GENWORTH FINANCIAL INC, 10-K filed on 2/27/2020
Annual Report
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Cover Page - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2019
Feb. 19, 2020
Jun. 30, 2019
Cover [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Entity Central Index Key 0001276520    
Current Fiscal Year End Date --12-31    
Document Annual Report true    
Document Transition Report false    
Document Period End Date Dec. 31, 2019    
Entity Registrant Name GENWORTH FINANCIAL INC    
Entity File Number 001-32195    
Entity Tax Identification Number 80-0873306    
Entity Incorporation, State or Country Code DE    
Entity Current Reporting Status Yes    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Filer Category Large Accelerated Filer    
Entity Shell Company false    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Address, Address Line One 6620 West Broad Street    
Entity Address, State or Province VA    
Entity Address, City or Town Richmond    
Entity Address, Postal Zip Code 23230    
Entity Interactive Data Current Yes    
City Area Code 804    
Local Phone Number 281-6000    
Trading Symbol GNW    
Security Exchange Name NYSE    
Title of 12(b) Security Class A Common Stock    
Entity Common Stock, Shares Outstanding   504,767,950  
Entity Public Float     $ 1.9
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CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
Assets    
Fixed maturity securities available-for-sale, at fair value $ 60,339 $ 55,589
Equity securities, at fair value 239 275
Commercial mortgage loans ($47 and $62 are restricted as of December 31, 2019 and 2018, respectively, related to a securitization entity) 6,963 6,749
Policy loans 2,058 1,861
Other invested assets 1,632 1,072
Total investments 71,231 65,546
Cash, cash equivalents and restricted cash 3,341 1,974
Accrued investment income 654 645
Deferred acquisition costs 1,836 3,142
Intangible assets and goodwill 201 333
Reinsurance recoverable 17,103 17,278
Other assets 443 395
Deferred tax asset 425 736
Separate account assets 6,108 5,859
Assets held for sale related to discontinued operations 0 5,015
Total assets 101,342 100,923
Liabilities and equity    
Future policy benefits 40,384 37,940
Policyholder account balances 22,217 22,968
Liability for policy and contract claims 10,958 10,295
Unearned premiums 1,893 2,013
Other liabilities 1,562 1,529
Non-recourse funding obligations 311 311
Long-term borrowings 3,277 3,707
Separate account liabilities 6,108 5,859
Liabilities held for sale related to discontinued operations   2,112
Total liabilities 86,710 86,734
Commitments and contingencies
Equity:    
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 592 million and 589 million shares issued as of December 31, 2019 and 2018, respectively; 504 million and 501 million shares outstanding as of December 31, 2019 and 2018, respectively 1 1
Additional paid-in capital 11,990 11,987
Net unrealized investment gains (losses):    
Net unrealized gains (losses) on securities not other-than-temporarily impaired 1,444 585
Net unrealized gains (losses) on other-than-temporarily impaired securities 12 10
Net unrealized investment gains (losses) 1,456 595
Derivatives qualifying as hedges 2,002 1,781
Foreign currency translation and other adjustments (25) (332)
Total accumulated other comprehensive income (loss) 3,433 2,044
Retained earnings 1,461 1,118
Treasury stock, at cost (88 million shares as of December 31, 2019 and 2018) (2,700) (2,700)
Total Genworth Financial, Inc.'s stockholders' equity 14,185 12,450
Noncontrolling interests 447 1,739
Total equity 14,632 14,189
Total liabilities and equity $ 101,342 $ 100,923
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CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
Restricted commercial mortgage loans related to securitization entities $ 47 $ 62
Class A common stock, par value $ 0.001 $ 0.001
Class A common stock, shares authorized 1,500,000,000 1,500,000,000
Class A common stock, shares issued 592,000,000 589,000,000
Class A common stock, shares outstanding 504,000,000 501,000,000
Treasury stock, shares 88,000,000 88,000,000
v3.19.3.a.u2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Revenues:      
Premiums $ 4,037 $ 3,994 $ 3,485
Net investment income 3,220 3,121 3,066
Net investment gains (losses) 50 (9) 137
Policy fees and other income 789 795 825
Total revenues 8,096 7,901 7,513
Benefits and expenses:      
Benefits and other changes in policy reserves 5,163 5,606 5,125
Interest credited 577 611 646
Acquisition and operating expenses, net of deferrals 962 943 957
Amortization of deferred acquisition costs and intangibles 441 348 392
Interest expense 239 256 266
Total benefits and expenses 7,382 7,764 7,386
Income from continuing operations before income taxes 714 137 127
Provision (benefit) for income taxes 195 70 (406)
Income from continuing operations 519 67 533
Income from discontinued operations, net of taxes 11 230 394
Net income 530 297 927
Less: net income from continuing operations attributable to noncontrolling interests 64 70 (80)
Less: net income from discontinued operations attributable to noncontrolling interests 123 108 190
Net income available to Genworth Financial, Inc.'s common stockholders 343 119 817
Net income available to Genworth Financial, Inc.'s common stockholders      
Income (loss) from continuing operations available to Genworth Financial, Inc.'s common stockholders 455 (3) 613
Income (loss) from discontinued operations available to Genworth Financial, Inc.'s common stockholders (112) 122 204
Net income available to Genworth Financial, Inc.'s common stockholders $ 343 $ 119 $ 817
Income (loss) from continuing operations available to Genworth Financial, Inc.'s common stockholders per share:      
Basic $ 0.90 $ (0.01) $ 1.23
Diluted 0.89 (0.01) 1.22
Net income available to Genworth Financial, Inc.'s common stockholders per share:      
Basic [1] 0.68 0.24 1.64
Diluted [1] $ 0.67 $ 0.24 $ 1.63
Weighted-average common shares outstanding:      
Basic 502.9 500.4 499.0
Diluted [2] 509.7 500.4 501.4
Supplemental disclosures:      
Total other-than-temporary impairments $ (1) $ 0 $ (6)
Portion of other-than-temporary impairments included in other comprehensive income (loss) 0 0 0
Net other-than-temporary impairments (1) 0 (6)
Other investment gains (losses) 51 (9) 143
Total net investment gains (losses) $ 50 $ (9) $ 137
[1] May not total due to whole number calculation.
[2] Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the year ended December 31, 2018, we were required to use basic weighted-average common shares outstanding as the inclusion of shares for stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) of 3.8 million would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the year ended December 31, 2018, dilutive potential weighted-average common shares outstanding would have been 504.2 million.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Net income $ 530 $ 297 $ 927
Other comprehensive income (loss), net of taxes:      
Net unrealized gains (losses) on securities not other-than-temporarily impaired 846 (669) (187)
Net unrealized gains (losses) on other-than-temporarily impaired securities 2 (2) 1
Derivatives qualifying as hedges 221 (298) (20)
Foreign currency translation and other adjustments 487 (301) 251
Total other comprehensive income (loss) 1,556 (1,270) 45
Total comprehensive income (loss) 2,086 (973) 972
Less: comprehensive income attributable to noncontrolling interests 354 22 222
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders $ 1,732 $ (995) $ 750
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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - USD ($)
$ in Millions
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Balances, beginning at Dec. 31, 2016 $ 14,467 $ 1 $ 11,962 $ 3,094 $ 287 $ (2,700) $ 12,644 $ 1,823
Cumulative effect of change in accounting, net of taxes 9       9   9  
Repurchase of subsidiary shares (33)             (33)
Comprehensive income (loss):                
Net income 927       817   817 110
Other comprehensive income (loss), net of taxes 45     (67)     (67) 112
Total comprehensive income (loss) 972           750 222
Dividends to noncontrolling interests (107)             (107)
Stock-based compensation expense and exercises and other 20   15       15 5
Balances, ending at Dec. 31, 2017 15,328 1 11,977 3,027 1,113 (2,700) 13,418 1,910
Cumulative effect of change in accounting, net of taxes 17     131 (114)   17  
Repurchase of subsidiary shares (105)             (105)
Comprehensive income (loss):                
Net income 297       119   119 178
Other comprehensive income (loss), net of taxes (1,270)     (1,114)     (1,114) (156)
Total comprehensive income (loss) (973)           (995) 22
Dividends to noncontrolling interests (97)             (97)
Stock-based compensation expense and exercises and other 19   10       10 9
Balances, ending at Dec. 31, 2018 14,189 1 11,987 2,044 1,118 (2,700) 12,450 1,739
Repurchase of subsidiary shares (44)             (44)
Sale of business that included noncontrolling interests (1,417)             (1,417)
Comprehensive income (loss):                
Net income 530       343   343 187
Other comprehensive income (loss), net of taxes 1,556     1,389     1,389 167
Total comprehensive income (loss) 2,086           1,732 354
Dividends to noncontrolling interests (197)             (197)
Stock-based compensation expense and exercises and other 15   3       3 12
Balances, ending at Dec. 31, 2019 $ 14,632 $ 1 $ 11,990 $ 3,433 $ 1,461 $ (2,700) $ 14,185 $ 447
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
$ in Millions
12 Months Ended
Dec. 31, 2019
USD ($)
Dec. 31, 2018
USD ($)
Dec. 31, 2017
USD ($)
Cash flows from operating activities:      
Net income $ 530 $ 297 $ 927
Less income from discontinued operations, net of taxes (11) (230) (394)
Adjustments to reconcile net income to net cash from operating activities:      
Amortization of fixed maturity securities discounts and premiums (118) (130) (156)
Net investment (gains) losses (50) 9 (137)
Charges assessed to policyholders (699) (697) (713)
Acquisition costs deferred (27) (42) (46)
Amortization of deferred acquisition costs and intangibles 441 348 392
Deferred income taxes 139 28 (427)
Trading securities, derivative instruments and limited partnerships (98) (260) 727
Stock-based compensation expense 27 35 31
Change in certain assets and liabilities:      
Accrued investment income and other assets (358) (166) 32
Insurance reserves 1,259 1,555 1,625
Current tax liabilities 26 8 (25)
Other liabilities, policy and contract claims and other policy-related balances 609 598 370
Cash from operating activities—discontinued operations 409 280 348
Net cash from operating activities 2,079 1,633 2,554
Cash flows from (used by) investing activities:      
Fixed maturity securities 3,436 3,312 4,170
Commercial mortgage loans 582 701 579
Restricted commercial mortgage loans related to a securitization entity 15 45 22
Proceeds from sales of investments:      
Fixed maturity and equity securities 3,883 5,488 3,788
Purchases and originations of investments:      
Fixed maturity and equity securities (6,899) (9,386) (7,800)
Commercial mortgage loans (813) (1,047) (806)
Other invested assets, net (389) 261 (678)
Policy loans, net 62 35 48
Proceeds from sale of business, net of cash transferred 1,398 0 0
Payments for business purchased, net of cash acquired 0 0 (5)
Cash from (used by) investing activities—discontinued operations 26 (31) (77)
Net cash from (used by) investing activities 1,301 (622) (759)
Cash flows used by financing activities:      
Deposits to universal life and investment contracts 824 1,193 857
Withdrawals from universal life and investment contracts (2,319) (2,355) (2,397)
Proceeds from issuance of long-term debt 0 441 0
Repayment and repurchase of long-term debt (446) (600) 0
Repayment of borrowings related to securitization entities 0 (40) (34)
Repurchase of subsidiary shares (22) (55) (19)
Dividends paid to noncontrolling interests (87) (40) (53)
Other, net (35) (56) (53)
Cash used by financing activities—discontinued operations (132) (109) (69)
Net cash used by financing activities (2,217) (1,621) (1,768)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $6, $(25) and $23 related to discontinued operations) 1 (88) 64
Net change in cash, cash equivalents and restricted cash 1,164 (698) 91
Cash, cash equivalents and restricted cash at beginning of period 2,177 2,875 2,784
Cash, cash equivalents and restricted cash at end of period 3,341 2,177 2,875
Less cash, cash equivalents and restricted cash of discontinued operations at end of period 0 203 229
Cash, cash equivalents and restricted cash $ 3,341 $ 1,974 $ 2,646
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Cash Flows [Abstract]      
Discontinued operations exchange rate effect $ 6 $ (25) $ 23
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Nature of Business and Formation of Genworth
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Nature of Business and Formation of Genworth
(1) Nature of Business and Formation of Genworth
Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.
On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“Parent”), a limited liability company incorporated in the People’s Republic of China and a subsidiary of China Oceanwide Holdings Group Co., Ltd., a limited liability company incorporated in the People’s Republic of China (together with its affiliates, “China Oceanwide”), and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and a direct, wholly-owned subsidiary of Asia Pacific Insurance USA Holdings LLC (“Asia Pacific Insurance”), which is a Delaware limited liability company and owned by China Oceanwide, pursuant to which, subject to the terms and conditions set forth therein, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as a direct, wholly-owned subsidiary of Asia Pacific Insurance. China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash.
 
At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement. The closing of the transaction remains subject to other closing
conditions and regulatory re-approvals
.
The accompanying financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or power to direct activities of certain variable interest entities (“VIEs”), which we refer to as “Genworth,” “Genworth Financial,” the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.
We operate our business through the following four operating segments:
 
U.S. Mortgage Insurance.
In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.
 
Australia Mortgage Insurance.
In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.
 
U.S. Life Insurance.
We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.
 
Runoff.
The Runoff segment includes the results of products which have not been actively sold since 2011, but we continue to service our existing blocks of business. These products primarily include variable annuity, variable life insurance and corporate-owned life insurance, as well as funding agreements.
 
In addition to our four operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.
On December 12, 2019, we completed the sale of Genworth MI Canada Inc. (“Genworth Canada”), our former Canada mortgage insurance business, to an affiliate of Brookfield Business Partners L.P. (“Brookfield”)
 
and received approximately $
1.7
 billion in net cash proceeds. Our Canada mortgage insurance business, previously the only business in the Canada Mortgage Insurance segment, is reported as discontinued operations and its financial position, results of operations and cash flows are separately reported for all periods presented. All prior periods reflected herein have been
re-presented
on this basis. See note 24 for additional information related to discontinued operations.
Unless otherwise indicated, references to the consolidated balance sheets, the consolidated statements of income, the consolidated statements of cash flows and the notes to the consolidated financial statements, exclude amounts related to discontinued operations.
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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Disclosue of Accounting Changes [Abstract]  
Summary of Significant Accounting Policies
(2) Summary of Significant Accounting Policies
Our consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (“U.S. GAAP”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation.
a) Premiums
For traditional long-duration insurance contracts, we report premiums as earned when due. For short-duration insurance contracts, we report premiums as revenue over the terms of the related insurance policies on a
pro-rata
basis or in proportion to expected claims.
For single premium
mortgage
insurance contracts, we report premiums over the estimated policy life in accordance with the expected pattern of risk emergence as further described in our accounting policy for unearned premiums. In addition, we have a practice of refunding the post-delinquent premiums in our U.S. mortgage insurance business to the insured party if the delinquent loan goes to claim. We record a liability for premiums received on the delinquent loans where our practice is to refund post-delinquent premiums.
Premiums received under annuity contracts without significant mortality risk and premiums received on investment and universal life insurance products are not reported as revenues but rather as deposits and are included in liabilities for policyholder account balances.
b) Net Investment Income and
Net
Investment Gains and Losses
Investment income is recognized when earned. Income or loss upon call or prepayment of
available-for-sale
fixed maturity securities is recognized in net investment income, except for hybrid securities where the income or loss upon call is recognized in net investment gains and losses. Investment gains and losses are calculated on the basis of specific identification on the trade date.
Investment income on mortgage-backed and asset-backed securities is initially based upon yield, cash flow and prepayment assumptions at the date of purchase. Subsequent revisions in those assumptions are recorded using the retrospective or prospective method. Under the retrospective method used for mortgage-backed and asset-backed securities of high credit quality (ratings equal to or greater than “AA” or that are backed by a U.S. agency) which cannot be contractually prepaid in such a manner that we would not recover a substantial portion of the initial investment, amortized cost of the security is adjusted to the amount that would have existed had the revised assumptions been in place at the date of purchase. The adjustments to amortized cost are recorded as a charge or credit to net investment income. Under the prospective method, which is used for all other mortgage-backed and asset-backed securities, future cash flows are estimated and interest income is recognized going forward using the new internal rate of return.
c) Policy Fees and Other Income
Policy fees and other income consists primarily of insurance charges assessed on universal and term universal life insurance contracts and fees assessed against customer account values. For universal and term universal life insurance contracts, charges to policyholder accounts for cost of insurance are recognized as revenue when due. Variable product fees are charged to variable annuity contractholders and variable life insurance policyholders based upon the daily net assets of the contractholder’s and policyholder’s account values and are recognized as revenue when charged. Policy surrender fees are recognized as income when the policy is surrendered.
d) Investment Securities
At the time of purchase, we designate our fixed maturity securities as either available-for-sale or trading and report them in our consolidated balance sheets at fair value. Our portfolio of fixed maturity securities comprises primarily investment grade securities. Changes in the fair value of available-for-sale fixed maturity securities, net of the effect on deferred acquisition costs (“DAC”), present value of future profits (“PVFP”), benefit reserves and deferred income taxes, are reflected as unrealized investment gains or losses in a separate component of accumulated other comprehensive income (loss). Equity securities are recorded at fair value in our consolidated balance sheets and changes in the fair value are reflected in net investment gains (losses). Realized and unrealized gains and losses related to trading securities are reflected in net investment gains (losses).
Other-Than-Temporary Impairments On
Available-For-Sale
Fixed Maturity Securities
As of each balance sheet date, we evaluate securities in an unrealized loss position for other-than-temporary impairments. For debt securities, we consider all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. More specifically for mortgage-backed and asset-backed securities, we also utilize performance indicators of the underlying assets including default or delinquency rates, loan to collateral value ratios, third-party credit enhancements, current levels of subordination, vintage and other relevant characteristics of the security or underlying assets to develop our estimate of cash flows. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Where possible, this data is benchmarked against third-party sources.
 
 
We recognize other-than-temporary impairments on debt securities in an unrealized loss position when one of the following circumstances exists:
  we do not expect full recovery of our amortized cost basis when due,
  the present value of cash flows expected to be collected is less than our amortized cost basis,
  we intend to sell a security or
  it is more likely than not that we will be required to sell a security prior to recovery.
For other-than-temporary impairments recognized during the period, we present the total other-than-temporary impairments, the portion of other-than-temporary impairments included in other comprehensive income (loss) (“OCI”) and the net other-than-temporary impairments as supplemental disclosure presented on the face of our consolidated statements of income.
Total other-than-temporary impairments that emerged in the current period are calculated as the difference between the amortized cost and fair value. For other-than-temporarily impaired securities where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery, total other-than-temporary impairments are adjusted by the portion of other-than-temporary impairments recognized in OCI
(“non-credit”).
Net other-than-temporary impairments recorded in net income (loss) represent the credit loss on the other-than-temporarily impaired securities with the offset recognized as an adjustment to the amortized cost to determine the new amortized cost basis of the securities.
For securities that were deemed to be other-than-temporarily impaired and a
non-credit
loss was recorded in OCI, the amount recorded as an unrealized gain (loss) represents the difference between the current fair value and the new amortized cost for each period presented. The unrealized gain (loss) on an other-than-temporarily impaired security is recorded as a separate component in OCI until the security is sold or until we record an other-than-temporary impairment where we intend to sell the security or will be required to sell the security prior to recovery.
To estimate the amount of other-than-temporary impairment attributed to credit losses on debt securities where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery, we determine our best estimate of the present value of the cash flows expected to be collected from a security using the effective yield on the security prior to recording any other-than-temporary impairment. If the present value of the discounted cash flows is lower than the amortized cost of the security, the difference between the present value and amortized cost represents the credit loss associated with the security with the remaining difference between fair value and amortized cost recorded as a
non-credit
other-than-temporary impairment in OCI.
The evaluation of other-than-temporary impairments is subject to risks and uncertainties and is intended to determine the appropriate amount and timing for recognizing an impairment charge. The assessment of whether such impairment has occurred is based on management’s best estimate of the cash flows expected to be collected at the individual security level. We regularly monitor our investment portfolio to ensure that securities that may be other-than-temporarily impaired are identified in a timely manner and that any impairment charge is recognized in the proper period.
While the other-than-temporary impairment model for debt securities generally includes fixed maturity securities, there are certain hybrid securities that are classified as fixed maturity securities where the application
 
of a debt impairment model depends on whether there has been any evidence of deterioration in credit of the issuer, such as a downgrade to below investment grade. Under certain circumstances, evidence of deterioration in credit of the issuer may result in the application of the equity securities impairment model discussed below.
Prior to adopting new accounting guidance related to the recognition and measurement of financial assets and financial liabilities on January 1, 2018 (see “—Accounting Changes
 
—Recognition and measurement of financial assets and liabilities” for additional details), we recognized an impairment charge for equity securities in the period in which we determined that the security would not recover to book value within a reasonable period of time. We determined what constituted a reasonable period on a
security-by-security
basis based upon consideration of all the evidence available to us, including the magnitude of an unrealized loss and its duration. In any event, this period did not exceed 15 months for common equity securities. We measured other-than-temporary impairments based upon the difference between the amortized cost of a security and its fair value.
e) Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have fixed maturity securities, short-term investments, equity securities, limited partnerships, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value.
Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
  Level 1—Quoted prices for identical instruments in active markets.
 
 
 
 
 
 
 
  Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
 
 
 
 
 
 
 
  Level 3—Instruments whose significant value drivers are unobservable.
 
 
 
 
 
 
 
Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as actively traded equity securities and actively traded mutual fund investments.
Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. These models are primarily industry-standard models that consider various inputs, such as interest rate, credit spread and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed maturity and equity securities; government or agency securities; certain mortgage-backed and asset-backed securities; securities held as collateral; and certain
non-exchange-traded
derivatives such as interest rate or cross currency swaps.
Level 3 comprises financial instruments whose fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on, nor corroborated by,
 
 
readily available market information. In certain instances, this category may also utilize
non-binding
broker quotes. This category primarily consists of certain less liquid fixed maturity, equity and trading securities and certain derivative instruments or embedded derivatives where we cannot corroborate the significant valuation inputs with market observable data.
As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability, such as the relative impact on the fair value as a result of including a particular input. We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. See note 16 for additional information related to fair value measurements.
f) Commercial Mortgage Loans
The carrying value of commercial mortgage loans is stated at original cost, net of principal payments, amortization and allowance for loan losses. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are deferred and amortized on an effective yield basis over the term of the loan. Commercial mortgage loans are considered past due when contractual payments have not been received from the borrower by the required payment date.
“Impaired” loans are defined by U.S. GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. In determining whether it is probable that we will be unable to collect all amounts due, we consider current payment status, debt service coverage ratios, occupancy levels and current
loan-to-value.
Impaired loans are carried on a
non-accrual
status. Loans are placed on
non-accrual
status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due. Income on impaired loans is not recognized until the loan is sold or the cash received exceeds the carrying amount recorded.
We evaluate the impairment of commercial mortgage loans first on an individual loan basis. If an individual loan is not deemed impaired, then we evaluate the remaining loans collectively to determine whether an impairment should be recorded.
For individually impaired loans, we record an impairment charge when it is probable that a loss has been incurred. The impairment is recorded as an increase in the allowance for loan losses. All losses of principal are charged to the allowance for loan losses in the period in which the loan is deemed to be uncollectible.
For loans that are not individually impaired where we evaluate the loans collectively, the allowance for loan losses is maintained at a level that we determine is adequate to absorb estimated probable incurred losses in the loan portfolio. Our process to determine the adequacy of the allowance utilizes an analytical model based on historical loss experience adjusted for current events, trends and economic conditions that would result in a loss in the loan portfolio over the next 12 months. Key inputs into our evaluation include debt service coverage ratios,
loan-to-value,
property-type, occupancy levels, geographic region, and probability weighting of the scenarios generated by the model. The actual amounts realized could differ in the near term from the amounts assumed in
 
arriving at the allowance for loan losses reported in the consolidated financial statements. Additions and reductions to the allowance through periodic provisions or benefits are recorded in net investment gains (losses). See note 4 for additional disclosures related to commercial mortgage loans.
g) Repurchase Agreements
We previously had a repurchase program in which we sold an investment security at a specified price and agreed to repurchase that security at another specified price at a later date. Repurchase agreements were treated as collateralized financing transactions and were carried at the amounts at which the securities were subsequently reacquired, including accrued interest, as specified in the respective agreement. The fair value of securities to be repurchased was monitored and collateral levels were adjusted where appropriate to protect the parties against credit exposure. Cash received was invested in fixed maturity securities. See note 12 for additional information related to our repurchase agreements.
h) Securities Lending Activity
W
e engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary. See note 12 for additional information related to our securities lending activity.
i) Cash, Cash Equivalents and Restricted Cash
Certificates of deposit, money market funds and other time deposits with original maturities of
90
days or less are considered cash equivalents in the consolidated balance sheets and consolidated statements of cash flows. Items with maturities greater than
90
days but less than one year at the time of acquisition are considered short-term investments.
j) Deferred Acquisition Costs
Acquisition costs include costs that are directly related to the successful acquisition of new or renewal insurance contracts. Acquisition costs are deferred and amortized to the extent they are recoverable from future profits.
Long-Duration Contracts
. Acquisition costs include commissions in excess of ultimate renewal commissions and for contracts issued, certain other costs such as underwriting, medical inspection and issuance expenses. DAC for traditional long-duration insurance contracts, including term life and long-term care insurance, is amortized as a level percentage of premiums based on assumptions, including, investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain
in-force
from one period to the next), insured life expectancy or longevity, insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, established when the contract is issued. Amortization is adjusted each period to reflect actual lapse or termination rates.
Amortization for deferred annuity and universal life insurance contracts is based on expected gross profits. Expected gross profits are adjusted quarterly to reflect actual experience to date or for changes in underlying
 
assumptions relating to future gross profits. Estimates of gross profits for DAC amortization are based on assumptions including interest rates, policyholder persistency or lapses, insured life expectancy or longevity and expenses.
We are required to analyze the impacts from net unrealized investment gains and losses on our
available-for-sale
investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. These “shadow accounting” adjustments result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on
available-for-sale
investment securities within the statement of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, based on changes in net unrealized investment (gains) losses, these shadow adjustments may reverse from period to period.
Therefore, DAC amortized based on expected gross profits is adjusted to reflect the effects that would have been recognized had the unrealized investment (gains) losses been actually realized with a corresponding amount recorded in other comprehensive income (loss). DAC associated with traditional long-duration insurance contracts is not adjusted for unrealized investment (gains) or losses unless a premium deficiency would have resulted upon the (gain) or loss being realized.
Short-Duration Contracts.
Acquisition costs primarily consist of commissions and premium taxes and are amortized ratably over the terms of the underlying policies.
We regularly review our assumptions and test DAC for recoverability at least annually. For deferred annuity and universal life insurance contracts, if the present value of expected future gross profits is less than the unamortized DAC for a line of business, a charge to net income (loss) is recorded for additional DAC amortization. For traditional long-duration and short-duration contracts, if the benefit reserve plus anticipated future premiums and interest income for a line of business are less than the current estimate of future benefits and expenses (including any unamortized DAC), a charge to net income (loss) is recorded for additional DAC amortization or for increased benefit reserves. See note 6 for additional information related to DAC including loss recognition and recoverability.
k) Intangible Assets
Present Value of Future Profits.
In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is assigned to the right to receive future gross profits arising from existing insurance and investment contracts. This intangible asset, called PVFP, represents the actuarially estimated present value of future cash flows from the acquired policies. PVFP is amortized, net of accreted interest, in a manner similar to the amortization of DAC.
We regularly review our PVFP assumptions and periodically test PVFP for recoverability similar to our treatment of DAC. See note 7 for additional information related to PVFP including recoverability.
Deferred Sales Inducements to
Contractholders
.
We defer sales inducements to contractholders for features on variable annuities that entitle the contractholder to an incremental amount to be credited to the account value upon making a deposit, and for fixed annuities with crediting rates higher than the contract’s expected ongoing crediting rates for periods after the inducement. Deferred sales inducements to contractholders are reported as a
 
separate
intangible asset and amortized in benefits and other changes in policy reserves using the same methodology and assumptions used to amortize DAC.
Other Intangible Assets
. We amortize the costs of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows, which requires the use of estimates and judgment, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested at least annually for impairment using a qualitative or quantitative assessment and are written down to fair value as required.
l) Goodwill
Goodwill is not amortized but is tested for impairment annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The determination of fair value requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment, or a business, one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the component level. If the reporting unit’s fair value is below its carrying value, we recognize an impairment in an amount equal to the difference between the carrying value and the fair value of the reporting unit up to the amount of recorded goodwill.
No
goodwill impairment charges were recorded in 2019, 2018 or 2017.
m) Reinsurance
Premium revenue, benefits and acquisition and operating expenses, net of deferrals, are reported net of the amounts relating to reinsurance ceded to and assumed from other companies. Amounts due from reinsurers for incurred and estimated future claims are reflected in the reinsurance recoverable asset. Amounts received from reinsurers that represent recovery of acquisition costs are netted against DAC so that the net amount is capitalized. The cost of reinsurance is accounted for over the terms of the related treaties using assumptions consistent with those used to account for the underlying reinsured policies. Premium revenue, benefits and acquisition and operating expenses, net of deferrals, for reinsurance contracts that do not qualify for reinsurance accounting are accounted for under the deposit method of accounting.
n) Derivatives
Derivative instruments are used to manage risk through one of four principal risk management strategies including: (i) liabilities; (ii) invested assets; (iii) portfolios of assets or liabilities; and (iv) forecasted transactions.
On the date we enter into a derivative contract, management designates the derivative as a hedge of the identified exposure (cash flow or foreign currency). If a derivative does not qualify for hedge accounting, the changes in its fair value and all scheduled periodic settlement receipts and payments are reported in net income (loss).
We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. In this documentation, we specifically identify the asset, liability or forecasted transaction that has been designated as a hedged item, state how the hedging instrument is expected to hedge the risks related to the hedged item, and set forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness. We generally determine hedge effectiveness based on total changes in fair value of the hedged item attributable to the hedged risk and the total changes in fair value of the derivative instrument.
 
We discontinue hedge accounting prospectively when: (i) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) the derivative is
de-designated
as a hedge instrument; or (iv) it is no longer probable that the forecasted transaction will occur.
For all qualifying and highly effective cash flow hedges, changes in fair value of the derivative instrument
are
reported as a component of OCI. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative continues to be carried in the consolidated balance sheets at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in net income (loss). When the hedged forecasted transaction is no longer probable, but is reasonably possible, the accumulated gain or loss remains in OCI and is recognized when the transaction affects net income (loss); however, prospective hedge accounting for the transaction is terminated. In all other situations in which hedge accounting is discontinued on a cash flow hedge, amounts previously deferred in OCI are reclassified into net income (loss) when net income (loss) is impacted by the variability of the cash flow of the hedged item.
We may enter into contracts that are not themselves derivative instruments but contain embedded derivatives. For each contract, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to those of the host contract and determine whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.
If it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and accounted for as a stand-alone derivative. Such embedded derivatives are recorded in the consolidated balance sheets at fair value and are classified consistent with their host contract. Changes in their fair value are recognized in current period net income (loss). If we are unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried in the consolidated balance sheets at fair value, with changes in fair value recognized in current period net income (loss).
Changes in the fair value of
non-qualifying
derivatives, including embedded derivatives, are reported in net investment gains (losses).
The majority of our derivative arrangements require the posting of collateral upon meeting certain net exposure thresholds. The amounts recognized for derivative counterparty collateral received by us
are
recorded in cash, cash equivalents and restricted cash with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us. We also receive
non-cash
collateral that is not recognized in our balance sheet unless we exercise our right to sell or
re-pledge
the underlying asset. As of December 31, 2019 and 2018, the fair value of
non-cash
collateral received was $112 million and $18 million, respectively, and the underlying assets were not sold or
re-pledged.
We pledged $405 million and $535 million of fixed maturity securities as of December 31, 2019 and 2018, respectively. Additionally, as of December 31, 2019 and 2018, we pledged $64 million and $57 million, respectively, of cash as collateral to derivative counterparties.
Fixed maturity securities that we pledge as collateral remain on our balance sheet within fixed maturity securities available-for-sale. Any cash collateral pledged to a derivative counterparty is derecognized with a receivable recorded in other assets for the right to receive our cash collateral back from the counterparty. Daily changes in the fair value of the derivative contract, commonly referred to as variation margin, for derivatives cleared through a Central Clearing Party, such as the Chicago Mercantile Exchange are treated as daily settlements of the derivative contract.
o) Separate Accounts and Related Insurance Obligations
Separate account assets represent funds for which the investment income and investment gains and losses accrue directly to the contractholders and are reflected in our consolidated balance sheets at fair value, reported as summary total separate account assets with an equivalent summary total reported for liabilities. Amounts assessed against the contractholders for mortality, administrative and other services are included in revenues. Changes in liabilities for minimum guarantees are included in benefits and other changes in policy reserves. Net investment income, net investment gains (losses) and the related liability changes associated with the separate account are offset within the same line item in the consolidated statements of income. There were no gains or losses on transfers of assets from the general account to the separate account.
We offer certain minimum guarantees associated with our variable annuity contracts. Our variable annuity contracts usually contain a basic guaranteed minimum death benefit (“GMDB”) which provides a minimum benefit to be paid upon the annuitant’s death equal to the larger of account value and the return of net deposits. Some variable annuity contracts permit contractholders to purchase through riders, at an additional charge, enhanced death benefits such as the highest contract anniversary value (“ratchets”), accumulated net deposits at a stated rate (“rollups”), or combinations thereof.
Additionally, some of our variable annuity contracts provide the contractholder with living benefits such as a guaranteed minimum withdrawal benefit (“GMWB”) or certain types of guaranteed annuitization benefits. The GMWB allows contractholders to withdraw a
pre-defined
percentage of account value or benefit base each year, either for a specified period of time or for life. The guaranteed annuitization benefit generally provides for a guaranteed minimum level of income upon annuitization accompanied by the potential for upside market participation.
Most of our reserves for additional insurance and annuitization benefits are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future experience. The projections utilize stochastic scenarios of separate account returns incorporating reversion to the mean, as well as assumptions for mortality and lapses. Some of our minimum guarantees, mainly GMWBs, are accounted for as embedded derivatives; see notes 5 and 16 for additional information on these embedded derivatives and related fair value measurement disclosures.
p) Insurance Reserves
Future Policy Benefits
The liability for future policy benefits is equal to the present value of expected future benefits and expenses, less the present value of expected future net premiums based on assumptions including projected interest rates and investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, all of which are locked-in at the time the policies are issued or acquired. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used.
The liability for future policy benefits is evaluated at least annually to determine if a premium deficiency exists. Loss recognition testing is generally performed at the line of business level, with acquired blocks and
 
certain reinsured blocks tested separately. If the liability for future policy benefits plus the current present value of expected future gross premiums are less than the current present value of expected future benefits and expenses (including any unamortized DAC), a charge to net income (loss) is recorded for accelerated DAC amortization and, if necessary, a premium deficiency reserve is established. If a charge is recorded, DAC amortization and the liability for future policy benefits are measured using updated assumptions, which become the new
locked-in
assumptions utilized going forward unless another premium deficiency charge is recorded. Our estimates of future
in-force
rate actions used in loss recognition testing for our long-term care insurance business include assumptions for significant premium rate increases and associated benefit reductions that have been approved or are anticipated to be approved (including premium rate increases and associated benefit reductions not yet filed). These anticipated future increases are based on our best estimate of the rate increases we expect to obtain, considering, among other factors, our historical experience from prior rate increase approvals and based on our best estimate of expected claim costs.
We are also required to accrue additional future policy benefit reserves when the overall reserve is adequate, but profits are projected in early periods followed by losses projected in later periods. When this pattern of profits followed by losses exists, we ratably accrue this additional profits followed by losses liability over time, increasing reserves in the profitable periods to offset estimated losses expected during the periods that follow. We calculate and adjust the additional reserves using our current best estimate of the amount necessary to offset the losses in future periods, based on the pattern of expected income and current best estimate assumptions consistent with our loss recognition testing. We adjust the accrual rate prospectively, going forward over the remaining profit periods, without any
catch-up
adjustment.
For long-term care insurance products, benefit reductions are treated as partial lapse of coverage with the balance of our future policy benefits and DAC both reduced in proportion to the reduced coverage. For level premium term life insurance products, we floor the liability for future policy benefits on each policy at zero.
Estimates and actuarial assumptions used for establishing the liability for future policy benefits and in loss recognition testing involve the exercise of significant judgment, and changes in assumptions or deviations of actual experience from assumptions can have material impacts on our liability for future policy benefits and net income (loss). Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition. The risk that our claims experience may differ significantly from our pricing and valuation assumptions is particularly significant for our long-term care insurance products. Long-term care insurance policies provide for long-duration coverage and, therefore, our actual claims experience will emerge over many years after pricing and locked-in valuation assumptions have been established.
Policyholder Account Balances
The liability for policyholder account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date for investment-type and universal and term universal life insurance contracts. We are also required to establish additional benefit reserves for guarantees or product features in addition to the contract value where the additional benefit reserves are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past
and anticipated future claims experience, which includes assumptions for insured mortality (i.e. life expectancy or longevity), interest rates and policyholder persistency or lapses (i.e., the probability that a policy or contract will remain
in-force
from one period to the next), among other assumptions.
Investment-type contracts are broadly defined to include contracts without significant mortality or morbidity risk. Payments received from sales of investment contracts are recognized by providing a liability equal to the current account value of the policyholders’ contracts. Interest rates credited to investment contracts are guaranteed for the initial policy term with renewal rates determined as necessary by management.
q) Liability for Policy and Contract Claims
The liability for policy and contract claims, or claim reserves, represents the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. The estimated liability includes requirements for future payments of: (a) claims that have been reported to the insurer; (b) claims related to insured events that have occurred but that have not been reported to the insurer as of the date the liability is estimated; and (c) claim adjustment expenses. Claim adjustment expenses include costs incurred in the claim settlement process such as legal fees and costs to record, process and adjust claims.
Our liability for policy and contract claims is reviewed regularly, with changes in our estimates of future claims recorded through net income (loss). Estimates and actuarial assumptions used for establishing the liability for policy and contract claims involve the exercise of significant judgment, and changes in assumptions or deviations of actual experience from assumptions can have material impacts on our liability for policy and contract claims and net income (loss). Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition.
The liability for policy and contract claims for our long-term care insurance products represents the present value of the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. Key assumptions include projected interest rates and investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used. Both claim termination rates and benefit utilization rates are influenced by, among other things, gender, age at claim, diagnosis, type of care needed, benefit period, and daily benefit amount. Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition.
The liabilities for our mortgage insurance policies represent our best estimates of the liabilities at the time based on known facts, trends and other external factors, including economic conditions, housing prices and
employment rates. For our mortgage insurance policies, reserves for losses and loss adjustment expenses are based on notices of mortgage loan defaults and estimates of defaults that have been incurred but have not been reported by loan servicers. The estimates are determined using either a factor-based approach, in which assumptions of claim rates for loans in default and the average amount paid for loans that result in a claim are calculated using traditional actuarial techniques, or a case-based approach, in which each individual delinquent loan is reviewed and a best-estimate loss is determined based on the status of the insured loan and an estimation of net sale proceeds from the disposition of the mortgaged property. As is common accounting practice in the mortgage insurance industry and in accordance with U.S. GAAP, we begin to provide for the ultimate claim payment relating to a potential claim on a defaulted loan when the status of that loan first goes delinquent. Over time, as the status of the underlying delinquent loans moves toward foreclosure and the likelihood of the associated claim loss increases, the amount of the loss reserves associated with the potential claims may also increase.
Management considers the liability for policy and contract claims provided to be its best estimate to cover the losses that have occurred. Management monitors actual experience, and where circumstances warrant, will revise its assumptions. The methods of determining such estimates and establishing the reserves are reviewed periodically and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses greater or less than the liability for policy and contract claims provided.
r) Unearned Premiums
For single premium insurance contracts, we recognize premiums over the policy life in accordance with the expected pattern of risk emergence. We recognize a portion of the revenue in premiums earned in the current period, while the remaining portion is deferred as unearned premiums and earned over time in accordance with the expected pattern of risk emergence. If single premium policies are cancelled and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. Expected pattern of risk emergence on which we base premium recognition is inherently judgmental and is based on actuarial analysis of historical experience. We periodically review our premium earnings recognition models with any adjustments to the estimates reflected as a cumulative adjustment in current period net income (loss). Our reviews include the consideration of recent and projected loss experience, policy cancellation experience and refinement of actuarial methods. In 2019, the review resulted in an increase in earned premiums
of $14 million in our U.S. mortgage insurance business. 
We did not have any adjustments associated with this review in 2018. In 2017, the review resulted in a decrease in earned premiums of $468 million in our Australia mortgage insurance business.
s) Stock-Based Compensation
We determine a grant date fair value and recognize the related compensation expense, adjusted for expected forfeitures, through the income statement over the respective vesting period of the awards.
t) Employee Benefit Plans
We provide employees with a defined contribution pension plan and recognize expense throughout the year based on the employee’s age, service and eligible pay. We make an annual contribution to the plan. We also provide employees with defined contribution savings plans. We recognize expense for our contributions to the savings plans at the time employees make contributions to the plans.
Some employees participate in defined benefit pension and postretirement benefit plans. We recognize expense for these plans based upon actuarial valuations performed by external experts. We estimate aggregate benefits by using assumptions for employee turnover, future compensation increases, rates of return on pension plan assets and future health care costs. We recognize an expense for differences between actual experience and estimates over the average future service period of participants. We recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in our consolidated balance sheets and recognize changes in that funded status in the year in which the changes occur through OCI.
u) Income Taxes
We determine deferred tax assets and/or liabilities by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled if there is no change in law. The effect on deferred taxes of a change in tax rates is recognized in
net
income (loss) in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.
Under U.S. GAAP, we are generally required to record U.S. deferred taxes on the anticipated repatriation of foreign income as the income is recognized for financial reporting purposes. An exception under certain accounting guidance permits us not to record a U.S. deferred tax liability for foreign income that we expect to reinvest in our foreign operations and for which remittance will be postponed indefinitely. If it becomes apparent that we cannot positively assert that some or all undistributed income will be reinvested indefinitely, the related deferred taxes are recorded in that period based on the expected form of repatriation (i.e. distribution, loan or sale). In determining indefinite reinvestment, we regularly evaluate the capital needs of our domestic and foreign operations considering all available information, including operating and capital plans, regulatory capital requirements, parent company financing and cash flow needs, as well as the applicable tax laws to which our domestic and foreign subsidiaries are subject. Our estimates are based on our historical experience and our expectation of future performance. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future capital needs, which are impacted by such things as regulatory requirements, policyholder behavior, competitor pricing, new product introductions, and specific industry and market conditions.
Similarly, under another exception to the recognition of deferred taxes under U.S. GAAP, we do not record deferred taxes on U.S. domestic subsidiary entities for the excess of the financial statement carrying amount over the tax basis in the stock of the subsidiary (commonly referred to as “outside basis difference”) if we have the ability under the tax law and intent to recover the basis difference in a tax free manner. Deferred taxes would be recognized in the period of a change to our ability or intent.
Our companies have elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). All companies domesticated in the United States are included in the life/non-life consolidated return as allowed by the tax law and regulations. We have a tax sharing agreement in place and all intercompany balances related to this agreement are settled at least annually.
v) Foreign Currency Translation
The determination of the functional currency is made based on the appropriate economic and management indicators. The assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Translation adjustments are included as a separate component of accumulated
other comprehensive income (loss). Revenues and expenses of the foreign operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. Gains and losses from foreign currency transactions are reported in net income (loss) and have not been material in any years presented in our consolidated statements of income.
w) Variable Interest Entities
We are involved in certain entities that are considered VIEs as defined under U.S. GAAP, and, accordingly, we evaluate the VIE to determine whether we are the primary beneficiary and are required to consolidate the assets and liabilities of the entity. The primary beneficiary of a VIE is the enterprise that has the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. The determination of the primary beneficiary for a VIE can be complex and requires management judgment regarding the expected results of the entity and how those results are absorbed by variable interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIEs.
Our primary involvement related to VIEs includes securitization transactions, certain investments, reinsurance transactions and certain mortgage insurance policies.
We have a beneficial interest in a VIE where we are the servicer and transferor of certain assets that were sold to the VIE. Our primary economic interest in this VIE represents the excess interest of the commercial mortgage loans and the subordinated notes of the VIE.
We have a reinsurance agreement with an entity that is considered a VIE. Our involvement with this VIE includes mortgage insurance claim coverage through excess of loss reinsurance. This involvement does not result in us having the ability to influence the economic performance of the VIE or result in the obligation to absorb losses or the right to receive benefits from the VIE.
We hold investments in certain structures that are considered VIEs. Our investments represent beneficial interests that are primarily in the form of structured securities or alternative investments. Our involvement in these structures typically represents a passive investment in the returns generated by the VIE and typically does not result in having significant influence over the economic performance of the VIE.
We also provide mortgage insurance on certain residential mortgage loans originated and securitized by third parties using VIEs to issue mortgage-backed securities. While we provide mortgage insurance on the underlying loans, we do not typically have any ongoing involvement with the VIE other than our mortgage insurance coverage and do not act in a servicing capacity for the underlying loans held by the VIE.
See note 17 for additional information related to these consolidated entities and other VIEs.
x) Accounting Changes
Benchmark Interest Rates Used in Derivative Hedge Accounting
On January 1, 2019, we adopted new accounting guidance related to benchmark interest rates used in derivative hedge accounting. The guidance adds an additional permissible U.S. benchmark interest rate, the Secured Overnight Financing Rate, for hedge accounting purposes. We adopted this new accounting guidance using the prospective method, which did not have any impact on our consolidated financial statements and disclosures.
Nonemployee Shared-Based Payments
On January 1, 2019, we adopted new accounting guidance related to accounting for nonemployee share-based payments. The guidance aligns the measurement and classification of share-based payments to
 
nonemployees
issued in exchange for goods or services with the guidance for share-based payments to employees, with certain exceptions. We adopted this new accounting guidance using the modified retrospective method. This guidance is consistent with our previous accounting practices and, accordingly, had no impact on our consolidated financial statements at adoption.
Amortization Period of Certain Callable Debt Securities Held at a Premium
On January 1, 2019, we adopted new accounting guidance related to shortening the amortization period of certain callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. We adopted this new accounting guidance using the modified retrospective method, which did not have a significant impact on our consolidated financial statements at adoption.
Accounting for Leases
On January 1, 2019, we adopted new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a
right-of-use
asset and a corresponding lease liability on the balance sheet. We adopted this new accounting guidance using the effective date transition method, which permits entities to apply the new lease standard using a modified retrospective transition approach at the date of adoption. As such, historical periods will continue to be measured and presented under the previous guidance while current and future periods will be subject to this new accounting guidance. The package of practical expedients was also elected upon adoption. Upon adoption we recorded a $52 million
right-of-use
asset related to operating leases and a $55 million lease liability. In addition, we
de-recognized
accrued rent expense of $3 million recorded under the previous accounting guidance. The
right-of-use
asset and the lease liability are included in other assets and other liabilities, respectively, and did not have a significant impact on our consolidated balance sheet as of December 31, 2019. The initial measurement of our
right-of-use
asset had no significant initial direct costs, prepaid lease payments or lease incentives; therefore, a cumulative-effect adjustment was not recorded to the opening retained earnings balance as a result of the change in accounting principle.
Our leased assets are predominantly classified as operating leases and consist of office space in 11 locations primarily in the United States and Australia. Lease payments included in the calculation of our lease liability include fixed amounts contained within each rental agreement and variable lease payments that are based upon an index or rate. We have elected to combine lease and
non-lease
components, as permitted under this new accounting guidance, and as a result,
non-lease
components are included in the calculation of our lease liability as opposed to being separated and accounted for as consideration under the new revenue recognition standard. Our remaining lease terms ranged from less than 1 year to 19 years and had a weighted-average remaining lease term of 9.8
years as of December 31, 2019. The implicit rate of our lease agreements was not readily determinable; therefore, we utilized our incremental borrowing rate to discount future lease payments. The
 
weighted-average discount rate was 6.6% as of December 31, 2019.
In 2019, under this new accounting guidance,
annual rental expense was $12 million.
Annual rental expense and future lease payments were not significantly different under this new accounting guidance as compared to the previous guidance.
Stranded Tax Effects
On January 1, 2018, we early adopted new accounting guidance on the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs
Act (“TCJA”), or “stranded tax effects.” Under U.S. GAAP, deferred tax assets and liabilities are adjusted for the effect of a change in tax laws or rates with the effect included in income (loss) from continuing operations in the period that the changes were enacted. This also includes situations in which the related tax effects were originally recognized in other comprehensive income (loss) as opposed to income (loss) from continuing operations.
The following summarizes the components for the cumulative effect adjustment recorded on January 1, 2018 related to the adoption of this new accounting guidance, including amounts related to our Canada mortgage insurance business which were classified as held for sale prior to the fourth quarter of 2019:
 
Accumulated other comprehensive
income (loss)
   
 
 
 
(Amounts in millions)
 
Net unrealized
investment
gains (losses)
 
 
Derivatives
qualifying
as hedges
 
 
Foreign
currency
translation
and other
adjustments
 
 
Retained
earnings
 
 
Total
stockholders’
equity
 
Deferred taxes:
   
     
     
     
     
 
Net unrealized gains on investment securities
  $
192
    $
—  
    $
—  
    $
(192
)   $
—  
 
Net unrealized gains on derivatives
   
—  
     
12
     
—  
     
(12
)    
—  
 
Investment in foreign subsidiaries
   
(3
)    
—  
     
(46
)    
49
     
—  
 
Accrued commission and general expenses
   
—  
     
—  
     
(1
)    
1
     
—  
 
                                         
Cumulative effect of changes in accounting
  $
189
    $
12
    $
(47
)   $
(154
)   $
—  
 
                                         
The accounting for the temporary differences related to investment in foreign subsidiaries recorded in accumulated other comprehensive income (loss) at adoption of the TCJA were provisional. Other than those effects related to the TCJA, our policy is to release stranded tax effects from accumulated other comprehensive income (loss) using the portfolio approach for items related to investments and derivatives, and upon disposition of a subsidiary for items related to outside basis differences.
Amendments to the Hedge Accounting Model
On January 1, 2018, we early adopted new accounting guidance related to the hedge accounting model. The new guidance amends the hedge accounting model to enable entities to better portray the economics of their derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain situations, the amendments also simplify the application of hedge accounting and
 
removed the requirements to separately measure and report hedge ineffectiveness. We adopted this new accounting using the modified retrospective method and recognized a gain of $
2
 million in accumulated other comprehensive income with a corresponding decrease to retained earnings at adoption. This gain was the cumulative amount of hedge ineffectiveness related to active hedges that was previously included in earnings.
Accounting for Share-Based Compensation as a Modification
On January 1, 2018, we adopted new accounting guidance that clarifies when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if
there
 
are
changes to the fair value, vesting conditions or classification as a liability or equity of the share-based
compensation. We adopted this new accounting guidance prospectively and therefore, the guidance did not have any impact at adoption.
Derecognition of Nonfinancial Assets
On January 1, 2018, we adopted new accounting guidance that clarifies the scope and accounting for gains and losses from the derecognition of nonfinancial assets or an in substance nonfinancial asset that is not a business and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control. We adopted this new accounting guidance using the modified retrospective method, which had no impact on our consolidated financial statements at adoption.
Simplifying the Test for Goodwill Impairment
On January 1, 2018, we early adopted new accounting guidance simplifying the test for goodwill impairment. The new guidance states goodwill impairment is equal to the difference between the carrying value and fair value of the reporting unit up to the amount of recorded goodwill. We adopted this new accounting guidance prospectively and applied it to our 2018 and 2019 goodwill impairment tests. This new accounting guidance simplified the test for goodwill impairment but had no impact on our consolidated financial statements.
Classification and Presentation of Changes in Restricted Cash
On January 1, 2018, we adopted new accounting guidance related to the classification and presentation of changes in restricted cash. The new guidance requires that changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents be shown in the statements of cash flows and requires additional disclosures related to restricted cash and restricted cash equivalents. We adopted this new accounting guidance retrospectively and modified the line item descriptions on our consolidated balance sheets and statements of cash flows in our consolidated financial statements. The other impacts from this new accounting guidance did not have a significant impact on our consolidated financial statements or disclosures.
Income Tax Effects of Intra-Entity Transfers of Assets Other Than Inventory
On January 1, 2018, we adopted new accounting guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted this new accounting guidance using the modified retrospective method, which did not have a significant impact on our consolidated financial statements or disclosures at adoption.
Classification of Certain Cash Payments and Receipts
On January 1, 2018, we adopted new accounting guidance related to the classification of certain cash payments and cash receipts on our statement of cash flows. The guidance reduces diversity in practice related to eight specific cash flow issues. We adopted this new accounting guidance retrospectively and reclassified
a $20 
million make-whole premium, which resulted in an increase in net cash used by financing activities and an increase in net cash from operating activities in our statement of cash flows for the year ended December 31,
2016. The remaining specific cash flow issues did not have a significant impact on our consolidated financial statements.
Recognition and Measurement of Financial Assets and Liabilities
On January 1, 2018, we adopted new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, are measured at fair value with changes in fair value recognized in net income (loss). The new guidance also clarified that the need for a valuation allowance on a deferred tax asset related to
available-for-sale
securities should be evaluated in combination with other
deferred
tax assets. We adopted this new accounting guidance using the modified retrospective method and reclassified, after adjustments for DAC and other intangible amortization and certain benefit reserves, taxes and noncontrolling interests, $25 million of gains related to equity securities from accumulated other comprehensive income and $17 million of gains related to limited partnerships previously recorded at cost to cumulative effect of change in accounting within retained earnings
, including amounts related to our Canada mortgage insurance business which were classified as held for sale prior to the fourth quarter of 2019. 
Revenue Recognition
On January 1, 2018, we adopted new accounting guidance related to revenue from contracts with customers. The key principle of the new guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. Insurance contracts are specifically excluded from this new guidance. The Financial Accounting Standards Board (“the FASB”) has clarified the scope that all of our insurance contracts, including mortgage insurance and investment contracts are excluded from the scope of this new guidance. We adopted this new accounting guidance using the modified retrospective method, which did not have a significant impact on our consolidated financial statements at adoption.
Simplified Share-Based Payment Transactions
On January 1, 2017, we adopted new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.
Transition to the Equity Method of Accounting
On January 1, 2017, we adopted new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through
earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. This accounting guidance did not have a significant impact on our consolidated financial statements.
Assessment of Contingent Put and Call Options
On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, had no impact on our consolidated financial statements.
Derivative Contract Novations
On January 1, 2017, we adopted new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, had no impact on our consolidated financial statements.
y) Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued new accounting guidance related to simplifying the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The guidance is currently effective for us on January 1, 2021 using the retrospective method or modified retrospective method for certain changes and prospective method for all other changes, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements and disclosures.
In August 2018, the FASB issued new accounting guidance that significantly changes the recognition and measurement of long-duration insurance contracts and expands disclosure requirements, which impacts our life insurance DAC and liabilities. In accordance with the guidance, the more significant changes include:
 
assumptions will no longer be locked-in at contract inception and all cash flow assumptions used to estimate the liability for future policy benefits (except the discount rate) will be reviewed at least annually in the same period each year or more frequently if actual experience indicates a change is required. Changes will be recorded in net income (loss) using a retrospective approach with a cumulative catch-up adjustment by recalculating the net premium ratio (which will be capped at 100%) using actual historical and updated future cash flow assumptions;
 
the discount rate used to determine the liability for future policy benefits will be a current upper-medium grade (low credit risk) fixed-income instrument yield, which is generally interpreted to mean a single-A rated bond rate for the same duration, and is required to be reviewed quarterly, with changes in the discount rate recorded in other comprehensive income (loss);
 
 
the provision for adverse deviation and the premium deficiency test will be eliminated;
 
market risk benefits associated with deposit-type contracts will be measured at fair value with changes related to instrument-specific credit risk recorded in other comprehensive income (loss) and remaining changes recorded in net income (loss);
 
the amortization method for DAC will generally be on a straight-line basis over the expected contract term; and
 
disclosures will be greatly expanded to include significant assumptions and product liability rollforwards.
This guidance is effective for us on January 1, 2022 using the modified retrospective method, with early adoption permitted. Given the nature and extent of the changes to our operations, this guidance is expected to have a significant impact on our consolidated financial statements.
In August 2018, the FASB issued new accounting guidance related to disclosure requirements for defined benefit plans as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for defined benefit pension and other postretirement benefit plans. We adopted this new accounting guidance on January 1, 2020 using the retrospective method, which did not have a significant impact on our consolidated financial statements and disclosures.
In August 2018, the FASB issued new accounting guidance related to fair value disclosure requirements as part of its disclosure framework project. The guidance adds, eliminates and modifies certain disclosure requirements for fair value measurements. The guidance includes new disclosure requirements related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. We adopted this new accounting guidance on January 1, 2020 using the prospective method for disclosures related to changes in unrealized gains and losses included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty and the retrospective method for all other disclosures. This accounting guidance did not have a significant impact on our consolidated financial statements and disclosures.
In June 2016, the FASB issued new accounting guidance related to accounting for credit losses on financial instruments. The guidance requires entities
to
recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value, which would primarily include our commercial mortgage loans and reinsurance recoverables. The new guidance retains most of the existing impairment guidance for
available-for-sale
debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. We adopted this new accounting guidance on January 1, 2020 using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of
approximately
$30
million, before taxes, for investments carried at amortized cost, after considering our current allowance for credit losses, and
approximately 
$40
million, before taxes, for reinsurance recoverables, with an offset to cumulative effect of change in accounting within retained earnings and before adjustments for taxes. The FASB also issued an amendment to the guidance allowing entities to irrevocably elect the fair value option on an instrument-by-instrument basis for eligible instruments, which we did not elect.
v3.19.3.a.u2
Earnings (Loss) Per Share
12 Months Ended
Dec. 31, 2019
Earnings (Loss) Per Share
(3) Earnings (Loss) Per Share
Basic and diluted earnings (loss)
per
share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted common shares outstanding for the years ended December 31:
                         
(Amounts in millions, except per share amounts)
 
2019
 
 
2018
 
 
2017
 
Weighted-average common shares used in basic earnings (loss) per share calculations
 
 
502.9
 
 
 
500.4
 
 
 
499.0
 
Potentially dilutive securities:
   
     
     
 
Stock options, restricted stock units and stock appreciation rights
 
 
6.8
 
 
 
 
 
 
2.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares used in diluted earnings (loss) per share calculations
(1)
 
 
509.7
 
 
 
500.4
 
 
 
501.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations:
 
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
519
 
 
$
67
 
 
$
533
 
Less: net income (loss) from continuing operations attributable to noncontrolling interests
 
 
64
 
 
 
70
 
 
 
(80
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations available to Genworth Financial, Inc.’s
 
common stockholders 
 
$
455
 
 
$
(3
)
 
$
613
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic per share
 
$
0.90
 
 
$
(0.01
)
 
$
1.23
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per share
 
$
0.89
 
 
$
(0.01
)
 
$
1.22
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations:
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of taxes
 
$
11
 
 
$
230
 
 
$
394
 
Less: net income from discontinued operations attributable to noncontrolling interests
 
 
123
 
 
 
108
 
 
 
190
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders
 
$
(112
 
$
122
 
 
$
204
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic per share
 
$
(0.22
 
$
0.24
 
 
$
0.41
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per share
 
$
(0.22
 
$
0.24
 
 
$
0.41
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income:
 
 
 
 
 
 
 
 
 
Income from continuing operations
 
$
519
 
 
$
67
 
 
$
533
 
Income from discontinued operations, net of taxes
 
 
11
 
 
 
230
 
 
 
394
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
530
 
 
 
297
 
 
 
927
 
Less: net income attributable to noncontrolling interests
 
 
187
 
 
 
178
 
 
 
110
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to Genworth Financial, Inc.’s common stockholders
 
$
343
 
 
$
119
 
 
$
817
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic per share
 
(2)
 
$
0.68
 
 
$
0.24
 
 
$
1.64
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Diluted per share
 
(2)
 
$
0.67
 
 
$
0.24
 
 
$
1.63
 
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the year ended December 31, 2018, we were required to use basic weighted-average common shares outstanding as the inclusion of shares for stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) of
3.8
million would have been
antidilutive
to the calculation. If we had not incurred a loss from continuing operations available to
Genworth
Financial, Inc.’s common stockholders for the year ended December 31, 2018, dilutive potential weighted-average common shares outstanding would have been
504.2
 million.
(2)
May not total due to whole number
calculation.
 
 
 
 
 
 
 
 
 
 
 
v3.19.3.a.u2
Investments
12 Months Ended
Dec. 31, 2019
Investments
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the years ended
December
31:
                         
(Amounts in millions)
 
2019
 
 
2018
 
 
2017
 
Fixed maturity securities—taxable
  $
2,494
    $
2,456
    $
2,458
 
Fixed maturity securities—non-taxable
   
8
     
11
     
12
 
Equity securities
   
16
     
20
     
19
 
Commercial mortgage loans
   
344
     
320
     
306
 
Restricted commercial mortgage loans related to a securitization entity
(1)
   
4
     
7
     
9
 
Policy loans
   
180
     
169
     
153
 
Other invested assets
(2)
   
234
     
181
     
157
 
Restricted other invested assets related to securitization entities
(1)
   
     
—  
     
1
 
Cash, cash equivalents
, restricted cash
and short-term investments
   
39
     
48
     
35
 
                         
Gross investment income before expenses and fees
   
3,319
     
3,212
     
3,150
 
Expenses and fees
   
(99
)    
(91
)    
(84
)
                         
Net investment income
  $
3,220
    $
3,121
    $
3,066
 
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
See note 17 for additional information related to consolidated securitization entities.
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
Included in other invested assets was 
$
2
 million of net investment income related to trading securities for the year ended December 31, 2017
.
 
 
 
 
 
 
 
 
 
 
 
(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the years ended December 31:
                         
(Amounts in millions)
 
2019
 
 
2018
 
 
2017
 
Available-for-sale
securities:
   
     
     
 
Realized gains
  $
107
    $
162
    $
205
 
Realized losses
   
(39
)    
(137
)    
(64
)
                         
Net realized gains (losses) on
available-for-sale
securities
   
68
     
25
     
141
 
                         
Impairments:
   
     
     
 
Total other-than-temporary impairments
   
(1
)    
     
(6
)
Portion of other-than-temporary impairments included in other
 
comprehensive income (loss)
   
     
—  
     
—  
 
                         
Net other-than-temporary impairments
   
(1
)    
     
(6
)
                         
Net realized gains (losses) on equity securities sold
   
9
     
11
     
 
Net unrealized gains (losses) on equity securities still held
   
14
     
(34
)    
 
Trading securities
   
     
     
1
 
Limited partnerships
   
29
     
11
     
 
Commercial mortgage loans
   
(2
)    
     
3
 
Net gains (losses) related to securitization entities
(1)
   
     
     
7
 
Derivative instruments
(2)
   
(72
)    
(22
)    
(9
)
Other
   
5
     
     
 
                         
Net investment gains (losses)
  $
50
    $
(9
)   $
137
 
                         
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
See note 17 for additional information related to consolidated securitization entities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(2)
See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).
 
 
 
 
 
 
 
 
 
 
 
 
We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the years ended December 31, 2019, 2018 and 2017 was $1,293 million, $3,027 million and $1,876 million, respectively, which was approximately 97%, 96% and 97%, respectively, of book value.
The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in OCI as of and for the years ended December 31:
                         
(Amounts in millions)
 
2019
   
2018
 
 
2017
 
Beginning balance
  $
24
    $
32
    $
42
 
Reductions:
   
     
     
 
Securities sold, paid down or disposed
   
(2
)    
(8
)    
(10
)
                         
Ending balance
  $
22
    $
24
    $
32
 
                         
 
 
 
 
 
 
 
 
 
 
 
 
(c) Unrealized Investment Gains and Losses
Net unrealized gains and losses on
available-for-sale
investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of December 31:
                         
(Amounts in millions)
 
2019
 
 
2018
 
 
2017
 
Net unrealized gains (losses) on investment securities:
   
     
     
 
Fixed maturity securities
  $
6,676
    $
1,775
    $
5,125
 
Equity securities