and conditions of Ms Pauline Blight-Johnston’s appointment were disclosed in the Genworth ASX announcement released on 24 January 2020. Mr West will step down as Acting CEO immediately prior to Ms Blight-Johnston’s commencement. 31 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) 2. Remuneration governance, policy and programs 2.1 Governance overview The Remuneration and 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 Ernst & Young (EY) in 2019. Services included a review of market practices. 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 sets out 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 talented people who are dedicated to achieving business objectives in a manner that is consistent with the long-term sustainability of the Company, our customers and our shareholders. This strategy is reflected in specific remuneration programs which, subject to Board (and, where applicable, shareholder) approval, deliver remuneration which align shareholder, company and employee interests over the long-term. 2.4 Alignment of risk and remuneration The Board approved a revised Remuneration Policy in 2018 to strengthen the link between risk and remuneration through a number of measures including: • broadening Board discretion to adjust remuneration in the event of misconduct and risk and compliance breaches; • more clearly articulating the different remuneration package elements and associated governance considerations; and • reinforcing links between remuneration governance and prudent financial and non-financial risk taking and consideration of customer outcomes. Enhanced malus and clawback provisions were introduced into the Genworth deferred STI and LTI plans in 2019. Also, in 2019 Genworth piloted “Risk Health Assessments” for each function and the business overall, which provided the Board with enhanced reporting on risk culture. These assessments will continue in 2020 to assist the Board to monitor risk culture and provide the Board with an important lens through which to assess risk behaviours in the business. The Board undertook assessments of risk culture outcomes and conduct when considering the appropriateness of releasing deferred awards and in determining remuneration awards for executives for the 2019 performance year. A key input to the Board’s assessment is an independent review undertaken by the Chief Risk Officer which incorporates: • assessment of the overall business environment, key business controls and mitigating actions and associated governance, accountability and culture practices against the key components of APRA CPS 220; • • review of the outcomes of “Risk Health Assessments” conducted over 2019 and any material risk matters arising in 2019; and consideration of any material adverse events or inappropriate risks that have or could have arisen through the inappropriate actions or lack of appropriate culture, governance and accountability practices by senior management. Other inputs to the Board’s decision-making on executive remuneration include annual performance assessments of executives, and multi-rater reviews of the executives’ behaviour against company values and key elements of organisational culture. In 2019, the Board concluded that executives managed risks appropriately in the context of a very dynamic commercial and regulatory environment, and there were no material adverse outcomes that have or could have arisen during the performance period related to risk culture and/or behaviour. As such, no risk-adjustments were required to be made to executive remuneration outcomes. 2.5 Executive KMP remuneration programs Genworth’s executive KMP remuneration programs are designed to align executive and shareholder interests by: • using appropriate pay mix and delivery vehicles (e.g. cash, equity and non-monetary benefits); • measuring performance and delivering resulting remuneration over an appropriate time frame, including deferral of a portion of Senior Leadership Team (SLT) variable remuneration; • linking fixed remuneration increases to individual performance and market benchmarks (e.g. median of relevant comparator group); • ensuring variable remuneration programs and outcomes balance prudent financial and non-financial risk taking with achievement of company objectives and minimise potentially adverse customer outcomes; 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 total fixed remuneration (TFR) component, a short-term incentive (STI) component and a long-term incentive (LTI) component. Table 2.5a presents the link between Genworth’s strategy and remuneration programs and outcomes. Certain executive KMP participated in Genworth Financial’s global remuneration programs prior to listing in May 2014. 32 Remuneration report (continued) Table 2.5a Remuneration framework and linkage to company strategy and performance Business vision Remuneration strategy To be the leading provider of customer-focused capital and risk management solutions in the Australian residential mortgage market. To attract, retain and motivate talented people dedicated to achieving business objectives in line with Genworth’s, shareholders’ and customers’ long-term interests. Measures of success Actual performance Enhance profitability and grow new business within risk-adjusted return parameters by delivering against Performance NPAT and Gross Written Premium targets. Proactively manage our capital structure to optimise returns for shareholders. Leverage our enhanced core capabilities by: • launching new flexible risk-based pricing capabilities; • generating GWP through diversified non-traditional LMI products; • enhancing operational efficiencies and customer experience via technology; and • supporting our customers to grow through data and insights. Continue to develop an organisational culture that is inclusive, supports our strategic objectives and enables Genworth to adapt and grow in a changing environment. • New insurance written increased 20.3% year on year. GWP growth in our core business in 2019 (excluding bespoke transactions written through our Bermudian entity) reflected increasing consumer confidence in housing markets in several state capitals including Sydney and Melbourne. NEP was up 6.0% and was slightly above guidance; Loss ratio reduced marginally to 50.6% and was in line with guidance. Statutory net profit after tax (NPAT) in 2019 increased by 58.7% to $120.1 million including an after tax unrealised gain of $24.6 million on the investment portfolio. Underlying NPAT increased 3.3% to $97.0 million. Performance NPAT for 2019 was $77 million; • Progress was made on developing flexible risk-based pricing capabilities in 2019 providing additional core capabilities ready to be leveraged in 2020; • Continued investment in digitisation and automation has contributed to realised savings in 2019 and the proportion of new business processed digitally continues to increase, further streamlining business operations; • Ongoing focus on our customer value proposition has resulted in several key customer contract renewals and significant positive improvements in our customer Net Promoter Score; and • Engagement levels improved 6% in 2019, with an increase of 4% for organisational agility and 4% for business alignment. Diversity and inclusion measures continue to remain a strength. Vision and strategy reflected in remuneration programs and actual outcomes TFR TFR • Fixed pay outcomes are driven by: individual performance (execution of individual and Genworth objectives and demonstration of behaviours aligned to Genworth values), size and scope of the role and relevant market benchmarks. STI Awards reflect combination of: • individual performance (execution against individual objectives and demonstration of behaviours aligned to Genworth values and supporting a strong risk culture); and • Company performance (including key financial metrics (Performance NPAT, capital management and GWP) and progress against the Company’s strategic objectives • Average pay increases to executive KMP were 1.9% in the 2020 remuneration review. STI • Performance resulted in 98% STI funding. STI awards to actively employed executive KMP ranged from 0–56% of the maximum. LTI LTI • Awards reflect company performance against ROE and relative TSR targets. • The 2017 LTI plan partially vested against relative TSR hurdles but did not achieve ROE hurdles across the three-year performance period. A 12-month deferral period applies from the end of the relevant performance period (31 December 2019), meaning performance rights will not vest to participating executives until 1Q21. For further detail on performance of the LTI plan, refer to section 3.3 – Link between performance and LTI outcomes. 33 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) Table 2.5b: 2019 target mix of pay (relative weight of each component as a percentage of total remuneration as at 31 December 2019) CEO Actual CEO Target CFO Actual CFO Target CRO Actual CRO Target CCO Actual CCO Target Former Acting CFO Actual Former Acting CFO Target Former COO Actual Former COO Target 33.6% 33.3% 32.9% 22.2% 11.1% 33.6% 33.3% 59.4% 59.1% 54.3% 53.0% 48.9% 50.4% 74.3% 66.7% 100.0% 17.6% 17.9% 8.8% 8.9% 14.2% 14.2% 12.8% 14.1% 6.4% 7.1% 18.4% 16.8% 9.2% 8.4% 26.5% 25.8% 23.6% 24.4% 22.0% 25.7% 3.7% 7.7% 50.0% 16.7% 8.3% 25.0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% TFR STI 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. 2.6 Total fixed remuneration Total fixed remuneration is the sum of base salary and the value of guaranteed employee benefits such as superannuation and car parking. Total fixed remuneration 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 as the primary reference point for comparative purposes, and Total Reward (TFR plus target STI and LTI) is used as a secondary reference point. As part of the 2019 remuneration review, the Board approved increases to TFR for executive KMP. For details of these increases, please refer to table 1a. 2.7 Short‑term incentive 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 2.7a. In determining individual STI awards, the CEO provides recommendations to the Committee in respect of the CEO’s direct reports (which includes all executive KMP except the CEO). The Committee reviews these recommendations and evaluates the CEO’s performance, and recommends to the Board any fixed pay changes and incentive awards for the CEO and KMP. Recommendations take into account the STI pool funding percentage and the performance of the executive KMP against individual and business performance goals as well as the behaviour demonstrated by the executive KMP in their role consistent with the Company values. Individual executive KMP goals align to the financial and operational objectives used to determine STI pool funding. 34 Remuneration report (continued) Table 2.7a: 2019 STI key characteristics 2019 STI features Detail Purpose of STI plan STI (% of TFR) by role Performance objectives Motivate and retain employees by providing awards that reflect a combination of individual performance and Genworth’s performance including behaviours as measured against Genworth’s values, and operating within the risk management framework. Executive KMP CEO: CFO, Acting CFO, CCO & COO: CRO: Financial objectives Performance NPAT (25%) Capital Management (20%) Gross Written Premium (20%) Target % (of TFR) 100% 50% 40% Maximum % (of TFR) 200% 100% 80% Strategic objectives Execute key strategic priorities (35%) Aggregate objective weighting Financial objectives 65% Strategic objectives 35% Performance period 1 January 2019 – 31 December 2019. Performance assessment In 1Q20, Genworth’s performance against each individual objective was evaluated to determine the STI pool funding percentage. Award determination Payment date Payment method 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). 1Q20. STI – 2/3 of the award paid in cash (inclusive of superannuation). Deferred STI – 1/3 of the dollar value of award converted to a grant of share rights (subject to vesting conditions). Deferral period Deferred STI component deferred for 12 months from 1 March 2020. Deferred STI vesting conditions 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. Share rights grant calculation The number of share rights is determined by dividing the deferred STI dollar value by a 10-day volume Treatment of dividends calculation weighted average price (VWAP) as at 31 December 2019. 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. 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. Treatment upon vesting 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. 35 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) Table 2.7b: 2020 STI performance objectives and weightings STI performance objective and weighting Rationale Performance NPAT (25%) Performance NPAT is a measure of performance of the in-force portfolio. Capital Management (15%) The capital management objective reflects execution against the Board approved capital management plan for 2020 which details planned capital returns to shareholders. Gross Written Premium (GWP – 20%) GWP target is intended to incentivise generation of new business within the current performance period and is subject to achievement of new business pricing return in excess of the weighted average cost of capital (WACC). Strategic Objectives (40%) 2020 strategic objectives include operationalising new product offerings, implementing newly developed flexible risk-based pricing capabilities, further enhancing value delivery for our customers, continuing to drive operational efficiencies through process improvement and digitalization, and ongoing progress in our cultural transformation. The 2020 STI Scorecard metric weightings have been changed from 65% financial/35% non-financial to 60% financial/40% non-financial to provide increased weighting to objectives around organisational culture that contribute to the longer-term strategic transformation of the business. 2.8 Long‑term incentive Prior to listing in May 2014, executive KMP participated in the Genworth Financial LTI program. Grants to Australian participants were delivered as share options in Genworth Financial. The final tranches of the Genworth Financial LTI grants to Australian participants vested in 2018 and are detailed in the statutory tables in section 6. Commencing 1 January 2015, executive KMP were invited to participate in an annual Long Term Incentive grant of share rights which are subject to vesting conditions. Vesting conditions for the 2019 plan include performance based vesting scales in respect of company performance against Underlying ROE and relative TSR. Table 2.8a: 2019 LTI key characteristics LTI 2019 features Detail Purpose of LTI plan Motivate and retain employees by providing awards that align with longer-term company performance, reflect the ability of the role to influence Genworth’s performance and operate within Genworth’s risk management framework. LTI % by executive KMP role Executive KMP CEO Other KMP (excluding Acting CFO) Target % (of TFR) 100% 50% Performance metrics Relative TSR Comparator group Vesting scales summary Underlying ROE: 25% of the 2019 LTI grant. Calculated as the average of three-year Underlying NPAT divided by the three-year average equity (excluding mark-to-market value of investments) measured against regulatory capital (based on the midpoint of the Board’s target range above the Prescribed Capital Amount) that provides direct line of sight for executives. Underlying ROE is a strategically important internal measure of financial performance for Genworth. It captures the Company’s ability to convert equity into returns (profit) and supports a number of Genworth’s strategic priorities. Relative TSR: 75% of the 2019 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. Top ASX 200 financial services companies excluding Real Estate Investment Trusts (REITs). Vesting % Underlying ROE Relative TSR 0% <7.5% <50th 50% 7.5% 50th 60% 8.4% 55th 70% 9.3% 60th 80% 10.2% 65th 90% 11.1% 70th 100% 12.0% 75th Vesting summary Vesting occurs on a straight-line basis between the summary points above and each performance metric is measured and vests (as applicable) independently of the other. Performance period 1 January 2019 – 31 December 2021. Performance assessment Performance to be assessed in 1Q22. There is no retesting of grants. Deferral period 12 months from the end of the relevant performance period. Vesting period/date Four years in total from the start of relevant performance period (three-year performance period with an additional year deferral). 36 Remuneration report (continued) LTI 2019 features Detail Award determination Payment method Vesting conditions At the end of the performance period, final vesting percentages are determined via a Board and Committee review, recommendation and approval process. 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. Continuous active employment for four years 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. Share rights grant calculation The number of share rights was determined by dividing the grant value by a 10-day VWAP as at Treatment of dividends 31 December 2018. 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. Dividends, or the value of any dividends, are not received on unvested share rights. Notional dividend equivalents are only provided following the completion of the four-year vesting period and only on share rights that vest based on the satisfaction of performance hurdles. 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. Treatment of terminating executive KMPs 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 2.7a for details: “treatment of terminating executive KMPs”). Change of control Board has discretion. Table 2.8b: 2020 LTI key characteristics LTI 2020 features Detail Performance metrics Relative TSR comparator group Vesting scales summary Underlying ROE: 25% of the 2020 LTI grant. Calculated as the average of three-year Underlying NPAT divided by the three-year average equity (excluding mark-to-market value of investments) measured against regulatory capital (based on the upper end of the Board’s target range above the Prescribed Capital Amount). Underlying ROE is a strategically important internal measure of financial performance for Genworth. It captures the Company’s ability to convert equity into returns (profit) and supports a number of Genworth’s strategic priorities. Relative TSR: 75% of the 2020 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. Top ASX 200 financial services companies excluding REITs. Vesting % Underlying ROE Relative TSR 0% <7.5% <50th 50% 7.5% 50th 60% 8.4% 55th 70% 9.3% 60th 80% 10.2% 65th 90% 11.1% 70th 100% 12.0% 75th Note the Underlying ROE scale may vary with any change in the targeted point within the PCA range or within the range itself within the performance period. The relative TSR vesting schedule remains unchanged for 2020. 2.9 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. 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. 37 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) 3. Relationship between company performance and remuneration 3.1 Performance overview Genworth’s 2019 financial results reflected performance in line with guidance supported by a recovery in consumer confidence in the housing market in Sydney, Melbourne and a number of other state capitals. Key metrics included: • GWP (excluding bespoke transactions written through Genworth’s Bermudian entity) increased 17.1% for 2019; • New insurance written (NIW) was up 20.3% to $26.7 billion; • Net earned premium increased by 6.0% to $298.2 million; • Performance NPAT for 2019 was $77 million; • Returned $330.5 million of capital to shareholders via buy-backs, full franked ordinary dividends and unfranked special dividends in line with capital plan; • Genworth’s absolute TSR 1 increased by 101.7% from 1 January to 31 December 2019; and • Ongoing focus on enhancement of our customer experience and value proposition resulted in several key customer renewals and an improvement of net promoter score of +19 to +42. This performance is reflected overall in a slightly below-target bonus pool and resulting awards to executive KMP (more detail section 3.2). 1 Including value of notionally re-invested dividends. Table 3.1a: Summary of Genworth’s performance (2014–2019) Financial results Gross Written Premium ($m) Net Investment Income ($m) Underlying NPAT ($m) Expense Ratio Underlying ROE 1 Dividends paid 2 (dollars per share) Share price at start of reporting period Share price at end of reporting period 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 2017 $369.0 $103.3 $171.1 29.3% 9.0% $0.260 $3.27 $3.00 2018 $460.2 $77.9 $93.9 33.6% 5.2% $0.200 $3.00 $2.19 2019 $433.2 $139.1 $97.0 35.3% 6.0% $0.626 $2.19 $3.65 1 Underlying ROE is calculated by dividing underlying NPAT by the average of the opening and closing underlying equity balance for a financial period. 2 Reflects dividends related to the performance year paid or subsequently declared. 3.2 Link between performance and STI outcomes The link between remuneration outcomes and business performance is fundamental to the design, administration and outcomes of Genworth’s remuneration programs. In developing threshold, target and stretch performance levels for financial measures, Genworth considers a combination of internal financial forecasts as well as external analyst expectations following the release of our prior year financial results. In light of Genworth’s performance against 2019’s STI objectives, the Board determined the STI pool funding level to be 98% of STI targets. 38 Remuneration report (continued) Table 3.2a: 2019 STI performance objectives and Board assessment of performance STI performance objective and weighting Rationale Performance NPAT (25%) As the headline figure of the various components that make up overall company performance, an annual profit measure is a key performance objective. Capital Management (20%) Reflects proactive management of our capital structure to optimise returns for shareholders. Gross Written Premium (20%) Leverage enhanced core capabilities (25%) Incentivises generation of new business within the current performance period, subject to achievement of new business pricing return in excess of the WACC. Key strategic priorities for each performance period may vary year-to-year based on Genworth’s priorities. For the 2019 performance period, strategic priorities included leveraging technology and underwriting efficiencies, product enhancement and renewal of key customer contracts. Culture and engagement (10%) Culture enhancement and employee engagement and alignment. Assessment of 2019 performance Performance NPAT for 2019 was $77 million. 2019 results were lower than expected due to higher incurred losses and lower interest income due to a declining yield environment, partially offset by higher earned premium. This outcome translated into an incentive outcome below target but above threshold for this metric. Returned $330.5 million of capital to shareholders via buy-backs, fully franked ordinary dividends and unfranked special dividends in line with capital plan, which translated into an on-target incentive outcome for this metric. Strong growth in our traditional LMI flow business across lender customers resulted in GWP performance above target at $433 million, translating into an incentive outcome between target and stretch performance levels. Realised savings from realising efficiencies gained through new technology capabilities. GWP from non-traditional LMI products was below target performance with a number of opportunities underway but not concluded in 2019. Above target performance on customer outcomes was reflected in several key customer renewals and an improvement of customer Net Promoter Score. Overall incentive outcome was between above target for these metrics. Employee survey outcomes exceeded our stretch targets with significant positive improvements noted on all metrics, resulting in an incentive outcome at stretch performance levels. 39 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) 3.3 Link between performance and LTI outcomes 2017 LTI award In January 2017, executive KMP roles were provided with a grant of share rights which vest subject to company performance against Underlying ROE and relative TSR. A 12-month deferral period applies from the end of the relevant performance period (31 December 2019), meaning the first tranche of performance rights will vest in 1Q21. LTI performance objective and weighting Underlying ROE (50%) Relative TSR (50%) Detailed calculation Performance Range Drivers of performance Calculated as the average of three year Underlying NPAT divided by the three-year average equity (excluding mark-to-market value of investments) Calculated as the relative TSR against a comparator group (the ASX200 excluding resources companies) Threshold performance (50% vesting): 9.5% Maximum performance (100% vesting): 13.0% The threshold Underlying ROE hurdle for the 2017 award was 9.5% and the actual Underlying ROE result was 6.9%. Decreases in NPAT following the introduction of the earnings curve contributed to the Underlying ROE outcome. None of the Underlying ROE awards vested. Threshold performance (50% vesting): median Maximum performance (100% vesting): upper quartile The TSR outcome for Genworth across the measurement period was achievement at the 82nd percentile (i.e. above upper quartile). Accordingly, 100% of the TSR component will vest, representing 50% of the overall grant. A key contributor to Genworth’s TSR performance relative to peers was the ongoing capital management program and associated dividend returns to shareholders. Three executives (G. Nicholas; A. Cormack and S. Degetto) will qualify for partial vesting in 1Q21, at which point more detail on actual vesting outcomes will be provided. 40 Remuneration report (continued) 4. Remuneration outcomes for executive KMP Table 4a: 2019 STI outcomes Target STI (% of TFR) Target STI $ Max STI $ Cash STI awarded 1 Deferred STI awarded 2 Deferred STI share rights Total STI awarded $ Actual STI awarded (% of TFR) Actual STI awarded (% of max) STI not awarded (% of max) Executive KMP G Nicholas 3 CEO M Bencsik 4 CFO A Cormack CRO S Degetto CCO 100% $890,000 $1,780,000 $872,200 $0 0 $872,200 50% $226,712 $453,423 $148,119 $74,059 19,833 $222,178 40% $202,950 $405,900 $119,335 $59,667 15,979 $179,002 50% $225,113 $450,225 $169,135 $84,567 22,647 $253,702 Former executive KMP W Milner Acting CFO 5 T Fonseca 6 COO 50% 50% $14,999 $29,998 $8,883 $1,497 401 $10,380 $0 $0 $0 $0 0 $0 98% 44% 35% 56% 3% 0% 49% 49% 44% 56% 35% 0% 51% 51% 56% 44% 65% 0% 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 2019 ($3.7341) and will vest on 1 March 2021 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. 3 As Ms Nicholas will be retiring from Genworth in March 2020, the Board exercised its discretion to pay the STI deferral component as cash on the scheduled payment date of March 2020 rather than as share rights with a one-year deferral period to March 2021. 4 The target STI for Mr Bencsik is pro-rated from the date of his commencement in the CFO role, 4 February 2019. 5 The target STI for Mr Milner is pro-rated for the period served as Acting CFO, 1 January – 3 February 2019. 6 Mr Fonseca was not eligible for an STI for the 2019 performance year under the STI administration guidelines as he only served one month of the performance year. 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. Statutory entitlements only for termination with cause. Payment in lieu of notice at Company discretion. Other executive KMP Ongoing Three months either party Immediate for misconduct, breach of contract or bankruptcy. 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. 41 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) 6. KMP remuneration tables Table 6a: Statutory remuneration table – 1 January to 31 December 2019 KMP Executive KMP G Nicholas CEO M Bencsik CFO A Cormack CRO S Degetto CCO Former executive KMP 8 W Milner Acting CFO T Fonseca 9 COO Cash salary 1 Other benefits 2 Short‑term remuneration Non‑monetary benefits 3 Cash STI awarded 4 Deferred STI 5 Long‑term/post‑emp benefits Long service leave 6 Share‑based payments RSUs 7 Termination benefits % of total that is performance related Total % of total that are options Sub‑total Super benefits 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 $861,095 $858,394 $428,057 $484,662 $473,043 $421,003 $411,734 $27,332 $242,147 $21,040 $438,043 $0 $0 $600 $600 $600 $600 $4,657 $4,167 $43,933 $0 $0 $15,043 $18,481 $13,259 $1,838 $2,877 $27,232 $13,434 $920 $1,548 $606 $845 $872,000 $415,333 $148,119 $119,335 $92,400 $169,135 $116,725 $8,883 $74,827 $0 $161,000 $0 $207,667 $74,059 $59,667 $46,200 $84,567 $58,363 $1,497 $12,413 $0 $0 $1,748,338 $1,499,875 $664,095 $666,102 $615,120 $702,537 $604,913 $42,799 $374,869 $21,646 $599,888 $20,767 $20,290 $20,767 $20,767 $20,290 $20,767 $20,290 $2,596 $27,434 $5,133 $20,290 $89,716 $66,342 $11,909 $21,505 $8,388 $28,488 $17,112 $4,050 $26,082 $0 $83,447 $973,386 $382,302 $186,963 $267,733 $48,060 $91,729 $35,000 $521 $9,205 $20,797 $151,599 $2,832,207 $1,968,810 $883,735 $976,107 $691,858 $843,521 $677,314 $49,966 $437,589 $447,462 $855,224 31% 32% 25% 18% 20% 30% 26% 21% 20% 0% 19% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% $399,887 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. 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 2019 performance, inclusive of super, accrued for in 2019. Actual payment made in March 2020. 5 Deferred STI awarded to executives 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 2019 deferred STI plan has been calculated using the 10-day volume weighted average share price (VWAP) as at 31 December 2019 ($3.7341). 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 Monte Carlo method and allocated to each reporting period over the period from grant date to vesting date for the 2017, 2018 and 2019 LTI grants, but represents the market share acquisition price of vested awards for the STI deferral 2017 (minus grant value previously disclosed in 2017 report plus associated notional dividend awards), equity 2019, LTI 2015 (notional dividend awards) and vested 2016 LTI. 8 Mr Milner’s disclosed remuneration is pro-rated for the period 1 January – 3 February 2019 served as Acting CFO. 9 Remuneration for Mr Fonseca includes all payments up to his termination date of 31 January 2019. Termination benefits provided to Mr Fonseca included a severance payment $313,344 and accrued but unused annual leave and long service leave entitlements. One third of the 2018 STI payment would normally be subject to deferral into share rights for one year, however the Board approved the full 2018 STI to be paid as cash on termination as Mr Fonseca would no longer be employed by Genworth during the deferral period. Table 6b: Share option holdings for the reporting period ended 31 December 2019. Executive KMP Name and position G Nicholas CEO A Cormack CRO Grant Detail Grant Date Issue Price 1 Vesting Date Expiration Date Granted Forfeited Vested Exercised Expired GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 $16.20 $12.61 $8.31 $8.79 $16.20 $12.61 $8.31 $8.79 $16.90 10 Feb ‘11, ‘12, ‘13, ‘14 9 Feb ‘12, ‘13, ‘14, ‘15 14 Feb ‘13, ‘14, ‘15, ‘16 15 Feb ‘14, ‘15, ‘16, ‘17 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 10 Feb ‘20 9 Feb ‘21 14 Feb ‘22 15 Feb ‘23 10 Feb ‘20 9 Feb ‘21 14 Feb ‘22 15 Feb ‘23 20 Feb ‘24 # Held 31/12/2018 15,000 18,000 20,400 18,000 12,000 8,500 11,700 13,500 14,000 Movement during the year 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 # Held 31/12/2019 Fair Value 15,000 18,000 20,400 18,000 12,000 8,500 11,700 13,500 14,000 $11.99 $3.09 $2.36 $2.40 $11.99 $3.09 $2.36 $2.40 $3.40 0 0 0 0 0 0 0 0 0 1 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. 42 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 0 0 0 0 0 0 0 0 0 Remuneration report (continued) 6. KMP remuneration tables Table 6a: Statutory remuneration table – 1 January to 31 December 2019 Cash salary 1 Other benefits 2 Non‑monetary benefits 3 Cash STI awarded 4 Deferred STI 5 Short‑term remuneration Long‑term/post‑emp benefits Sub‑total Super benefits Long service leave 6 Share‑based payments RSUs 7 Termination benefits % of total that is performance related Total % of total that are options 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 $861,095 $858,394 $428,057 $484,662 $473,043 $421,003 $411,734 $27,332 $242,147 $21,040 $438,043 $0 $0 $600 $600 $600 $600 $4,657 $4,167 $43,933 $0 $0 $15,043 $18,481 $13,259 $1,838 $2,877 $27,232 $13,434 $920 $1,548 $606 $845 $872,000 $415,333 $148,119 $119,335 $92,400 $169,135 $116,725 $8,883 $74,827 $0 $161,000 $0 $207,667 $74,059 $59,667 $46,200 $84,567 $58,363 $1,497 $12,413 $0 $0 $1,748,338 $1,499,875 $664,095 $666,102 $615,120 $702,537 $604,913 $42,799 $374,869 $21,646 $599,888 $20,767 $20,290 $20,767 $20,767 $20,290 $20,767 $20,290 $2,596 $27,434 $5,133 $20,290 $89,716 $66,342 $11,909 $21,505 $8,388 $28,488 $17,112 $4,050 $26,082 $0 $83,447 $973,386 $382,302 $186,963 $267,733 $48,060 $91,729 $35,000 $521 $9,205 $20,797 $151,599 $0 $0 $0 $0 $0 $0 $0 $0 $0 $399,887 $0 $2,832,207 $1,968,810 $883,735 $976,107 $691,858 $843,521 $677,314 $49,966 $437,589 $447,462 $855,224 31% 32% 25% 18% 20% 30% 26% 21% 20% 0% 19% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Executive KMP G Nicholas KMP CEO CFO CRO M Bencsik A Cormack S Degetto CCO W Milner Acting CFO T Fonseca 9 COO tax (FBT). Former executive KMP 8 # Held 31/12/2018 Granted Forfeited Vested Exercised Expired # Held 31/12/2019 Fair Value Movement during the year 15,000 18,000 20,400 18,000 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 0 0 0 0 0 0 0 0 0 0 0 15,000 18,000 20,400 18,000 12,000 8,500 11,700 13,500 14,000 $11.99 $3.09 $2.36 $2.40 $11.99 $3.09 $2.36 $2.40 $3.40 43 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. 3 Non-monetary benefits include insurance premiums, executive health benefits, other non-cash benefits (such as car parking) and related fringe benefits 4 Cash STI awarded is the actual STI cash payment relating to 2019 performance, inclusive of super, accrued for in 2019. Actual payment made in March 2020. 5 Deferred STI awarded to executives 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 2019 deferred STI plan has been calculated using the 10-day volume weighted average share price (VWAP) as at 31 December 2019 ($3.7341). 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 Monte Carlo method and allocated to each reporting period over the period from grant date to vesting date for the 2017, 2018 and 2019 LTI grants, but represents the market share acquisition price of vested awards for the STI deferral 2017 (minus grant value previously disclosed in 2017 report plus associated notional dividend awards), equity 2019, LTI 2015 (notional dividend awards) and vested 2016 LTI. 8 Mr Milner’s disclosed remuneration is pro-rated for the period 1 January – 3 February 2019 served as Acting CFO. 9 Remuneration for Mr Fonseca includes all payments up to his termination date of 31 January 2019. Termination benefits provided to Mr Fonseca included a severance payment $313,344 and accrued but unused annual leave and long service leave entitlements. One third of the 2018 STI payment would normally be subject to deferral into share rights for one year, however the Board approved the full 2018 STI to be paid as cash on termination as Mr Fonseca would no longer be employed by Genworth during the deferral period. Table 6b: Share option holdings for the reporting period ended 31 December 2019. Executive KMP Name and position G Nicholas CEO A Cormack CRO Grant Detail Grant Date Issue Price 1 Vesting Date Expiration Date GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘10 GFI Equity ‘11 GFI Equity ‘12 GFI Equity ‘13 GFI Equity ‘14 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 10 Feb ‘10 9 Feb ‘11 14 Feb ‘12 15 Feb ‘13 20 Feb ‘14 $16.20 $12.61 $8.31 $8.79 $16.20 $12.61 $8.31 $8.79 $16.90 10 Feb ‘11, ‘12, ‘13, ‘14 9 Feb ‘12, ‘13, ‘14, ‘15 14 Feb ‘13, ‘14, ‘15, ‘16 15 Feb ‘14, ‘15, ‘16, ‘17 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 10 Feb ‘20 9 Feb ‘21 14 Feb ‘22 15 Feb ‘23 10 Feb ‘20 9 Feb ‘21 14 Feb ‘22 15 Feb ‘23 20 Feb ‘24 1 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. 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) Table 6c: Share right holdings for the reporting period ended 31 December 2019 Executive KMP Name and position G Nicholas CEO M Bencsik CFO A Cormack CRO S Degetto CCO Former executive KMP W Milner Acting CFO T Fonseca 3 COO Grant detail Grant date 1 Issue price 2 Vesting date # Held 31/12/2018 Number granted Forfeited Vested Exercised # Held 31/12/2019 Movement during the year LTI ‘15 LTI ‘16 LTI ‘17 Deferred STI ‘17 Deferred STI ‘18 LTI ‘18 LTI ‘19 Equity ‘19 LTI ‘16 LTI ‘17 Deferred STI ‘17 Deferred STI ‘18 LTI ‘18 LTI ‘19 LTI ‘17 Deferred STI ‘17 Deferred STI ‘18 LTI ‘18 LTI ‘19 Equity ‘16 Equity ‘17 Deferred STI ‘18 LTI ‘15 LTI ‘16 LTI ‘17 Deferred STI ‘17 LTI ‘18 1 Jan ‘15 1 Jan ‘16 1 Jan ‘17 1 March ‘18 1 March ‘19 1 Jan ‘18 1 Jan ‘19 4 Feb ‘19 1 Jan ‘16 1 Jan ‘17 1 March ‘18 1 March ‘19 1 Jan ‘18 1 Jan ‘19 1 Jan ‘17 1 March ‘18 1 March ‘19 1 Jan 2018 1 Jan ‘19 1 March ‘16 1 March ‘17 1 March ‘19 1 Jan ‘15 1 Jan ‘16 1 Jan ‘17 1 Jan 2018 1 Jan 2018 $3.47 $2.33 $2.90 $3.05 $2.17 $2.66 $2.17 $2.23 $2.33 $2.90 $3.05 $2.17 $2.66 $2.17 $2.90 $3.05 $2.17 $2.66 $2.17 $2.33 $2.90 $2.17 $3.47 $2.33 $2.90 $3.05 $2.66 31 Dec ‘18 31 Dec ‘19 31 Dec ‘20 1 March ‘19 1 March ‘20 31 Dec ‘21 31 Dec ‘22 4 Aug ’19, 2 Dec ‘19 31 Dec ‘19 31 Dec ‘20 1 March ‘19 1 March ‘20 31 Dec ‘21 31 Dec ‘22 31 Dec ‘20 1 March ‘19 1 March ‘20 31 Dec ‘21 31 Dec ‘22 1 Mar ’17, ’18, ’19, ‘20 1 Mar ’18, ’19, ’20, ‘21 1 Mar ‘20 31 Dec ‘18 31 Dec ‘19 31 Dec ‘20 1 March ‘19 31 Dec ‘21 364,119 293,204 96,070 326,932 101,739 83,649 14,192 91,127 75,025 11,463 81,733 0 0 0 0 0 0 0 0 0 0 4,285 6,468 86,746 77,612 21,834 84,551 12,272 9,477 95,580 409,628 53,702 1,400 21,263 113,913 1,130 26,861 100,105 5,713 11,517 2,153 0 0 0 0 0 0 0 0 0 0 0 0 0 255,248 71,319 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 86,746 77,612 84,551 12,272 108,871 105,547 53,702 30,420 15,592 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12,272 108,871 105,547 53,702 30,420 15,592 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12,593 12,593 2,141 2,155 11,517 2,141 2,155 11,517 23,987 23,987 293,204 95,580 326,932 409,628 83,649 21,263 91,127 113,913 75,025 26,861 81,733 100,105 2,144 4,313 5,713 0 0 0 0 0 0 0 0 0 0 0 0 1 Grant date represents the commencement of the performance period. 2 Issue price is the share price of the instrument at the date of grant. 3 Mr Fonseca was made redundant on 31 January 2019. The Board approved his 2017 deferred STI rights to vest and be awarded as shares (plus the value of associated notional dividends) on the normal vesting date, reflecting his status as a good leaver. All outstanding unvested share rights under the LTI 2016, 2017 and 2018 plans were forfeited on termination. 44 Remuneration report (continued) Table 6c: Share right holdings for the reporting period ended 31 December 2019 Executive KMP Grant detail Grant date 1 Issue price 2 Vesting date # Held 31/12/2018 Number granted Forfeited Vested Exercised # Held 31/12/2019 Movement during the year Name and position G Nicholas CEO M Bencsik CFO CRO A Cormack S Degetto CCO Former executive KMP W Milner Acting CFO T Fonseca 3 COO LTI ‘15 LTI ‘16 LTI ‘17 Deferred STI ‘17 Deferred STI ‘18 LTI ‘18 LTI ‘19 Equity ‘19 Deferred STI ‘17 Deferred STI ‘18 Deferred STI ‘17 Deferred STI ‘18 LTI ‘16 LTI ‘17 LTI ‘18 LTI ‘19 LTI ‘17 LTI ‘18 LTI ‘19 LTI ‘15 LTI ‘16 LTI ‘17 LTI ‘18 Equity ‘16 Equity ‘17 Deferred STI ‘18 Deferred STI ‘17 1 Jan ‘15 1 Jan ‘16 1 Jan ‘17 1 March ‘18 1 March ‘19 1 Jan ‘18 1 Jan ‘19 4 Feb ‘19 1 Jan ‘16 1 Jan ‘17 1 March ‘18 1 March ‘19 1 Jan ‘18 1 Jan ‘19 1 Jan ‘17 1 March ‘18 1 March ‘19 1 Jan 2018 1 Jan ‘19 1 March ‘16 1 March ‘17 1 March ‘19 1 Jan ‘15 1 Jan ‘16 1 Jan ‘17 1 Jan 2018 1 Jan 2018 $3.47 $2.33 $2.90 $3.05 $2.17 $2.66 $2.17 $2.23 $2.33 $2.90 $3.05 $2.17 $2.66 $2.17 $2.90 $3.05 $2.17 $2.66 $2.17 $2.33 $2.90 $2.17 $3.47 $2.33 $2.90 $3.05 $2.66 4 Aug ’19, 2 Dec ‘19 31 Dec ‘18 31 Dec ‘19 31 Dec ‘20 1 March ‘19 1 March ‘20 31 Dec ‘21 31 Dec ‘22 31 Dec ‘19 31 Dec ‘20 1 March ‘19 1 March ‘20 31 Dec ‘21 31 Dec ‘22 31 Dec ‘20 1 March ‘19 1 March ‘20 31 Dec ‘21 31 Dec ‘22 1 Mar ‘20 31 Dec ‘18 31 Dec ‘19 31 Dec ‘20 1 March ‘19 31 Dec ‘21 1 Mar ’17, ’18, ’19, ‘20 1 Mar ’18, ’19, ’20, ‘21 1 Grant date represents the commencement of the performance period. 2 Issue price is the share price of the instrument at the date of grant. 3 Mr Fonseca was made redundant on 31 January 2019. The Board approved his 2017 deferred STI rights to vest and be awarded as shares (plus the value of associated notional dividends) on the normal vesting date, reflecting his status as a good leaver. All outstanding unvested share rights under the LTI 2016, 2017 and 2018 plans were forfeited on termination. 0 364,119 293,204 96,070 0 326,932 0 0 101,739 83,649 14,192 0 91,127 0 75,025 11,463 0 81,733 0 4,285 6,468 0 0 86,746 77,612 21,834 84,551 12,272 0 0 9,477 95,580 0 409,628 53,702 0 0 1,400 21,263 0 113,913 0 1,130 26,861 0 100,105 0 0 5,713 11,517 0 0 2,153 0 0 255,248 0 0 0 0 0 0 71,319 0 0 0 0 0 0 0 0 0 0 0 0 0 0 86,746 77,612 0 84,551 12,272 108,871 0 105,547 0 0 0 53,702 30,420 0 15,592 0 0 0 0 12,593 0 0 0 2,141 2,155 0 11,517 0 0 23,987 0 12,272 108,871 0 105,547 0 0 0 53,702 30,420 0 15,592 0 0 0 0 12,593 0 0 0 2,141 2,155 0 11,517 0 0 23,987 0 0 0 293,204 0 95,580 326,932 409,628 0 0 83,649 0 21,263 91,127 113,913 75,025 0 26,861 81,733 100,105 2,144 4,313 5,713 0 0 0 0 0 45 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) 7. Non‑executive director remuneration Table 7a: KMP in 2019 – Non-executive directors Name Ian MacDonald Duncan West David Foster Gai McGrath Christine Patton Stuart Take Gayle Tollifson Jerome Upton Position Chairman Independent Director Independent Director – Genworth Financial designee Independent Director Independent Director – Genworth Financial designee Director – Genworth Financial designee Independent Director Director – Genworth Financial designee Term as KMP Full Period Full Period Full Period Full Period Full Period Full Period Full Period Full Period Non-executive directors 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. At the Annual General Meeting the aggregate fee cap remained unchanged at $1.75 million per annum, inclusive of superannuation obligations. Non-executive directors 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. Table 7b: NED fee table Position Non-executive directors (excluding S Take and J Upton) Board Chairman Director 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. 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. 46 Remuneration report (continued) Table 7c: Statutory remuneration table – 1 January to 31 December 2019 KMP Non-executive directors I MacDonald Chairman D West 7 Director D Foster 1 Director G McGrath 2 Director C Patton 3 Director S Take 4 Director G Tollifson 5 Director J Upton 6 Director Year 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Fees Non‑monetary benefits Superannuation benefits $244,233 $244,710 $163,000 $54,333 $159,817 $159,817 $159,817 $159,817 $126,941 $42,313 $0 $0 $159,817 $159,817 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $20,767 $20,290 $0 $0 $15,183 $15,183 $15,183 $15,183 $12,059 $4,020 $0 $0 $15,183 $15,183 $0 $0 Total $265,000 $265,000 $163,000 $54,333 $175,000 $175,000 $175,000 $175,000 $139,000 $46,333 $0 $0 $175,000 $175,000 $0 $0 1 Mr Foster is Chairman of the Remuneration & Nominations Committee and Technology Committee and a member of the Capital & Investment Committee. 2 Ms McGrath is Chairman of the Audit Committee and a member of the Risk Committee, Remuneration & Nominations Committee and Technology Committee. 3 Ms Patton is a member of the Audit Committee and Capital & Investment Committee. 4 Mr Take is a member of the Risk Committee and Remuneration and Nominations Committee. 5 Ms Tollifson is Chairman of the Risk Committee and a member of the Audit Committee, Capital & Investment Committee and Remuneration & Nominations Committee. 6 Mr Upton is a member of the Audit Committee, Risk Committee, Capital & Investment Committee and the Technology Committee. 7 Mr West is Chairman of the Capital & Investment Committee, and member of the Risk Committee and Technology Committee. 8. Other tables Table 8a: KMP and their related parties direct, indirect and beneficial shareholdings (including movements during the period ending 31 December 2019). Balance at 31‑Dec‑2018 Received via vesting/exercising Other changes Balance at 31‑Dec‑2019 Executive KMP G Nicholas – CEO M Bencsik – CFO A Cormack – CRO S Degetto – CCO Former executive KMP W Milner – Acting CFO T Fonseca – COO Non-executive directors I MacDonald – Chairman D West – Director D Foster – Director G McGrath – Director C Patton – Director S Take – Director G Tollifson – Director J Upton – Director 267,857 0 23,726 0 0 16,313 85,000 0 8,196 29,650 0 8,297 48,424 16,711 226,690 53,702 46,012 12,593 4,296 35,504 – – – – – – – – – -15,500 – – -4,296 -51,817 – 2,318 3,937 – 20,000 – – – 494,547 38,202 69,738 12,593 – – 85,000 2,318 12,133 29,650 20,000 8,297 48,424 16,711 47 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Remuneration report (continued) Table 8b: Relevant interest of each director in Genworth Australia and its related bodies corporate (unaudited) Directors Name and position I MacDonald D West D Foster G McGrath G Nicholas C Patton S Take G Tollifson J Upton GMA Group balance held directly or indirectly at 31 Dec 2019 Genworth Financial balance held directly or indirectly at 31 Dec 2019 Shares: 85,000 Shares: 2,318 Shares: 12,133 Shares: 29,650 Shares: 494,547 Share rights: 1,125,344 Shares: 20,000 Shares: 8,297 Shares: 48,424 Shares: 16,711 None None None None Shares: 18,571 Restricted stock units: 0 Options: 15,000 Stock appreciation rights: 56,400 None Shares: 65,885 Options: 13,200 Stock appreciation rights: 53,200 None Shares: 59,756 Options: 18,000 Stock appreciation rights: 88,000 48 Remuneration report (continued) The lead auditor’s independence declaration is set out on the following page and forms part of the Directors’ Report. Signed in accordance with a resolution of the directors: Ian MacDonald Chairman Dated 26 February 2020 49 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Directors’ report (continued) 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 2019 there have been: (i) (ii) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG David Kells Partner Dated 26 February 2020 50 Lead auditor’s independence declaration 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 Reporting entity 1.2 Significant accounting policies Section 2 Risk management 2.1 Risk management framework 2.2 Financial risk management Section 3 Results for the year 3.1 Gross written premium 3.2 Investment income 3.3 Other underwriting expenses 3.4 Net cash provided by operating activities 3.5 3.6 Dividends 3.7 Earnings per share Income taxes Section 4 Insurance contracts 4.1 Net claims incurred 4.2 Deferred reinsurance expense 4.3 Deferred acquisition costs 4.4 Outstanding claims 4.5 Non-reinsurance recoveries 4.6 Unearned premium 4.7 Liability adequacy test 4.8 Accounting estimates and judgements 4.9 Actuarial assumptions and methods 4.10 Capital adequacy Section 5 Capital management and financing Interest bearing liabilities 5.1 Capital management 5.2 5.3 Equity 5.4 Capital commitments and contingencies 5.5 Other reserves Section 6 Operating assets and liabilities 6.1 Cash and cash equivalents 6.2 Trade and other receivables 6.3 Leases 6.4 6.5 Goodwill 6.6 Trade and other payables 6.7 Employee benefits provision Intangibles Section 7 Other disclosures 7.1 Parent entity disclosures 7.2 Remuneration of auditors 7.3 Key management personnel disclosures 7.4 Related party disclosures 7.5 Controlled entities 7.6 Share-based payments 7.7 Events subsequent to reporting date 52 53 54 55 56 56 56 60 60 60 67 67 67 67 68 68 69 70 71 71 71 72 72 73 74 74 75 75 78 79 79 80 80 81 81 82 82 82 82 84 85 85 86 87 87 87 87 88 88 88 92 5151 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Financial statements Gross written premium Movement in unearned premium Outward reinsurance premium expense Net earned premium Net claims incurred Acquisition costs Other underwriting expenses Other underwriting revenue Underwriting result Investment income on assets backing insurance liabilities Insurance profit Investment income on equity holders’ funds Investment expense Financing costs Profit before income tax Income tax expense Profit for the year Note 3.1 4.1 3.3 3.2 3.2 3.5(a) 2019 1 $’000 433,248 (64,806) (70,229) 298,213 (150,886) (46,859) (59,489) 1,197 42,176 65,891 108,067 77,449 (4,256) (11,785) 169,475 (49,391) 120,084 2018 $’000 460,166 (103,823) (75,059) 281,284 (145,899) (40,640) (55,268) 1,497 40,974 38,711 79,685 42,967 (3,760) (12,128) 106,764 (31,096) 75,668 Total comprehensive income for the year 120,084 75,668 Earnings per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 1 Refer to note 1.2(c)(i) for details about changes in accounting policies. 3.7 3.7 28.6 28.5 16.5 16.4 The consolidated statement of comprehensive income is to be read in conjunction with the notes to the financial statements. 52 Consolidated statement of comprehensive incomefor the year ended 31 December 2019 Assets Cash and cash equivalents Accrued investment income Investments Trade and other receivables Prepayments Deferred reinsurance expense Non-reinsurance recoveries Deferred acquisition costs Plant and equipment Lease assets Deferred tax assets Intangibles Goodwill Total assets Liabilities Trade and other payables Lease liabilities 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 6.1 2.2(d) 6.2 4.2 4.5 4.3 6.3 3.5(b) 6.4 6.5 6.6 6.3 4.4 4.6 6.7 5.2 2019 1 $’000 2018 $’000 87,254 19,529 3,043,814 47,106 2,077 31,771 22,770 181,234 5,120 11,166 9,104 7,340 9,123 3,477,408 41,827 16,430 43,854 360,905 1,280,451 7,096 199,369 1,949,932 141,450 22,129 3,082,973 80,559 1,810 43,333 21,215 166,845 6,566 – 7,875 6,195 9,123 3,590,073 51,856 – 42,225 339,063 1,214,206 7,257 198,166 1,852,773 1,527,476 1,737,300 5.3(a) 5.3(b) 5.5 1,090,180 2,209 (476,559) 911,646 1,527,476 1,154,084 1,659 (476,559) 1,058,116 1,737,300 1 Refer to note 1.2(c)(i) for details about changes in accounting policies. The consolidated statement of financial position is to be read in conjunction with the notes to the financial statements. 53 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Consolidated statement of financial positionas at 31 December 2019 Balance at 1 January 2018 Profit after taxation Dividends declared and paid Share-based payment expense recognised Share-based payment settled Buy-back of shares, net of transaction costs Balance at 31 December 2018 Balance at 1 January 2019 Adjustment on initial application of AASB 16 1 Leases Adjusted balance as at 1 January 2019 Profit after taxation Dividends declared and paid Share-based payment expense recognised Share-based payment settled Buy-back of shares, net of transaction costs Balance at 31 December 2019 Share capital $’000 1,303,151 – – – – (149,067) 1,154,084 1,154,084 – 1,154,084 – – – – (63,904) 1,090,180 Other reserves $’000 (476,559) – – – – – (476,559) (476,559) – (476,559) – – – – – (476,559) Retained earnings $’000 1,093,069 75,668 (110,621) – – – 1,058,116 1,058,116 79 1,058,195 120,084 (266,633) – – – 911,646 Share based payment reserve $’000 2,528 – – 668 (1,537) – 1,659 1,659 – 1,659 – – 2,095 (1,545) – 2,209 Total $’000 1,922,189 75,668 (110,621) 668 (1,537) (149,067) 1,737,300 1,737,300 79 1,737,379 120,084 (266,633) 2,095 (1,545) (63,904) 1,527,476 1 Refer to note 1.2(c)(i) for details about changes in accounting policies. The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements. 54 Consolidated statement of changes in equityfor the year ended 31 December 2019 Cash flows from operating activities Premiums received Interest and other income Claims paid Interest paid Cash payments in the course of operations Income tax paid Net cash provided by operating activities Cash flows from investing activities Payments for plant, equipment and intangibles Payments for investments Proceeds from sale of investments Proceeds from sub-lease of property Net cash provided by investing activities Cash flows from financing activities Payment of lease liabilities Dividends paid Payments for the on-market buy-back of shares Net cash used in financing activities Net (decrease)/increase in cash held Effects of exchange rate changes on balances of cash held in foreign currencies Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 1 Refer to note 1.2(c)(i) for details about changes in accounting policies. Note 2019 1 $’000 2018 $’000 497,068 80,375 (133,960) (9,931) (196,349) (45,385) 191,818 447,622 82,311 (147,642) (10,997) (241,057) (28,782) 101,455 (2,447) (2,330,133) 2,421,871 946 90,237 (11,642) (3,848,337) 4,115,849 – 255,870 (3,527) (266,633) (63,904) (334,064) (52,009) (2,187) 141,450 87,254 – (110,621) (149,067) (259,688) 97,637 788 43,025 141,450 3.4 6.1 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements. 55 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Consolidated statement of cash flowsfor the year ended 31 December 2019 Section 1 Basis of preparation 1.1 Reporting entity This general purpose consolidated financial report is for the year ended 31 December 2019 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 the Australian Securities Exchange (ASX). The Group operates in one business and operating segment consisting of a loan mortgage insurance business in Australia; therefore no segment information is presented. The annual financial report was authorised for issue by the Board of Directors on 26 February 2020. 1.2 Significant accounting policies (a) Statement of compliance This report has been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards adopted by the Australian Accounting Standards Board (AASB) and the ASX listing rules. International Financial Reporting Standards (IFRS) form the basis of Australian Accounting Standards adopted by the AASB, being Australian equivalents to IFRS. The financial report also complies with IFRS and interpretations adopted by the International Accounting Standards Board (IASB). The current IFRS standard for insurance contracts does not include a comprehensive set of recognition and measurement criteria. The IASB has issued a new standard (IFRS 17 Insurance Contracts – adopted as AASB 17 Insurance Contracts in an Australian context) that does include such criteria, with an effective date of 1 January 2021. However, since issuing the standard, the IASB has proposed a one year delay to the effective date to 1 January 2022, the agreement of which was subject to public consultation. This proposed amendment, along with a number of others, have been included in the exposure draft issued on 26 June 2019. At the time of implementation of AASB 17, AASB 9 Financial Instruments will be implemented as well given the Group meets the requirements for deferral under AASB 2016-6 Amendments to Australian Accounting Standards – Applying AASB 9 Financial Instruments with AASB 4 Insurance Contracts. Until this standard takes effect, the financial reports of insurers in different countries that comply with IFRS may not be comparable in terms of the recognition and measurement of insurance contracts. 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. (b) Basis of preparation of the financial report 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 and derivatives being stated at fair value and outstanding claims and the related reinsurance recoveries on unpaid claims being reported at present value. (c) Accounting policies adopted The accounting policies adopted in the preparation of this financial report have been applied consistently by the Group and are the same as those applied for the previous reporting year, unless otherwise stated. The significant accounting policies adopted in the preparation of this financial report are set out within the relevant notes to the financial statements. (i) Changes in accounting policies from adoption of AASB 16 Leases The Group adopted AASB 16 Leases as at 1 January 2019. As a result, the Group has amended its accounting policy for these lease contracts. In applying AASB 16, the Group has utilised the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings as at 1 January 2019. On transition to AASB 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. It applied AASB 16 only to contracts that were previously identified as leases. The definition of a lease under AASB 16 was only applied to lease contracts entered or changed on or after 1 January 2019. The comparative information has not been restated and continues to be reported under AASB 117 Leases (AASB 117). All the leases of the Group were previously classified as operating leases and consequently not brought on-balance sheet. At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rate as at 1 January 2019. Right-of-use assets are measured at their carrying amount as if AASB 16 had been applied since the commencement date, discounted using the Group’s incremental borrowing rate as at 1 January 2019. Under AASB 16, the Group is required to assess the classification of a sub-lease with reference to the right-of-use asset, not the underlying asset. On transition, the Group reassessed the classification of a sub-lease contract previously classified as an operating lease under AASB 117. The Group concluded that the sub-lease is a finance lease under AASB 16. Refer to note 6.3 for further details. 56 Notes to the financial statements Impacts to the financial statements on transition On transition to AASB 16 as at 1 January 2019, the Group derecognised assets and liabilities which arose from the application of AASB 117, recognised right-of-use assets, sub-lease receivable and lease liabilities, recognising the difference in retained earnings. The impact on transition is summarised below. Derecognition of AASB 117 balances (net liability) Increase right-of-use assets presented in lease assets Increase recognition of sub-lease receivable Decrease deferred tax asset Increase lease liabilities Net transition impact recognised in retained earnings 1 January 2019 $’000 903 14,346 3,972 (34) (19,108) 79 When measuring lease liabilities for leases that were classified as operating leases, the Group discounted lease payments using its incremental borrowing rate as at 1 January 2019. The weighted average rate applied is 4.5%. Operating lease commitment as at 31 December 2018 as disclosed in the Group’s consolidated financial statements Difference in basis 1 Add back sub-lease 2 Undiscounted future cash flows Discounted using the incremental borrowing rate as at 1 January 2019 Lease liabilities recognised as at 1 January 2019 1 January 2019 $’000 14,930 1,978 4,359 21,267 (2,159) 19,108 1 The operating lease commitment disclosed as at 31 December 2018 was on a projected view of the rent expense under AASB 117 as opposed to the future rent payments. 2 The operating lease commitment disclosed as at 31 December 2018 was net of future income to be received from the tenant arising from a sub-lease agreement classified as operating lease under AASB 117. (ii) Other new and amended standards adopted by the Group There are additional new accounting standards and interpretations, effective as at 1 January 2019 (refer to the table below) which were adopted by the Group. The adoption of these standards did not have a material effect on the Group’s financial statements. AASB 2018-1 AASB 2018-2 New standards, amendments and interpretations Operative date Amendments to Australian Accounting Standards – Annual Improvements 2015–2017 Cycle 1 January 2019 Amendments to Australian Accounting Standards – Plan Amendment, Curtailment or Settlement AASB Interpretation 23 Uncertainty over Income Tax Treatments 1 January 2019 1 January 2019 (iii) New accounting standards and amendments issued but not yet effective There are various new accounting standards, amendments and interpretations noted below which are effective for annual periods beginning on or after 1 January 2020 and have not been applied in preparing these consolidated financial statements. An initial assessment of the financial impact of these accounting standards and amendments has been undertaken and they are not expected to have a material impact on the Group’s financial statements, except where noted below. AASB 17 Insurance Contracts New standards, amendments and interpretations AASB 2015-10 AASB 2018-6 AASB 2018-7 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 Amendments to Australian Accounting Standards – Definition of a Business Amendments to Australian Accounting Standards – Definition of Material Conceptual Framework Amendments to standards to apply the new definition and recognition criteria in the Conceptual Framework for Financial Reporting Operative date 1 January 2022 1 January 2022 1 January 2020 1 January 2020 1 January 2020 57 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) AASB 17 Insurance Contracts AASB 17, a new accounting standard for insurance contracts, was adopted by the Australian Accounting Standards Board on 19 July 2017 subsequent to being issued by the IASB on 18 May 2017. The standard is expected to be effective for periods beginning 1 January 2022 (subject to approval of the proposed one-year delay). The first applicable annual reporting period for the Group will be for the year ending 31 December 2022, with the comparative period for the year ending 31 December 2021 and the Statement of Financial Position at the start of the comparative period (i.e. 1 January 2021) also presented under AASB 17. The standard introduces a new general measurement model for accounting for insurance contracts, with the application of a simplified approach permitted in certain circumstances. The Group continues to work through the detailed impact assessment of the new standard, and it is expected that the vast majority of insurance contracts underwritten by the Group will not meet the requirements of the simplified approach due to their long-term coverage period. Significant changes in the presentation of the financial statements and disclosures are anticipated. In addition to the proposed one-year delay in the effective date of the standard, the IASB has proposed wording changes intended to remedy implementation issues identified to date. These proposed changes have been included in an exposure draft issued on 26 June 2019. The IASB will consider feedback on the proposed amendments and aims to issue final amendments in mid-2020. Given the potential for change in the standard, and the complexity and differing interpretation of the requirements, the final impact of certain requirements may not be determined until global interpretations and regulatory responses to the new standard reach a broad consensus. AASB 9 Financial Instruments AASB 9 Financial Instruments (AASB 9) applies to annual reporting periods beginning on or after 1 January 2018. The Group is allowed to apply the temporary exemption from AASB 9 as it has not previously adopted any version of AASB 9 and its activities are predominantly connected with insurance, as prescribed by AASB 4 Insurance Contracts (i.e. at 31 December 2015, the carrying amount of the Group’s insurance liabilities was significant compared to the total carrying amount of all its liabilities and the percentage of the total carrying amount of its liabilities connected with insurance relative to the total carrying amount of all its liabilities was greater than 90%). Through the exposure draft issued on 26 June 2019 the IASB has also proposed to extend the temporary exemption from the adoption of AASB 9 to reporting periods beginning 1 January 2022, for companies meeting this criteria. The Group, having met the relevant criteria, has deferred the adoption of AASB 9 and is expecting to adopt AASB 9 at the same time as AASB 17. The Group’s investments are currently designated at fair value through profit and loss on initial recognition and are subsequently remeasured to fair value at each reporting date, reflecting the business model applied by the Group to manage and evaluate its investment portfolio. Under the Group’s business model, the adoption of AASB 9 could result in a portion of the investment portfolio being revalued through other comprehensive income. The Group is currently evaluating the elections to be made to its portfolios of investments, in conjunction with the implementation of AASB 17. (d) Rounding off 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. (e) Critical accounting 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. The accounting policies have been applied consistently by the Group, unless otherwise stated. 58 Notes to the financial statements (continued) (f) Principles of consolidation Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, 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. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. The Group incorporates the assets and liabilities of the Company and all subsidiaries as at the reporting date and the results for the financial year then ended. 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. (g) Comparative figures Comparative figures have been adjusted, where necessary, to conform to the basis of presentation and the classification used in the current year. Change in the presentation of the claims development in note 4.1(b) A new claims development attribution methodology for “current year” and “prior years” presentation has been introduced effective 1 January 2019 to reflect the substance of the underlying claims event. This involves claims incurred but not reported being attributed to the year of actual incident (i.e. the year in which the loan first went into 30+ days in arrears). As a result, the 2018 comparatives have been updated reducing the “current year” net claims incurred from $215,502,000 to $142,235,000 and a corresponding increase in the “prior years” net claims incurred from ($69,603,000) to $3,664,000, with no change to total net claims incurred. Change in the presentation of the current outstanding claims balance note 4.4(a) A new claim payments attribution methodology for “current” and “non-current” outstanding claims liability has been introduced effective 1 January 2019 to reflect the underlying probability that delinquencies, including incurred but not reported delinquencies, will be paid in the next 12 months, based on the underlying characteristics of the delinquency. As a result the 2018 comparatives have been updated, reducing the “current” outstanding claims liability from $254,271,000 to $147,362,000 and a corresponding increase in the “non-current” liability from $84,792,000 to $191,701,000 with no change in the total outstanding claims balance. 59 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) Section 2 Risk management This note presents information about the Group’s objectives, policies and processes for measuring and managing risk. 2.1 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, an Audit Committee and Capital and 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 Risk Committee assists the Board in providing an objective non-executive review and oversight of the implementation and ongoing operation of the Group’s risk management framework. The Risk 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 and 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 assess 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. 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 lenders representing 10% or more of the Group’s gross written premium (GWP) are included in the table below: Lender customer Largest customer Second largest customer 2019 GWP 55.0% 12.0% 2018 GWP 60.1% 14.3% 2.2 Financial risk management The Group has exposure to market, credit and liquidity risks relating to its use of financial instruments. (a) 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. (i) Currency risk 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 debt securities, in receivables and payables denominated in a currency other than Australian dollars and the net investment in foreign branch operations. The currencies giving rise to the risk are United States dollars, Euros and New Zealand dollars. The Group used forward foreign exchange contracts to mitigate currency risk arising from fixed interest securities denominated in United States dollars and Euros. The risk management processes required both Board and regulatory approvals. Transactions are subject to close senior management scrutiny in addition to the regular risk management and monitoring processes. 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 are closely monitored. The potential impact on the Group’s profit and loss and equity resulting from 10% depreciation/appreciation of the Australian dollar (AUD) compared with selected currencies, net of related derivatives at the reporting date, assuming all other variables remain constant, is shown below: 2019 2018 +10% $’000 319 198 66 ‑10% $’000 (390) (218) (67) +10% $’000 307 812 97 ‑10% $’000 (375) (826) (181) New Zealand dollar United States dollar Euros 60 Notes to the financial statements (continued) (ii) Cash flow and fair value interest rate risk The Group is exposed to interest rate risk primarily arising from interest bearing assets. Assets with floating interest rate 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 debt securities and cash and to actively manage the duration. 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 potential impact of movements in interest rates on the Group’s profit and loss and equity resulting from 100 basis points increase/ decrease in interest rates on interest bearing assets, assuming all other variables remain constant, are shown below: Interest bearing assets 2019 +100bps $’000 (63,033) ‑100bps $’000 65,903 2018 +100bps $’000 (60,325) ‑100bps $’000 64,395 (iii) Equity price risk 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 and equity unit trusts. During the year, the Group sold the bulk of its equity securities and purchased units in the unlisted Alliance Bernstein Managed Volatility Equities Fund – MVE Class as a return enhancing investment for the shareholder fund’s portfolio. The equity investments also provide 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 S&P 300 Index. The potential impact of movements in price risk on the Group’s profit and loss and equity resulting from 10% increase/decrease in value of equity securities at reporting date are shown below: Investments – unit trusts equity securities Investments – unlisted equities 2019 +10% $’000 7,885 400 ‑10% $’000 (7,885) (400) 2018 +10% $’000 11,880 400 ‑10% $’000 (11,880) (400) 61 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) (b) Credit risk 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 81% (2018: 83%) 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. The ratings in the following table are the lower equivalent ratings of either Standard & Poor’s or Moody’s. 2019 $’000 2,098 149,117 72,737 56,435 – 280,387 1,253,623 579,999 493,868 424,113 16,231 2,767,834 7,244 5,737 3,098 2,918 263 269 19,529 37,149 600 4,140 – 570 4,647 47,106 2018 $’000 50,467 171,588 86,284 87,929 3,000 399,268 1,189,001 714,724 471,478 318,340 8,829 2,702,372 8,517 6,865 3,772 2,900 75 – 22,129 54,378 663 9,407 12,220 – 3,891 80,559 Cash at bank and short-term deposits AAA AA A BBB BB Investments (excluding short-term deposits) AAA AA A BBB BB Accrued interest receivable AAA AA A BBB BB Not rated Trade and other receivables Premium receivables AA A Other receivables AAA AA A Not rated 62 Notes to the financial statements (continued) (c) Liquidity risk 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 to effectively match the interest rate maturity profile with the expected pattern of claims payments. The money market securities are restricted to investment grade securities with concentrations of investments managed in accordance with investment mandates. 2019 Financial liabilities Trade and other payables Reinsurance payable Lease liabilities 2018 Financial liabilities Trade and other payables Reinsurance payable (d) Fair value measurements Accounting policies Less than 1 year $’000 38,645 22,027 4,790 65,462 1–5 years $’000 Total $’000 3,182 21,827 11,640 36,649 41,827 43,854 16,430 102,111 Less than 1 year $’000 1–5 years $’000 47,554 22,215 69,769 4,302 20,010 24,312 Total $’000 51,856 42,225 94,081 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 their 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 gains 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. • 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. • Unlisted unit trusts securities are valued using quoted current unit prices as advised by the responsible entity, trustee or equivalent of the investment vehicle. 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 The Group uses forward foreign exchange contracts to hedge currency exposures arising from interest bearing securities denominated in currencies other than Australian dollars, with both the foreign exchange and derivatives impact reported through profit and loss. Derivatives are used solely to manage risk exposure and are not used for trading or speculation. Derivatives are initially recognised at trade date at fair value; attributable transaction costs are recognised in profit and loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value through profit and loss. The investment related derivatives are presented together with the underlying investments or as payables when the fair value is negative. Forward foreign exchange contracts are determined using observable inputs (level 2 in the fair value hierarchy). 63 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) Investment Fixed interest rate Short-term deposits Government and semi-government bonds Corporate bonds Floating interest rate Short-term deposits Corporate bonds Derivatives Investment related derivatives Equity securities Unlisted unit trusts Listed equities Unlisted equities Total investments Comprising: Current Non-current Equity 2019 $’000 2018 $’000 133,274 1,319,323 680,710 2,133,307 162,870 1,229,480 656,505 2,048,855 59,860 757,768 817,628 10,033 78,846 – 4,000 82,846 94,948 816,387 911,335 – – 118,783 4,000 122,783 3,043,814 3,082,973 644,193 2,316,775 82,846 3,043,814 705,876 2,254,314 122,783 3,082,973 The following additional disclosure is required for eligible insurers which met the criteria of the temporary exemption of deferring the adoption of AASB 9. It presents the fair value and the change in the fair value of the Group’s financial assets as at 31 December 2019, showing separately the fair value of financial assets with contractual terms that give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI) and the fair value of financial assets that do not give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding (Non-SPPI): 2019 Financial assets Short-term deposits Bonds Derivatives Unlisted equities Unlisted unit trusts 2018 Financial assets Short-term deposits Bonds Unlisted equities Listed equities SPPI Non‑SPPI Fair value $’000 193,134 2,742,455 – – – 2,935,589 Change in fair value $’000 (76) 57,526 – – – 57,450 Fair value $’000 – 15,346 10,033 4,000 78,846 108,225 Change in fair value $’000 – 156 – – (1,164) (1,008) SPPI Non‑SPPI Fair value $’000 257,818 2,700,539 – – 2,958,357 Change in fair value $’000 (12) 10,519 – – 10,507 Fair value $’000 – 1,833 4,000 118,783 124,616 Change in fair value $’000 – (12) – (25,839) (25,851) Trade and other receivables are financial assets which are in the scope of AASB 9 and are SPPI assets. These assets amounted to $47,106,000 at 31 December 2019 (2018: $80,559,000). These assets are measured at their present value less any impairment loss for any doubtful accounts (no doubtful account at 31 December 2019 and 31 December 2018) which approximates fair value. 64 Notes to the financial statements (continued) The credit risk ratings of SPPI financial assets at 31 December 2019 is set out in the table below: 2019 Bonds and short-term deposits AAA AA A BBB BB 2018 Bonds and short-term deposits AAA AA A BBB BB Credit Risk Fair value $’000 Fair value % Low Low Low Low Other 1,255,191 670,491 527,943 466,408 15,556 2,935,589 42.8 22.8 18.0 15.9 0.5 100.0 Credit Risk Fair value $’000 Fair value % Low Low Low Low Other 1,239,468 827,149 475,475 405,105 11,160 2,958,357 41.9 28.0 16.0 13.7 0.4 100.0 Trade and other receivables at 31 December 2019 have the following credit risk: AAA with low credit risk ($4,140,000), AA with low credit risk ($37,149,000), A with low credit risk ($1,170,000) and not rated with other credit risk ($4,647,000). The Group investments carried at fair value have been classified under the three levels of the AASB 13 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. This category includes unlisted equities. The fair value has been supported based on a discounted cash flow analysis performed utilising latest available cash flows from the entity. 2019 Financial instruments Government and semi-government bonds Corporate bonds Short-term deposits Derivative assets Unlisted unit trusts Unlisted equities Total 2018 Financial instruments Government and semi-government bonds Corporate bonds Short-term deposits Listed equities Unlisted unit trusts Unlisted equities Total Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – 193,134 – – – 193,134 1,319,323 1,438,478 – 10,033 78,846 – 2,846,680 – – – – – 4,000 4,000 1,319,323 1,438,478 193,134 10,033 78,846 4,000 3,043,814 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 – – 257,818 118,783 – – 376,601 1,229,480 1,472,892 – – – – 2,702,372 – – – – – 4,000 4,000 1,229,480 1,472,892 257,818 118,783 – 4,000 3,082,973 65 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) The reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy is set out in the table below: Financial instruments Unlisted equities Total Financial instruments Unlisted equities Total Balance at 1 January 2019 $’000 4,000 4,000 Balance at 1 January 2018 $’000 Purchases $’000 Disposals $’000 Movement in fair value $’000 Balance at 31 December 2019 $’000 – – – – – – 4,000 4,000 Purchases $’000 Disposals $’000 Movement in fair value $’000 Balance at 31 December 2018 $’000 – – 4,000 4,000 – – – – 4,000 4,000 Interest bearing liabilities are initially measured at fair value (net of transaction costs) and are subsequently measured at amortised cost. The Group considers the carrying value of the interest bearing liabilities to be approximate to that of the fair value. The interest bearing liabilities have been classified as Level 2 under the three levels of the AASB 13 fair value hierarchy. Derivative financial instruments Reporting date positions The notional amount and fair value of derivative financial instruments at balance date is set out in the table below: Forward foreign exchange contracts Exposure $’000 578,679 578,679 2019 Fair value asset $’000 10,033 10,033 Fair value liability $’000 – – Exposure $’000 536,419 536,419 2018 Fair value asset $’000 – – Fair value liability $’000 9,418 9,418 All derivative contracts are expected to be settled within 12 months. 66 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 3.2 Investment income Accounting policies 2019 $’000 431,974 1,274 433,248 2018 $’000 457,367 2,799 460,166 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. Dividend revenue Dividends are recognised on the date the dividends/distributions are declared, which for listed equity securities is deemed to be the ex-dividend date. Dividend revenue is recognised net of franking credits and gross of withholding tax. Refer to note 2.2(d) fair value measurements Accounting policies for further details. Interest revenue Dividend revenue Unrealised gains/(losses) including derivatives Realised gains including derivatives Other income gains/(losses) Total investment income Represented by Investment income on assets backing insurance liabilities Investment income on equity holders’ funds 3.3 Other underwriting expenses Depreciation and amortisation expense Employee expenses: – Salaries and wages – Superannuation contributions – Employee benefits Occupancy expenses Marketing expenses Administrative expenses 2019 $’000 78,448 3,583 26,656 33,155 1,498 143,340 65,891 77,449 143,340 2019 $’000 5,172 26,847 1,786 (90) 2,276 520 22,978 59,489 2018 $’000 82,269 8,153 (23,973) 17,281 (2,052) 81,678 38,711 42,967 81,678 2018 $’000 1,027 25,871 1,867 270 2,626 473 23,134 55,268 67 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 3.4 Net cash provided by operating activities This note reconciles the operating profit to the cash provided by operating activities per the consolidated statement of cash flow. Profit after income tax Less items classified as investing/financing activities: – Gain on sale of investments including derivatives – Unrealised (gains)/loss on investments including derivatives Add non-cash items: – Share-based payments – Loss on disposal of plant and equipment – Depreciation and amortisation – Interest expense leases Net cash provided by operating activities before change in assets and liabilities Change in assets and liabilities during the financial year: Decrease in receivables Increase/(decrease) in outstanding claims liability Increase/(decrease) in payables and borrowings Increase in deferred acquisition costs (Decrease)/increase in provision for employee entitlements Increase in unearned premiums (Increase)/decrease in deferred tax asset balances Net cash provided by operating activities 3.5 Income taxes 2019 $’000 120,084 (33,155) (26,656) 552 33 5,172 674 66,704 43,613 21,842 9,227 (14,389) (161) 66,245 (1,263) 191,818 2018 $’000 75,668 (17,281) 23,973 (870) 93 1,027 – 82,610 32,679 (615) (105,838) (15,054) 461 105,652 1,560 101,455 Accounting policies Income tax on the profit and 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 the 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 nor 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. 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 68 2019 $’000 51,076 (1,239) (423) (23) 49,391 2018 $’000 28,730 1,442 806 118 31,096 Notes to the financial statements (continued) (i) Reconciliation of income tax expense to prima facie tax payable Prima facie income tax expense calculated at 30% of profit Decrease in income tax expense due to: (Over)/under provision in prior year Other non-taxable items Non-deductible items Franking tax credit Income tax expense (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: Leases Employee benefits Share-based payments and accrued expenses Provision for indirect claims handling costs Other Net deferred tax Balance at 1 January Debited to retained earnings Credited/(debited) to the statement of comprehensive income Under/(over) provision of prior year tax Balance at 31 December 3.6 Dividends 2019 $’000 50,842 (446) (233) 96 (868) 49,391 2019 $’000 624 3,775 488 4,075 142 9,104 7,875 (34) 1,239 24 9,104 2018 $’000 32,029 924 (44) 92 (1,905) 31,096 2018 $’000 – 3,580 475 3,820 – 7,875 9,435 – (1,442) (118) 7,875 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. (a) Restrictions that may limit the payment of dividends There are currently no restrictions on the payment of dividends by the Company other than: • • the provisions of section 254T of the Corporations Act 2001 and the Company’s constitution. 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. 2019 unfranked special dividend paid on 28 November 2019 2019 interim dividend paid on 28 August 2019 (2018: interim dividend) fully franked at 30% 2019 unfranked special dividend paid on 28 August 2019 (2018: special dividend fully franked at 30%) 2018 final dividend paid on 18 March 2019 (2017: final dividend) fully franked at 30% TOTAL 2019 Cents per share 24.2 $’000 99,828 2018 Cents per share – 9.0 37,126 21.9 9.0 64.1 90,341 39,338 1 266,633 8.0 4.0 12.0 24.0 $’000 – 35,842 17,921 56,858 110,621 1 Of the total 2018 final dividend declared of $39.4 million, right and entitlement of $0.1 million to dividends was removed due to the share buy-back during the period. 69 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) (b) Dividends not recognised at reporting date 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. 2019 final dividend (c) Dividend franking account The balance of the franking account arises from: Cents per share 7.5 Total amount $’000 30,939 Expected payment date 19 March 2020 Tax rate for franking credit 30% Percentage franked 100% • • franked dividends received or recognised as a receivable at the reporting date. income tax paid, after adjusting for any franking credits which will arise from the settlement of income tax provided for in the financial statements. • franking debits from payment of dividends paid and payable after the reporting date. Franking account surplus balance – tax paid basis 2019 $’000 14,959 2018 $’000 1,081 After taking into consideration the impact of franking credits and debits relating to the tax payable for the 2019 year the franking account balance would have a surplus of $10,819,000 (2018: $8,325,000 deficit). 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 the 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 420,164,000 (2018: 459,840,000) and 420,780,000 (2018: 460,417,000) respectively. 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 Net profit after tax Net profit used in calculating basic and diluted earnings per share 2019 28.6 28.5 2019 $’000 120,084 120,084 (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 2019 ‘000 420,164 420,164 616 420,780 2018 16.5 16.4 2018 $’000 75,668 75,668 2018 ‘000 459,840 459,840 577 460,417 70 Notes to the financial statements (continued) Section 4 Insurance contracts 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. 4.1 Net claims incurred (a) Claims analysis Gross claims incurred Reinsurance and other recoveries revenue Net borrower recoveries recognised Net claims incurred (b) Claims development Gross claims expense Direct Inwards reinsurance Gross claims incurred 1 Reinsurance and other recoveries Reinsurance and other recoveries Net borrower recoveries recognised Net claims incurred 2019 $’000 162,043 (11,157) – 150,886 2018 $’000 156,586 (9,315) (1,372) 145,899 2019 2018 Current year $’000 Prior years $’000 Total $’000 Current year 2 $’000 Prior years 2 $’000 Total $’000 169,960 4,760 174,720 (1,723) – 172,997 (11,982) (695) (12,677) (9,434) – (22,111) 157,978 4,065 162,043 (11,157) – 150,886 139,299 4,148 143,447 (1,056) (156) 142,235 14,193 (1,054) 13,139 (8,259) (1,216) 3,664 153,492 3,094 156,586 (9,315) (1,372) 145,899 Including reinsurance and other recoveries provision movement. 1 2 Refer to note 1.2 (g) for details on the adjustment to comparative figures. 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 Comprising: Current Non-current 2019 $’000 43,333 – (11,562) 31,771 11,553 20,218 31,771 2018 $’000 145,425 43,333 (145,425) 43,333 12,076 31,257 43,333 71 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 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 (refer to note 4.7). Refer to note 4.8 Accounting estimates and judgements for further detailed information. Balance as at 1 January Acquisition costs incurred during the year Amortisation charge Balance as at 31 December Comprising: Current Non-current 4.4 Outstanding claims 2019 $’000 166,845 59,468 (45,079) 181,234 37,966 143,268 181,234 2018 $’000 151,791 62,292 (47,238) 166,845 35,375 131,470 166,845 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, incurred but not reported (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 and 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. 2019 $’000 319,340 41,565 360,905 2019 $’000 339,063 150,886 1,555 (130,599) 360,905 2018 $’000 299,919 39,144 339,063 2018 $’000 339,679 145,899 (2,337) (144,178) 339,063 160,101 200,804 360,905 147,362 191,701 339,063 Central estimate Risk margin Gross outstanding claims (a) Reconciliation of changes in outstanding claims Balance as at 1 January Current period net claims incurred Movement in non-reinsurance and borrower recoveries Claims paid Balance as at 31 December Comprising 1: Current Non-current 1 Refer to note 1.2(g) for details on the adjustment to comparative figures. 72 Notes to the financial statements (continued) (b) Claims development Underwriting years At end of year of underwrite One year later: Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Net incurred to date Net paid to date Net outstanding claims provision at 31 December 2019 Non-reinsurance recoveries on unpaid claims at 31 December 2019 Gross outstanding claims provision at 31 December 2019 Prior years $’000 2010 $’000 2011 $’000 2012 $’000 2013 $’000 2014 $’000 2015 $’000 2016 $’000 2017 $’000 2018 $’000 2019 $’000 Total $’000 1,019 11,193 632 1,162 6,716 8,885 860 8,620 8,680 8,238 1,424 6,803 16,711 13,560 14,601 777 12,917 20,319 21,130 20,825 31,018 1,021 6,825 20,870 29,722 28,494 30,254 18,955 1,079 7,805 11,246 24,535 43,917 34,634 21,273 13,540 992 6,668 10,997 9,989 15,925 23,182 14,669 14,053 10,687 701 7,004 15,005 9,744 8,107 23,971 11,717 10,923 8,854 7,518 103,544 107,162 158,029 136,141 106,986 53,269 85,284 124,596 85,635 89,843 53,099 19,488 26,398 5,551 16,763 2,283 12,212 527 632 – 83,645 17,909 21,878 33,433 46,298 53,717 33,611 20,847 14,480 11,685 632 338,135 22,770 360,905 4.5 Non‑reinsurance recoveries Accounting policies Reinsurance and non-reinsurance 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. The following table presents non-reinsurance recoveries. Balance as at 1 January Movement of non-reinsurance recoveries Net borrower recoveries receivable recognised Balance as at 31 December There were no reinsurance recoveries at 31 December 2019 (2018: Nil). 2019 $’000 21,215 1,555 – 22,770 2018 $’000 23,552 463 (2,800) 21,215 73 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 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 12 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 or receivable is recorded as unearned premium. Refer to note 4.8 Accounting estimates and judgements and note 4.9 Actuarial assumptions and methods for further detailed information. Balance as at 1 January Premiums incepted during the year Premiums earned during the year Balance as at 31 December Comprising: Current Non-current 4.7 Liability adequacy test 2019 $’000 1,214,206 433,248 (367,003) 1,280,451 2018 $’000 1,108,554 460,166 (354,514) 1,214,206 286,114 994,337 1,280,451 276,148 938,058 1,214,206 Accounting policies The liability adequacy test (LAT) is an assessment of the carrying amount of the unearned premium liability and is conducted at each reporting date. It comprises 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. If the future claim costs exceed the unearned premium liability less related deferred reinsurance expense 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 LAT at the reporting date has identified a surplus in the portfolio of contracts that are subject to broadly similar risks. The probability of adequacy (PoA) adopted for the liability adequacy test is set at 70% and differs from the 75% probability of adequacy adopted in determining the outstanding claims liabilities (refer to note 4.9(a)). The reason for this difference is that the former is in effect an impairment test used only to test the sufficiency of net premium liabilities whereas the latter is a measurement accounting policy used in determining the carrying value of the outstanding claims liabilities. The process used to determine the risk margin is discussed in note 4.9(a). As at 31 December 2019 and 31 December 2018, the LAT resulted in surpluses for the LMI portfolio. Net central estimate of present value of expected cash flows associated with future claims Risk margin of the present value of expected cash flows on future claims Risk margin percentage Probability of adequacy 2019 $’000 899,295 121,454 1,020,749 17% 70% 2018 $’000 766,631 100,164 866,795 17% 70% 74 Notes to the financial statements (continued) 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 4.6 and note 4.3) Premium is earned over periods of up to 12 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 annual analysis of a number of factors including the historical pattern of claims incurred, the pattern of policy cancellations, economic outlook and policyholder risk profile. The estimate for unearned premiums is established on the basis of this earning scale. Changes to earnings curve assumptions, which in turn impact the timing of the recognition of unearned premium and DAC, are recognized prospectively. Changes are recommended by the Appointed Actuary when the results of the annual analysis indicate an ongoing change in the pattern of emergence of risk. 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 sometime 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. 4.9 Actuarial assumptions and methods (a) Outstanding claims 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 by lenders as being 90 days delinquent at the valuation date. • IBNR, being loans delinquent between 30 and 90 days, or not otherwise advised to the Group by lenders. 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 mortgagee in possession (MIP) but a claim has not yet been submitted, a case estimate based approach is used utilising 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. • 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. 75 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) Actuarial assumptions and process Historical information relating to arrears and claims history for the Group is provided to the Appointed Actuary to determine the underlying assumptions. The Appointed Actuary examines all past underwriting years, including the mix of business by loan to value ratio (LVR), loan size band, the region in which the mortgaged property is located, mortgagor groups, property price appreciation since inception, 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, house price appreciation (HPA) 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 geographic region of the properties secured by the mortgages and mortgagor groups. 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 26% (2018: 29%) • Average severity factor is 28% (2018: 28%) Incurred But Not Reported The IBNR provision is estimated by analysing the historical pattern of reported delinquencies. 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. • Increased uncertainty due to future legislative changes. A risk margin for outstanding claims of 14% (2018: 14%) 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, which is estimated to be 22 months (2018: 19 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. Various scenarios regarding key economics including HPA, unemployment and mortgage interest rates, as well as the upper and lower bounds of a 95% confidence interval of frequency 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. 76 Notes to the financial statements (continued) Impact on outstanding claims liabilities to changes in key variables Sensitivity Change Base Ultimate Loss Ratio Upside Economics – 5% House Price Appreciation (HPA), 0.5% reduction in unemployment rate Downside Economics – 5% House Price Depreciation (HPD), increase in mortgage rates Downside Economics – 10% HPD, increase in mortgage rates Downside Economics – 15% HPD Arrears Frequency Model +5% HPA estimate -5% HPA estimate -10% HPA estimate 5% Parameter Estimate Confidence Interval 95% Parameter Estimate Confidence Interval Discount Rate +1.0% -0.5% Net Outstanding Claims Liability $M 297 2019 % Net Premium Liability Net Outstanding Claims Liability $M 899 % $M 279 2018 % Net Premium Liability $M 767 % (9) (3) (62) (7) (2) (1) (24) (3) 9 18 27 (9) 9 18 (4) 9 – – 3 6 9 (3) 3 6 (1) 3 – – 88 131 154 – – – – – (39) 20 10 15 17 – – – – – (4) 2 10 20 16 (5) 13 22 (4) 7 – – 4 7 6 (2) 5 8 (2) 3 – – 65 119 130 – – – – – (32) 17 9 16 17 – – – – – (4) 3 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. (b) Unearned premium The assessment of future recognition of unearned premium is an inherently uncertain process involving assumptions concerning the discontinuance and pattern of the incidence of risk. When deciding on an appropriate earning pattern to apply at the start of an underwriting year, consideration is given to: • The emergence of claims and their cost for historical underwriting years. • The economic outlook for key economic variables (interest rates, house prices and unemployment) at the time the policy was written. • Policyholder risk profile, determined by characteristics such as location, LVR at underwriting, type of dwelling, loan type and type of interest repayment. Over the term of a policy, changes in economic conditions invariably lead to a difference between the expected and actual risk emergence pattern. Over time, these differences may be sizeable and, as business is cyclical, these may build up over successive periods. The earnings curve is revised when experience indicates such differences are ongoing. The Group completed the annual review of its premium earnings pattern in the fourth quarter of 2019. The review resulted in no changes to the earnings curve pattern adopted in the fourth quarter of 2017. The impact of shortening (or lengthening) the earnings curve by six months would increase (or decrease) the current unearned premium by less than $10 million, with an equal and opposite impact in non-current unearned premium, as at 31 December 2019 and 31 December 2018. 77 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 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. The following companies comprise the APRA Level 2 Group as at 31 December 2019: Genworth Mortgage Insurance Australia Limited Genworth Financial Mortgage Insurance Pty Limited Genworth Financial Mortgage Indemnity Limited Balmoral Insurance Company Limited The calculation of the PCA 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 (deficit)/surplus relating to insurance liabilities Common equity 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 2019 $’000 2018 $’000 1,090,180 (474,350) 911,646 (25,567) (42,327) 1,459,582 200,000 1,659,582 284,442 479,115 125,679 35,726 (55,703) 869,259 1,154,084 (474,900) 1,058,116 (23,193) 34,029 1,748,136 200,000 1,948,136 245,457 660,748 124,767 31,698 (56,379) 1,006,291 1.91x 1.94x 78 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 the following three considerations: (a) Regulatory capital The regulated controlled entities are subject to APRA’s prudential standards, which set out the basis for calculating the Prudential Capital Requirements (PCR), 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 event, 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. (b) Ratings capital 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 31 May 2019 Standard & Poor’s Ratings Services (S&P) reaffirmed Genworth Financial Mortgage Insurance Pty Limited’s financial strength rating at ‘A+’ and outlook as ‘negative’. S&P subsequently, on 1 July 2019, published revised criteria for rating insurance companies. On 25 July 2019 S&P announced that due to revisions to its ratings criteria it has revised Genworth Financial Mortgage Insurance Pty Limited’s financial strength rating to ’A’ with a ‘stable’ outlook. Fitch Ratings On 18 June 2019 Fitch reaffirmed Genworth Financial Mortgage Insurance Pty Limited’s financial strength rating at ‘A+’ however revised its outlook from ‘stable’ to ‘negative’. (c) Economic capital 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 insurers financial strength and credit rating. 79 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 5.2 Interest bearing liabilities 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 $200 million subordinated notes Less: capitalised transaction costs 2019 $’000 2018 $’000 (A) 200,000 (631) 199,369 200,000 (1,834) 198,166 (A) 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. • 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. 5.3 Equity (a) Share capital Issued fully paid capital Balance as at 1 January Buy-back shares, net of transaction costs Balance as at 31 December 2019 Number of shares ‘000 2018 Number of shares ‘000 2019 $’000 2018 $‘000 437,465 (24,951) 412,514 1,154,084 (63,904) 1,090,180 492,351 (54,886) 437,465 1,303,151 (149,067) 1,154,084 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. On-market buy-back On 6 February 2019, the Company announced its intention to commence, with effect from 21 February 2019, an on-market share buy-back program for shares up to a maximum value of $100.0 million. This share buy-back program ceased on 30 June 2019. At that date the Company had acquired 24,950,648 shares for a total consideration of $63.9 million. The remaining $36.1 million was effectively paid out on 28 August 2019 as part of an unfranked special dividend (refer to note 3.6 for more details on dividends). The shares acquired by the Company as part of on-market share buy-back programs have been cancelled and removed from the share register. (b) Share-based payment reserve Balance as at 1 January Share-based payment expense Share-based payment settled Balance as at 31 December Refer to note 7.6 Share-based payments for further detailed information. 2019 $’000 1,659 2,095 (1,545) 2,209 2018 $’000 2,528 668 (1,537) 1,659 80 Notes to the financial statements (continued) 5.4 Capital commitments and contingencies Capital commitments There were no capital commitments as at 31 December 2019. The Group adopted AASB 16 Leases as at 1 January 2019 utilising the modified retrospective approach which resulted in all the leases of the Group previously classified as operating leases and not brought on-balance sheet being recognised on the balance sheet in the form of right-of-use assets and corresponding lease liabilities. Refer to note 6.3 for further details. Contingencies Contingent liabilities are not recognised on the balance sheet but are disclosed where the possibility of settlement is less than probable but more than remote. Provisions are not required with respect to these matters as it is not probable that a future sacrifice of economic benefits will be required, or the amount is not reliably measurable. If settlement becomes probable, a provision is recognised. The best estimate of the settlement amount is used in measuring a contingent liability for disclosure. There were no contingent liabilities as at 31 December 2019 (2018: Nil). 5.5 Other reserves Other reserves 2019 $’000 (476,559) 2018 $’000 (476,559) The balance represents reserves recognised from the reorganisation of the intragroup debt and equity arrangements when the Company became the holding company of the Group. 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 arose; therefore, any difference in these transactions was recognised directly in equity as other reserves. 81 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) Section 6 Operating assets and liabilities 6.1 Cash and cash equivalents Accounting policies Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and other short-term and highly liquid investments with maturity from date of acquisitions of three months or less that are readily convertible to known amounts of cash, that are subject to an insignificant risk of changes in value and which are used to meet short-term cash commitments. 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 6.2 Trade and other receivables 2019 $’000 87,254 2018 $’000 141,450 Accounting policies The collectability of receivables is assessed at balance date and an impairment loss is made for any doubtful accounts. The amounts are discounted where the time value of money effect is material. Premium receivable Sub-lease receivable Trade and other receivables Income tax receivable Comprising: Current Non current 2019 $’000 37,749 3,184 2,033 4,140 47,106 25,498 21,608 47,106 2018 $’000 55,040 – 16,112 9,407 80,559 44,931 35,628 80,559 Carrying amounts of receivables reasonably approximate fair value at the reporting date. None of the receivables are impaired or past due. 6.3 Leases The Group leases properties for its office space. These leases have varying terms (from three to five years), escalation clauses and renewal rights. On renewal, the terms of the leases are usually renegotiated. At the time of adopting AASB 16, the Group determined that it was not reasonably certain to exercise renewal options. The optional term is usually the same length as the initial term. The Group also leased equipment for its offices. These leases have varying terms, from one year to three years. The equipment assets leased are of low value. Accounting policies Under AASB 16 At inception of a contract, the Group assesses whether a contract is, or contains, a lease based on the new definition of a lease. Under AASB 16, a contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This policy is applied to contracts entered or changed on or after 1 January 2019. The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset, less any lease incentives received. The right-of-use-asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property, plant and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. 82 Notes to the financial statements (continued) The lease liability is measured at amortised cost using the effective interest rate method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate or if the Group changes its assessment of whether it will exercise an extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit and loss if the carrying amount of the right-of-use asset has been reduced to zero. The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low value assets, including office equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. As an intermediate lessor The Group classifies a sub-lease as finance or an operating lease by reference to the right-of-use asset arising from the head lease, rather than by reference to the underlying asset (i.e. the item of property being leased). The Group accounts for its interests in the head lease and the sub-lease separately. At the commencement date of a sub-lease, the Group assesses whether the sub-lease transfers substantially all the risks and rewards incidental to ownership of the right-of-use asset arising from the head lease. If this is the case, then the sub-lease is a finance lease; if not, then it is an operating lease. At inception of a finance sub-lease, the Group derecognises the right-of-use asset that arises from the head lease and recognises its net investment in the sub-lease as a receivable, measured as the present value of the future payments to be received from the tenant, using the same discount rate used for the head lease. The Group subsequently measures the net investment in a sub-lease using the effective interest rate method. Under AASB 117 In the comparative period the Group leased property and equipment under operating leases where the lessor retained substantially all the risks and benefits of ownership of the leased items. Lease payments were recognised as an expense in profit and loss on a straight-line basis over the term of these leases. Lease incentives received were recognised as an integral part of the total lease expense over the term of the lease. Lease assets (right-of-use assets) Balance as at 1 January (adoption of AASB 16) Depreciation charge for the year Modification of leases Balance as at 31 December Lease liabilities Balance as at 1 January (adoption of AASB 16) Payments made Interest expense Modification of leases Balance as at 31 December Comprising of: Current Non-current Maturity analysis – contractual undiscounted cash flows Future payments to be made arising from lease contracts: Within one year One year or later and no later than five years Total undiscounted lease liabilities as at 31 December Amounts recognised in profit and loss Depreciation charge for the period Interest expense on lease liabilities Income from subleasing right-of-use assets 2019 $’000 14,346 (3,245) 65 11,166 2019 $’000 19,108 (3,551) 808 65 16,430 4,790 11,640 16,430 2019 $’000 4,909 12,879 17,788 2019 $’000 (3,245) (808) 158 2018 $’000 – – – – 2018 $’000 – – – – – – – – 2018 $’000 – – – – 2018 $’000 – – – The interest expense on lease liabilities and the income from subleasing the right-of-use assets are presented as financing costs in the statement of comprehensive income. 83 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 6.4 Intangibles The intangibles balance represents software development expenditure. Accounting policies Acquired software 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). Internally developed capitalised software 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 its carrying value. An impairment charge is recognised in the statement of comprehensive income when the carrying value exceeds the calculated recoverable amount. 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 (2018: Nil). Reconciliations Reconciliations of the carrying amounts for intangibles are set out below: Cost Balance as at 1 January Additions Disposals Balance as at 31 December Accumulated amortisation and impairment losses Balance as at 1 January Amortisation Disposals Balance as at 31 December Intangibles 2019 $’000 30,618 2,226 (390) 32,454 (24,423) (1,048) 357 (25,114) 7,340 2018 $’000 25,263 5,355 – 30,618 (23,962) (461) – (24,423) 6,195 84 Notes to the financial statements (continued) 6.5 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 has an indefinite useful life and is therefore not subject to amortisation, but is tested for impairment annually, or more often if there is an indication of impairment. Goodwill is stated at deemed cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill is allocated to cash-generating units (CGU). At 31 December 2019, the Group comprises of a single CGU (Mortgage Insurance Australia), which reflects the level at which goodwill is monitored for impairment by management. The impairment test involves the use of accounting estimates and assumptions. The recoverable amount of the CGU 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. Goodwill – at deemed cost 2019 $’000 9,123 2018 $’000 9,123 The following describes the key assumptions on which management based its cash flow projections when conducting the impairment testing: • Cash flow forecast is based on the latest five-year business plan approved by management. This business plan is based on a combination of historical performance and management’s expectations of future performance based on prevailing and anticipated market factors. • Terminal value is calculated using a perpetuity growth formula applied to the cash flows projected for the last year of the forecast period. The terminal growth rate used by management for its impairment assessment as at 31 December 2019 is 1.7% (2018: 1.9%). • Discount rate reflects a beta and equity risk premium associated to GMA. The pre-tax discount rate used at 31 December 2019 is 13.6% (2018: 14.3%). Management believes that any reasonably possible change in the key assumptions on which the value in use of GMA’s CGU is based would not cause GMA’s goodwill to be impaired. This is demonstrated in the sensitivity analysis below: Sensitivity analysis Under each of the stressed assumption scenarios used below (all other assumptions remaining constant), GMA’s goodwill is not impaired: • Reduction of the projected cash flow by 15%. • Terminal growth rate of 0%. • Increase of the discount rate by 300 basis points. 6.6 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 to 60 days. The carrying amount of accounts payable approximates fair value. Accrued expenses Trade creditors and other payables Related party payables Derivative financial instruments Comprising: Current Non-current 2019 $’000 15,919 25,810 98 – 41,827 38,645 3,182 41,827 2018 $’000 17,545 24,570 323 9,418 51,856 47,554 4,302 51,856 85 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 6.7 Employee benefits provision Accounting policies The carrying amount of provisions for employee entitlements approximates fair value. 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 corporate bond yields 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 Comprising: Current Non-current As at the balance date there were 195 employees (2018: 213). 2019 $’000 2,583 4,513 7,096 5,313 1,783 7,096 2018 $’000 2,790 4,467 7,257 5,280 1,977 7,257 86 Notes to the financial statements (continued) Section 7 Other disclosures 7.1 Parent entity disclosures Results 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 payments Other reserves Total equity 7.2 Remuneration of auditors Audit and review of financial statements Regulatory audit services Audit related services Non-assurance services 2019 $’000 2018 $’000 303,237 303,237 169,883 169,883 6,355 1,821,382 32,203 1,847,229 949 949 50 50 1,820,433 1,847,179 1,090,180 294,006 1,572 434,675 1,820,433 1,154,084 257,402 1,018 434,675 1,847,179 2019 $ 840,743 91,275 12,780 944,798 – 944,798 2018 $ 831,138 88,188 – 919,326 35,000 954,326 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 Executive KMP David Foster Ian MacDonald Gai McGrath Michael Bencsik (appointed on 4 February 2019) Andrew Cormack Steven Degetto Georgette Nicholas (ceased as a Director on 31 December 2019) Tobin Fonseca (ceased on 31 January 2019) Christine Patton Stuart Take Gayle Tollifson Jerome Upton Duncan West The key management personnel remuneration is: Short-term employee benefits Post-employment benefits Equity compensation benefits William Milner (ceased as Acting Chief Financial Officer on 4 February 2019) 2019 $’000 4,857 725 1,541 7,123 2018 $’000 4,892 429 629 5,950 87 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) 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 initial public offering (IPO), the Group entered into certain agreements with Genworth Financial, Inc (GFI) 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 ordinary shares of the Company or at the request of either party giving six months’ notice prior to the automatic annual renewal terms after 31 December each year. 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 $4,584,000 (2018: $3,550,000) for the year ended 31 December 2019. There is a payable balance of $98,000 as at 31 December 2019 (2018: $323,000). Share buy-back GFI participated in on-market sale transactions during the buy-back program to maintain the approximately 52% stake in the Group. GFI has sold 13.0 million (2018: 28.5 million) shares for a total consideration of $32.9 million as at 31 December 2019 (2018: $76.4 million). Refer to note 5.3 Equity for further details. 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. Major shareholder and its ultimate parent entity The major 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 Australian General Partnership is GFI which is incorporated in Delaware, United States of America. In October 2016, GFI and China Oceanwide announced that they had entered into a definitive agreement under which China Oceanwide 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. As at 31 December 2019, the closing of the merger remains subject to the receipt of required regulatory approvals in the U.S. and China and other closing conditions. Genworth Financial and China Oceanwide also continue to be actively engaged with the other relevant regulators regarding the pending applications. 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 Pty Limited Genworth Financial Mortgage Indemnity Limited Balmoral Insurance Company Limited 7.6 Share‑based payments Country of incorporation Australia Australia Bermuda Class of shares Ordinary Ordinary Ordinary Equity holding (%) 2019 100 100 100 2018 100 100 100 Accounting policies 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. 88 Notes to the financial statements (continued) Share Rights Plan Between 7 May 2015 and 1 March 2017, the Group granted restricted share rights to a number of key employees. The aggregate amount of these share rights was $1,501,907. One quarter of the share rights granted during the year vest on each of the first, second, third and fourth anniversaries of the grant date. If at any time an employee ceases continuous service with the Group, any unvested share rights are immediately cancelled, except in cases of retirement, redundancy, total and permanent disability or death. From 1 January 2018, it was decided that no grants would be made under the share rights plan. All outstanding grants (prior to 2018) made under the share rights plan will continue to vest per the original terms and conditions of the plan. Share rights plan grant date 7 May 2015 6 May 2016 1 March 2017 Available to Nominated employees Nominated employees Nominated employees Vesting period Four equal tranches vested on first anniversary of grant date Four equal tranches vested on first anniversary of grant date Four equal tranches vested on first anniversary of grant date Total ($) $509,967 $499,030 $492,910 The fair value of the share rights is calculated as at the grant date using a Black Scholes valuation. The factors and assumptions used for the valuation are summarised in the below table: Grant date Share price on grant date ($) Dividend yield Risk free rate (%) Vesting dates 2017 1 March 2017 $2.81 8.60% Tranche 1: 1.83% 2016 6 May 2016 $3.00 11.36% Tranche 1: 1.57% 2015 7 May 2015 $3.09 11.16% Tranche 1: 2.03% Tranche 2: 2.00% Tranche 2: 1.57% Tranche 2: 2.03% Tranche 3: 2.15% Tranche 3: 1.57% Tranche 3: 2.20% Tranche 4: 2.29% Tranche 1: 1 March 2018 Tranche 4: 1.80% Tranche 1: 1 March 2017 Tranche 4: 2.35% Tranche 1: 1 March 2016 Tranche 2: 1 March 2019 Tranche 2: 1 March 2018 Tranche 2: 1 March 2017 Tranche 3: 1 March 2020 Tranche 3: 1 March 2019 Tranche 3: 1 March 2018 Tranche 4: 1 March 2021 Tranche 4: 1 March 2020 Tranche 4: 1 March 2019 The final tranche of the 2015 Equity Plan grant vested on 1 March 2019. 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. Deferred short term incentive Plan Eligibility Nature of award Vesting conditions Short Term Incentive (STI) Deferral Plan Executives and any employee with an annual STI award >$50,000 • One-third of the dollar value of • 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 annual short-term incentive is converted to a grant of deferred share rights for executives. • For any annual STI payment greater than $50,000 one-third of the amount greater than $50,000 is converted to a grant of deferred share rights, provided the amount is $10,000 or more (applies to any non-executive incentive > $50,000). • 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 deferral period. 2019 Equity Grant A one-off grant of 53,702 share rights was made on 4 February 2019 to an employee subject to ongoing tenure and minimum performance thresholds as follows: • 31,326 share rights vesting on 2 August 2019. • 22,376 share rights vesting on 2 December 2019. • The key terms and conditions are similar to the rights issued under the Equity Plan. Both tranches of the 2019 Equity Grant are now vested in full. 89 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) Details of the number of employee share rights granted, exercised and forfeited or cancelled during the period were as follows: 2019 Grant date 7 May 2015 22 June 2015 6 May 2016 1 March 2017 1 March 2018 4 February 2019 1 March 2019 Total Balance at 1 January 2019 Number 21,292 1,935 74,970 161,700 166,920 – – 426,817 Granted in the year Number – – – – 16,464 53,702 215,0871 285,253 Exercised in the year Number (21,292) (1,935) (36,737) (51,298) (183,384) (53,702) – (348,348) Cancelled/ forfeited in the year Number – – (3,931) (25,009) – – – (28,940) Balance at 31 December 2019 Number – – 34,302 85,393 – – 215,087 334,782 Vested and exercisable at end of the year Number – – – – – – – – 1 The number of share rights granted in the year representing the deferred short-term incentive component under the 2018 remuneration program. 2018 Grant date 21 May 2014 7 May 2015 22 June 2015 6 May 2016 1 March 2017 1 March 2018 Total Balance at 1 January 2018 Number 294,344 51,936 3,869 154,224 363,374 – 867,747 Granted in the year Number – – – – 5,890 191,6361 197,526 Exercised in the year Number (269,187) (22,710) (1,934) (43,158) (173,951) (11,790) (522,730) Cancelled/ forfeited in the year Number (25,157) (7,934) – (36,096) (33,613) (12,926) (115,726) Balance at 31 December 2018 Number – 21,292 1,935 74,970 161,700 166,920 426,817 Vested and exercisable at end of the year Number – – – – – – – 1 The number of share rights granted in the year representing the deferred short-term incentive component under the 2017 remuneration program. Long term incentive plan The Group implemented a long term incentive (LTI) plan for executive KMP which is performance oriented and reflects local market practice. The vesting conditions for each of the LTI plan granted include: • Continuous active employment for four years from grant date. • Subject to performance conditions. LTI grant date 7 May 2015 6 May 2016 1 March 2017 1 March 2018 1 March 2019 Nature of award share rights share rights share rights share rights share rights Key terms and conditions for the 2019 LTI: • The rights are granted for nil consideration. Total $1,822,777 $1,729,230 $1,873,986 $1,886,491 $1,688,601 • Holders are entitled to receive notional dividend equivalents during the vesting period but do not have voting rights. • Each allocation is split 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: – – 25% is subject to a Underlying ROE performance condition. The Group’s three-year average Underlying ROE (based on mid-point of the Board’s targeted range above the Prescribed Capital Amount) is tested against target Underlying ROE over a three year period. 75% is subject to a relative TSR performance condition. The Group’s TSR is tested against comparator group, the ASX 200 financial services excluding Real Estate Investment Trust (REITs) over a three year period. • The number of share rights offered is determined by dividing the grant value of the 2019 long term incentive plan by $2.1727, being the 10-day volume weighted average price (VWAP) of the Company share price as at 31 December 2018 results, rounded down to the nearest whole share right. Each share right is a right granted to acquire a fully paid ordinary share of the Company. • The fair value of the share rights is the share price as at the grant date. If an employee ceases employment with the Group before the performance conditions are tested, their unvested rights will generally lapse. 90 Notes to the financial statements (continued) The fair value of the share rights for LTI is calculated as at the grant date using Monte Carlo simulation. The factors and assumptions used for the valuation are summarised in the below table. Grant date 2019 1 March 2019 2018 1 March 2018 2017 1 March 2017 Share price on grant date Dividend yield Volatility ($) $2.53 (%) 0% 1 (%) 31.02% Correlation Risk free rate Vesting date A correlation matrix for the ASX 200 financial services (excluding REITs) has been used (%) 2.24% 31 December 2022 $2.37 0% 1 34.1% A correlation matrix for the ASX 200 financial services (excluding REITs) has been used 2.1% 31 December 2021 $2.81 8.60% 35.00% A correlation matrix for the ASX 200 (excluding resource companies) has been used 2.0% 31 December 2020 1 Consistent with the requirements set out in AASB 2, given participants in the LTI plan are entitled to dividend equivalents on the underlying shares, the input for expected dividend yield has been set to zero. For the purposes of relative TSR fair value calculations, the expected dividend yield of the comparator group has also been set to zero. Details of the number of employee share rights granted, exercised and forfeited or cancelled during the period were as follows: 2019 Grant date 7 May 2015 1 6 May 2016 1 March 2017 17 July 2017 1 March 2018 1 March 2019 Total Balance at 1 January 2019 Number – 552,604 531,042 75,025 667,766 – 1,826,437 Granted in the year Number 23,789 – – – – 777,190 800,979 Exercised in the year Number (23,789) (139,291) – – – – (163,080) Cancelled/ forfeited in the year Number – (413,313) (77,612) – (84,551) – (575,476) Balance at 31 December 2019 Number – – 453,430 75,025 583,215 777,190 1,888,860 Vested and exercisable at end of the year Number – – – – – – 1 Represents notional dividends awarded as share rights associated with 2015 LTI plan share rights that had previously vested/been exercised on 31 December 2018. 2018 Grant date 7 May 2015 6 May 2016 1 March 2017 17 July 2017 1 March 2018 Total Balance at 1 January 2018 Number 116,196 648,988 646,425 75,025 – 1,486,634 Granted in the year Number – – – – 708,914 708,914 Exercised in the year Number (33,696) – – – – (33,696) Cancelled/ forfeited in the year Number (82,500) (96,384) (115,383) – (41,148) (335,415) Balance at 31 December 2018 Number – 552,604 531,042 75,025 667,766 1,826,437 Vested and exercisable at end of the year Number – – – – – – Omnibus Incentive Plan GFI and GFMI 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. Under the Omnibus Incentive Plans, GFI issues stock options, stock appreciation rights, restricted stock, restricted stock units (RSU), other stock-based awards and dividend equivalent awards with respect to its common stock to employees of its affiliates throughout the world. 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. 91 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Notes to the financial statements (continued) Details of the number of employee options granted, exercised and forfeited or cancelled during the year were as follows: 2019 Grant date 10/02/2010 09/02/2011 14/02/2012 15/02/2013 20/02/2014 Total Weighted average exercise price ($) 2018 Grant date 13/02/2008 19/08/2009 10/02/2010 09/02/2011 14/02/2012 15/02/2013 20/02/2014 Total Weighted average exercise price ($) Expiry date 10/02/2020 09/02/2021 14/02/2022 15/02/2023 20/02/2024 Expiry date 13/02/2018 13/02/2018 10/02/2020 09/02/2021 14/02/2022 15/02/2023 20/02/2024 Exercise price ($) 20.20 18.16 12.65 12.91 21.70 Balance at 1 January 2019 Number 27,000 26,500 32,100 31,500 14,000 131,100 Granted in the year Number – – – – – – Exercised in the year Number – – – – – – Cancelled/ forfeited in the year Number – – – – – – Balance at 31 December 2019 Number 27,000 26,500 32,100 31,500 14,000 131,100 Vested and exercisable at end of the year Number 27,000 26,500 32,100 31,500 14,000 131,100 16.35 – – – 16.35 16.35 Exercise price ($) 32.37 11.07 20.13 18.10 12.61 12.86 21.62 Balance at 1 January 2018 Number 3,000 6,288 27,000 29,000 38,100 37,000 19,500 159,888 Granted in the year Number – – – – – – – – Exercised in the year Number – – – – – – – – Cancelled/ forfeited in the year Number (3,000) (6,288) – (2,500) (6,000) (5,500) (5,500) (28,788) Balance at 31 December 2018 Number – – 27,000 26,500 32,100 31,500 14,000 131,100 Vested and exercisable at end of the year Number – – 27,000 26,500 32,100 31,500 14,000 131,100 16.34 – – 16.58 16.29 16.29 Details of the number of employee RSUs granted, exercised and forfeited or cancelled during the year were as follows: 2019 Grant date 20/03/2015 Total 2018 Grant date 20/2/2014 20/03/2015 Total Balance at 1 January 2019 Number 675 675 Balance at 1 January 2018 Number 12,746 1,350 14,096 Granted in the year Number – – Exercised in the year Number (675) (675) Cancelled/ forfeited in the year Number – – Balance at 31 December 2019 Number – – Granted in the year Number – – – Exercised in the year Number (12,746) (675) (13,421) Cancelled/ forfeited in the year Number – – – Balance at 31 December 2018 Number – 675 675 Vested and exercisable at end of the year Number – – Vested and exercisable at end of the year Number – – – 7.7 Events subsequent to reporting date As this 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 2019. • On 24 January 2020, the Company announced the appointment of Pauline Blight-Johnson as Chief Executive Officer and Managing Director effective 2 March 2020. • On 5 February 2020, the Directors declared a 100% fully franked final dividend of 7.5 cents per share totalling $30.9 million. • On 18 February 2020, the Company announced the retirement of Gayle Tollifson from the Board of Genworth effective 15 March 2020 and the appointment of Andrea Waters to the Board effective 16 March 2020. These changes were made as part of Genworth’s Board renewal program. 92 Notes to the financial statements (continued) 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 52 to 92 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 2019 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. The directors have been given the declarations required by section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 31 December 2019. Signed in accordance with a resolution of the Directors Ian MacDonald Chairman Dated 26 February 2020 93 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Directors’ declaration 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 2019 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 2019; • 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 Genworth Mortgage Insurance Australia Limited (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 • Valuation of Unearned Premium Liability and Net Earned Premium Key Audit Matters are those matters that, in our professional judgement, 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. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 94 Independent auditor’s reportto the shareholders of Genworth Mortgage Insurance Australia Limited Valuation of Gross Outstanding Claims Liability ($361m) Refer to accounting policy in Note 4.1 Net claims incurred, Note 4.4 Outstanding claims, Note 4.8 Accounting estimates and judgements and Note 4.9 Actuarial assumptions and methods. The key audit matter How the matter was addressed in our audit The valuation of gross outstanding claims liability is a key audit matter as it is highly judgemental and requires assumptions to be made with inherent estimation uncertainty. These assumptions can have significant impacts on the valuation. This complexity requires us to exercise judgement when evaluating the methodology and assumptions adopted by the Group. The Group’s insurance policies are similar in nature. As a result our audit focused on the Group’s consistent identification and application of common characteristics to segment the stages of claim emergence when applying frequency and severity (size) factors to determine the gross outstanding claims liability. These common characteristics include region, loan originator, outstanding loan size, and loan-to-value ratio. As a result of these factors, the estimation of the liability is highly dependent on the integrity of the underlying data. The gross outstanding claims liability reflects the Groups’ internal actuarial experts’ 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 the Group to make assumptions 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 are likely to be influenced by changes in macroeconomic factors such as interest rates, unemployment, property prices, and performance of industry and geographic segments; • the timing of receipt of information from lenders indicating a delinquency or claim has occurred; and • past claims experience being an appropriate predictor of future experience. The assumptions adopted have a significant impact on the financial performance of the Group, and therefore, are a focus of our audit attention. As a result, we involved senior audit team members, including specialists, who collectively understand the valuation methodology, the Group’s business, its industry and the economic and regulatory environment it operates in. Our procedures included: We tested the key controls designed and operated by the Group for gross outstanding claims liability. Along with our IT specialists, we assessed the key controls for significant data inputs used by the Group to determine the outstanding claims liability. Our assessment included testing specific reconciliation controls and interfaces from key IT systems that provide data used in the actuarial valuation processes underlying the outstanding claims liability. We focused on the assumptions and valuation methodology used by the Group in estimating the gross 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, against the criteria of the accounting standards. We were assisted by our actuarial specialists in this and in our consideration of the work and findings of the Group’s internal actuarial experts, including their competency, objectivity, and scope of work. We considered the Group’s valuation methodology and assumptions for consistency between reporting periods, as well as for indicators of possible bias. Our challenge focused on the assumptions applied to delinquencies and claims data. We did this by: • evaluating underlying documentation. 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) and investigating significant variances. Specifically, we have considered the impact of recent trends in housing prices on the selected assumptions. identifying and analysing key changes in frequency and severity assumptions by comparing selected assumptions to experience exhibited to date. • assessing the consistency of information, such as claims experience and trends across the Group’s operations. 95 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Independent auditor’s report (continued)to the shareholders of Genworth Mortgage Insurance Australia Limited Valuation of Unearned Premium Liability ($1,280m) and Net Earned Premium ($298m) Refer to the accounting policy in Note 4.6 Unearned premium, Note 4.8 Accounting estimates and judgements, and Note 4.9 Actuarial assumptions and methods. The key audit matter How the matter was addressed in our audit Genworth receives payment for its insurance policies upfront, however it is their policy to recognise this premium revenue over time. The timing pattern for recognition of premium earned and the resulting valuation of the unearned premium liability (the proportion of the premium revenue not yet recognised), is determined by the Group 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. As a result the complexities noted in the key audit matter on ‘Valuation of Gross Outstanding Claims Liability’ are also relevant to our work over net earned premium and the valuation of the unearned premium liability. Net earned premium and the Valuation of 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 judgement applied by us in assessing the assumptions adopted by the Group. In addition to those assumptions we identified as relevant to the key audit matter on ‘Valuation of Gross Outstanding Claims Liability’, the Group considers the following to further impact the length and development of the earnings curve: underwriting year, loan type, policy type, premium cancellation and loan increase (top-up) rates. The assumptions adopted have a significant impact on the financial performance of the Group. As a result, we involved senior audit team members, including specialists, who collectively understand the valuation methodology, the Group’s business and the economic and regulatory environment it operates in. Our procedures included: We tested the key controls designed and operated by the Group for the unearned premium liability and net earned premium. Along with our IT specialists, we assessed the key controls for significant data inputs. This included testing specific reconciliation controls, including those over the reliability of data used in the actuarial modelling processes and interfaces from key IT systems used in the valuation of the unearned premium liability. With the assistance of our Actuarial specialists, we focused on the assumptions and valuation methodology used by the Group in their assessment. We performed additional procedures for each key segment of the portfolio, reflecting underwriting year, loan type and policy type and considered indicators of possible bias. These included: • an assessment of consistency in the adopted pattern of risk emergence by comparing the methodology utilised in the current year to the methodology adopted for previous assessments; • an assessment of sensitivity of the adopted earnings curve to more recent experience in key model assumptions including claims frequency, cancellations and top-ups; and, • consideration of the impact of more recent experience on the applied earnings curve. Our detailed testing also included the procedures outlined in the key audit matter on Valuation of Gross Outstanding Claims Liability as timing of revenue recognition is dependent upon future claim emergence. 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. 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. 96 Independent auditor’s report (continued)to the shareholders of Genworth Mortgage Insurance Australia Limited 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 and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. 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 and Company 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 the 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_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Genworth Mortgage Insurance Australia Limited for the year ended 31 December 2019, complies with Section 300A of the Corporations Act 2001. 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 48 of the Directors’ report for the year ended 31 December 2019. 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 26 February 2020 97 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Independent auditor’s report (continued)to the shareholders of Genworth Mortgage Insurance Australia Limited Unless otherwise stated, the information in this section is current as at 31 January 2020. Annual General Meeting The 2020 AGM of Genworth Mortgage Insurance Australia Limited will be held on Thursday, 7 May 2020, at The Mint, 10 Macquarie Street, Sydney NSW 2000. The AGM will be webcast live on the internet at 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. Share Registry contact information can be found in the Corporate Directory of this report. Online voting Shareholders can lodge voting instructions electronically either as a direct vote or by appointing a proxy for the 2020 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, 30 April 2020. 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. 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. Shareholders that are broker (CHESS) sponsored should direct queries relating to incorrect registrations, name changes and address changes to their broker. 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 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 98 Shareholder information Important dates 1 Company financial year end Full year results and dividend announced Record date for dividend Dividend paid Annual Report and Notice of AGM mail out commences AGM 1 Note: some dates may be subject to change. Ordinary shares and share rights As at 31 January 2020, the Company had on issue the following equity securities: • 412,514,184 Shares • 2,217,766 Share Rights 31 December 2019 5 February 2020 5 March 2020 19 March 2020 27 March 2020 7 May 2020 Ordinary share 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 Twenty largest holders of ordinary shares Rank Name 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 Pty Limited Citicorp Nominees Pty Limited National Nominees Limited Brazil Farming Pty Ltd Argo Investments Limited BNP Paribas Noms Pty Ltd Prudential Nominees Pty Ltd National Exchange Pty Ltd BNP Paribas Nominees Pty Ltd CS Third Nominees Pty Limited National Nominees Limited Woodross Nominees Pty Ltd Girt By Sea Investments P/L BNP Paribas Nominees Pty Ltd FJP Pty Ltd Rhodium Capital Pty Limited Stanbox Pty Limited Aotearoa Investment Company Pty Limited Total for Top 20 Number of shares % of issued shares 214,316,838 51.95 68,702,781 27,689,104 25,297,507 13,778,875 4,300,000 3,208,901 2,862,916 2,800,000 2,000,000 1,850,966 1,341,298 1,086,615 946,220 801,974 461,237 438,750 400,000 400,000 380,765 16.65 6.71 6.13 3.34 1.04 0.78 0.69 0.68 0.48 0.45 0.33 0.26 0.23 0.19 0.11 0.11 0.10 0.10 0.09 373,064,747 90.44 99 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Shareholder information (continued) Distribution schedule of holders of ordinary shares 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 137 ordinary shares ($3.66 on 31 January 2020) is 203 and they hold 4,037 ordinary shares Number of holders Number of shares % of issued shares 1,252 1,649 817 814 56 610,169 4,622,096 6,364,329 20,645,831 380,271,759 4,588 412,514,184 0.15 1.12 1.54 5.00 92.18 100.00 Dividend details Share class Ordinary Ordinary Ordinary Ordinary 1 Dividend declared on 5 February 2020. 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 Voting rights Dividend Franking Amount per share Payment date Interim Fully franked 9.0 cents 28 August 2019 Special Special Unfranked Unfranked 21.9 cents 28 August 2019 24.2 cents 28 November 2019 Final Fully franked 7.5 cents 19 March 2020 1 Number of holders Number of share rights % of total share rights 0 14 5 5 5 29 0 38,327 32,311 116,943 2,030,185 2,217,766 0 1.73 1.46 5.27 91.54 100.00 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 Rights Plan 511,446 shares were purchased on-market for the purposes of the Rights Plan during the period from 1 January 2019 to 31 December 2019 at an average price of $2.95 per share. On-market share buy-back As at 31 January 2020, there was no current on-market share buy-back. 100 Shareholder information (continued) Term AASB AGP APRA ASX Description Australian Accounting Standards Board Genworth Australian General Partnership Australian Prudential Regulation Authority Australian Securities Exchange Australian Subsidiaries Genworth Financial’s 100% owned Australian subsidiaries prior to the IPO Book Year The calendar year an LMI policy is originated CET1 or Tier 1 Capital 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 Combined ratio The sum of the loss ratio and the expense ratio China Oceanwide China Oceanwide Holdings Group Co., Ltd DUA EPS Expense ratio 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 FBT Fringe benefit tax Genworth or the Group The Company and its subsidiaries Genworth Financial Group Genworth Financial and its subsidiaries, excluding Genworth Genworth Financial or GFI Genworth Financial, Inc. and, where relevant, its predecessors GFMI Genworth Financial Mortgage Insurance Pty Limited GMA or the Company Genworth Mortgage Insurance Australia Limited ABN 72 154 890 730 Gross earned premium or GEP The earned premium for a given period prior to any outward reinsurance expense GWP HLVR IBNR ICAAP IFRS Indemnity Insurance margin Investment return IPO KMP 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 Limited 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 and Level 2 Group “Level 2 insurance group” as defined by APRA under Prudential Standard GPS 001, referring to a consolidated insurance group 101 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Glossary Term LLC LMI LMI Market LMI Provider LMI subsidiary Loss ratio LTI LVR Major Banks or Major Lenders Description 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 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 Mark-to-market Unrealised gains/losses (exclusive of foreign exchange) MIP NED 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 New insurance written Non-operating holding company Omnibus Incentive Plans The Genworth Financial 2004 Omnibus Incentive Plan and 2012 Omnibus Incentive Plan PCA PCA coverage PCR PCP PDR Performance NPAT 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 Performance NPAT excludes the after-tax impact of realised mark-to-market gains/(losses) on the investment portfolio, and the impact of foreign exchange rates on Genworth’s investment portfolio. The bulk of these foreign exchange exposures are hedged. PoA Probability of adequacy Regulatory capital base The sum of Tier 1 Capital and Tier 2 Capital ReMS Reinsurance Management Strategy Return on equity (ROE) Calculated by dividing NPAT by the average of the opening and closing equity balance for a financial period Rights Plan Genworth Share Rights Plan RMF RMS RSU 102 Risk Management Framework Risk Management Strategy Restricted share units Glossary (continued) Term S&P Description 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 Senior Leadership Team Statutory NPAT Net profit after tax STI Short-term incentive Supply and Service Contract A contract between a lender customer and Genworth for the supply of LMI and related services Technical Funds Investments held to support unearned premium and outstanding claims reserves TFR Tier 2 Capital 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 TSR Total shareholder return Underlying Equity Underlying NPAT Underlying ROE VWAP WACC WGEA XOL Underlying equity is defined as total equity excluding the after-tax impact of mark-to-market gains/ (losses) on the investment portfolio, and the impact of unhedged movements in foreign exchange rates on Genworth’s non-AUD exposures Underlying NPAT excludes the after-tax impact of mark-to-market gains/(losses) on the investment portfolio, and the impact of foreign exchange rates on Genworth’s investment portfolio. The bulk of these foreign exchange exposures are hedged The Underlying ROE is calculated by dividing Underlying NPAT by the average of the opening and closing Underlying Equity balance for a financial period Volume weighted average price Weighted Average Cost of Capital Workplace Gender Equality Agency Excess of loss 103 342DIRECTORS’ REPORTFINANCIAL REPORTOTHER INFORMATION1OVERVIEWGENWORTH Annual Report 2019Glossary (continued) 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. 104 Corporate directory This document has been printed on 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.