Genworth Mortgage Insurance Australia
Annual Report 2020

Plain-text annual report

Level 26 101 Miller Street North Sydney NSW 2060 Australia Tel 1300 655 422 genworth.com.au 26 February 2021 Companies Announcements Office Australian Securities Exchange 20 Bridge Street SYDNEY NSW 2000 Genworth Mortgage Insurance Australia Limited (ASX:GMA) 2020 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 2020. 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: Investors: Paul O’Sullivan Head of Investor Relations M: +61 499 088 640 Media: Iwona Falkiner Head of Corporate Affairs M: +61 428 059 965 Genworth Mortgage Insurance Australia Limited ABN 72 154 890 730 ® Registered Trade Mark of Genworth Financial, Inc. G e n w o r t h A n n u a l R e p o r t 2 0 2 0 Annual Report 2020 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 more sustainable housing market in Australia. VALUES Our values underpin how we interact with each other, how we interact with our customers and how we build a brand that truly reflects the character of our business. f Act with integrity have courage. do what’s right. f Rethink the everyday experiment. embrace change. adapt. f One team work together to deliver on our commitments. f Own it be accountable. plan. get it done. f Focus on your customer listen. be relevant. be flexible. SUPPORTING THE DREAM OF HOME OWNERSHIP Years of facilitating home ownership 50+ Lender customers 50+ Borrowers experiencing financial stress and hardship supported since 20131 70,964 Genworth is a leading provider of Lenders Mortgage Insurance (LMI) and capital and risk management solutions in Australia. LMI has been an important part of the Australian residential mortgage lending market since Housing Loan Insurance Corporation (HLIC) was founded by the Australian Government in 1965. 1. Via our lender customers 01 Strategic Report 02 FY20 highlights 04 Chairman’s review 06 CEO’s report 08 Our strategy and business 10 Response to COVID-19 12 Our approach to sustainability 14 Risk management Directors’ Report 16 Directors’ report 17 Board of directors 20 Senior leadership team 22 Operating and financial review 30 Remuneration report 51 Lead auditor’s independence declaration Financial Report 52 Financial statements 100 Directors’ declaration 101 Independent auditor’s report 106 Shareholder information 110 Glossary 113 Corporate directory Genworth Mortgage Insurance Australia Limited and its controlled entities ABN 72 154 890 730 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report 02 FY20 highlights Overview INSURED LOANS IN-FORCE1 1,195,907 PORTFOLIO OF INSURED HOME LOANS (DECEMBER 2020) Number of Insured Policies Value of Insured Policies WA 146,374 12.2% $38.9b 12.7% SA 90,621 $18.7b 7.6% 6.1% VIC 290,313 24.3% $70.7b 23.1% TAS 44,049 $6.9b 3.7% 2.3% INSURANCE IN-FORCE BY HOME LOAN TYPE AND VALUE² NT 13,962 $3.7b 1.2% 1.2% QLD 273,201 22.8% $71.3b 23.3% NSW 286,627 24.0% $83.7b 27.4% ACT 30,176 $8.3b 2.5% 2.7% NZ 20,584 $3.5b 1.7% 1.1% $305.7b Value of Insured Policies 31 December 2020    Owner Occupier + Principal & Interest $193.0b    Owner Occupier + Interest Only    Investor + Principal & Interest   Investor + Interest Only OTHER $27.7b $32.0b $31.6b $21.4b 63% 9% 10% 11% 7% 1. Number of insured loans in-force at 31 December 2020 2. Value of insurance in-force at 31 December 2020 03 Financial strength PCA ratio of 1.65 times, with surplus capital of $203 million above the top end of board target range of 1.32 to 1.44 times 2020 $31.6b 2019 $26.7b 1.65x CREDIT RATINGS S&P Insurer Financial Strength A Rating Fitch Insurer Financial Strength A Rating Operational NEW INSURANCE WRITTEN Number of policies 80,000 2020 76,557 2019 66,895 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 $b 35 30 25 20 15 10 5 0 LENDER CUSTOMERS FOR 2020 DEFERRAL APPLICATIONS IN 2020 50+ 56,630 CLAIMS PAID IN 2020 AMOUNT OF CLAIMS PAID IN 2020 1,254 $120.8m Shareholder³ CLOSING SHARE PRICE SHARES ON ISSUE MARKET CAPITALISATION $2.39 413m $985.9m Shareholders by Geography Shareholders by Type Shareholders by geography Shareholders by type North America 61% Corporate 52% Australia Europe Other 29% 2% 8% Domestic institutions Foreign institutions Private Other 22% 11% 6% 9% 3. As at 31 December 2020 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report04 Chairman’s review In these unprecedented times, the fundamental role of our Company has never been more pertinent – to help Australians realise their dream of owning a home. We are committed to working in partnership with our lender customers to enable people to buy homes sooner and, wherever possible, to help them remain in their homes in difficult times. 2020 has been a challenging year for Australians. With many people and communities already dealing with a record drought and devastating bushfires at the start of the year, it was the onset of what would become a global pandemic that ultimately defined our nation and the world in 2020. SUPPORTING AUSTRALIAN HOMEBUYERS AND HOMEOWNERS Your Company did not hesitate to support Australians in their time of need. With our lender customers, we assisted over 63,000 borrowers who were experiencing difficulties, including those impacted by COVID-19. In addition, Genworth wrote over 75,000 new Lenders Mortgage Insurance (LMI) policies over the year, reflecting the historically low interest rates and strong mortgage market competition. At the end of 2020, Genworth had 1.2 million policies with insurance in-force of $305.7 billion. Our commitment to enabling homeownership underpinned the way we supported our people and customers throughout the year. The unprecedented nature of the pandemic necessitated our people rapidly adapting to new ways of working, and this was enabled by a robust business continuity plan and the automated technology that Genworth has invested in over recent years. Our people have worked hard under challenging circumstances and it is a credit to them that they maintained high standards of service to Genworth’s lender customers. BUSINESS PERFORMANCE AND CAPITAL MANAGEMENT Genworth’s 2020 financial performance was materially impacted by the effects of COVID-19 on the economy, that led to increased reserving for anticipated future claims outcomes contributing to a full year Statutory NPAT loss of $107.6 million. Pleasingly, Genworth was in a strong financial position when the pandemic arose, and your Company continues to remain well positioned. As at 31 December 2020, Genworth’s regulatory solvency ratio was 1.65 times the Prescribed Capital Amount (PCA) on a Group (Level 2) basis, comfortably above the Board’s target range of 1.32 to 1.44 times and representing surplus capital of $203.2 million above the top end of the range. Due to the uncertain economic outlook, APRA’s regulatory guidance and the Company’s FY20 Statutory NPAT loss, the Board concluded it would preserve capital and not pay an interim or final ordinary dividend for 2020. Your Board acknowledges the importance of dividends for shareholders and remains committed to resuming dividend payments when we believe it is appropriate to do so, taking into account the impacts of COVID-19 on the Company’s financial and capital position as further information becomes available. STRATEGY FOR GROWTH Genworth’s operating environment is rapidly evolving. Even before the pandemic, the financial sector had been facing disruption from new and emerging technologies, evolving consumer expectations, and continuing regulatory change. In response to these developments, over the past few years Genworth has enhanced its data and technology tools and leveraged our capabilities to launch new products and improve customer experience. For example, this year we successfully piloted the monthly premium LMI offering and we are currently in discussions with further customers regarding their requirements. During 2020, the Company undertook a strategic review to confirm organisation priorities in this new environment and realign the business structure to support growth. Genworth’s strategic direction is now being refreshed to build an even stronger, more efficient and sustainable business for the years ahead. SUSTAINABLE BUSINESS PRACTICE The Board believes that to have a sustainable business, Genworth needs to continue to make a positive contribution to Australia’s social fabric. This commitment is embedded in our sustainability framework that supports our people, the community and the Australian dream of home ownership. In delivering sustainable growth, the Board places significant importance on managing our business responsibly, 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 on the Genworth website. An integral component of Genworth’s success is a culture that encourages collaboration and accountability. These characteristics were certainly evident in the flexibility and adaptability of Genworth’s people in moving seamlessly to remote working and continuing to collaborate and innovate to serve our customers. Details of Genworth’s sustainability approach and response to COVID-19 are provided on pages 10 to 13 of this Annual Report. 05 REMUNERATION REFLECTING PERFORMANCE Whilst management did an excellent job leading their teams during a challenging year, the effects of COVID-19 impacted FY20 profit and returns to shareholders. The Board and management believe that the impact on shareholders should be shared by our management team and therefore executive Key Management Personnel did not receive any fixed remuneration increases or Short-Term Incentives (STI) for 2020. More information is provided in the Remuneration Report on pages 30 – 49. BOARD RENEWAL The program of Board renewal continued in 2020. Gayle Tollifson retired in February after eight years of service; Christine Patton retired in August after almost two years of service; and Jerome Upton retired in September after eight years of service. In March, Andrea Waters was appointed as an independent director; in August, Graham Mirabito was appointed as an independent director; and in September, Rajinder Singh was appointed as a non-executive director, replacing Jerome on the Board as a Genworth Financial, Inc. designee. I would like to thank the retiring and current Directors for their wise counsel and support over the year, with additional thanks to Duncan West who acted as Chief Executive Officer in early 2020 until Pauline Blight-Johnston commenced in March. I also express my thanks to Pauline who, despite the challenges of her first year as Chief Executive Officer, has led the organisation admirably, supported by the Senior Leadership Team and Genworth’s hard working and dedicated people who continued to demonstrate their passion and commitment. LOOKING AHEAD As we look ahead, your Board understands how important it is for Genworth to play our part in the nation’s rebuilding program, by continuing to support our lender customers, their borrowers and the broader community. While the outlook for the Australian economy is improving, uncertainty remains. In facing the challenges ahead, Genworth has the balance sheet strength to continue to assist Australian homeowners on their homeownership journey. In closing, on behalf of the Board, thank you for your ongoing support. Ian MacDonald Chairman Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report06 CEO’s report Financial strength, resilience and a commitment to facilitating homeownership have underpinned 2020 at Genworth. In an unprecedented year, our priorities have been to prudently and efficiently manage our business, support Genworth’s customers and take care of our people. All of us at Genworth are dedicated to helping Australians in need in a financially and socially responsible manner. I am proud of the passion and commitment of our people to go above and beyond to support our lender customers and their borrowers, guided by Genworth’s role in helping Australians realise the dream of home ownership. SUPPORTING OUR CUSTOMERS Our business was operationally and financially well positioned for the challenges of 2020. We responded rapidly when COVID-19 emerged, establishing an incident management team in January and implementing our business continuity and contingency plans in March when the pandemic was declared. The Company’s investment in data and technology over recent years enabled us to mobilise quickly, setting up our people to safely and productively work remotely to service our lender customers. Our people adapted well to the new operating environment, working together with lender customers to help families and individuals into homes and support those experiencing hardship. We took actions to decisively and prudently support our customers impacted by COVID-19. We expanded our Hardship Policy to include pandemics. We redirected teams to where they were needed the most, to process over 55,000 home loan repayment deferrals, as well as high volumes of new business being written by lender customers as a result of a low interest rate environment. We adapted processes and enhanced controls to electronically ingest data, creating operational efficiencies and enabling rapid customer response. This work was delivered while meeting all contractual service level agreements. By the end of the year, most borrowers who were on repayment deferrals had opted out or had their loans restructured, with approximately 8,100 still requiring support. As we manage through the economic recovery, we will remain sensitive to borrower circumstances, working closely with our lender customers around appropriate hardship solutions to support Australians in need and mitigate potential losses. FINANCIAL PERFORMANCE Turning to the Company’s financial performance for the full year ended 31 December 2020 (FY20), Statutory NPAT was a $107.6 million loss and Underlying NPAT was a $104.3 million loss. The FY20 results were materially impacted by the effects of COVID-19 on the economy and the anticipated flow on to our claims experience. While we delivered substantial growth in gross written premium (GWP) to $561.7 million, profits were reduced primarily by the write-down of deferred acquisition cost (DAC) of $181.8 million (pre-tax) at 31 March 2020, and the 18 December 2020 reserving review of $109.1 million (pre-tax). In response to the pandemic, repayment deferrals and moratoriums on foreclosures were introduced to support borrowers. These initiatives interrupted the typical behaviour patterns of delinquencies and claims, leading to lower than anticipated claims activity. To allow for these unusual circumstances, Genworth increased reserving and refined our reserving methodology to bring forward the average timing for recognising the potential liability for losses. Importantly, despite the unforeseen economic downturn, the business remains in a strong capital position, able to withstand a wide range of future claims outcomes. As at 31 December 2020, the PCA ratio was 1.65 times on a Group (Level 2) basis, comfortably above the Board’s target range of 1.32 to 1.44 times and representing surplus capital of $203.2 million. The Company’s cash and investment portfolio had a market value of $3.4 billion. PARTNERSHIPS AND COLLABORATION Genworth has long-standing partnerships with major, non-major, mutual and non- bank mortgage originators. During the year we renewed a number of contracts for the exclusive provision of Lenders Mortgage Insurance (LMI). We also introduced to market our monthly premium product, underpinning our expected premium revenues for the coming years. We continued to add value along the mortgage chain, sharing data insights and developing education tools to support our lender customers and brokers. Taking advantage of the remote working environment, we launched the Genworth Insights series to digitally share data and customer research insights. Topics included First Homebuyer Sentiment research, providing independent analysis of first homebuyer perceptions and behaviours in the current economic environment. 07 Our ability to move quickly over this past year to support our lender customers, while also prioritising our people’s wellbeing, is a testament to Genworth’s culture and capability. The new operating model will further enhance our ability to respond to lender customers and borrowers, whilst continuing to prudently manage risk. This will ensure our Company emerges from COVID-19 in a stronger position, with a more customer-centric approach that amplifies the passion and dedication of our people to our customers, empowering them to do even more. WELL POSITIONED THROUGH THE ECONOMIC RECOVERY The Company is well capitalised, with a solid balance sheet to ensure we can support lenders and their borrowers at this time of need and over the longer term. We will continue to actively manage our capital position while delivering long-term shareholder returns and retaining the flexibility to grow the business for the future. In closing, I would like to thank the Chairman and my fellow Directors for their stewardship of the Company and support to me since I joined Genworth last March. To all our Genworth people, thank you for your hard work and commitment to our customers. I am extremely proud of how our people have adapted to meet the challenges of the year and maintained service standards. 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, our shareholders for your support. Pauline Blight-Johnston Chief Executive Officer and Managing Director SHAPING THE BUSINESS FOR THE FUTURE The unusual circumstances presented by COVID-19 have become a catalyst for innovation in the way our people interact, collaborate and solve problems, both with each other and with our customers and brokers. Consumer behaviour is also continuing its rapid evolution as people become increasingly comfortable in allowing more digitisation and automation into their lives. In response to the changing environment, we undertook a strategic review of the business in 2020. We are now finalising a business strategy that repositions our customer value proposition to maintain market leadership in LMI as well as achieve sustainable growth through product innovation and complementary product offerings. In order to set the business up for growth, we introduced a more customer-centric operating model accompanied by a leaner organisation design that removes duplication, creates efficiencies and clear end-to-end accountabilities. We have recruited additional management expertise, including a Chief Operating Officer and Chief Commercial Officer, New Ventures, to help lead the business towards a more agile future, supporting the next phase of Genworth’s growth. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report08 Our strategy and business Genworth’s strategic objective over recent years has been to redefine and then enhance our core business model to help Australians into homes by providing excellent LMI products and service. The strategic initiatives we implemented allow Genworth to better meet customer needs in a dynamic market environment and deliver profitable growth. Since 2019, we have transitioned our focus to leveraging our new capabilities to launch new products and enhance customer experience. t i o n n g e a a h Te c h n ple, org a n is d cultural c o e P n a Strategic enablers D a t a a n d a n alytics o l d S t a k e h o l o g y t n e m e g e r m ana 2020 PROGRESS In 2020, we leveraged expanded product and technology capabilities to add value across the mortgage value chain. Our Initiatives enhanced our customer value proposition, as exhibited by several key customer renewals as well as a meaningful increase in our Net Promoter Score. We delivered a successful pilot launch of our monthly premium offering and expect further expansion in 2021. Throughout the COVID-19 environment, our enhanced digital capabilities allowed us to prudently manage the quality of business written as well as support borrowers on home loan repayment deferrals. A REFINED STRATEGIC PLAN TO DELIVER PROFITABLE GROWTH OVER THE MEDIUM-TERM In 2021, Genworth’s strategic focus will be on enhancing the competitiveness of our existing LMI business, evolving LMI to meet the changing needs of lenders, brokers and borrowers and leveraging the capabilities we’ve built to expand out business into complimentary service offerings. Business model GENWORTH’S BUSINESS ACTIVITIES Genworth supports 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. SHAREHOLDER VALUE CHAIN Products and income Costs Distribution Premium income Financial income Claims f Interest rates f Investment income f Delinquencies f Reserving f Payment of claims f Customers f New insurance written f Gross written premium f Revenue recognition Dividends and retained earnings f Underlying NPAT f Payout ratio f Special dividends f Share buy-backs Underwriting and other costs f Underwriting fees f Amortisation of customer acquisition related costs f Marketing costs f Employee and IT costs Strategy, risk and capital management 09 Our business CORPORATE STRUCTURE2 52% Genworth Financial, Inc.3 214,316,838 ordinary shares PRINCIPAL ACTIVITY ORGANISATION OVERVIEW 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 high loan to value ratio (HLVR) residential mortgage loans. Genworth is the leading provider in Australia and a provider of capital and risk management solutions in the Australian residential mortgage market. The Group estimates that it had approximately 52% of the Australian HLVR LMI market1 by GWP for the 12 months ended 31 December 2020. Genworth is listed on the Australian Securities Exchange (ASX: GMA). As at 31 December 2020, the number of Genworth shares on issue was 412.5 million. Genworth Mortgage Insurance Australia Limited ABN 72 154 890 730 412,514,184 ordinary shares 48% Public 198,197,346 ordinary shares Genworth Financial Mortgage Insurance Pty Limited ABN 60 106 974 305 Balmoral Insurance Company Limited (Bermuda) Registration No. 53069 Genworth Financial Mortgage Indemnity Limited ABN 55 001 825 725 PRODUCTS AND CUSTOMERS In 2020, Genworth continued to focus on our first in market, monthly premium LMI product as a complement to our traditional upfront LMI offering (Standard LMI, Homebuyer Plus and Business Select). Our monthly premium LMI product continues to gain momentum with several customers commencing activities with a goal to implement in 2021, following our successful pilot during 2020. In 2020, GWP was predominantly generated from insurance written on a flow and portfolio basis. The Company maintains commercial relationships with over 50 lender customers across Australia, with a majority of its mortgage insurance business concentrated in a small number of key customers. We have a very strong relationship with our largest customer, as well as with others who are growing well and we are strengthening relationships. Lender customers 2020 GWP4 Lender customers Largest customer 56.9% Second largest customer 11.0% Largest customers 3–10 24.5% All others 7.6% 1. Estimates based on APRA quarterly general insurance statistics and management estimates 2. Genworth corporate structure as at 31 December 2020 3. Genworth Financial, Inc.’s interest in the Company is held indirectly through the Genworth Financial Group 4. Includes excess of loss insurance Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report10 Response to COVID-19 In response to COVID-19, our priorities and actions have been to support our lender customers and borrowers, protect our people and support the community. 11 Our priority has been to help Australians maintain their home ownership during these uncertain times wherever possible. We will continue to work with our lender customers to provide support to meet the needs of their borrowers. OUR PEOPLE The health and wellbeing of our people is critical to our business and from March Genworth’s workforce successfully transitioned to working remotely in accordance with government guidelines, with a strong focus on sustaining physical and mental health. Physical wellbeing was supported by providing employees the necessary equipment to set up safe and ergonomic home workspaces as well as the introduction of an additional two week’s personal leave to assist with any COVID-19 related illness and carer responsibilities. People managers were provided with training in managing employee mental health whilst working remotely and several employees were trained and appointed as mental health first aiders to provide additional support to colleagues. Our regular COVID-19 employee pulse surveys indicated a very high level of satisfaction and confidence in the way our business has managed the pandemic and supported our employee’s health and wellbeing. OUR CUSTOMERS OUR PARTNERS Customer engagement We responded quickly to support our lender customers and their borrowers. With the need for a heightened level of engagement, we met more regularly with our customers' credit and collections teams to understand their rapidly changing needs and ensured we continued this dialogue throughout 2020. We adapted our processes and systems to allow for additional due diligence. Throughout the year we provided detailed portfolio reporting and insights to our customers to understand trends, impacts and support needed, with a sharp focus on deferred payment arrangements. Our customers have expressed appreciation for our support. Hardship and deferrals support As regulators and our lender customers made changes to assist affected borrowers, Genworth quickly adjusted our disaster and hardship policies and delegations to ensure rapid support could be provided. We extended COVID-19 related payment deferrals for up to 10 months. We adjusted our processes and systems which allowed activity to occur with limited impact. All debt recovery activity was placed on hold in 2020. We worked closely with our partners and suppliers to ensure continuity of service to our customers. Pre-COVID-19, Genworth had established robust and tested business continuity and supplier governance practices, which enabled us to swiftly work with our key suppliers to identify and monitor potential COVID-19 impacts to service. Our suppliers’ response to the pandemic underscored our strong relationships and ensured flexibility to adjust priorities as the year progressed. ONGOING RESPONSE As COVID-19 evolves, it will likely present new challenges. We will continue to monitor and adapt our response as required to ensure our customers and people are supported through these challenging times. "Genworth responded quickly to support our people and customers at the onset of the pandemic, and our support continued throughout the year." Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report12 Our approach to sustainability Our sustainability framework creates value for stakeholders by providing better long term outcomes for investors, our customers, first home buyers and employees. Sustainability framework Genworth is committed to making a positive contribution to the communities of which we are part. Our Sustainability Framework reflects the important environmental, social and governance (ESG) matters that we believe are critical to achieving business objectives and long-term value for all stakeholders. The Framework is structured around four pillars (our people, community, environment and marketplace), highlighting the areas identified as being those most material to the business and of greatest relevance to stakeholders. In 2020 we continued to deliver initiatives that supported our people, industry, environment and the communities in which we operate. We continued to invest in the diversity and inclusiveness of our workforce, we further developed our approach to Reconciliation and formed our first reconciliation action plan (RAP) Working Group. We educated the market on the benefit of LMI, and we also improved our environmental footprint by reducing our net lettable area. Four pillars of sustainability Our people Workplace safety and wellbeing Training and development Culture Diversity and inclusion Community Environment Supporting home buyers Borrower education Charitable donations Volunteering Energy consumption GHG emissions Waste management Water consumption Marketplace Direct economic value generated Responsible lending Facilitating competition Supporting innovation and collaboration 13 2020 Highlights DIVERSITY AND INCLUSION Board Senior Leadership Team Other management roles (ex SLT) Overall INDIRECT EMISSIONS DOWN BY MORE THAN¹ 67% 56% 64% 53% 33% 44% 36% 47% 30% Male Female COMMUNITY DONATIONS, GRANTS AND WORKPLACE GIVING $170,000+ LMI POLICIES ISSUED 75,000+ 1. On a 2018 baseline Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report14 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 framework outlines the process for managing the risks faced by Genworth, using a ‘three lines’ approach that drives accountability and responsibility. The Board and Senior Leadership Team are accountable for Genworth’s risk culture and ensure we continue to develop and improve practices to measure, assess and manage risk at Genworth. Our strategies for managing risks are developed across all levels of the organisation, reflecting the principle that it is everyone’s role to manage risk. Specific risk management strategies for our most important organisational risks are outlined in the table below. Material Risks Risk Management Strategies Housing and Underwriting Risks1 Economic Risk • Back book loss management actions and new business underwriting responses (including where applicable underwriting policy, product and pricing changes/responses). Underwriting Risk (In-force Portfolio) • Strong mortgage default risk management policies and disciplines through the economic cycle; • Active management of in-force portfolio risks (loss management of arrears, claims, hardships practices). Underwriting Risk (New Business) • Genworth manages its underwriting policy settings in a dynamic and responsive manner relative to the current and emerging environment; • Underwriting policy includes geographic risks of oversupply and high-risk postcodes, policy constraints such as LVR, loan size, loan purpose, property types, borrower attributes and credit score; • Genworth considers other aspects of LMI product design and pricing as further levers to manage risk actively. Strategic Risks LMI Market Risk • Key existing accounts management and early renewal where possible; • Actively participate in open tenders for new business opportunities from non-Genworth LMI customers; • Seeking to enhance core market as well as diversify concentration risks through the 2021. 15 Material Risks Product Risk Risk Management Strategies • Seeking to enhance core LMI product proposition with a stronger alignment of value to the borrower, lender and distribution stakeholders; • Continue to rollout alternative LMI propositions (including monthly premium) which can vary product attributes and pricing; • Strategic programs established with strong review and challenge to support strategic execution. Regulatory Change/Political Risk • Maintain strong engagement in Government and Regulatory Relations to enable proactive input on regulatory developments. Strategic Execution Risk • Establish focused teams with the appropriate capabilities to separately support both core LMI growth and in leveraging our core capabilities into complementary offerings. Market, Credit and Liquidity Risk Market, Credit and Liquidity Risk • Strategic asset allocation (risk/return in low yield environment); • Structuring the investment portfolio for long term profitability. Operational Risks Operational Risk • Continue to drive a risk culture where people are accountable end to end for risk management and driving business outcomes; • Continue to drive a focus on getting to root cause and resolution of issues, challenges and incidents in the business; • Focus on execution and optimising balance between risk and reward; • Ongoing assessments of the risk of processes including the design and operating effectiveness of controls. IT Risk (including Cyber Risk) • Ensure implementation of the Technology Roadmap and currency of technology platform to be fit for purpose or proportionate to the business strategy, in particular with the increased uptake of digital and automation; • Continue to drive the appropriate IT surveillance and controls around cyber risk including the Information Security Policy framework, Council governance, Vulnerability Management Program, independent audit of cyber security controls and Cyber Risk insurance coverage. Reinsurance Risk Reinsurance Renewal Risk • Annual cancel and rewrite reinsurance program continuing to seek new markets and maintaining continuity of coverage provisions to mitigate renewal risk. Compliance and Conduct Risk Compliance and Conduct Risk • Continue to drive a risk culture where people are accountable end to end for compliance and conduct risk management and driving appropriate business and stakeholder outcomes; • Continue to drive a focus on getting to root cause and resolution of issues, challenges and incidents in the business. Reputational Risk Reputational Risk Cross risk class • Continue to actively manage reputational risk through appropriate internal controls and a coherent set of externally facing processes including disclosure and external stakeholder management. Pandemic and Contagions Risks • Consider the long term implications of COVID-19 as well as other potential black swan events and how to manage and/or risk protect. Climate Change Risk • Provide quantified insight into the effects of present and future physical climate change on our Risk in-force and any climate transition risks and their impacts. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report16 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 2020 and the auditor’s report thereon. 17 20 Board of directors Senior leadership team 22 Operating and financial review 30 51 Remuneration report Lead auditor’s independence declaration CORPORATE GOVERNANCE STATEMENT The corporate governance statement is available on the Genworth website. Please visit: investor.genworth.com.au/investor-centre/ Board of directors 17 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. Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): None. PAULINE BLIGHT-JOHNSTON DAVID FOSTER Chief Executive Officer and Managing Director, Genworth Financial Designee Director, Independent, Genworth Financial Designee Pauline joined Genworth as Chief Executive Officer and Managing Director on 2 March 2020. Qualifications and experience: Pauline has over 25 years of senior management, financial and strategic experience in wealth management and insurance in Australia, New Zealand and globally. Prior to joining Genworth, Pauline held senior leadership and strategic roles in Challenger, AMP and RGA Reinsurance Company. She has also served as Chief Financial Officer and Appointed Actuary of Asteron Life, and consulted to the insurance and wealth management industry at KPMG and Tillinghast-Towers Perrin. An active industry participant, Pauline has served on the boards of the Institute of Actuaries, the Financial Services Council and the Australian Institute of Insurance and Finance, as well as been a member of and chaired numerous committees of these bodies. Pauline is a Fellow of each of the Institute of Actuaries of Australia, the New Zealand Society of Actuaries, the Actuarial Society of South Africa, Finsia, the Australian and New Zealand Institute of Insurance and Finance and the Australian Institute of Company Directors. She also holds a Master of Economics degree from Macquarie University. Special responsibilities (including Committee memberships): Managing Director. Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): None. 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): Remuneration and Nominations Committee – Chair; Technology Committee – Chair; Capital and Investment Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): 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). Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report18 Board of directors (continued) 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 and 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. Special responsibilities (including Committee memberships): Risk Committee – Chair; Audit Committee – Member; Remuneration and Nominations Committee – Member; Technology Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): Steadfast Group (since 1 June 2018); Investa Listed Funds Management Limited as responsible entity of Investa Office Fund (from 17 October 2017 to 14 December 2018). GRAHAM MIRABITO RAJINDER (RAJ) SINGH Director, Independent, Genworth Financial Designee Graham was appointed to the Board on 10 August 2020. Qualifications and experience: Graham has over 35 years’ experience in the information technology industry including 10 years in engineering and 25 years in sales, marketing, operations, mergers, acquisitions and general management. Graham has held senior roles at Telstra as MD Telstra Europe and EVP Telstra Asia. Graham previously spent 12 years as CEO of RP Data which he took public on the ASX in 2006 and was acquired by strategic shareholder CoreLogic in 2011. His last executive role was as CEO CoreLogic International responsible for operations in Australia, Asia and UK. Graham is currently a non-executive director of Cipherpoint Ltd, Harcourts International, Auscred Services Ltd and Archistar Pty Ltd. Graham holds an Associate Diploma in Electrical Engineering from the Queensland University of Technology. Special responsibilities (including Committee memberships): Audit Committee – Member; Capital and Investment Committee – Member; Technology Committee – Member Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): Cipherpoint Ltd (since 1 November 2019). Director, Genworth Financial Designee Raj was appointed to the Board on 9 September 2020. Qualifications and experience: Raj is Chief Risk Officer of Genworth Mortgage Insurance for Genworth Financial, Inc, a position he has held since 2014. His previous roles include Managing Director and Chief Risk Officer for Citigroup’s U.S. Mortgage Business; Chief Credit Risk Officer for Ally Financial (formerly known as GMAC Financial Services); Chief Risk Officer for GE Money Americas (division of GE Capital), and Head of Retail Risk at U.S. Bancorp, Minneapolis. Raj also serves on the boards of India Mortgage Guarantee Corporation Private Limited, Genworth Seguros de Credito a la Vivienda, S.A. de C.V. in Mexico, and the Appalachian Trail Conservancy. Raj holds an MBA in Finance from the University of Rochester’s Simon Business School, an MS in Mechanical and Aerospace Engineering from Rutgers University, a B.Tech. in Mechanical Engineering from the Indian Institute of Technology Kanpur, and is a graduate of Wharton’s Advanced Risk Management Program. Special responsibilities (including Committee memberships): Audit Committee – Member; Risk Committee – Member; Capital and Investment Committee – Member; Technology Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): None. 19 STUART TAKE ANDREA WATERS Director, Genworth Financial Designee Director, Independent DUNCAN WEST Director, Independent Stuart was appointed to the Board on 20 February 2012. Andrea was appointed to the Board on 16 March 2020. Duncan was appointed to the Board on 1 September 2018. 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 2018 – 31 December 2020): None. Qualifications and experience: Andrea has over 35 years’ experience in financial services as an auditor, accountant and non executive director. She was a former partner of KPMG (until 2012) specialising in financial services audit and has a deep experience in risk management and in implementing and enhancing audit and governance structures in financial services. She brings to the Board a strong strategic perspective and deep experience understanding complex business operations. Andrea is a Fellow of Chartered Accountants Australia and New Zealand and a member and accredited facilitator of the Australian Institute of Company Directors. Andrea is currently a director of MyState Limited, Grant Thornton Australia Limited, Bennelong Funds Management Group, Citywide Service Solutions Pty Limited and the Colonial Foundation. Special responsibilities (including Committee memberships): Audit Committee – Chair; Risk Committee – Member; Capital and Investment Committee – Member; Remuneration and Nominations Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): MyState Limited (since 19 October 2017); Cash Converters International Limited (from 9 February 2017 to 14 December 2018). 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): Capital and Investment Committee – Chair; Audit Committee – Member; Risk Committee – Member; Technology Committee – Member. Directorships of other ASX listed companies and period of appointment (1 January 2018 – 31 December 2020): Challenger Limited (since 10 September 2018). Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report20 Senior leadership team PAULINE BLIGHT-JOHNSTON ANDREW CORMACK Chief Executive Officer and Managing Director Chief Risk Officer STEVEN DEGETTO Chief Commercial Officer Pauline joined Genworth as Chief Executive Officer and Managing Director in March 2020. Pauline has over 25 years of senior management, financial and strategic experience in wealth management and insurance in Australia, New Zealand and globally. Prior to joining Genworth, Pauline held senior leadership and strategic roles in Challenger, AMP and RGA Reinsurance Company. She has also served as Chief Financial Officer and Appointed Actuary of Asteron Life, and consulted to the insurance and wealth management industry at KPMG and Tillinghast-Towers Perrin. An active industry participant, Pauline has served on the boards of the Institute of Actuaries, the Financial Services Council and the Australian Institute of Insurance and Finance, as well as been a member of and chaired numerous committees of these bodies. Pauline is a Fellow of each of the Institute of Actuaries of Australia, the New Zealand Society of Actuaries, the Actuarial Society of South Africa, Finsia, the Australian and New Zealand Institute of Insurance and Finance and the Australian Institute of Company Directors. She also holds a Master of Economics degree from Macquarie University. 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 market leading risk and compliance practices and developing high achieving teams engaged in delivering the company’s key strategic objectives and outcomes. 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. 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 and Marketing and Chief Financial Officer. Earlier in his career, Andy spent three years with JP Morgan where he focused on emerging market fixed income derivatives and prior to this worked at Neville Russell Accountants (now Mazars) as 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). 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 has also recently completed a Global Leadership program through Tuck Business School at Dartmouth College. MICHAEL BENCSIK Chief Financial Officer BRAD DEAN Chief of Staff Michael joined Genworth as Chief Financial Officer 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 Chief Financial Officer and Head of 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 Graduate of the Australian Institute of Company Directors. Brad joined Genworth in August 2002, was appointed to the senior leadership role of Head of Strategy and Innovation in October 2018, and subsequently appointed to the new role of Chief of Staff in December 2020. 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. 21 NICOLE LANG PRUDENCE MILNE SENIOR LEADERSHIP TEAM Chief People and Culture Officer General Counsel and Company Secretary Nicole joined Genworth in January 2021 as Chief People and Culture Officer. She is a global HR executive with extensive experience delivering significant strategic and operational initiatives to drive transformation and cultural change. Nicole recently moved back to Australia from Hong Kong where she led the Human Resources function for the Commonwealth Bank's International Financial Services Business and was Company Director for a number of their offshore entities. Nicole has a Master’s in Business (International Human Resources), Graduate Diploma in Education and a Bachelor of Science Degree. 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. 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. 56% Male (56% in 2019) 44% Female (44% in 2019) Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report22 Operating and financial review OPERATING RESULT FOR THE FINANCIAL YEAR The Group’s key financial measures are summarised in the below table. Financial performance measures (A$ million) Gross written premium Gross earned premium Net earned premium Statutory NPAT Underlying NPAT FY20 561.7 381.4 312.0 (107.6) (104.3) FY19 433.2 368.4 298.2 120.1 97.0 Non-IFRS performance metrics FY20 (%) FY19 (%) Loss ratio Expense ratio Combined ratio Insurance margin Investment return ROE Underlying return on equity (ROE) The underwriting performance in 2020 reflects: 92.9 82.1 175.0 (55.8) 2.7 (7.4) (7.3) 50.6 35.3 85.9 36.2 4.4 7.4 6.0 a. Gross written premium growth of 29.7% reflected higher LMI flow volumes across lender customers with underlying credit quality remaining strong; b. Net earned premium increased 4.6% mainly reflecting higher business volumes and the seasoning of current and prior book years; c. The anticipated economic impacts of COVID-19 led to a $181.8 million deferred acquisition costs (DAC) write-down in 1Q20; d. The reserving review undertaken during 4Q20 had the effect of increasing the net claims incurred by $109.1 million and increasing the loss ratio to 92.9%; e. The expense ratio increased from 35.3% in FY19 to 82.1% in FY20 largely due to the $181.8 million DAC write-down in 1Q20. Excluding the DAC write-down and the associated DAC amortisation benefit from 2Q20 to 4Q20, the expense ratio increased 60 bps to 35.9% reflecting slightly higher underwriting expenses in the current year as a result of increased new business; f. The insurance margin decreased to (55.8%) compared to 36.2% for FY19 mainly driven by the DAC write-down in 1Q20 and the increase in net claims incurred as a result of the reserving review undertaken in 4Q20. Excluding the DAC write-down and the associated DAC amortisation benefit from 2Q20 to 4Q20; and excluding the increase in net claims incurred as a result of the reserving review undertaken in 4Q20, the insurance margin decreased 10.8 percentage points to 25.4% mainly reflecting higher net claims incurred in the current year. Operating and financial review (continued) REVIEW OF FINANCIAL CONDITION Key assets and liabilities (A$ million) Cash and investments Deferred acquisition costs Deferred tax assets Total assets Outstanding claims Unearned premium Interest bearing liabilities Total liabilities Net assets 23 FY20 FY19 3,425.5 3,131.1 41.6 55.6 181.2 9.1 3,680.6 3,477.4 540.4 360.9 1,461.2 1,280.5 187.8 199.4 2,292.7 1,387.9 1,949.9 1,527.5 Total assets as at 31 December 2020 of $3,680.6 million increased by $203.2 million from 31 December 2019 driven by: • $294.4 million increase in cash and investments, due to strong operating cash flows from gross written premiums during the year; • $139.6 million decrease in DAC as a result of the $181.8 million write-down in 1Q20, partially offset by additional expenditure associated with obtaining and recording mortgage insurance contracts from 2Q20 to 4Q20; • $46.5 million increase in deferred tax assets largely from the timing difference created by the $181.8 million DAC write-down in 1Q20. The total liabilities as at 31 December 2020 of $2,292.7 million increased by $342.8 million from 31 December 2019 driven by: • $180.7 million increase in unearned premium resulting from strong performance in gross written premium during the year; • $179.5 million increase in outstanding claims driven by additional COVID-19 related reserving including the reserving methodology review undertaken in 4Q20 where the Group now holds re-delinquency claims reserves for all in-force policies that have at any point experienced delinquency, up until the associated policy is cancelled or a case reserve is established. The equity of the Group as at 31 December 2020 of $1,387.9 million decreased $139.6 million from 31 December 2019. The movement is mainly attributable to the payment of $30.9 million of the final FY19 dividend in March 2020 and $107.6 million in current year losses. 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 2020, the Group’s capital mix was: • Net tangible equity (net of goodwill and intangibles) 88.0%; • Debt 12.0%. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report 24 Operating and financial review (continued) CAPITAL MANAGEMENT The Group remains strongly capitalised with regulatory capital of $1,616.3 million at 31 December 2020 (2019: $1,659.6 million). The Group has solvency of 1.65 times the prescribed capital amount (PCA) and a Common Equity Tier 1 (CET1) ratio of 1.45 times, which continues to be above the Board’s targeted solvency range of 1.32 to 1.44 times the PCA on a level 2 basis. The table below illustrates the capital position as at 31 December 2020 compared with 31 December 2019. PCA COVERAGE RATIO (LEVEL 2) (A$ million), as at 31 Dec 20 31 Dec 19 Common Equity Tier 1 Capital (incl. net excess technical provisions) 1,426.3 1,459.6 Tier 2 Capital Regulatory capital base Insurance concentration risk charge Asset risk charge Insurance risk charge Operational risk charge Aggregation benefit Total PCA PCA coverage 190.0 200.0 1,616.3 1,659.6 511.7 166.1 332.0 43.4 (71.9) 981.3 1.65x 479.1 125.7 284.4 35.7 (55.7) 869.3 1.91x The decrease in PCA coverage in 2020 mainly reflects the impact of the DAC write-down in 1Q20, the increase in reserves and strong gross written premium throughout the year. 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 2020 was $985.9 million based on the closing share price of $2.39. 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 12 February 2021, the directors determined that no dividend declaration would be made for the year ended 31 December 2020. 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. 25 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 Pauline Blight-Johnston (commenced as a Director on 2 March 2020) David Foster Gai McGrath Graham Mirabito (commenced as a Director on 10 August 2020) Rajinder Singh (commenced as a Director on 9 September 2020) Stuart Take Andrea Waters (commenced as a Director on 16 March 2020) Duncan West Former directors Christine Patton (ceased to be a Director on 9 August 2020) Gayle Tollifson (ceased to be a Director on 15 March 2020) Jerome Upton (ceased to be a Director on 8 September 2020) 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, initial public offerings, equity raisings and joint ventures. Brady holds a Bachelor of Commerce and Bachelor of Laws from the University of Sydney. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report26 Operating and financial review (continued) Economic overview and outlook ECONOMIC OVERVIEW Prior to 2020, the Australian economy had experienced just two years of negative growth during the previous six decades. However, 2020 saw the Australian economy enter its first recession in nearly three decades. KEY ECONOMIC HIGHLIGHTS OVER 2020 Bushfires continue COVID-19 initial cases reported Stimulus measures including JobSeeker and JobKeeper announced Unemployment reaches 7.5% Victoria goes under second lockdown Cash rate reduced to 0.10% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Global pandemic declared. Border closes for all non-citizens and non-residents GDP falls by 7% COVID vaccination approved by UK, EU and US early December 2020, followed by approval in Australia early January 2021 Movements in key economic indicators over 2020 are discussed below. GROSS DOMESTIC PRODUCT Economic growth slowed in the first quarter of 2020 as the impacts of bushfires were felt across the economy. Economic activity was further impacted in the second quarter as COVID-19 related restrictions took effect, with yearly GDP bottoming at -6.4% in June 2020 despite the unprecedented level of Government fiscal policy stimulus, accommodative monetary policy and lender support programs. GDP growth recovered in the third quarter of 2020 as COVID-19 restrictions eased, improving yearly GDP to -3.8%. December 2020 data is expected to be released by the Australian Bureau of Statistics in early March 2021. Quarterly national GDP growth Data sourced from ABS at Dec ‘20 -4-5-6-7-2-3-101324%1Q202Q203Q204Q1927 Operating and financial review (continued) UNEMPLOYMENT COVID-19 proved particularly disruptive for Australia’s labour market. The unemployment rate reached a 2020 low of 5.1% in February 2020 but began to rise sharply over the course of the second quarter and early into the third quarter of 2020 assisted by the Government’s JobKeeper support measures as economic activity slowed, peaking at 7.5% in July 2020. Over the course of the third quarter, the unemployment rate began to fall, reflecting the pickup in economic activity boosted by the end of state border closures. However, the December 2020 unemployment rate of 6.6% remains well above the 5.1% reported at December 2019. Quarter end national unemployment rate Data sourced from ABS at Dec ‘20 HOUSE PRICES The effects of COVID-19 were also visible on the Australian housing market with dwelling values initially declining from April to September 2020, falling 2.1% from their April 2020 peak. Dwelling values began to recover over the fourth quarter of 2020 rising by 2.3%, as the housing market responded to a combination of the Reserve Bank of Australia (RBA) cutting its official cash rate to 0.1%, government stimulus packages and an improved employment and economic outlook. Quarterly national house price movements Data sourced from Corelogic’s Hedonic Home Value Index at Dec ’20 ECONOMIC OUTLOOK Genworth expects its financial performance in 2021 to be influenced by several factors: • The recovery of the Australian economy is expected to continue but is likely to be uneven. The Reserve Bank does not expect GDP to reach 2019 levels until mid-year 2021; • The unemployment rate is likely to remain above pre COVID-19 levels as the participation rate rises and government stimulus measures cease; • The RBA expects the cash rate to remain at 0.1% for the next three years, which is expected to continue to provide some support to the Australian housing market. 2Q203Q204Q201Q2002468%2Q203Q204Q201Q2002468%Quarterly national house price movements-1-21023%2Q203Q204Q201Q20Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report28 Operating 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 Risk Committee Ian MacDonald Pauline Blight-Johnston David Foster Gai McGrath Graham Mirabito Christine Patton Raj Singh Stuart Take Gayle Tollifson Jerome Upton Andrea Waters Duncan West A H A H 9 7 9 9 3 6 2 9 2 6 7 9 9 7 9 9 3 6 2 9 2 7 7 9 2 2 2 2 – 2 – 2 1 2 1 2 2 2 2 2 – 2 – 2 1 2 1 2 A – 4 – 2 – – – – – 2 2 4 H – 4 – 2 – – – – – 2 2 4 A H – – – 7 2 5 2 – 2 5 5 5 – – – 7 2 5 2 – 2 5 5 5 A 2 – – 6 – – 2 6 2 4 4 4 H 2 – – 6 – – 2 6 2 4 4 4 Capital and Investment Committee Remuneration and Nomination Committee Technology Committee A H A H A H – – 7 – 2 5 2 – 1 5 6 6 – – 7 – 2 5 2 – 1 5 6 6 – – 5 5 – – – 5 2 – 3 – – – 5 5 – – – 5 2 – 3 – – – 4 4 1 – 1 – – 3 – 3 – – 4 4 1 – 1 – – 3 – 3 Note: A represents the number of meetings attended, and H represents the 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 2020 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 2021. 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. 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. 29 Operating and financial review (continued) NON-AUDIT SERVICES The directors are satisfied that the provision of non-audit services during the year by the auditor of $nil (2019: $nil), 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 and 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 Each of the following persons was an Officer of the Company during 2020, and was a partner of KPMG at a time when KPMG undertook an audit of the Company: • Ms Andrea Waters, Director since 16 March 2020, was a partner of KPMG from 1996 – 2012; • Ms Pauline Blight-Johnston, Chief Executive Officer and Managing Director since 2 March 2020, was a partner of KPMG from 2019 – 2020. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportSHORT TERM INCENTIVE OBJECTIVES The conditions noted above resulted in 2020 financial performance against Genworth’s Short-Term Incentive (STI) objectives as follows: • Performance NPAT loss of $137.5 million, a below threshold outcome driven by the write-down of the DAC accounting expense and additional reserving; • Capital management – no dividend returns to shareholders in 2020 due to the uncertain economic outlook, APRA’s regulatory guidance and the Company’s FY20 Statutory net loss and the Board’s decision to preserve capital; • Gross written premium of $561.7 million, an outcome that outperformed the maximum stretch target. Genworth delivered several strategic priorities in 2020. Building on our core business model and investment in data and technology over recent years, we implemented the first ever monthly premium LMI offering in Australia in 2020; we delivered sophisticated new loss forecast modelling; and continued our ongoing data and technology to drive business efficiencies. There were some positive customer outcomes as reflected in Net Promoter Score (NPS) improvements and new customer acquisition, however the National Australia Bank contract was not renewed during the year. The linkage between our remuneration framework and Company strategy and performance is set out in more detail in section 2.5 – Executive Key Management Personnel (KMP) remuneration programs. More details on the 2020 STI outcomes are provided in section 3.2 – Link between performance and STI outcomes. 30 Remuneration report Dear Shareholder, On behalf of your Board, I am pleased to present our annual remuneration report for the year ended 31 December 2020. THE 2020 YEAR IN REVIEW COVID-19 has created unprecedented challenges across Australia and Genworth has worked hard to respond quickly and effectively for our customers, employees and to focus on the long-term financial stability of the business. To respond to the challenging and unpredictable business conditions in the Australian mortgage market, Genworth has implemented a range of targeted financial and operational measures to ensure that we will continue to be able to pursue our mission to promote the dream of home ownership in Australia, and play a role in contributing to the ongoing stability of the housing market. For our employees, Genworth responded quickly with a safe and effective transition to remote working with no disruption to business activities. Genworth’s employees were then able to continue to deliver high customer service standards despite the challenges of high home loan deferral volumes. Genworth also worked closely with our lender customers to implement loss management strategies to support borrowers who entered into repayment deferrals, while still prudently managing portfolio risk. Genworth did not rely upon the government JobKeeper initiative during 2020 to remunerate our employees. Genworth quickly adapted our capital management strategy to respond to the COVID-19 pandemic by maintaining a strong balance sheet to provide flexibility to meet any future challenges. Our strong capital base of 1.65 times the Prescribed Capital Amount (PCA) provides a capital buffer that means we are well positioned to navigate and prepare for a potential increase in delinquency rates once repayment deferrals cease. Genworth moved quickly to respond to the projected impacts of the pandemic by increasing reserving during the year by $179.5 million and recognising a one-off $181.8 million write-down of Deferred Acquisition Costs (DAC) at 1Q20. These impacts contributed to a $227.7 million decrease in statutory Net Profit After Tax (NPAT) for 2020 compared to 2019. Due to the uncertain economic outlook, APRA’s regulatory guidance and the Company’s FY20 statutory net loss, the Board concluded it would preserve capital and not pay an interim or final dividend for 2020. The low interest rate environment has contributed to increased new business reflected in an 18.1% increase in New Insurance Written (NIW) in 2020. The Board is cognisant that 2020 has been a difficult year for our shareholders with high volatility in the Genworth share price coupled with no dividend returns. Whilst the prudent capital preservation actions taken in 2020 will help to ensure the longer-term sustainability of the business for our shareholders in the future, the Board and Senior Leadership Team felt it appropriate that 2020 executive remuneration outcomes were reflective of the shareholder outcomes. 31 Remuneration report (continued) EXECUTIVE REMUNERATION OUTCOMES FOR 2020 The COVID-19 pandemic contributed to a Total Shareholder Return (TSR) for 2020 of (34.5%) and dividend returns of zero cents per share. While the Board recognises the agility and responsiveness of management in prudently managing the Company through the effects of COVID-19 and increased new business volumes, remuneration outcomes for executive KMP have reduced ensuring greater alignment with shareholder returns: 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 • No Fixed Remuneration adjustments for executive KMP its shareholders; for 2021; 2. Provide a clear link between Company and individual • To reflect shareholder outcomes in 2020, the Chief performance and remuneration outcomes; Executive Officer (CEO) and other executive KMP voluntarily elected not to receive a 2020 STI award acknowledging the need for executive and shareholder aligned outcomes, notwithstanding the valuable individual contributions of executive KMP and the CEO during a challenging year; • Short-term incentive funding for the broader organisation was determined to be 53% of target (section 3.2) representing a 45 percentage point reduction from the 2019 outcome of 98%; • The 2018 Long-Term Incentive (LTI) relative TSR tranche (75% of the overall grant) exceeded the upper quartile of the comparator group across the performance period, while the underlying ROE tranche (25% of the overall grant) did not meet the minimum hurdle. This will result in an overall vesting outcome of 75% at the conclusion of the vesting period in December 2021. More details on these outcomes in FY20 are outlined in section 3.3 – Link between performance and LTI outcomes. In addition, there were no Director base or committee fee increases for 20201. 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; 6. Recognise the importance of executing on the Company’s strategy to evolve the business model and deliver a sustainable future for the Company; 7. Attract the talent we need to underpin strategy execution. GENWORTH’S REMUNERATION APPROACH FOR 2021 The Board remains satisfied that the revised incentive plan structure implemented in 2020 supports Genworth’s business strategy and drives alignment with shareholders and, as such, has made no structural adjustments to the remuneration framework for 2021. A review will be undertaken in 2021 to ensure that the incentive plan structure continues to meet evolving regulatory expectations and aligns to changes in strategy. The 2021 STI scorecard metrics have been updated to align to our 2021 strategic priorities and the underlying ROE vesting scale for the 2021 LTI plan updated for the current lower interest rate environment (refer to tables 2.7b – 2021 STI performance objectives and weightings and 2.8b – 2021 LTI key characteristics for more information). 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. Ongoing preparations are underway for anticipated regulatory changes for APRA-regulated institutions. More detail on these initiatives and outcomes of the Board’s approach to consequence management is provided in section 2.4 – Alignment of risk and remuneration. While 2020 has been a challenging year for Genworth, the Board is confident that we are well positioned to ensure the long-term sustainability and success of the Company. David Foster Chairman – Remuneration and Nominations Committee 1. D Foster’s overall fees increased from FY19 to FY20 due to changes in Committee membership, while D West’s fees from FY19 to FY20 increased due to remuneration received as Acting CEO from 1 January to 1 March 2020 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report32 Remuneration report (continued) 1. EXECUTIVE KMP REMUNERATION SUMMARY 1.1 Executive KMP Remuneration This report provides shareholders with an overview of Genworth’s remuneration governance, strategy, programs and outcomes for KMP for the year ended 31 December 2020. The table below provides a concise summary of the remuneration received by executive KMP for the year ended 2020. 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 – 2020 Remuneration summary table (unaudited) as at 31 December 2020 Fixed remuneration At-risk/performance remuneration Short-term incentive (STI) Long-term incentive (LTI) Name and position – Executive KMP Contract TFR 1 Actual TFR received 2 STI target Actual STI awarded 3 LTI maximum opportunity 4 LTI vested 5 Pauline Blight-Johnston 6 Chief Executive Officer (CEO) Michael Bencsik 7 Chief Financial Officer (CFO) Andrew Cormack Chief Risk Officer (CRO) Steven Degetto Chief Commercial Officer (CCO) 2020 2019 2020 2019 2020 2019 2020 2019 $900,000 $742,892 $600,000 – –  – $510,000 $509,059 $255,000 – – – $600,000 – $250,000 – – – $500,000 $456,357 $226,712 $222,178 $120,000 $187,062 $517,523 $517,657 $207,009 – $253,688 $145,280 $507,375 $505,428 $202,950 $179,002 $247,500 $111,029 $468,234 $464,876 $234,117 – $225,113 $86,938 $450,225 $447,776 $225,113 $253,702 $217,500 – 1.2 Overview of Genworth’s KMP in 2020 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 2020 Name Executive KMP P Blight-Johnston M Bencsik A Cormack S Degetto Position Term as KMP CEO CFO CRO CCO 2 March – 31 December Full year Full year Full year 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 each disclosed year 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 includes any amounts delivered as deferred STI – see section 4 for more details 4. The LTI grant reflects the face value of the LTI grant awarded during the respective year 5. Represents the dollar value of vested awards as at the date of vesting under the Genworth LTI plan, excluding any deferred STI plans 6. Ms Blight-Johnston’s 2020 STI target and LTI grant were pro-rated from commencement in the CEO role on 2 March 2020 7. Mr Bencsik’s 2019 target and actual STI is pro-rated from commencement in the CFO role on 4 February 2019 33 Remuneration report (continued) In 2019, the Board asked Mr Duncan West, a current Non-Executive Director (NED) with extensive insurance industry experience, to serve as Acting CEO effective 1 January 2020 until a permanent CEO appointment was made. Fees received by Mr West during this period are disclosed in table 7c. The Board appointed Ms Pauline Blight-Johnston as CEO and Managing Director effective from 2 March 2020. Mr West then stepped down as Acting CEO on 1 March immediately prior to Ms Blight-Johnston’s commencement and returned to his NED duties on the Board. 1.3 Termination Payments to former CEO Ms Georgette Nicholas announced her retirement from Genworth in May 2019 and stepped down as CEO and as a member of the Board effective 31 December 2019. Termination payments associated with the former CEO’s retirement were within the termination benefit limits prescribed in the Corporations Act. Table 1c – Termination payments to former CEO Award Value Description Accrued annual leave $20,797 Accrued long service leave $284,475 Relocation benefits $19,195 LTI 2019 128,008 share rights Statutory entitlement Contractual entitlement Costs associated with the conclusion of the international assignment A pro-rated portion of the 2019 LTI award remains unvested and subject to ongoing participation in the plan subject to ongoing hurdles and vesting timeframes 1 LTI 2017 and LTI 2018 No entitlement Grants forfeited 1. Any part of the 2019 LTI grant that passes performance hurdles will vest on 31 December 2022; 281,620 share rights under Ms Nicholas’ 2019 LTI grant were forfeited on termination 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 did not receive advice from external advisers in 2020. 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report34 Remuneration report (continued) 2.4 Alignment of risk and remuneration The Genworth Remuneration Policy provides a link between risk and remuneration through a number of measures including: • Board discretion to adjust remuneration in the event of misconduct and risk and compliance breaches; • Articulation of the different remuneration package elements and associated governance considerations; • Linking remuneration governance and prudent financial and non-financial risk taking and consideration of customer outcomes. The Genworth deferred STI and LTI plans include malus and clawback provisions that may be applied at the discretion of the Board. ‘Risk Health Dashboard’ assessments for the business are provided to the Remuneration and Nominations Committee, 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 2020 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 Risk Management; • review of the outcomes of ‘Risk Health Assessments’ conducted over 2020 and any material risk matters arising in 2020; • 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 (including behaviour) assessments of executives. Genworth has undertaken a program of work to prepare for pending regulatory changes, including the Financial Accountability Regime and APRA’s CPS511 Remuneration. This work included mapping accountabilities, developing accountability statements, and implementation of malus and clawback for variable remuneration. Genworth continues to monitor ongoing regulatory and governance trends to continue to adopt best practice. 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; • 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. 35 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: • Improving the efficiency and competitiveness of the core LMI offering; • Evolve LMI to respond to the changing needs of our customers and partners including lenders, brokers and borrowers; • Investigate revenue diversification opportunities that leverage Genworth’s core capabilities where we have or can build competitive advantage. 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 18.1% year on year. GWP growth in our core business increased by 29.7% in 2020 reflecting strong lender customer performance and the impact of ongoing low interest rates. NEP increased by 4.6% in 2020 and the loss ratio increased to 92.9% in 2020. Statutory NPAT in 2020 decreased to a $107.6 million loss including an after-tax unrealised loss of $3.3 million on the investment portfolio. Underlying NPAT decreased to a $104.3 million loss in 2020. Performance NPAT for 2020 was a $137.5 million loss; • Genworth introduced the first monthly premium LMI product into the Australian market in 2020; • Genworth was able to leverage recently developed flexible risk-based pricing capabilities in FY20; • An ongoing focus on our customer value proposition has resulted in several key customer contract renewals (noting that a significant account was lost) and significant positive improvements in our customer Net Promoter Score to +49; • The measures of the key elements of culture which are seen as a key contributor to effectively implementing Genworth’s strategy did not materially change. Vision and strategy reflected in remuneration programs and actual outcomes 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 LTI Awards reflect Company performance against underlying ROE and relative TSR targets. TFR • There were no increases to executive KMP remuneration in the 2021 remuneration review. STI • Scorecard performance resulted in 53% STI funding, with no STI paid to executive KMP to align to shareholder outcomes in 2020. STI awards for actively employed executive KMP represented 0% of the maximum. LTI • The 2018 LTI plan exceeded the upper quartile of the comparator market for the relative TSR component across the three-year performance period. The underlying ROE hurdle did not meet the performance threshold across the three-year performance period. This means that the 2018 LTI plan will vest at 75% overall. For further detail on performance of the LTI plan, refer to section 3.3 – Link between performance and LTI outcomes. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report36 Remuneration report (continued) Table 2.5b 2020 target mix of pay (relative weight of each component as a percentage of total remuneration as at 31 December 2020) CEO Target CEO Actual CFO Target CFO Actual CRO Target CRO Actual CCO Target CCO Actual 38.5% 20.5% 10.3% 60.0% 50.2% 16.7% 8.4% 67.1% 52.9% 14.1% 7.1% 67.1% 50.5% 16.8% 8.4% 55.6% 30.8% 40.0% 24.6% 32.9% 25.9% 32.9% 24.3% 44.4% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ■ TFR ■ STI Cash ■ STI Deferred ■ LTI The actual mix of pay delivered in any year is based on an assessment of individual and Company performance, applicable regulations and plan rules and, as such, may differ from the targeted mix of pay. 2.6 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 maximum opportunity) is used as a secondary reference point. 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. 37 Remuneration report (continued) Table 2.7a 2020 STI key characteristics 2020 STI features Detail Purpose of STI plan 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. STI (% of TFR) by role Executive KMP Target % (of TFR) Maximum % (of TFR) Performance objectives CEO: CFO and CCO: CRO: 80% 50% 40% Financial objectives Performance NPAT (25%) Capital Management (15%) Gross Written Premium (20%) Strategic objectives Execute key strategic priorities (40%) 160% 100% 80% Aggregate objective weighting Financial objectives 60% Strategic objectives 40% Performance period 1 January 2020 – 31 December 2020. Performance assessment Genworth’s performance against each individual objective was evaluated to determine the STI pool funding percentage. Award determination Combination of STI pool funding and individual performance. Awards determined via Board and Committee review, recommendation and approval process. The Board and Committee have authority and discretion to adjust STI funding and individual awards (including to zero if appropriate). Payment date Payment method On or around 15 March 2021. STI – 2/3 of the award paid in cash (inclusive of superannuation). Deferral period Deferred STI component deferred for 12 months from 1 March 2021. Deferred STI – 1/3 of the dollar value of award converted to a grant of share rights (subject to vesting conditions). Deferred STI vesting conditions Share rights grant calculation Treatment of dividends calculation Treatment upon vesting Treatment of terminating Executive KMP Continuous active employment for 12 months from grant date. Board and Committee satisfaction that adverse outcomes have not arisen that were not apparent when performance was assessed, and satisfaction that there was not excessive risk taking in achievement of results. The number of share rights is determined by dividing the deferred STI dollar value by a 10-day Volume Weighted Average Price (VWAP) as at 31 December 2020. 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. 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. Eligibility for an STI award is contingent on active, continuous employment throughout the performance period. In the event of resignation or termination (with the exception of those leaving with good leaver status), 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, or converted to cash. Change of control Board has discretion. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report38 Remuneration report (continued) Table 2.7b 2021 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 (10%) Prudent and efficient management of capital. Gross Written Premium (GWP – 25%) Strategic Objectives (40%) 2.8 Long-term incentive 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). 2021 strategic objectives include optimizing core LMI profitability, reimagining LMI, developing complementary business opportunities and culture enhancement. Executive KMP participate in an annual Long-Term Incentive grant of share rights which are subject to performance-based vesting conditions in respect of company performance against Underlying ROE and Relative TSR across a three-year performance period, followed by an additional one-year vesting period. Table 2.8a 2020 LTI key characteristics LTI 2020 features Detail Purpose of LTI plan LTI % by Executive KMP role Performance metrics Relative TSR comparator group 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. Executive KMP CEO Other KMP Grant % (of TFR) 80% 50% Underlying ROE: 25% of the 2020 LTI grant. Calculated as the average of three-year Underlying ROE 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) 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 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 notionally reinvested on the ex-dividend date closing price and franking credits are excluded. ASX top 200 financial services companies excluding Real Estate Investment Trusts (REITs). Vesting scales summary Vesting % Underlying ROE Relative TSR 0% <7.5% <50th 50% 7.5% 50th 60% 8.4% 55th 70% 9.3% 60th 80% 90% 10.2% 11.1% 65th 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 2020 – 31 December 2022. Performance assessment Performance to be assessed in 1Q23. 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). Award determination 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). 39 Remuneration report (continued) LTI 2020 features Detail Payment method Grant of share rights. Vested share rights entitle the holder to ordinary shares in the Company for nil consideration. The Company retains discretion to satisfy vested share rights delivered through the LTI plan via the issuance of new shares or via an on-market purchase. Vesting conditions Continuous active employment for four years from grant date. Share rights grant calculation Treatment of dividends Board and Committee satisfaction that adverse outcomes have not arisen that were not apparent when performance was assessed, and satisfaction that there was not excessive risk taking in achievement of results. The number of share rights was determined by dividing the grant value by a 10-day 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 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. As interest rates have declined over recent years, the Board has approved a change to the underlying ROE vesting scale for 2021. In addition, given the uncertainty around forecast underlying ROE in 2021 due to effects of COVID-19, the weighting of the 2021 individual performance year has been reduced relative to the other performance years for the 2021 LTI grant (refer to table 2.8b for details). Table 2.8b 2021 LTI key characteristics LTI 2021 features Detail Performance metrics Underlying ROE: 25% of the 2021 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. For the 2021 LTI grant, the Underlying ROE outcome for 2021 will be weighted 25.0%, while the Underlying ROE outcomes for 2022 and 2023 will each be weighted 37.5%. This is intended to reflect uncertainty around the forecast outcome for Underlying ROE in 2021. Relative TSR: 75% of the 2021 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 notionally reinvested on the ex-dividend date closing price and franking credits are excluded. Relative TSR comparator group Top ASX 200 financial services companies excluding REITs. Vesting scales summary Vesting % Underlying ROE Relative TSR 0% <7.0% <50th 50% 7.0% 50th 60% 7.7% 55th 70% 8.4% 60th 80% 9.1% 65th 90% 9.8% 70th 100% 10.5% 75th Note the 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 2021. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report40 Remuneration report (continued) 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 Company1. The CEO is required to hold two times, and other executive KMP one times, 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. 3. RELATIONSHIP BETWEEN COMPANY PERFORMANCE AND REMUNERATION 3.1 Performance overview Genworth’s FY20 financial results reflected performance impacted by effects of the COVID-19 pandemic. Key metrics included: • New Insurance Written (NIW) was up 18.1% to $31.6 billion; • Gross Written Premium (GWP) increased 29.7% in 2020; • Net earned premium increased by 4.6% to $312.0 million; • Performance NPAT for 2020 was a loss of $137.5 million impacted by the 1Q20 DAC write-down and increased reserving during 2020; • There were no capital returns to shareholders due to dividend restrictions and prudential considerations related to the COVID-19 pandemic; • Genworth’s absolute Total Shareholder Return2 (TSR) was a decrease of 34.5% from 1 January to 31 December 2020; • Ongoing focus on enhancement of our customer experience and value proposition resulted in several key customer renewals and an improvement of Net Promoter Score of +49, noting the non-renewal of a key customer during the year. This performance is reflected overall in a below-target bonus pool and resulting awards to executive KMP (more detail section 3.2). Table 3.1a Summary of Genworth’s performance (2014–2020) Financial results 2015 2016 2017 2018 2019 2020 Gross Written Premium ($m) Net Investment Income ($m) Underlying NPAT ($m) Expense Ratio Underlying ROE 3 Dividends paid 4 Share price at start of reporting period Share price at end of reporting period $507.6 $107.9 $264.7 26.2% 11.6% $0.503 $3.64 $2.76 $381.9 $126.0 $212.2 25.7% 10.4% $0.405 $2.76 $3.27 $369.0 $103.3 $171.1 29.3% 9.0% $0.260 $3.27 $3.00 $460.2 $77.9 $93.9 33.6% 5.2% $433.2 $139.1 $97.0 35.3% 6.0% $0.200 $0.626 $3.00 $2.19 $2.19 $3.65 $561.7 $89.9 ($104.3) 82.1% (7.3%) $0.0 $3.65 $2.39 1. Share rights granted via equity plans that have met applicable hurdles but not yet vested due to outstanding tenure-based vesting hurdles are counted towards the executive’s shareholding 2. Including value of notionally re-invested dividends 3. Underlying ROE is calculated by dividing underlying NPAT by the average of the opening and closing underlying equity balance for a financial period 4. Reflects dividends related to the performance year paid or subsequently declared 41 Remuneration report (continued) 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 Stakeholder expectations following the release of our prior year financial results. In light of Genworth’s performance against 2020’s STI objectives, the Board determined the STI pool funding level to be 53% of STI targets. Table 3.2a 2020 STI performance objectives and Board assessment of performance STI performance objective and weighting Performance NPAT (25%) Rationale Assessment of 2020 performance 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 (15%) Reflects proactive management of our capital structure to optimise returns for shareholders. Gross Written Premium (20%) Incentivises generation of new business within the current performance period, subject to achievement of new business pricing return of in excess of the WACC. Leverage enhanced core capabilities (25%) Key strategic priorities for each performance period may vary year-to-year based on Genworth’s priorities. For the 2020 performance period, short-term incentive plan strategic priorities included leveraging technology and underwriting efficiencies, product enhancement and renewal of key customer contracts. Culture and engagement (15%) Culture enhancement and employee engagement and alignment.  Performance NPAT for 2020 was a loss of $137.5 million. 2020 results were lower than expected primarily due to the 1Q20 DAC write-down and strengthening of claims reserves during 2020 to provision for potentially higher rates of defaults due to COVID-19. This outcome translated into an incentive outcome below threshold. There were no returns of capital to shareholders related to FY20. Due to the onset of COVID-19 Genworth decided not to proceed with the intended capital plan actions in order to preserve capital to support long-term sustainability which aligned with regulatory guidance during COVID-19. This translated into an incentive outcome below threshold. Strong growth in our traditional LMI flow business across lender customers driven by lender campaigns and low interest rates resulted in GWP performance above target at $561.2 million, an increase of 29.7% over 2019 translating into an incentive outcome above stretch performance level. New loss forecasting capabilities were utilised for COVID-19 loss modelling and portfolio stress testing. Customer outcomes were reflected in an improvement of customer Net Promoter Score and customer renewals, however this was balanced with non-renewal of a key customer. The first monthly premium product was implemented in the Australian market. The consolidated incentive outcome was between threshold and target. Employee survey outcomes did not reach threshold requirements as there were not year-on-year increases in all culture related survey questions. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report42 Remuneration report (continued) 3.3 Link between performance and LTI outcomes 2018 LTI award In January 2018, executive KMP roles were provided with a grant of share rights which vest subject to Company performance against underlying ROE and relative Total Shareholder Return (TSR). A 12-month deferral period applies from the end of the relevant performance period (31 December 2020), meaning the first tranche of Performance Rights will vest in 1Q22. The vesting outcomes for this grant are outlined below. LTI performance objective and weighting Underlying ROE (25%) Relative TSR (75%) 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) measured against regulatory capital (based on the upper end of the Board’s target range above the Prescribed Capital Amount) Calculated as the relative Total Shareholder Return against a comparator group (the ASX200 Financial Services firms excluding REITs) Threshold performance (50% vesting): 7.5% Maximum performance (100% vesting): 12.0% The threshold Underlying ROE hurdle for the 2018 award was 7.5% and the actual Underlying ROE result was 2.5%. 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 76th percentile (i.e. above the upper quartile). Accordingly, 100% of the relative TSR component will vest, representing 75% 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. Two executive KMP will qualify for partial vesting in 1Q22, at which point more detail on actual vesting outcomes will be provided. 4. REMUNERATION OUTCOMES FOR EXECUTIVE KMP Table 4a 2020 STI outcomes Target STI (% of TFR) Target STI $ Max STI $ Cash STI awarded 1 Deferred STI awarded Deferred STI share rights Total STI awarded $ Actual STI awarded (% of TFR) Actual STI awarded (% of max) STI not awarded (% of max) 80% $600,000 $1,200,000 50% $255,000 $510,000 40% $207,009 $414,018 50% $234,117 $468,234 $0 $0 $0 $0 $0 $0 $0 $0 0 0 0 0 $0 $0 $0 $0 0% 0% 0% 0% 0% 100% 0% 100% 0% 100% 0% 100% Executive KMP P Blight-Johnston 2 CEO M Bencsik CFO A Cormack CRO S Degetto CCO 1. Cash STI awarded figure is inclusive of superannuation 2. Ms Blight-Johnston’s 2020 STI target was pro-rated for her start date of 2 March 2020 43 Remuneration report (continued) 5. CONTRACTUAL ARRANGEMENTS FOR EXECUTIVE KMP 5.1 Contractual arrangements for executive KMP Table 5a Summary of contract details Executive KMP Term of agreement Notice period Termination payments CEO Ongoing Six months either party; immediate for misconduct, breach of contract or bankruptcy. Other executive KMP Ongoing Three months either party; immediate for misconduct, breach of contract or bankruptcy. Statutory entitlements only for termination with cause. Payment in lieu of notice at Company discretion. For Company termination “without cause”, 12 months fixed remuneration or as limited without shareholder approval under the Corporations Act. Statutory entitlements only for termination with cause. Payment in lieu of notice at Company discretion. For Company termination “without cause”, no more than six months fixed remuneration, pro rata STI is payable for time worked. All executive KMP are subject to a non-solicitation undertaking and a non-compete restraint for a maximum period of 12 months after ceasing employment. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report44 Remuneration report (continued) 6. KMP REMUNERATION TABLES Table 6a Statutory remuneration table – 1 January to 31 December 2020 Short-term remuneration Long-term/post-emp benefits KMP Executive KMP P Blight-Johnston CEO M Bencsik CFO A Cormack CRO S Degetto CCO 2020 2019 2020 2019 2020 2019 2020 2019 Cash salary 1 Other benefits 2 Non- monetary benefits 3 Cash STI awarded 4 Deferred STI 5 Sub-total $721,543 – $487,710 $428,057 $496,308 $484,662 $443,527 $421,003 $600 – $600 $600 $600 $600 $600 $600 $15,235 – $8,703 $13,259 $1,786 $1,838 $4,791 $0 – $0 $0 – $0 $148,119 $74,059 $0 $0 $119,335 $59,667 $0 $0 $27,232 $169,135 $84,567 $737,378 – $497,013 $664,094 $498,694 $666,102 $448,918 $702,537 1. Cash salary consists of base salary and any salary sacrifice arrangements 2. Other benefits include annual health reimbursement offered to all employees 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 the respective performance year, inclusive of super, accrued for during the performance year. Actual payment made in March of the following year 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 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 2018, 2019 and 2020 LTI grants, LTI 2016 (associated notional dividend awards) and vested 2017 LTI awards Share-based % of total that is Super benefits Long payments Termination service leave 6 RSUs 7 benefits performance % of total that Total related are options $21,348 $17,060 – $21,348 $20,767 $21,348 $20,767 $21,348 $20,767 – $22,068 $11,909 $31,218 $21,505 $37,489 $28,488 $0 – $0 $186,963 $53,583 $267,733 $50,521 $91,729 $0 – $0 $0 $0 $0 $0 $0 $775,786 – $540,429 $883,733 $604,843 $976,107 $558,276 $843,521 0% – 0% 25% 0% 18% 0% 30% 0% – 0% 0% 0% 0% 0% 0% Table 6b Share right holdings for the reporting period ended 31 December 2020 Movement during the year Executive KMP Name and position P Blight-Johnston CEO M Bencsik CFO A Cormack CRO S Degetto CCO Grant detail Grant date 1 Issue price 2 Vesting date # Held 31/12/19 Number granted Forfeited Vested Exercised # Held 31/12/20 LTI ‘20 LTI ‘20 Deferred STI ‘19 LTI ‘16 LTI ‘17 Deferred STI ‘18 Deferred STI ‘19 LTI ‘18 LTI ‘19 LTI ‘20 LTI ‘17 Deferred STI ‘18 Deferred STI ‘19 LTI ‘18 LTI ‘19 LTI ‘20 1 Jan ‘20 1 Jan ‘20 1 Mar ‘20 1 Jan ‘16 1 Jan ‘17 1 Mar ‘19 1 Mar ‘20 1 Jan ‘18 1 Jan ‘19 1 Jan ‘20 1 Jan ‘17 1 Mar ‘19 1 Mar ‘20 1 Jan ‘18 1 Jan ‘19 1 Jan ‘20 $3.73 $3.73 $3.73 $2.33 $2.90 $2.17 $3.73 $2.66 $2.17 $3.73 $2.90 $2.17 $3.73 $2.66 $2.17 $3.73 31 Dec ‘23 31 Dec ‘23 1 Mar ‘21 31 Dec ‘19 31 Dec ‘20 1 Mar ‘20 1 Mar ‘21 31 Dec ‘21 31 Dec ‘22 31 Dec ‘23 31 Dec ‘20 1 Mar ‘20 1 Mar ‘21 31 Dec ‘21 31 Dec ‘22 31 Dec ‘23 0 0 0 0 0 0 0 0 83,649 21,263 91,127 113,913 75,025 26,861 81,733 100,105 160,681 66,950 19,833 13,189 3,590 15,979 0 0 0 0 0 0 67,938 4,535 22,647 60,285 41,825 13,189 41,824 24,853 13,189 41,824 24,853 37,513 37,512 31,396 37,512 31,396 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 160,681 66,950 19,833 0 0 0 0 0 15,979 91,127 113,913 67,938 22,647 81,733 100,105 60,285 0 0 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                      6. KMP REMUNERATION TABLES Table 6a Statutory remuneration table – 1 January to 31 December 2020 Short-term remuneration Long-term/post-emp benefits Cash salary 1 Other benefits 2 Non- monetary benefits 3 Cash STI awarded 4 Deferred STI 5 Sub-total Super benefits Long service leave 6 Share-based payments RSUs 7 Termination benefits Remuneration report (continued) $21,348 $17,060 – $21,348 $20,767 $21,348 $20,767 $21,348 $20,767 – $22,068 $11,909 $31,218 $21,505 $37,489 $28,488 $0 – $0 $186,963 $53,583 $267,733 $50,521 $91,729 $0 – $0 $0 $0 $0 $0 $0 45 % of total that is performance related % of total that are options 0% – 0% 25% 0% 18% 0% 30% 0% – 0% 0% 0% 0% 0% 0% Total $775,786 – $540,429 $883,733 $604,843 $976,107 $558,276 $843,521 Table 6b Share right holdings for the reporting period ended 31 December 2020 Movement during the year Grant detail Grant date 1 Issue price 2 Vesting date # Held 31/12/19 Number granted Forfeited Vested Exercised # Held 31/12/20 0 0 0 0 83,649 21,263 0 91,127 113,913 0 75,025 26,861 0 81,733 100,105 160,681 66,950 19,833 13,189 0 3,590 15,979 0 0 67,938 0 4,535 22,647 0 0 0 60,285 0 0 0 0 41,825 0 0 0 0 0 37,513 0 0 0 0 0 0 0 0 13,189 41,824 24,853 0 0 0 0 0 0 0 13,189 41,824 24,853 0 0 0 0 37,512 31,396 37,512 31,396 0 0 0 0 0 0 0 0 160,681 66,950 19,833 0 0 0 15,979 91,127 113,913 67,938 0 0 22,647 81,733 100,105 60,285 KMP Executive KMP P Blight-Johnston CEO M Bencsik CFO A Cormack CRO S Degetto CCO 2020 2019 2020 2019 2020 2019 2020 2019 $721,543 – $487,710 $428,057 $496,308 $484,662 $443,527 $421,003 $600 – $600 $600 $600 $600 $600 $600 $15,235 – $8,703 $13,259 $1,786 $1,838 $4,791 $0 – $0 $0 $0 $148,119 $74,059 $119,335 $59,667 $0 – $0 $0 $0 $737,378 – $497,013 $664,094 $498,694 $666,102 $448,918 $702,537 $27,232 $169,135 $84,567 1. Cash salary consists of base salary and any salary sacrifice arrangements 2. Other benefits include annual health reimbursement offered to all employees 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 the respective performance year, inclusive of super, accrued for during the performance year. Actual payment made in March of the following year 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 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 2018, 2019 and 2020 LTI grants, LTI 2016 (associated notional dividend awards) and vested 2017 LTI awards Executive KMP Name and position P Blight-Johnston CEO M Bencsik CFO A Cormack CRO S Degetto CCO 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 Deferred STI ‘19 Deferred STI ‘18 Deferred STI ‘19 Deferred STI ‘18 Deferred STI ‘19 LTI ‘20 LTI ‘20 LTI ‘16 LTI ‘17 LTI ‘18 LTI ‘19 LTI ‘20 LTI ‘17 LTI ‘18 LTI ‘19 LTI ‘20 1 Jan ‘20 1 Jan ‘20 1 Mar ‘20 1 Jan ‘16 1 Jan ‘17 1 Mar ‘19 1 Mar ‘20 1 Jan ‘18 1 Jan ‘19 1 Jan ‘20 1 Jan ‘17 1 Mar ‘19 1 Mar ‘20 1 Jan ‘18 1 Jan ‘19 1 Jan ‘20 $3.73 $3.73 $3.73 $2.33 $2.90 $2.17 $3.73 $2.66 $2.17 $3.73 $2.90 $2.17 $3.73 $2.66 $2.17 $3.73 31 Dec ‘23 31 Dec ‘23 1 Mar ‘21 31 Dec ‘19 31 Dec ‘20 1 Mar ‘20 1 Mar ‘21 31 Dec ‘21 31 Dec ‘22 31 Dec ‘23 31 Dec ‘20 1 Mar ‘20 1 Mar ‘21 31 Dec ‘21 31 Dec ‘22 31 Dec ‘23 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report                    46 Remuneration report (continued) 7. NON-EXECUTIVE DIRECTOR REMUNERATION Table 7a KMP in 2020 – Non-executive directors Name Ian MacDonald David Foster Gai McGrath Graham Mirabito Rajinder Singh Stuart Take Andrea Waters Duncan West1 Position Chairman Term as KMP Full Period Independent Director – Genworth Financial designee Full Period Independent Director Full Period Independent Director – Genworth Financial designee 10 August – 31 December 2020 Director – Genworth Financial designee 9 September – 31 December 2020 Director – Genworth Financial designee Full Period Independent Director Independent Director 16 March – 31 December 2020 Full Period Former Non-Executive Directors Christine Patton Gayle Tollifson Jerome Upton Independent Director – Genworth Financial designee 1 January – 9 August 2020 Independent Director 1 January – 15 March 2020 Director – Genworth Financial designee 1 January – 8 September 2020 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, Mr Upton and Mr Singh) 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, J Upton and R Singh) 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. There was no increase in base or committee fee rates in 20202. In 2020, the share ownership guidelines for NEDs were adjusted to better align to market practice and shareholder interests through introduction of a mandatory minimum share ownership requirement for independent NEDs of one times their annual base fees in Company shares. The current independent directors support this approach and will achieve this requirement within five years of the approval of the mandatory minimum shareholding guidelines or appointment date to the Board, whichever is later. 1. Mr West served as Acting CEO for 1 January – 1 March 2020 2. D Foster’s overall fees increased from FY19 to FY20 due to changes in Committee membership, while D West’s fees from FY19 to FY20 increased due to remuneration received as Acting CEO from 1 January to 1 March 2020 Remuneration report (continued) Table 7c Statutory remuneration table – 1 January to 31 December 2020 KMP1 Year Fees Non-Executive Directors Other short-term benefits Non-monetary benefits Superannuation benefits I MacDonald Chairman D Foster 2 Director G McGrath 3 Director G Mirabito 4 Director R Singh 5 Director S Take 6 Director A Waters 7 Director D West 8 Director 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Former Non-Executive Directors C Patton Director G Tollifson Director J Upton Director 2020 2019 2020 2019 2020 2019 $243,652 $244,233 $162,086 $159,817 $159,817 $159,817 $54,122 N/A $0 N/A $0 $0 $134,328 N/A $145,349 $163,000 $77,120 $126,941 $33,080 $159,817 $0 $0 $0 $0 $0 $0 $0 $0 $0 N/A $0 N/A $0 $0 $0 N/A $150,000 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 N/A $0 N/A $0 $0 $0 N/A $0 $0 $0 $0 $0 $0 $0 $0 47 Total $265,000 $265,000 $177,484 $175,000 $175,000 $175,000 $59,264 N/A $0 N/A $0 $0 $21,348 $20,767 $15,398 $15,183 $15,183 $15,183 $5,142 N/A $0 N/A $0 $0 $4,449 $138,777 N/A $0 $0 $7,326 $12,059 $3,143 $15,183 $0 $0 N/A $295,349 $163,000 $84,446 $139,000 $36,223 $175,000 $0 $0 1. R Singh, S Take and former Director J Upton were employed by Genworth Financial in the ordinary course of their duties and were not paid fees by Genworth Australia hence receive no director fees in table 7c, however because they are still directors of GMA, they are disclosed in table 7c 2. Mr Foster is Chairman of the Remuneration and Nominations Committee and Technology Committee and a member of the Capital and Investment Committee; note Mr Foster’s fees increased from FY19 to FY20 due to changes in Committee membership 3. Ms McGrath is Chairman of the Risk Committee and a member of the Audit Committee, Remuneration and Nominations Committee and Technology Committee 4. Mr Mirabito is a member of the Audit Committee, Capital and Investment Committee and Technology Committee 5. Mr Singh is a member of the Audit Committee, Risk Committee, Capital and Investment Committee and Technology Committee 6. Mr Take is a member of the Risk Committee and the Remuneration and Nominations Committee 7. Ms Waters is Chairman of the Audit Committee and a member of the Risk Committee, Capital and Investment Committee and Remuneration and Nominations Committee 8. Mr West is Chairman of the Capital and Investment Committee, and member of the Audit Committee, Risk Committee and Technology Committee. “Other short-term benefits” represent fees received while Acting CEO for 1 January – 1 March 2020 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report48 Remuneration report (continued) 8. OTHER TABLES Table 8a KMP and their related parties direct, indirect and beneficial shareholdings (including movements during the period ending 31 December 2020) Executive KMP P Blight-Johnston – CEO M Bencsik – CFO A Cormack – CRO S Degetto – CCO Non-Executive Directors I MacDonald – Chairman D Foster – Director G McGrath – Director G Mirabito – Director R Singh – Director S Take – Director A Waters – Director D West – Director Balance at 31-Dec-191 Received via vesting/ exercising Other changes2 Balance at 31-Dec-20 N/A 38,202 69,738 12,593 85,000 12,133 29,650 N/A N/A 8,297 N/A 2,318 0 0 79,866 68,908 0 0 0 38,202 -30,000 119,604 0 81,501 – – – – – – – – 46,823 10,802 – – – – 50,000 58,000 131,823 22,935 29,650 0 0 8,297 50,000 60,318 1. Several KMP were not yet appointed to their roles in Genworth as at 1 January 2020 and their shareholding balance is therefore recorded as N/A 2. Acquisition or sale of shares on market 49 Remuneration report (continued) Table 8b Relevant interest of each director in Genworth Australia and its related bodies corporate (unaudited) Directors Name I MacDonald P Blight-Johnston D Foster G McGrath G Mirabito R Singh S Take A Waters D West GMA Group balance held directly or indirectly at 31 Dec 2020 Genworth Financial balance held directly or indirectly at 31 Dec 2020 Shares: 131,823 Shares: None Share rights: 160,681 Shares: 22,935 Shares: 29,650 Shares: None Shares: None Shares: 8,297 Shares: 50,000 Shares: 60,318 None None None None None Shares: None Restricted Stock Units: 51,958 Shares: 65,885 Stock appreciation rights: 53,200 None None Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report50 Directors’ 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 2021 51 Lead auditor’s independence declaration Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Genworth Mortgage Insurance Australia Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Genworth Mortgage Insurance Australia Limited for the financial year ended 31 December 2020 there have been: i. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and ii. no contraventions of any applicable code of professional conduct in relation to the audit. KPMG David Kells Partner Sydney 26 February 2021 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report52 Financial statements CONTENTS NOTES TO THE FINANCIAL STATEMENTS Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows 53 54 55 56 Section 1 – Basis of preparation 1.1 1.2 Reporting entity Significant accounting policies Section 2 – Risk management 2.1 2.2 Risk management framework Financial risk management Section 3 – Results for the year 3.1 3.2 3.3 3.4 3.5 3.6 3.7 Gross written premium Investment income Other underwriting expenses Net cash provided by operating activities Income taxes Dividends Earnings per share Section 4 – Insurance contracts 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Net claims incurred Deferred reinsurance expense Deferred acquisition costs Outstanding claims Non-reinsurance recoveries Unearned premium Liability adequacy test Accounting estimates and judgements Actuarial assumptions and methods 4.10 Capital adequacy Section 5 – Capital management and financing 5.1 5.2 5.3 5.4 5.5 Capital management Interest bearing liabilities Equity Capital commitments and contingencies Other reserves Section 6 – Operating assets and liabilities 6.1 6.2 6.3 6.4 6.5 6.6 6.7 Cash and cash equivalents Trade and other receivables Leases Intangibles Goodwill Trade and other payables Employee benefits provision Section 7 – Other disclosures 7.1 7.2 7.3 7.4 7.5 7.6 7.7 Parent entity disclosures Remuneration of auditors Key management personnel disclosures Related party disclosures Controlled entities Share-based payments Events subsequent to reporting date 57 57 57 60 60 61 69 69 69 70 70 71 72 73 74 74 75 75 76 77 78 78 79 80 83 84 84 85 86 86 86 87 87 87 88 89 90 91 91 92 92 92 93 93 94 94 99 Consolidated statement of comprehensive income for the year ended 31 December 2020 53 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 (loss)/profit Investment income on equity holders’ funds Investment expense on equity holders’ funds Financing costs (Loss)/profit before income tax Income tax benefit/(expense) (Loss)/profit for the year Total comprehensive (loss)/income for the year Earnings per share Basic (loss)/earnings per share (cents per share) Diluted (loss)/earnings per share (cents per share) Note 3.1 4.1 4.7 3.3 3.2 3.2 3.5(a) 2020 $’000 561,730 (180,363) (69,346) 312,021 (289,846) (196,229) (61,164) 1,197 (234,021) 59,917 (174,104) 34,391 (4,363) (10,709) (154,785) 47,203 (107,582) (107,582) 2019 $’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) 120,084 120,084 3.7 3.7 (26.1) (26.0) 28.6 28.5 The consolidated statement of comprehensive income is to be read in conjunction with the notes to the financial statements. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report54 Consolidated statement of financial position as at 31 December 2020 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 5.3(a) 5.3(b) 5.5 2020 $’000 104,557 20,492 2019 $’000 87,254 19,529 3,320,968 3,043,814 56,225 1,760 20,218 33,286 41,604 4,301 5,955 55,624 6,490 9,123 47,106 2,077 31,771 22,770 181,234 5,120 11,166 9,104 7,340 9,123 3,680,603 3,477,408 50,898 12,324 32,450 41,827 16,430 43,854 540,353 360,905 1,461,232 1,280,451 7,645 187,781 2,292,683 1,387,920 7,096 199,369 1,949,932 1,527,476 1,090,180 1,090,180 1,174 (476,559) 773,125 2,209 (476,559) 911,646 1,387,920 1,527,476 The consolidated statement of financial position is to be read in conjunction with the notes to the financial statements. 55 Consolidated statement of changes in equity for the year ended 31 December 2020 Share capital $’000 Other reserves $’000 Retained earnings $’000 Share-based payment reserve $’000 Total $’000 Balance at 1 January 2019 1,154,084 (476,559) 1,058,116 1,659 1,737,300 Adjustment on initial application of AASB 16 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 – – 79 – 79 1,154,084 (476,559) 1,058,195 1,659 1,737,379 – – – – (63,904) – – – – – 120,084 (266,633) – – – – – 2,095 (1,545) 120,084 (266,633) 2,095 (1,545) – (63,904) Balance at 31 December 2019 1,090,180 (476,559) 911,646 2,209 1,527,476 Balance at 1 January 2020 1,090,180 (476,559) Loss after taxation Dividend declared and paid Share-based payment expense recognised Share-based payment settled – – – – – – – – 911,646 (107,582) (30,939) – – Balance at 31 December 2020 1,090,180 (476,559) 773,125 2,209 1,527,476 – – (107,582) (30,939) 42 (1,077) 1,174 42 (1,077) 1,387,920 The consolidated statement of changes in equity is to be read in conjunction with the notes to the financial statements. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report56 Consolidated statement of cash flows for the year ended 31 December 2020 Note 2020 $’000 2019 $’000 Cash flows from operating activities Premiums received Interest and other income Claims paid Outwards reinsurance premium expense paid Interest paid Cash payments in the course of operations Income tax paid Net cash provided by operating activities 3.4 Cash flows from investing activities Payments for plant, equipment and intangibles Payments for the purchase of investments Proceeds from sale of investments Proceeds from sub-lease of property Net cash (used in)/provided by investing activities Cash flows from financing activities Net repayments of long-term borrowings Payment of lease liabilities Dividends paid Payments for the on-market buy-back of shares Net cash used in financing activities Net increase/(decrease) 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 6.1 638,660 45,985 497,068 80,375 (123,930) (133,960) (69,197) (12,190) (159,320) (23,421) 296,587 (57,037) (9,931) (139,312) (45,385) 191,818 (529) (2,447) (3,425,068) (2,330,133) 3,192,327 2,421,871 1,629 (231,641) 946 90,237 (12,434) (4,304) (30,939) – – (3,527) (266,633) (63,904) (47,677) (334,064) 17,269 34 87,254 104,557 (52,009) (2,187) 141,450 87,254 The consolidated statement of cash flows is to be read in conjunction with the notes to the financial statements. 57 Notes to the financial statements SECTION 1 – BASIS OF PREPARATION 1.1 Reporting entity This general purpose consolidated financial report is for the year ended 31 December 2020 and comprises the consolidated financial statements for Genworth Mortgage Insurance Australia Limited (the Company) 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 2021. 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 2023. 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 notes 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report58 (i) New and amended standards adopted by the Group There are additional new accounting standards and interpretations, effective on or after 1 January 2020 (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. New standards, amendments and interpretations AASB 2018-6 Amendments to Australian Accounting Standards – Definition of a Business AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material Operative date 1 January 2020 1 January 2020 AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework 1 January 2020 AASB 2019-3 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform AASB 2019-5 Amendments to Australian Accounting Standards – Disclosure of the Effect of New IFRS Standards Not yet Issued in Australia 1 January 2020 1 January 2020 AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19 - Related Rent Concessions 1 June 2020 (ii) 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 2021 and have not been applied in preparing these consolidated financial statements. An initial assessment of the financial impact of these 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. New standards, amendments and interpretations Operative date AASB 17/ Insurance Contracts/Amendments to Australian Accounting Standards – Insurance Contracts 1 January 2023 AASB 2020-5 AASB 9 Financial Instruments 1 January 2023 (subject to exemption) 1 January 2022 1 January 2022 1 January 2022 1 January 2022 AASB 2017-5 AASB 2020-1 AASB 2020-3 AASB 2020-6 AASB 2020-7 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 and Editorial Corrections Amendments to Australian Accounting standards – Classification of Liabilities as Current or Non-current Amendments to Australian Accounting Standards – Annual Improvements 2018-2020 and Other Amendments Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-current – Deferral of Effective Date Amendments to Australian Accounting Standards – COVID-19 - Related Rent Concessions: Tier 2 Disclosures 1 July 2021 AASB 2019-8 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2 1 January 2021 (iii) AASB 17 Insurance Contracts AASB 17 (including amendments within AASB 2020-5), the new accounting standard for insurance contracts, was adopted by the Australian Accounting Standards Board in July 2020. Various implementation and interpretation matters are still being discussed by various stakeholders at the AASB 17 Transition Resource Group. At this stage, it is not expected that those discussions will lead to further changes to AASB 17. The first applicable annual reporting period for the Group will be the year ending 31 December 2023, with the comparative period for the year ending 31 December 2022 and the Consolidated Statement of Financial Position as at 1 January 2022. 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 has completed a detailed impact assessment of the new standard and has determined 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. Notes to the financial statements(continued)59 It is expected that the timing of recognition of profit will change under the new standard. As AASB 17 is to be applied retrospectively, a different valuation method for the insurance liability and a different model for the recognition of profit could lead to significant changes in the net asset position between 31 December 2021 (under the current insurance accounting standard) and 1 January 2022 (to be determined under AASB 17 in the Group’s financial statements as at 31 December 2023). AASB 17 will require substantial changes to the presentation and the disclosures of the financial statements. To achieve those changes, significant modifications to systems and processes are required. The Group will also consider revising the key performance indicators relevant for its employee incentive schemes. In November 2020, the Australian Prudential Regulation Authority (APRA) has issued a Quantitative Impact Study to be completed by a sample of insurance companies in Australia, as part of its ongoing work to update its prudential and reporting standards, in light of the adoption of AASB 17. APRA has indicated that those updates were not intended to alter the minimum capital levels required to be held by insurance company. (iv) 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, including insurance debt instruments, 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%). The AASB (in line with the IASB) extended the temporary exemption from the adoption of AASB 9 to reporting periods beginning 1 January 2023, 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 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. (i) Coronavirus (COVID-19) pandemic The ongoing COVID-19 pandemic has increased the estimation uncertainty in the preparation of these financial statements. The Group has developed various accounting estimates in these financial statements based on forecasts of economic conditions which reflect expectations and assumptions as at 31 December 2020 about future events that the directors believe are reasonable in the circumstances. There is a considerable degree of judgement involved in preparing these forecasts. The underlying assumptions are also subject to uncertainties which are often outside the control of the Group. Accordingly, actual economic conditions may be different from those forecast since anticipated events may not occur as expected, and the effect of those differences may significantly impact accounting estimates included in these financial statements. The significant accounting estimates particularly impacted by these associated uncertainties are predominantly related to the valuation of the outstanding claims liability including the estimates of future claims and related expenses for the preparation of the liability adequacy test, recoverable amount assessments of non-financial assets and fair value measurement of investments. The impact of the COVID-19 pandemic on accounting estimates is discussed further below and in the relevant notes to the financial statements. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)60 Outstanding claims liability Responses to COVID-19 such as government stimulus and repayment deferrals are delaying the development and progression of delinquencies and claims and increasing uncertainty around potential claims emergence. The Group has allowed for those factors in its reserving process, which led to the outstanding claims liability increasing from $360.9 million as at 31 December 2019 to $540.4 million as at 31 December 2020. This movement includes the estimated impact of the delayed claims progression of claims and a refinement of the reserving methodology for future re-reporting of cured delinquencies, as well as an increase in the risk margin to reflect the elevated uncertainty. Refer to notes 4.4 and 4.9 for more detail. In addition to the COVID-19 specific element reflected in the outstanding claims provision, any COVID-19 underwriting exposure related to unexpired risk has been incorporated within the estimation of premium liabilities and, as a result, in the calculation of the Group’s regulatory capital position. Refer to note 4.7 and note 4.9 for further details on the liability adequacy test (LAT) and capital adequacy position respectively. Goodwill and intangible assets impairment The assumptions underpinning the value-in-use calculations used to evaluate the recoverability of goodwill and intangible assets were adjusted to reflect reasonable estimates of the impact of COVID-19 and the increased risks associated with the estimated cash flows. Whilst there is no impairment in relation to the cash-generating unit at 31 December 2020, there is a heightened level of uncertainty around key assumptions in the current environment. This has the potential to materially impact the value-in-use assessment moving forward and potentially the carrying value of the respective intangible assets and goodwill. Refer to note 6.4 and note 6.5 for further details on intangible assets and goodwill respectively. Fair value measurement of investments The Group’s investments are designated at fair value through profit and loss, and for the vast majority of the investments, the fair value is determined based on observable market data. This measurement basis has not changed as a result of COVID-19. The investments which are subject to valuation using unobservable inputs are disclosed in the Group’s fair value hierarchy. Refer to note 2.2(d) for further details on investments. (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. 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 a 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 Company’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. Notes to the financial statements(continued)61 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. In Australia, 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 2020 GWP 2019 GWP 56.9% 11.0% 55.0% 12.0% The second largest customer’s contract with the Group was not renewed and expired on 20 November 2020. 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 the Group’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 interest bearing 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 (before tax) resulting from 10% depreciation or 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: New Zealand dollar United States dollar Euro 2020 2019 +10% $’000 (79) (347) 201 -10% $’000 79 347 (201) +10% $’000 (268) (75) 67 -10% $’000 268 75 (67) Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)62 (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 (before tax) resulting from 50 basis points (2019: 100 basis points) increase or decrease in interest rates on interest bearing assets, assuming all other variables remain constant, are shown below: Interest bearing assets 2020 2019 +50bps $’000 (41,962) -50bps $’000 41,962 +100bps $’000 -100bps $’000 (63,033) 65,903 (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 investments in equities and equity unit trusts. The potential impact of movements in price risk on the Group’s profit and loss (before tax) resulting from 10% increase or decrease in value of equity securities at the reporting date are shown below: Investments – unit trusts equity securities Investments – unlisted equities (b) Credit risk 2020 2019 +10% $’000 11,631 967 -10% $’000 (11,631) (967) +10% $’000 7,885 400 -10% $’000 (7,885) (400) 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 80% (2019: 81%) 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. Notes to the financial statements(continued)63 The ratings in the following table are the lower equivalent ratings of either Standard and Poor’s or Moody’s. Cash at bank and short-term deposits AAA AA A BBB 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 Not rated Other receivables AAA A Not rated 2020 $’000 2019 $’000 13,176 189,709 23,975 10,000 236,860 2,098 149,117 72,737 56,435 280,387 1,037,638 1,253,623 906,963 583,671 519,831 14,590 579,999 493,868 424,113 16,231 3,062,693 2,767,834 5,407 8,185 2,529 3,356 200 815 7,244 5,737 3,098 2,918 263 269 20,492 19,529 18,896 37,149 – 254 28,240 – 8,835 56,225 600 – 4,140 570 4,647 47,106 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)64 (c) Liquidity risk Liquidity risk is the risk of having 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. 2020 Financial liabilities Trade and other payables Reinsurance payable Lease liabilities 2019 Financial liabilities Trade and other payables Reinsurance payable Lease liabilities Less than 1 year $’000 1 – 5 years $’000 49,058 21,788 4,978 75,824 1,840 10,662 7,346 19,848 Less than 1 year $’000 1 – 5 years $’000 38,645 22,027 4,790 65,462 3,182 21,827 11,640 36,649 Total $’000 50,898 32,450 12,324 95,672 Total $’000 41,827 43,854 16,430 102,111 Interest bearing liabilities which is classified as financial liabilities are separately disclosed in note 5.2. (d) Fair value measurements Accounting policies 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. • Interest bearing 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. • 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 backing general insurance liabilities The assets backing general insurance liabilities are 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. 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. Notes to the financial statements(continued)65 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). Investments Fixed interest rate Short-term deposits Australian government and state-government bonds Corporate bonds and others Floating interest rate Short-term deposits Corporate bonds and others Derivatives Investment related derivatives Equity securities Unlisted unit trusts Unlisted equities Total investments Comprising: Current Non-current Equities For further details on the impact from COVID-19 refer to note 1.2(e). 2020 $’000 2019 $’000 107,216 133,274 1,433,219 1,327,689 864,136 672,344 2,404,571 2,133,307 25,087 747,867 772,954 59,860 757,768 817,628 17,471 10,033 116,306 9,666 125,972 78,846 4,000 82,846 3,320,968 3,043,814 399,813 644,193 2,795,183 2,316,775 125,972 82,846 3,320,968 3,043,814 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)66 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 2020, 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): 2020 Financial assets Short-term deposits Bonds Derivatives Unlisted equities Unlisted unit trusts 2019 Financial assets Short-term deposits Bonds Derivatives Unlisted equities Unlisted unit trusts SPPI Non-SPPI Fair value $’000 132,303 3,006,202 – – – Change in fair value $’000 (71) (7,244) – – – 3,138,505 (7,315) Fair value $’000 – 39,020 17,471 9,666 116,306 182,463 SPPI Non-SPPI Fair value $’000 193,134 2,742,455 – – – Change in fair value $’000 (76) 57,526 – – – Fair value $’000 – 15,346 10,033 4,000 78,846 2,935,589 57,450 108,225 Change in fair value $’000 – 275 – 5,666 (2,540) 3,401 Change in fair value $’000 – 156 – – (1,164) (1,008) Trade and other receivables are financial assets which are in the scope of AASB 9 and are SPPI assets. These assets amounted to $56,225,000 at 31 December 2020 (2019: $47,106,000). These assets are measured at their present value less any impairment loss for any doubtful accounts (no doubtful account at 31 December 2020 and 31 December 2019) which approximates fair value. The credit risk ratings of SPPI financial assets at 31 December 2020 is set out in the table below: 2020 Bonds and short-term investments AAA AA A BBB BB Credit Risk Fair value $’000 Fair value % Low Low Low Low Other 1,050,570 974,643 607,647 491,055 14,590 33.5 31.1 19.4 15.6 0.4 3,138,505 100.0 Notes to the financial statements(continued)67 Credit Risk Fair value $’000 Fair value % Low Low Low Low Other 1,255,191 670,491 527,943 466,408 15,556 42.8 22.8 18.0 15.9 0.5 2,935,589 100.0 2019 Bonds and short-term investments AAA AA A BBB BB Trade and other receivables at 31 December 2020 have the following credit rating: AAA with low credit risk $28,240,000 (2019: $4,140,000), AA with low credit risk $18,896,000 (2019: $37,149,000), A with low credit risk $nil (2019: $1,170,000) and not rated with other credit risk $9,089,000 (2019: $4,647,000). Fair value hierarchy 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 the unlisted equities. The fair value has been supported based on a discounted cash flow analysis performed utilising the latest available cash flows projection from the entity. Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 2020 Financial instruments Australian government and state-government bonds Corporate bonds and others Short-term deposits Derivative assets Unlisted unit trusts Unlisted equities 2019 Financial instruments – – 132,303 – – – 1,433,219 1,612,003 – 17,471 116,306 – 132,303 3,178,999 Level 1 $’000 Level 2 $’000 Australian government and state-government bonds Corporate bonds and others – – 1,327,689 1,430,112 Short-term deposits Derivative assets Unlisted unit trusts Unlisted equities 193,134 – – – – 10,033 78,846 – 193,134 2,846,680 There have not been any transfers between levels during the current and prior years. – – – – – 9,666 9,666 Level 3 $’000 – – – – – 4,000 4,000 1,433,219 1,612,003 132,303 17,471 116,306 9,666 3,320,968 Total $’000 1,327,689 1,430,112 193,134 10,033 78,846 4,000 3,043,814 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)68 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 Financial instruments Unlisted equities Balance at 1 January 2020 $’000 4,000 4,000 Balance at 1 January 2019 $’000 4,000 4,000 Purchases $’000 Disposals $’000 Movement in fair value $’000 Balance at 31 December 2020 $’000 – – – – 5,666 5,666 9,666 9,666 Purchases $’000 Disposals $’000 Movement in fair value $’000 Balance at 31 December 2019 $’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. 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: 2020 Fair value asset $’000 17,471 17,471 Exposure $’000 673,100 673,100 Fair value liability $’000 14 14 Exposure $’000 578,679 578,679 2019 Fair value asset $’000 10,033 10,033 Fair value liability $’000 – – Forward foreign exchange contracts All derivative contracts are expected to be settled within 12 months. Notes to the financial statements(continued)69 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 2020 $’000 560,322 1,408 561,730 2019 $’000 431,974 1,274 433,248 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/distribution 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/distribution revenue Unrealised (losses)/gains including derivatives Realised gains including derivatives Other income (losses)/gains Total investment income Represented by: Investment income on assets backing insurance liabilities Investment income on equity holders’ funds 2020 $’000 50,102 1,210 (45,937) 90,369 (1,436) 94,308 59,917 34,391 94,308 2019 $’000 78,448 3,583 26,656 33,155 1,498 143,340 65,891 77,449 143,340 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)70 3.3 Other underwriting expenses Depreciation and amortisation expense Employee expenses: – Salaries and wages – Superannuation contributions – Employee benefits Occupancy expenses Marketing expenses Administrative expenses 2020 $’000 4,859 2019 $’000 5,172 26,270 26,847 1,656 302 1,789 506 25,782 61,164 1,786 (90) 2,276 520 22,978 59,489 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 flows. (Loss)/profit after income tax Less items classified as investing/financing activities: – Gain on sale of investments including derivatives – Unrealised losses/(gains) on investments including derivatives Add non-cash items: – Share-based payments – Loss on disposal of plant and equipment – Depreciation and amortisation – Interest (income)/expense leases 2020 $’000 2019 $’000 (107,582) 120,084 (90,369) 45,937 (33,155) (26,656) (1,035) – 4,869 (221) 552 33 5,172 674 Net cash (used in)/provided by operating activities before change in assets and liabilities (148,401) 66,704 Change in assets and liabilities during the financial year: Decrease in receivables Increase in outstanding claims liability (Decrease)/increase in payables and borrowings Decrease/(increase) in deferred acquisition costs Increase/(decrease) in provision for employee entitlements Increase in unearned premiums Increase in deferred tax asset balances Net cash provided by operating activities 16,808 179,448 (25,708) 139,630 549 180,781 (46,520) 296,587 43,613 21,842 9,227 (14,389) (161) 66,245 (1,263) 191,818 Notes to the financial statements(continued)71 3.5 Income taxes 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 (benefit)/expense Current tax Deferred tax Over provision in prior year Current tax Deferred tax (i) Reconciliation of income tax (benefit)/expense to prima facie tax payable 2020 $’000 – (46,486) (683) (34) 2019 $’000 51,076 (1,239) (423) (23) (47,203) 49,391 2020 $’000 2019 $’000 Prima facie income tax (benefit)/expense calculated at 30% of (loss)/profit (46,435) 50,842 (Increase)/decrease in income tax (benefit)/expense due to: Over provision in prior year Other non-taxable items Non-deductible items Franking tax credit Income tax (benefit)/expense (717) – 345 (396) (446) (233) 96 (868) (47,203) 49,391 (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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)72 (b) Deferred tax assets Deferred tax asset balance comprises temporary differences attributable to: Leases Employee benefits Share-based payments and accrued expenses Tax losses carried forward Deferred acquisition costs Provision for indirect claims handling costs Other Net deferred tax Balance as at 1 January Debited to retained earnings Credited to the statement of comprehensive income Over provision of prior year tax Balance as at 31 December 2020 $’000 557 3,519 509 2,151 43,322 5,335 231 55,624 9,104 – 46,486 34 55,624 2019 $’000 624 3,775 488 – – 4,075 142 9,104 7,875 (34) 1,239 24 9,104 As at 31 December 2020 the Group had carried forward tax losses in New Zealand amounting to $74,145,000 (2019: $75,160,000). These tax losses will be available to be used against future taxable income generated by the Group’s New Zealand operations. No deferred tax asset has been recognised in respect of these tax losses due to insufficient certainty of future profits to utilise those losses. In 2020, due to a strengthening of outstanding claims liabilities as a response to the COVID-19 pandemic, the Group has incurred a tax loss in Australia. Management considers it is probable that future taxable profits will be available to utilise those tax losses. Accordingly, the Group has recognised a deferred tax asset on the totality of those tax losses. 3.6 Dividends Accounting policy A provision for dividends is made in respect of ordinary shares when dividends have been declared on or before the reporting date but have not yet been distributed at that date. (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. 2020 nil (2019: unfranked special dividend) 2020 nil (2019: interim dividend fully franked at 30%) 2020 nil (2019: unfranked special dividend) 2019 final dividend paid on 19 March 2020 (2018: final dividend) fully franked at 30% – – – 7.5 7.5 2020 2019 Cents per share $’000 Cents per share – – – 30,939 24.2 9.0 21.9 9.0 $’000 99,828 37,126 90,341 39,338 1 30,939 64.1 266,633 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 Notes to the financial statements(continued)73 (b) Dividends not recognised at reporting date 2020 nil (2019: final dividend fully franked at 30%) Total 2020 Cents per share – – $’000 – – 2019 Cents per share 7.5 7.5 $’000 30,939 30,939 On 12 February 2021, the directors determined that no final dividend declaration would be made for the year ended 31 December 2020. (c) Dividend franking account The balance of the franking account arises from: • 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 2020 $’000 25,436 2019 $’000 14,959 After taking into consideration the impact of franking credits and debits relating to the settlement of current tax balances the franking account balance would have a deficit of $2,804,000 (2019: $10,819,000 surplus). 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 (loss)/earnings per share is calculated by dividing the (loss)/profit after tax by the weighted average number of shares on issue during the reporting period. Diluted (loss)/earnings per share is calculated by dividing the (loss)/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 (loss)/earnings per share have been calculated using the weighted average and dilutive number of shares outstanding during the year of 412,514,000 (2019: 420,164,000) and 413,388,000 (2019: 420,780,000) respectively. The difference between basic and diluted (loss)/earnings per share is caused by the granting of potentially dilutive securities such as share rights, options and restricted share units (RSUs). Basic (loss)/earnings per share (cents per share) Diluted (loss)/earnings per share (cents per share) (a) Reconciliation of (loss)/earnings used in calculating (loss)/earnings per share Net (loss)/profit after tax Net (loss)/profit used in calculating basic and diluted (loss)/earnings per share 2020 (26.1) (26.0) 2020 $’000 (107,582) (107,582) 2019 28.6 28.5 2019 $’000 120,084 120,084 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)74 (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 (loss)/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 (loss)/earnings per share SECTION 4 – INSURANCE CONTRACTS Accounting policies Classification of insurance contracts 2020 $’000 2019 $’000 412,514 420,164 412,514 420,164 874 616 413,388 420,780 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 claims incurred (b) Claims development Gross claims expense Direct Inwards reinsurance Gross claims incurred 1 Reinsurance and other recoveries revenue 2020 $’000 296,835 (6,989) 289,846 2019 $’000 162,043 (11,157) 150,886 Current year $’000 2020 Prior years $’000 Total $’000 Current Year $’000 2019 Prior Years $’000 Total $’000 133,507 147,755 281,262 169,960 (11,982) 157,978 5,729 9,844 15,573 4,760 (695) 4,065 139,236 157,599 296,835 174,720 (12,677) 162,043 Reinsurance and other recoveries (398) (6,591) (6,989) (1,723) (9,434) (11,157) Net claims incurred 138,838 151,008 289,846 172,997 (22,111) 150,886 1. Including reinsurance and other recoveries provision movement Notes to the financial statements(continued)75 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 as at 1 January Expensing/reversing of reinsurance premium previously deferred Balance as at 31 December Comprising: Current Non-current 4.3 Deferred acquisition costs Accounting policies 2020 $’000 31,771 (11,553) 20,218 11,553 8,665 20,218 2019 $’000 43,333 (11,562) 31,771 11,553 20,218 31,771 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 2020 $’000 181,234 56,824 (196,454) 41,604 5,904 35,700 41,604 2019 $’000 166,845 59,468 (45,079) 181,234 37,966 143,268 181,234 After conducting the liability adequacy test as at 31 March 2020, the Group had a liability deficiency of $181.8 million which resulted in a DAC write-down of $181.8 million (2019: $nil). Refer to note 4.7 for further details. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)76 4.4 Outstanding claims Accounting policies Claims expense and a liability for outstanding claims are recognised in respect of direct and inward reinsurance business. The liability covers claims reported and outstanding, 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. 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: Current Non-current 2020 $’000 462,961 77,392 540,353 2020 $’000 360,905 289,846 10,516 (120,914) 540,353 148,578 391,775 540,353 2019 $’000 319,340 41,565 360,905 2019 $’000 339,063 150,886 1,555 (130,599) 360,905 160,101 200,804 360,905 Notes to the financial statements(continued)77 (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 Prior years $’000 2011 $’000 2012 $’000 2013 $’000 2014 $’000 2015 $’000 2016 $’000 2017 $’000 2018 $’000 2019 $’000 2020 $’000 Total $’000 992 1,079 1,021 777 1,424 860 1,162 1,019 632 2,231 6,668 7,805 6,825 12,917 6,803 8,620 6,716 11,193 13,399 10,997 11,246 20,870 20,319 16,711 8,680 8,885 18,599 9,989 24,535 29,722 21,130 13,560 8,238 18,443 15,925 43,917 28,494 20,825 14,601 17,099 23,182 34,634 30,254 31,018 31,787 14,669 21,273 18,955 38,764 14,053 13,540 31,205 10,687 26,026 15,274 Net incurred to date 122,436 184,055 167,346 145,750 84,886 43,497 35,206 30,811 14,031 2,231 Net paid to date Net outstanding claims provision at 31 December 2020 Non-reinsurance recoveries on unpaid claims at 31 December 2020 Gross outstanding claims provision at 31 December 2020 94,031 142,462 111,257 75,378 31,548 8,882 4,417 1,456 60 – 146,309 28,405 41,593 56,089 70,372 53,338 34,615 30,789 29,355 13,971 2,231 507,067 33,286 540,353 For further details on the impact from COVID-19 refer to note 1.2(e). 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 Balance as at 31 December There were no reinsurance recoveries at 31 December 2020 (2019: nil). 2020 $’000 22,770 10,516 33,286 2019 $’000 21,215 1,555 22,770 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)78 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 Accounting policies 2020 $’000 2019 $’000 1,280,451 1,214,206 561,730 (380,949) 433,248 (367,003) 1,461,232 1,280,451 315,781 1,145,451 286,114 994,337 1,461,232 1,280,451 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 probability of adequacy (POA) adopted for LAT 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). Notes to the financial statements(continued)79 The table below provides the details of the net premium liabilities (net of reinsurance and adjusted for the appropriate risk margin) used in the LAT as at 31 December 2020, 31 March 2020 and 31 December 2019: Unearned premium Less: Deferred acquisition costs Less: Deferred reinsurance expense Net unearned premium Net central estimate of present value of expected cash flows associated with future claims 31 December 2020 $’000 31 March 2020 $’000 31 December 2019 $’000 1,461,232 1,302,208 1,280,451 (41,604) (20,218) 1,399,410 983,564 (183,798)1 (72,030) 1,046,380 1,071,823 (181,234) (31,771) 1,067,446 899,295 Risk margin of the present value of expected cash flows on future claims 137,124 156,349 121,454 Net premium liabilities LAT surplus/(deficiency) Risk margin percentage Probability of adequacy 1. Prior to DAC write-down 1,120,688 1,228,172 1,020,749 278,722 (181,792) 46,697 17% 70% 17% 70% 17% 70% Expected future claims are inherently uncertain, particularly in the current environment as the economic effects of COVID-19 continue to emerge. The Group has projected future claims from COVID-19 based on a range of possible economic scenarios and has adopted a central scenario estimate for the liability valuation incorporating a median view of economic forecasts. At 31 March 2020, the Group had a LAT deficiency of $181.8 million which resulted in a DAC write down of $181.8 million. This related to older book years, as newer book years have benefitted from higher pricing and enhanced underwriting standards and are expected to remain profitable. At 31 December 2020, under the Group’s central scenario estimate, expected future claims (including an appropriate risk margin) exceeded the net insurance liabilities, creating a LAT surplus of $278.7 million. The $181.8 million DAC write-down is included in the “Acquisition costs” line which totals $196.2 million in the consolidated statement of comprehensive income for the year ended 31 December 2020, and is the key driver of the reduction in “Deferred acquisition costs” in the consolidated statement of financial position from $181.2 million at 31 December 2019 to $41.6 million at 31 December 2020. 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 gross 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 earnings curve which recognises the premium in accordance with the incidence of claims risk. The review of the premium earnings curve 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 earnings curve. Changes to earnings curve assumptions, which in turn impact the timing of the recognition of unearned premium and DAC, are recognised 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 curve 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 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)80 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. In establishing the COVID-19 specific element of the net outstanding claims liability, significant management judgement has been applied to derive a reasonable estimate of the probability-weighted view of potential future cash flows. Key areas of judgement relate to the exposure period, the estimation of potential economic loss, related key macroeconomic variables (including unemployment), reinsurance coverage and legal risk. Given the extent of the uncertainty, the range of potential financial outcomes in relation to these matters is unusually wide. All related uncertainties have been factored into the Group’s probability weighting when estimating the provision. For further details on the impact from COVID-19 refer to note 1.2(e). 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 delinquency portfolio. The Group establishes provisions for outstanding claims in two parts: • Delinquent policies advised to the Group by lenders as being 90 days delinquent at the valuation date; • IBNR, being the liability for future claims from policies which have missed at least 1 monthly repayment (or equivalent) and are not currently reported by lenders as being 3 months or more in delinquency. This includes policies that were reported delinquent in past periods and may re-report as delinquent in future periods. For loans where the mortgagee is in possession (MIP) and a claim has been submitted, the claimed amount adjusted for amounts not eligible to be claimed is provided. For loans where there is a MIP but a claim has not yet been submitted, 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. 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. Notes to the financial statements(continued)81 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 for policies being 90 days delinquent at the valuation date: • Average frequency factor is 31% (2019: 26%); • Average severity factor is 27% (2019: 28%). Incurred But Not Reported The IBNR provision is estimated by analysing the historical pattern of reported delinquencies, separated into: • Policies estimated as being between 30 and 90 days delinquent at the valuation date, or otherwise delinquent at that date but not reported by lenders; • Policies which were at least 30 days delinquent in prior periods and may re-report as delinquent in subsequent periods; • In the context of the increased uncertainty created by the COVID-19 pandemic and the associated government stimulus and repayment deferrals, the Group has revised its estimate of the re-delinquency reserve in 2020. At 31 December 2019, the Group was holding claims reserves within its IBNR for a period of six months after a delinquent loan had been cured to allow for the possibility that the loan could become re-delinquent. At 31 December 2020, the Group holds re-delinquency claims reserves for all policies that have at any point experienced delinquency up until the associated policy is cancelled or a case reserve is established. This change in assumption increased the outstanding claims liability by $116.1 million and its non-reinsurance recoveries by $7.0 million as at 31 December 2020. 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 18% (2019: 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 (2019: nil). The weighted average term to settlement, which is estimated to be 28 months (2019: 22 months). Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)82 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 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, 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. Impact on net outstanding claims liabilities to changes in key variables Sensitivity change Base Ultimate loss ratio Upside Economics – 5% House Price Appreciation, 1% reduction in unemployment rate Downside Economics – 5% House Price Depreciation (HPD), 1% increase in unemployment rate Downside Economics – 10% HPD, 1% increase in unemployment rate Downside Economics – 15% HPD Discount rate + 0.5% + 1.0% 2020 2019 Net outstanding claims liability Net premium liability Net outstanding claims liability Net premium liability $M 429 % $M 984 % $M 297 % $M 899 % (22) (5) (145) (15) (9) (3) (62) (7) 22 34 33 – – 5 8 8 – – 156 209 146 (27) (50) 16 21 15 (2) (5) 9 18 27 – – 3 6 9 – – 102 146 154 (19) (39) 11 16 17 (2) (4) 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 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 2020. 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 $10.0 million, with an equal and opposite impact in non-current unearned premium, as at 31 December 2020 and 31 December 2019. Notes to the financial statements(continued)83 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 2020: • Genworth Mortgage Insurance Australia Limited; • Genworth Financial Mortgage Insurance Pty Limited (GFMI); • Genworth Financial Mortgage Indemnity Limited; • Balmoral Insurance Company Limited. The calculation of the Prescribed Capital Amount (PCA) provided below is based on the APRA Level 2 Group requirements. Tier 1 capital Paid-up ordinary shares Reserves Retained earnings Less: Deductions Net surplus/(deficit) 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 2020 $’000 2019 $’000 1,090,180 1,090,180 (475,385) 773,125 (73,457) 111,879 (474,350) 911,646 (25,567) (42,327) 1,426,342 1,459,582 190,000 200,000 1,616,342 1,659,582 332,031 511,717 166,088 43,428 (71,949) 981,315 1.65x 284,442 479,115 125,679 35,726 (55,703) 869,259 1.91x Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)84 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 incorporated in Australia 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. Following an assessment of the impact of the COVID-19 pandemic, in May 2020, ratings agencies revised the insurer financial strength (IFS) rating of the Group’s operating subsidiary Genworth Financial Mortgage Insurance Pty Limited. GFMI’s rating was affirmed by Standard and Poor’s at ‘A’, with the outlook changed from ‘stable’ to ‘negative’. Fitch revised its rating from ‘A+’ (Strong) to ‘A’ (Strong); with the outlook maintained as ‘negative’. Both agencies acknowledged the capital strength and strong competitive position of GFMI. (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. Notes to the financial statements(continued)85 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 (A) $190 million subordinated notes (B) Less: capitalised transaction costs 2020 $’000 2019 $’000 – 200,000 190,000 (2,219) 187,781 – (631) 199,369 (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. On 3 July 2020, GFMI exchanged $146,575,000 of the outstanding $200,000,000 due in July 2025 (existing 2015 notes) for $146,575,000 of a new 10-year, non-call five-year floating rate subordinated notes due on 3 July 2030 (new 2020 notes). $5,000,000 of the existing 2015 notes were redeemed on 25 August 2020 with the remainder $48,425,000 of existing 2015 notes redeemed by GFMI on 6 October 2020. 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. (B) On 3 July 2020, GFMI exchanged $146,575,000 of the outstanding $200,000,000 due in July 2025 (existing 2015 notes) for $146,575,000 of new 10-year, non-call five-year floating rate subordinated notes due on 3 July 2030 (new 2020 notes). GFMI also issued $43,425,000 additional new 2020 notes. The new 2020 notes qualify as Tier 2 Capital under the APRA’s capital adequacy framework. As at 31 December 2020 GFMI has $190,000,000 of new 2020 notes on issue. 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 5.0% per annum; • The notes mature on 3 July 2030 (non-callable for the first five years) with the issuer having the option to redeem at par from 3 July 2025. Redemption at maturity, or any earlier date provided for in the terms and conditions of issue, is subject to prior approval by APRA. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)86 5.3 Equity (a) Share capital Issued fully paid capital Balance as at 1 January Buy-back shares, net of transaction costs 2020 Number of shares ‘000 2019 Number of shares ‘000 2020 $’000 2019 $‘000 412,514 1,090,180 – – 437,465 (24,951) 1,154,084 (63,904) Balance as at 31 December 412,514 1,090,180 412,514 1,090,180 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. (b) Share-based payment reserve Balance as at 1 January Share-based payment expense Share-based payment settled Balance as at 31 December 2020 $’000 2,209 42 (1,077) 1,174 2019 $’000 1,659 2,095 (1,545) 2,209 Refer to note 7.6 Share-based payments for further detailed information. 5.4 Capital commitments and contingencies Capital commitments There were no capital commitments as at 31 December 2020 (31 December 2019: nil). 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 2020 (31 December 2019: nil). 5.5 Other reserves Other reserves 2020 $’000 2019 $’000 (476,559) (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. Notes to the financial statements(continued)87 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 Accounting policies 2020 $’000 104,557 2019 $’000 87,254 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 2020 $’000 19,150 4,514 4,321 28,240 56,225 52,873 3,352 56,225 2019 $’000 37,749 3,184 2,033 4,140 47,106 25,498 21,608 47,106 Carrying amounts of receivables reasonably approximate fair value at the reporting date. None of the receivables are impaired or past due as at 31 December 2020 and 31 December 2019. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)88 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 asset leased are of low value. Accounting policies 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. The lease liability is measured at amortised cost using the effective interest 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 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 or 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. Lease assets (right-of-use assets) Balance as at 1 January Additions Disposals Decrease from recognition of sub-lease asset Depreciation charge for the year Modification of leases Balance as at 31 December 2020 $’000 11,166 300 (8) (2,739) (2,671) (93) 5,955 2019 $’000 14,346 – – – (3,245) 65 11,166 Notes to the financial statements(continued)Lease liabilities Balance as at 1 January Payments made Additions Disposals Interest expense Modification of leases Balance as at 31 December Comprising: 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 89 2020 $’000 16,430 (4,935) 300 (17) 639 (93) 2019 $’000 19,108 (3,551) – – 808 65 12,324 16,430 4,978 7,346 12,324 5,097 7,942 13,039 (2,671) (639) 221 4,790 11,640 16,430 4,909 12,879 17,788 (3,245) (808) 158 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. 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)90 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 (2019: nil). For further details on the impact from COVID-19 refer to note 1.2(e). 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 Total net intangibles 6.5 Goodwill Accounting policies 2020 $’000 32,454 407 – 32,861 (25,114) (1,257) – (26,371) 6,490 2019 $’000 30,618 2,226 (390) 32,454 (24,423) (1,048) 357 (25,114) 7,340 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 2020, 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. For further details on the impact from COVID-19 refer to note 1.2(e). Goodwill – at deemed cost 2020 $’000 9,123 2019 $’000 9,123 Notes to the financial statements(continued)91 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 2020 is 1.6% (2019: 1.7%); • Discount rate reflects a beta and equity risk premium applicable to the Group. The pre-tax discount rate used at 31 December 2020 is 12.9% (2019: 13.6%). Management believes that any reasonably possible change in the key assumptions on which the value in use of the Group’s CGU is based would not cause the Group’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), the Group’s goodwill is not impaired: • Reduction of the net cash flow projection by 15%; • Terminal growth rate of 0%; • Increase of the discount rate by 200 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 30-60 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 6.7 Employee benefits provision Accounting policies 2020 $’000 15,362 35,520 2 14 2019 $’000 15,919 25,810 98 – 50,898 41,827 49,058 1,840 50,898 38,645 3,182 41,827 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 Group’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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)92 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 181 employees (2019: 195). 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 2020 $’000 2,943 4,702 7,645 5,842 1,803 7,645 2020 $’000 30,060 30,060 2019 $’000 2,583 4,513 7,096 5,313 1,783 7,096 2019 $’000 303,237 303,237 5,528 6,355 1,822,706 1,821,382 3,731 3,731 949 949 1,818,975 1,820,433 1,090,180 1,090,180 293,127 993 434,675 294,006 1,572 434,675 1,818,975 1,820,433 2020 $ 905,743 91,275 53,330 2019 $ 840,743 91,275 12,780 1,050,348 944,798 Notes to the financial statements(continued)93 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. Executive KMP Michael Bencsik Andrew Cormack Steven Degetto Directors of the Company Pauline Blight-Johnston (appointed on 2 March 2020) David Foster Ian MacDonald Graham Mirabito (appointed on 10 August 2020) Rajinder Singh (appointed on 9 September 2020) Stuart Take Andrea Waters (appointed on 16 March 2020) Duncan West Former Directors Christine Patton (resigned on 9 August 2020) Gayle Tollifson (resigned on 15 March 2020) Jerome Upton (resigned on 8 September 2020) The key management personnel compensation is: Short-term employee benefits Post-employment benefits Equity compensation benefits 7.4 Related party disclosures 2020 $’000 3,342 265 104 3,711 2019 $’000 4,857 725 1,541 7,123 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 $4,561,000 (2019: $4,584,000) for the year ended 31 December 2020. There is a payable balance of $2,000 as at 31 December 2020 (2019: $98,000). Share buy-back There has been no on-market share buy-back for the year ended 31 December 2020. In 2019 GFI participated in on-market sale transactions during the buy-back program to maintain approximately a 52% stake in the Group. GFI had sold 13.0 million shares for a total consideration of $32.9 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)94 Major shareholder and its ultimate parent entity The major shareholder of the Group is Genworth Financial International Holdings, LLC and 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. On 5 January 2021, GFI announced that, given the uncertainty around the completion and timing of the remaining steps required to close the transaction, GFI and China Oceanwide have not extended the current 31 December 2020 end date under the merger agreement. However, the merger agreement remains in effect, although either party is able to terminate the merger agreement at any time. Further details are set out in the Company’s announcement of 5 January 2021. 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 Country of incorporation Class of shares Genworth Financial Mortgage Insurance Pty Limited Genworth Financial Mortgage Indemnity Limited Balmoral Insurance Company Limited Australia Australia Bermuda Ordinary Ordinary Ordinary Equity holding (%) 2020 100 100 100 2019 100 100 100 7.6 Share-based payments 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. 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 $1,501,907. One quarter of the share rights granted during the year vest on each of the first, second, third and fourth anniversaries of the grant date. If at any time an employee ceases continuous service with the Group, any unvested share rights are immediately cancelled, except in cases of retirement, redundancy, total and permanent disability or death. From 1 January 2018, it was decided that no grants would be made under the share rights plan. All outstanding grants (prior to 2018) made under the share rights plan will continue to vest per the original terms and conditions of the plan. Notes to the financial statements(continued)Share rights plan grant date Available to Vesting period 6 May 2016 Nominated employees Four equal tranches vested on first anniversary of grant date 1 March 2017 Nominated employees Four equal tranches vested on first anniversary of grant date 95 Total ($) $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% Tranche 2: 2.00% Tranche 3: 2.15% Tranche 4: 2.29% 2016 6 May 2016 $3.00 11.36% Tranche 1: 1.57% Tranche 2: 1.57% Tranche 3: 1.57% Tranche 4: 1.80% Tranche 1: 1 March 2018 Tranche 1: 1 March 2017 Tranche 2: 1 March 2019 Tranche 2: 1 March 2018 Tranche 3: 1 March 2020 Tranche 3: 1 March 2019 Tranche 4: 1 March 2021 Tranche 4: 1 March 2020 The final tranche of the 2016 Equity Plan grant vested on 1 March 2020. 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 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. • 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)96 Details of the number of employee share rights granted, exercised and forfeited or cancelled during the year were as follows: 2020 Grant date 6 May 2016 1 March 2017 1 March 2019 1 March 2020 Total Balance at 1 January 2020 Number Granted in the year Number Exercised in the year Number Cancelled/ forfeited in the year Number Balance at 31 December 2020 Number Vested and exercisable at end of the year Number 34,302 85,393 215,087 – 334,782 – – 35,321 117,533 1 152,854 (34,302) (42,674) (244,532) – (321,508) – (2,542) (5,876) – (8,418) – 40,177 – 117,533 157,710 – – – – – 1. The number of share rights granted in the period representing the deferred short term incentive component under the 2019 remuneration program 2019 Grant date 7 May 2015 22 June 2015 6 May 2016 1 March 2017 1 March 2018 4 February 2019 1 March 2019 Balance at 1 January 2019 Number Granted in the year Number Exercised in the year Number Cancelled/ forfeited in the year Number Balance at 31 December 2019 Number Vested and exercisable at end of the year Number 21,292 1,935 74,970 161,700 166,920 – – – – – – 16,464 53,702 215,087 1 285,253 (21,292) (1,935) (36,737) (51,298) (183,384) (53,702) – – – (3,931) (25,009) – – – (348,348) (28,940) – – 34,302 85,393 – – 215,087 334,782 – – – – – – – – Total 426,817 1. The number of share rights granted in the year representing the deferred short term incentive component under the 2018 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 6 May 2016 1 March 2017 1 March 2018 1 March 2019 1 March 2020 Nature of award Total share rights $1,729,230 share rights $1,873,986 share rights $1,886,491 share rights $1,688,601 share rights $1,771,188 Notes to the financial statements(continued)97 Key terms and conditions for the 2020 LTI: • The rights are granted for nil consideration; • Holders are entitled to receive notional dividend equivalents during the vesting period but do not have voting rights; • Each allocation is split 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 Underlying return on equity (ROE) performance condition. The Group’s three-year average Underlying ROE measured against regulatory capital (based on the upper end of the Board’s target range above the prescribed capital amount) is tested against target Underlying ROEs over a three-year period; – 75% is subject to relative total shareholder return (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 2020 long term incentive plan by $3.7341, being the 10-day volume weighted average price (VWAP) of the Company share price as at 31 December 2019 results, rounded down to the nearest whole share right. Each share right is a right granted to acquire a fully paid ordinary share of the Company; • The fair value of the share rights is the share price as at the grant date. If an employee ceases employment with the Group before the performance conditions are tested, their unvested rights will generally lapse. The fair value of the share rights for LTI linked to relative TSR performance huddles is calculated as at the grant date using Monte Carlo simulation. The factors and assumptions used for the valuation are summarised in the below table. 2020 2019 2018 2017 Grant date 1 March 2020 1 March 2019 1 March 2018 1 March 2017 Share price on grant date ($) Dividend yield (%) Volatility (%) Correlation $3.22 0% 1 31.94% $2.53 0% 1 31.02% $2.37 0% 1 34.1% $2.81 8.60% 35.00% A correlation matrix for the ASX 200 financial services (excluding REITs) has been used A correlation matrix for the ASX 200 financial services (excluding REITs) has been used A correlation matrix for the ASX 200 financial services (excluding REITs) has been used A correlation matrix for the ASX 200 (excluding resource companies) has been used Risk free rate (%) Vesting date 0.54% 2.24% 2.1% 2.0% 31 December 2023 31 December 2022 31 December 2021 31 December 2020 1. Consistent with the requirements set out in AASB 2 Share-based payment, 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 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)98 Details of the number of employee share rights granted, exercised and forfeited or cancelled during the year were as follows: 2020 Grant date 6 May 2016 1 1 March 2017 17 July 2017 1 March 2018 1 March 2019 1 March 2020 Total Balance at 1 January 2020 Number Granted in the year Number Exercised in the year Number Cancelled/ forfeited in the year Number Balance at 31 December 2020 Number – 60,393 453,430 75,025 583,215 777,190 – 1,888,860 – – – – 474,328 534,721 (60,393) (80,112) (37,512) – – – (373,318) (37,513) (336,233) (305,783) (23,620) – – – 246,982 471,407 450,708 (178,017) (1,076,467) 1,169,097 Vested and exercisable at end of the year Number – – – – – – – 1. Represents notional dividends awarded as share rights associated with 2016 LTI plan share rights that had previously vested/been exercised on 31 December 2019 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 Granted in the year Number Exercised in the year Number Cancelled/ forfeited in the year Number Balance at 31 December 2019 Number – 23,789 552,604 531,042 75,025 667,766 – 1,826,437 – – – – 777,190 800,979 (23,789) (139,291) – – – – – (413,313) (77,612) – (84,551) – – – 453,430 75,025 583,215 777,190 (163,080) (575,476) 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 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. Notes to the financial statements(continued)99 Details of the number of employee options granted, exercised and forfeited or cancelled during the year were as follows: 2020 Grant date Expiry date 10/02/2010 10/02/2020 09/02/2011 09/02/2021 14/02/2012 14/02/2022 15/02/2013 15/02/2023 20/02/2014 20/02/2024 Total Weighted average exercise price ($) 2019 Grant date Expiry date 10/02/2010 10/02/2020 09/02/2011 09/02/2021 14/02/2012 14/02/2022 15/02/2013 15/02/2023 20/02/2014 20/02/2024 Total Weighted average exercise price ($) Exercise price ($) Balance at 1 January 2020 Number Granted in the year Number Exercised in the year Number Cancelled/ forfeited in the year Number Balance at 31 December 2020 Number Vested and exercisable at end of the year Number 18.41 16.55 11.53 11.76 19.77 27,000 26,500 32,100 31,500 14,000 131,100 14.90 – – – – – – – – – – – – – – (27,000) (18,000) (20,400) (18,000) – – 8,500 11,700 13,500 14,000 – 8,500 11,700 13,500 14,000 (83,400) 47,700 47,700 14.89 14.91 14.91 Exercise price ($) Balance at 1 January 2019 Number Granted in the year Number Exercised in the year Number Cancelled/ forfeited in the year Number Balance at 31 December 2019 Number Vested and exercisable at end of the year Number 20.20 18.16 12.65 12.91 21.70 27,000 26,500 32,100 31,500 14,000 131,100 16.35 – – – – – – – – – – – – – – – – – – – – – 27,000 26,500 32,100 31,500 14,000 27,000 26,500 32,100 31,500 14,000 131,100 131,100 16.35 16.35 7.7 Events subsequent to reporting date On 12 February 2021, the Directors determined that no dividend declaration would be made for the year ended 31 December 2020. There are no events that have arisen since 31 December 2020 to the date of this report that, in the opinion of the Directors, that have significantly affected or may significantly affect the operations of the Group or the state of affairs of the Group in future years. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic ReportNotes to the financial statements(continued)100 Directors’ declaration In the opinion of the Directors of Genworth Mortgage Insurance Australia Limited (the Company): a) the consolidated financial statements and notes set out on pages 53 to 99 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 2020 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 2020. Signed in accordance with a resolution of the Directors Ian MacDonald Chairman Dated 26 February 2021 101 Independent auditor’s report To the shareholders of Genworth Mortgage Insurance Australia Limited REPORT ON THE AUDIT OF THE FINANCIAL REPORT Opinion We have audited the Financial Report of Genworth Mortgage Insurance Australia Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group’s financial position as at 31 December 2020 and of its financial performance for the year ended on that date; and The Financial Report comprises: • Consolidated statement of financial position as at 31 December 2020; • 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; • complying with Australian Accounting Standards and the and Corporations Regulations 2001. • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report102 Independent auditor’s report (continued) Valuation of Gross Outstanding Claims Liability (A$540m) 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: We tested the key controls designed and operated by the Group over the valuation of the 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: • the uncertainty in the timing of claim payments and • evaluating underlying documentation. For example, we 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; • past claims experience being an appropriate predictor of future experience; and • the impact of COVID-19 including the related government stimulus and lender payment deferral programs on future delinquencies and claim payments. 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. 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 property prices and other impacts due to the COVID-19 pandemic 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. 103 Independent auditor’s report (continued) Valuation of Unearned Premium Liability (A$1,461m), Net Earned Premium (A$312m) and the Liability Adequacy Test (LAT) Refer to the accounting policy in Note 4.6 Unearned premium, Note 4.7 Liability adequacy test, Note 4.8 Accounting estimates and judgements, and Note 4.9 Actuarial assumptions and methods to the Financial Report. 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 unearned premium liability is also subject to a Liability Adequacy Test (LAT) at each reporting date, whereby it is compared to the present value of cash flows relating to future claims plus an additional risk margin. Expected future claims are estimated in a consistent manner to the earnings pattern described above and therefore also have a high degree of estimation uncertainty. Further, the impact of COVID-19 on future claims significantly increased the estimation uncertainty during the year. The LAT resulted in a $181.8 million write-down of the deferred acquisition costs in 2020. 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 the methodology adopted to compare the pattern of risk emergence with current year experience and consideration of estimated future experience; • 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, including impacts from COVID-19, 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report104 Independent auditor’s report (continued) Other Information Other Information is financial and non-financial information in Genworth Mortgage 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. 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; and • 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: https://auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our Auditor’s Report. 105 Independent auditor’s report (continued) 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 2020, 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 49 of the Directors’ report for the year ended 31 December 2020. 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 2021 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report106 Shareholder information Unless otherwise stated, the information in this section is current as at 18 January 2021. ANNUAL GENERAL MEETING The 2021 Annual General Meeting (AGM) of Genworth Mortgage Insurance Australia Limited will be held on Thursday, 6 May 2021. 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. Further details will be set out in the Notice of 2021 AGM to be released on ASX in due course. 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 2021 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, 29 April 2021. Members will also be given a reasonable opportunity to ask questions of the Company and the auditor at the AGM. 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. 107 31 December 2020 12 February 2021 26 March 2021 6 May 2021 Shareholder information (continued) Important dates1 Company financial year end Full year results announced Annual Report and Notice of AGM mail out commences AGM 1. Some dates may be subject to change ORDINARY SHARES AND SHARE RIGHTS As at 18 January 2021, the Company had on issue the following equity securities: • 412,514,184 Shares • 1,326,807 Share Rights ORDINARY SHARE INFORMATION Substantial holders of ordinary shares Name Number of shares Voting power (%) Date of notice 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 AXA S.A. National Nominees Ltd ACF Australian Ethical Investment Limited 337,700,000 52.0 2 October 2015 264,634,553 51.95 25 October 2016 82,090,323 20,694,424 19.9 21 July 2020 5.02 18 December 2020 Note: substantial holder details are as disclosed in substantial holding notices given to the Company Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report108 Shareholder information (continued) Twenty largest holders of ordinary shares Rank Name Number of shares % of issued shares 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Genworth Financial International Holdings, LLC and Genworth Holdings, Inc. (as partners of the Genworth Australian General Partnership) Genworth Financial International Holdings, LLC and Genworth Holdings, Inc. (as partners of the Genworth Australian General Partnership) HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited National Nominees Limited J P Morgan Nominees Australia Pty Limited Brazil Farming Pty Ltd BNP Paribas Nominees Pty Ltd Argo Investments Limited Prudential Nominees Pty Ltd National Exchange Pty Ltd BNP Paribas Noms Pty Ltd Mr Guthrie John Williamson BNP Paribas Nominees Pty Ltd Solium Nominees (Australia) Pty Ltd Girt by Sea Investments P/L National Nominees Limited Mr Sunny Yang + Mrs Connie Yang FJP Pty Ltd Aotearoa Investment Company Pty Limited 132,226,515 82,090,323 56,117,910 27,099,081 24,990,471 19,398,210 6,661,673 3,563,840 3,208,901 2,935,000 2,000,000 1,995,091 1,292,170 1,202,482 1,147,571 823,469 744,245 450,891 438,750 380,765 32.05 19.90 13.60 6.57 6.06 4.70 1.62 0.87 0.78 0.71 0.49 0.48 0.31 0.29 0.28 0.20 0.18 0.11 0.11 0.09 Total for Top 20 368,767,358 89.40 109 Shareholder 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 Number of holders Number of shares % of issued shares 1,504 1,689 774 880 76 710,093 4,749,273 6,084,213 22,047,854 378,922,751 4,923 412,514,184 0.17 1.15 1.48 5.34 91.86 100.00 Note: Shareholders with less than a marketable parcel of 223 ordinary shares ($2.250 on 18 January 2021) is 368 and they hold 29,022 ordinary shares. Dividend details Share class Ordinary Dividend Franking Amount per share Payment date Final (FY19) Fully franked 7.5 cents 19 March 2020 SHARE RIGHTS INFORMATION Distribution schedule of holders of share rights Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Voting rights Number of holders Number of share rights % of total share rights 1 12 4 4 5 26 911 18,992 29,531 279,807 997,566 1,326,807 0.1 1.4 2.2 21.1 75.2 100.0 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 499,525 shares were purchased on-market for the purposes of the Rights Plan during the period from 1 January 2020 to 31 December 2020 at an average price of $3.27 per share. On-market share buy-back As at 18 January 2021, there was no current on-market share buy-back. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report110 Glossary AASB APRA ASX Book Year Business Select Central estimate CET1 or Tier 1 Capital China Oceanwide Combined ratio COVID-19 DAC Deferral Delinquency Delinquency rate EPS Excess of loss or XOL Expense ratio FBT Fitch Flow GDP Australian Accounting Standards Board Australian Prudential Regulation Authority Australian Securities Exchange The calendar year an LMI policy is originated LMI product offered by Genworth to provide self-employed borrowers access to residential mortgage finance by providing limited evidence of income. The borrower self certifies an income that is used to establish serviceability The value of insurance liabilities which represents the average (i.e. statistical mean) of the estimated distribution of outcomes 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; • rank behind the claims of policyholders and creditors in the event of winding up China Oceanwide Holdings Group Co., Ltd The sum of the loss ratio and the expense ratio A disease caused by a new strain of coronavirus. ‘CO’ stands for corona, ‘VI’ for virus, and ‘D’ for disease Deferred acquisition costs Temporary relief granted to borrowers impacted by COVID-19 by lender customers, allowing them to defer loan repayments for a period of time. Active – comprised of new and existing deferrals Cumulative – All deferral notifications received to date Closures – lender notified opt outs and closures. Also includes expiry of deferral periods Any insured loan which is reported as three or more months of repayments in arrears The delinquency rate is calculated by dividing the number of reported delinquent loans insured by the number of in-force policies (excluding excess of loss insurance) Earnings per share A type of insurance in which the insurer indemnifies the insured for losses that exceed a specified limit Calculated by dividing the sum of the acquisition costs and the other underwriting expenses by the net earned premium Fringe benefit tax Fitch Ratings Policies written by Genworth on a loan by loan basis at the time of origination by the lender customer Gross domestic product 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 Glossary (continued) GWP HLVR Homebuyer Plus HPA/HPD IBNR IFRS Indemnity Insurance in-force Insurance margin 111 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 LMI product offered by Genworth that allows borrowers to purchase a property for owner occupation with limited or no deposit, or those wishing to use money not sourced from their own savings as a deposit House price appreciation/depreciation Delinquent loans that have been incurred but not reported International Financial Reporting Standards Genworth Financial Mortgage Indemnity Ltd The original principal balance of all mortgage loans currently insured (excludes excess of loss insurance) 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 Insured loans in-force The count of policies currently insured (excludes excess of loss insurance) Investment return 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 IPO Initial Public Offering JobKeeper/JobSeeker KMP LAT Lender customers Payment designed to help businesses affected by COVID-19 to cover the costs of their employees’ wages/financial help for people aged between 22 and the aged pension Key Management Personnel, as the term is defined in the Corporations Act 2001 (Cth) Liability adequacy test – AASB 1023 – General Insurance Contracts requires a LAT test. If the LAT test is failed, the DAC asset is written-down and an unexpired risk reserve established if there is a further deficiency after the write-down of DAC Those with a direct relationship with Genworth such as traditional lenders and funding programs. Excludes mortgage managers and originators who generate loans though a funding program 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 LLC LMI LMI market LMI provider Loss ratio LTI LVR 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 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 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 Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Report112 Glossary (continued) NIW NPAT New insurance written Net profit after tax Omnibus incentive plans The Genworth Financial 2004 Omnibus Incentive Plan and 2012 Omnibus Incentive Plan PCA PCA coverage PCR Performance NPAT PoA Premium liabilities Prescribed capital amount Calculated by dividing the regulatory capital base by the prescribed capital amount The PCA plus any supervisory adjustment determined by APRA 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. Probability of adequacy Premium liabilities reflects the present value of (a) expected cash flows associated with anticipated future claims based on the net central estimate; and (b) risk margin Regulatory capital base The sum of Tier 1 Capital and Tier 2 Capital Return on equity (ROE) Calculated by dividing NPAT by the average of the opening and closing equity balance for a financial period Rights Plan Risk margin RSU S&P SLT Statutory NPAT STI Technical funds TFR Tier 2 capital Top-ups TSR Underlying equity Underlying NPAT Underlying ROE VWAP WACC Genworth Share Rights Plan An additional amount that is added to the central estimate loss forecast and reserves to reflect the inherent uncertainty in forecasting loss outcomes Restricted share units Standard & Poor’s Ratings Services Senior Leadership Team Net profit/(loss) after tax Short-term incentive Investments held to support unearned premium and outstanding claims reserves Total fixed remuneration As defined by GPS 112, Tier 2 Capital comprises components of capital that fall short of the quality of Tier 1 Capital but nonetheless contribute to the overall strength of a regulated institution and its capacity to absorb losses When a lender customer purchases additional LMI policies to cover an increase in the amount of original mortgage loan Total shareholder return 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 unhedged movements in foreign exchange rates on Genworth’s non-AUD exposures. The bulk of these foreign exchange exposures are fully 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 113 Corporate directory REGISTERED OFFICE Genworth Mortgage Insurance Australia Limited Level 26 101 Miller Street North Sydney NSW 2060 Telephone: +61 1300 655 422 Fax: +61 1300 366 228 Website: genworth.com.au Company Secretary Ms Prudence Milne, General Counsel and Company Secretary Assistant Company Secretary Mr Brady Weissel, Corporate Counsel and 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. Genworth Annual ReportFinancial ReportDirectors’ ReportStrategic Reportgenworth.com.au 

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