GENWORTH FINANCIAL INC, 10-Q filed on 8/5/2020
Quarterly Report
v3.20.2
Cover Page - shares
6 Months Ended
Jun. 30, 2020
Jul. 27, 2020
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Entity Central Index Key 0001276520  
Current Fiscal Year End Date --12-31  
Document Quarterly Report true  
Document Transition Report false  
Document Period End Date Jun. 30, 2020  
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 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, par value $.001 per share  
Entity Common Stock, Shares Outstanding   594,010,907
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Millions
Jun. 30, 2020
Dec. 31, 2019
Assets    
Fixed maturity securities available-for-sale, at fair value (amortized cost of $54,834 and allowance for credit losses of $7 as of June 30, 2020) $ 63,544 $ 60,339
Equity securities, at fair value 206 239
Commercial mortgage loans (net of unamortized balance of loan origination fees and costs of $4 as of June 30, 2020 and December 31, 2019) 6,945 6,976
Less: Allowance for credit losses (28) (13)
Commercial mortgage loans, net 6,917 6,963
Policy loans 2,182 2,058
Other invested assets 2,473 1,632
Total investments 75,322 71,231
Cash, cash equivalents and restricted cash 2,597 3,341
Accrued investment income 601 654
Deferred acquisition costs 1,718 1,836
Intangible assets and goodwill 223 201
Reinsurance recoverable 16,944 17,103
Less: Allowance for credit losses (44) 0
Reinsurance recoverable, net 16,900 17,103
Other assets 454 443
Deferred tax asset 286 425
Separate account assets 5,536 6,108
Total assets 103,637 101,342
Liabilities and equity    
Future policy benefits 41,463 40,384
Policyholder account balances 22,921 22,217
Liability for policy and contract claims 11,280 10,958
Unearned premiums 1,804 1,893
Other liabilities 2,075 1,428
Non-recourse funding obligations 0 311
Long-term borrowings 2,817 3,277 [1]
Separate account liabilities 5,536 6,108
Liabilities related to discontinued operations 653 134
Total liabilities 88,549 86,710
Commitments and contingencies  
Equity:    
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 594 million and 592 million shares issued as of June 30, 2020 and December 31, 2019, respectively; 506 million and 504 million shares outstanding as of June 30, 2020 and December 31, 2019, respectively 1 1
Additional paid-in capital 11,996 11,990
Accumulated other comprehensive income (loss) 4,447 3,433
Retained earnings 899 1,461
Treasury stock, at cost (88 million shares as of June 30, 2020 and December 31, 2019) (2,700) (2,700)
Total Genworth Financial, Inc.'s stockholders' equity 14,643 14,185
Noncontrolling interests 445 447
Total equity 15,088 14,632
Total liabilities and equity $ 103,637 $ 101,342
[1] Subordinated floating rate notes issued by Genworth Financial Mortgage Insurance Pty Limited (“GFMIPL”), our indirect majority-owned subsidiary, who has the option to redeem the notes at face value beginning on July 3, 2020, subject to the Australian Prudential Regulation Authority’s (“APRA”) prior written approval.
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($)
$ in Millions
Jun. 30, 2020
Dec. 31, 2019
Debt securities amortized costs $ 54,834  
Debt securities allowance for credit losses 7  
Unamortized balance of loan origination fees $ 4 $ 4
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 594,000,000 592,000,000
Class A common stock, shares outstanding 506,000,000 504,000,000
Treasury stock, shares (88,000,000) (88,000,000)
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - USD ($)
shares in Millions, $ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Revenues:        
Premiums $ 1,019 $ 1,001 $ 2,034 $ 1,989
Net investment income 786 816 1,579 1,610
Net investment gains (losses) 159 (46) 7 29
Policy fees and other income 174 223 355 410
Total revenues 2,138 1,994 3,975 4,038
Benefits and expenses:        
Benefits and other changes in policy reserves 1,486 1,251 2,847 2,533
Interest credited 139 146 280 293
Acquisition and operating expenses, net of deferrals 223 229 472 466
Amortization of deferred acquisition costs and intangibles 93 84 209 165
Goodwill impairment 5 0 5 0
Interest expense 44 60 96 120
Total benefits and expenses 1,990 1,770 3,909 3,577
Income from continuing operations before income taxes 148 224 66 461
Provision for income taxes 46 66 36 135
Income from continuing operations 102 158 30 326
Income (loss) from discontinued operations, net of taxes (520) 60 (520) 122
Net income (loss) (418) 218 (490) 448
Less: net income from continuing operations attributable to noncontrolling interests 23 15 17 35
Less: net income from discontinued operations attributable to noncontrolling interests 0 35 0 71
Net income (loss) available to Genworth Financial, Inc.'s common stockholders (441) 168 (507) 342
Net income (loss) available to Genworth Financial, Inc.'s common stockholders:        
Income from continuing operations available to Genworth Financial, Inc.'s common stockholders 79 143 13 291
Income (loss) from discontinued operations available to Genworth Financial, Inc.'s common stockholders (520) 25 (520) 51
Net income (loss) available to Genworth Financial, Inc.'s common stockholders $ (441) $ 168 $ (507) $ 342
Income from continuing operations available to Genworth Financial, Inc.'s common stockholders per share:        
Basic $ 0.16 $ 0.29 $ 0.03 $ 0.58
Diluted 0.15 0.28 0.03 0.57
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per share:        
Basic [1] (0.87) 0.33 (1.00) 0.68
Diluted $ (0.86) $ 0.33 $ (0.99) $ 0.67
Weighted-average common shares outstanding:        
Basic 505.4 503.4 504.8 502.3
Diluted 512.5 508.7 511.1 508.7
[1] May not total due to whole number calculation.
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Net income $ (418) $ 218 $ (490) $ 448
Other comprehensive income (loss), net of taxes:        
Net unrealized gains (losses) on securities without an allowance for credit losses 682 0 362 0
Net unrealized gains (losses) on securities with an allowance for credit losses (8) 0 (8) 0
Net unrealized gains (losses) on securities not other-than-temporarily impaired 0 376 0 755
Net unrealized gains (losses) on other-than-temporarily impaired securities 0 0 0 1
Derivatives qualifying as hedges (78) 133 675 202
Foreign currency translation and other adjustments 73 43 (25) 97
Total other comprehensive income (loss) 669 552 1,004 1,055
Total comprehensive income 251 770 514 1,503
Less: comprehensive income attributable to noncontrolling interests 60 81 7 192
Total comprehensive income available to Genworth Financial, Inc.'s common stockholders $ 191 $ 689 $ 507 $ 1,311
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - USD ($)
$ in Millions
Total
Cumulative effect of change in accounting, net of taxes
Common stock
Common stock
Cumulative effect of change in accounting, net of taxes
Additional paid-in capital
Additional paid-in capital
Cumulative effect of change in accounting, net of taxes
Accumulated other comprehensive income (loss)
Accumulated other comprehensive income (loss)
Cumulative effect of change in accounting, net of taxes
Retained earnings
Retained earnings
Cumulative effect of change in accounting, net of taxes
Treasury stock, at cost
Treasury stock, at cost
Cumulative effect of change in accounting, net of taxes
Total Genworth Financial, Inc.'s stockholders' equity
Total Genworth Financial, Inc.'s stockholders' equity
Cumulative effect of change in accounting, net of taxes
Noncontrolling interests
Noncontrolling interests
Cumulative effect of change in accounting, net of taxes
Balances, beginning at Dec. 31, 2018 $ 14,189   $ 1   $ 11,987   $ 2,044   $ 1,118   $ (2,700)   $ 12,450   $ 1,739  
Repurchase of subsidiary shares (44)   0   0   0   0   0   0   (44)  
Comprehensive income (loss):                                
Net income (loss) 448   0   0   0   342   0   342   106  
Other comprehensive income (loss), net of taxes 1,055   0   0   969   0   0   969   86  
Total comprehensive income 1,503                       1,311   192  
Dividends to noncontrolling interests (53)   0   0   0   0   0   0   (53)  
Stock-based compensation expense and exercises and other (3)   0   (4)   0   0   0   (4)   1  
Balances, ending at Jun. 30, 2019 15,592   1   11,983   3,013   1,460   (2,700)   13,757   1,835  
Balances, beginning at Mar. 31, 2019 14,882   1   11,989   2,492   1,292   (2,700)   13,074   1,808  
Repurchase of subsidiary shares (32)   0   0   0   0   0   0   (32)  
Comprehensive income (loss):                                
Net income (loss) 218   0   0   0   168   0   168   50  
Other comprehensive income (loss), net of taxes 552   0   0   521   0   0   521   31  
Total comprehensive income 770                       689   81  
Dividends to noncontrolling interests (25)   0   0   0   0   0   0   (25)  
Stock-based compensation expense and exercises and other (3)   0   (6)   0   0   0   (6)   3  
Balances, ending at Jun. 30, 2019 15,592   1   11,983   3,013   1,460   (2,700)   13,757   1,835  
Balances, beginning at Dec. 31, 2019 14,632 $ (55) 1 $ 0 11,990 $ 0 3,433 $ 0 1,461 $ (55) (2,700) $ 0 14,185 $ (55) 447 $ 0
Comprehensive income (loss):                                
Net income (loss) (490)   0   0   0   (507)   0   (507)   17  
Other comprehensive income (loss), net of taxes 1,004   0   0   1,014   0   0   1,014   (10)  
Total comprehensive income 514                       507   7  
Dividends to noncontrolling interests (9)   0   0   0   0   0   0   (9)  
Stock-based compensation expense and exercises and other 6   0   6   0   0   0   6   0  
Balances, ending at Jun. 30, 2020 15,088   1   11,996   4,447   899   (2,700)   14,643   445  
Balances, beginning at Mar. 31, 2020 14,834   1   11,993   3,815   1,340   (2,700)   14,449   385  
Comprehensive income (loss):                                
Net income (loss) (418)   0   0   0   (441)   0   (441)   23  
Other comprehensive income (loss), net of taxes 669   0   0   632   0   0   632   37  
Total comprehensive income 251                       191   60  
Stock-based compensation expense and exercises and other 3   0   3   0   0   0   3   0  
Balances, ending at Jun. 30, 2020 $ 15,088   $ 1   $ 11,996   $ 4,447   $ 899   $ (2,700)   $ 14,643   $ 445  
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Millions
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Cash flows from operating activities:    
Net income (loss) $ (490) $ 448
Less (income) loss from discontinued operations, net of taxes 520 (122)
Adjustments to reconcile net income (loss) to net cash from operating activities:    
Amortization of fixed maturity securities discounts and premiums (50) (57)
Net investment (gains) losses (7) (29)
Charges assessed to policyholders (314) (364)
Acquisition costs deferred (9) (16)
Amortization of deferred acquisition costs and intangibles 209 165
Goodwill impairment 5 0
Deferred income taxes 28 98
Derivative instruments, limited partnerships and other 191 18
Stock-based compensation expense 19 10
Change in certain assets and liabilities:    
Accrued investment income and other assets (131) (284)
Insurance reserves 674 609
Current tax liabilities (1) 13
Other liabilities, policy and contract claims and other policy-related balances 655 134
Cash from operating activities—discontinued operations 0 172
Net cash from operating activities 1,299 795
Cash flows used by investing activities:    
Fixed maturity securities 1,687 1,774
Commercial mortgage loans 302 291
Other invested assets 71 51
Proceeds from sales of investments:    
Fixed maturity and equity securities 1,657 2,362
Purchases and originations of investments:    
Fixed maturity and equity securities (4,166) (4,054)
Commercial mortgage loans (271) (561)
Other invested assets (236) (235)
Short-term investments, net 59 3
Policy loans, net 10 39
Cash used by investing activities—discontinued operations 0 (21)
Net cash used by investing activities (887) (351)
Cash flows used by financing activities:    
Deposits to universal life and investment contracts 516 444
Withdrawals from universal life and investment contracts (914) (1,096)
Redemption of non-recourse funding obligations (315) 0
Repayment and repurchase of long-term debt (471) (1)
Repurchase of subsidiary shares 0 (22)
Dividends paid to noncontrolling interests (9) (14)
Other, net 49 55
Cash used by financing activities—discontinued operations 0 (61)
Net cash used by financing activities (1,144) (695)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (includes $—and $12 related to discontinued operations) (12) 12
Net change in cash, cash equivalents and restricted cash (744) (239)
Cash, cash equivalents and restricted cash at beginning of period 3,341 2,177
Cash, cash equivalents and restricted cash at end of period 2,597 1,938
Less cash, cash equivalents and restricted cash of discontinued operations at end of period 0 223
Cash, cash equivalents and restricted cash of continuing operations at end of period $ 2,597 $ 1,715
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) - USD ($)
$ in Millions
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Statement of Cash Flows [Abstract]    
Discontinued operations exchange rate effect $ 0 $ 12
v3.20.2
Formation of Genworth and Basis of Presentation
6 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Formation of Genworth and Basis of Presentation
(1) Formation of Genworth and Basis of Presentation
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.
The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.
References to “Genworth Financial,” “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and the notes thereto are, unless the context otherwise requires, to Genworth Financial, Inc. on a consolidated basis.
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. Prior to the sale, in the third quarter of 2019, Genworth Canada was reported as discontinued operations and its financial position, results of operations and cash flows were separately reported for all periods presented. All prior periods reflected herein have been
re-presented
on this basis. See note 14 for additional information related to discontinued operations.
Unless otherwise indicated, references to the condensed consolidated balance sheets, the condensed consolidated statements of income, the condensed consolidated statements of cash flows and the notes to the condensed consolidated financial statements, exclude amounts related to discontinued operations.
The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). 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. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. Potential impacts, risks and uncertainties of the coronavirus pandemic
(“COVID-19”)
may include investment valuations and impairments, commercial mortgage loan restructurings, deferred acquisition cost or intangible assets impairments or the acceleration of amortization, deferred tax asset recoverability and increases to insurance reserves, including higher claims reserves in our mortgage insurance businesses, among other matters. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2019 Annual Report on Form
10-K.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Each reporting period, we assess our ability to continue as a going concern for one year
from
the date the financial statements are issued. As of June 30, 2020, Genworth Holdings has $494 million of unrestricted cash and cash equivalents. For the quarterly period ended June 30, 2020, our evaluation of our ability to meet our obligations included the following contractual obligations due within one year from the issue date of our unaudited condensed consolidated financial statements included herein:
 
 
 
A partial settlement payment in the amount of £100 million ($125 million) paid to
AXA S.A. (“AXA”) on
 July
21
, 2020 in connection with a settlement reached regarding the case titled
AXA S.A. v. Genworth Financial International Holdings, LLC et al.
As part of the settlement agreement, we issued a secured promissory note agreeing to pay AXA
two
 installments in 2022. Under the settlement, certain cash flows to
Genworth
Holdings, including dividends and capital raises, above defined thresholds must be paid to AXA until the promissory note is fully repaid. In addition,
over the next year, we expect to pay AXA approximately $25 million in interest on the promissory note, assuming we do not make any pre-payments, and we may make an additional one-time payment of approximately
$40 million for an
 
 
 
unrelated liability and other expenses. See note 12 for additional details on the case. See note 14 for additional details related to the sale of our former lifestyle protection insurance business and amounts recorded related to loss from discontinued operations.
 
   
Genworth Holdings has $356 million of its 7.20% senior notes maturing in February 2021. We are currently in compliance with the terms of our debt agreements and interest payments on our senior notes are forecasted to be $158 million for the next twelve months. See note 9 for additional details on our long-term borrowings.
We also evaluate other conditions and events and their relative significance in relation to our ability to meet our obligations. As an example, we are exposed to risks associated with
COVID-19,
which has disrupted the global economy and financial markets, business operations, and consumer behavior and confidence.
 
   
Due to higher delinquencies and the impact to capital levels resulting from
COVID-19,
we do not expect to receive further dividends in 2020 from our mortgage insurance subsidiaries.
 
   
Due to the uncertain macroeconomic conditions surrounding
COVID-19,
on June 30, 2020, Genworth and China Oceanwide agreed to a fifteenth waiver and agreement extending the merger deadline to no later than September 30, 2020.
 
The consummation of this transaction is dependent on steps outside of our control; accordingly, the associated
post-closing
capital contributions
from China
Oceanwide
have not been included in this evaluation.
While conditions and events occurring and expected to occur raise doubt about our ability to meet our financial obligations for the next year, management’s plans alleviate this doubt.
We are actively taking steps to raise capital to address our obligations, including a debt
financing
as well as, should our pending transaction with China Oceanwide not close, preparing for a 19.9% public offering of our U.S. mortgage insurance business subject to market conditions. We expect to
engage in
a debt
financing
through our U.S. mortgage insurance business later in 2020 which, along with existing cash and cash equivalents, would provide Genworth Holdings sufficient liquidity to meet its obligations and maintain business operations
for one
year from the issue date of the unaudited condensed consolidated financial statements. We believe this debt
financing
is probable to be effectively implemented given the value of the U.S. mortgage insurance business, the healthy conditions of the relevant credit markets, recent similar peer transactions and our history of similar refinancing transactions, among other factors.
The impact of the developing coronavirus pandemic is very difficult to predict
.
 
Its
related outcomes and impact on our business
and the capital markets, and our ability to raise capital
will depend on the length of the pandemic
, economic impacts of social, global and political influences, and the
shape of the economic recovery
, among other factors and uncertainties. While these risks exist, we
believe the execution of our plan will provide sufficient funds to meet our obligations for
one
year following the issuance of our unaudited condensed consolidated financial statements.
v3.20.2
Accounting Changes
6 Months Ended
Jun. 30, 2020
Disclosure of Accounting Changes [Abstract]  
Accounting Changes
(2) Accounting Changes
Accounting Pronouncements Recently Adopted
On January 1, 2020, we adopted new accounting guidance related to disclosure requirements for defined benefit plans as part of the Financial Accounting Standards Board’s (the “FASB”) 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 using the retrospective method, which did not have a significant impact on our condensed consolidated financial statements and disclosures.
On January 1, 2020, we adopted new accounting guidance related to fair value disclosure requirements as part of the FASB’s 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 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 impact our condensed consolidated financial statements but impacted our fair value disclosures.
In March 2020, the FASB issued new accounting guidance related to reference rate reform, which was effective for us on January 1, 2020. The guidance provides temporary guidance to ease the potential burden in accounting for, or recognizing the effects of, reference rate reform, which includes the transition away from the London Interbank Offered Rate (“LIBOR”). This new guidance provides optional practical expedients and exceptions for applying generally accepted accounting principles to investments, derivatives or other transactions affected by reference rate reform such as those that impact the assessment of derivative hedge effectiveness and contract modifications, to include continuing hedge accounting when certain critical terms of a hedging relationship change and modifying certain effectiveness assessments to exclude certain potential sources of ineffectiveness. In addition to the optional practical expedients, the guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. We adopted this guidance prospectively and it did not have a significant impact on our condensed consolidated financial statements or disclosures. However, the amendments in this guidance may be elected over time through December 31, 2022 as reference rate reform activities occur and therefore, this guidance may impact our procedures, including our process for assessing the effectiveness of our cash flow hedging relationships, determined on an individual hedge basis, as we implement measures to transition away from LIBOR.
On January 1, 2020, we adopted 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 financial instruments not measured at fair value, which primarily includes our commercial mortgage loans, bank loan investments and reinsurance recoverables. The new guidance also requires the recognition of an allowance for expected credit losses as a liability in our consolidated balance sheet for off-balance
sheet
credit exposures, including commitments to fund bank loan investments, private placement investments and commercial mortgage loans. The new guidance did not have a significant impact on other assets not measured at fair value. 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.
For our commercial mortgage loans, we determine the adequacy of the allowance for credit losses utilizing an analytical model that provides various loss scenarios based on historical experience adjusted for current events, trends, economic conditions and reasonable and supportable forecasts that result in a loss in the loan portfolio over the estimated life of the loans. We revert to historical credit loss experience for periods beyond forecasts that are reasonable and supportable. The allowance for credit losses is measured on a collective basis with consideration for debt service coverage ratio,
debt-to-value,
property-type and geographic location. Key
inputs into the analytical model include exposure, weighted-average life, return, historical loss rates and forecast
 
scenarios. Actual amounts realized over time could differ from the amounts estimated for the allowance for credit losses reported in the condensed consolidated financial statements. Commercial mortgage loans are written off against the allowance to the extent principal or interest is deemed uncollectible. Accrued interest related to commercial mortgage loans is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $
25
 million as of June 
30
,
2020
. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our commercial mortgage loans are written off after
90
days and once
collectability
is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses).
We adopted the guidance related to our investments carried at amortized cost using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $23 million, net of deferred taxes of $6 million, for commercial mortgage loans and bank loan investments, with an offset to cumulative effect of change in accounting within retained earnings. See note 4 for additional disclosures related to commercial mortgage loans. We adopted the guidance related to our
off-balance
sheet credit exposures using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $1 million, included in other liabilities in our condensed consolidated balance sheet, with an offset to cumulative effect of change in accounting within retained earnings.
The allowance for credit losses for reinsurance recoverables is evaluated based on historical loss experience adjusted for current events and reasonable and supportable forecasts from both internal and external sources. The allowance is measured by reinsurer, taking into consideration the reinsured product type and collateral type, and is calculated based on an externally reported probability of default corresponding to the reinsurer’s credit rating and the expected duration of the reinsurer’s contractual obligation to reimburse us for ceded claims on the underlying policies. Our estimate of the allowance reflects consideration for collateral securing the reinsurance agreements and expected recoveries of amounts previously charged off and expected to be charged off. We also consider other credit risk factors, including, among other factors, the historical frequency and severity of the associated insurance claims, aging of recoverables and regulatory, legal and economic factors, to determine if an additional incremental allowance for credit losses is required. No reversion adjustments are necessary as the starting point for our allowance for credit losses reflects historical loss experience covering the expected duration of the reinsurer’s contractual obligation to reimburse us. If available facts and circumstances indicate the reinsurance recoverable does not reflect expectations consistent with the collective analysis, the reinsurance recoverable is assessed on a separate basis. Write-offs of reinsurance recoverables are deducted from the allowance in the period the reinsurance recoverable is determined to be uncollectible. We adopted the guidance related to our reinsurance recoverables using the modified retrospective method and recorded an allowance related to lifetime expected credit losses of $31 million, net of deferred taxes of $9 million, with an offset to cumulative effect of change in accounting within retained earnings. See note 8 for additional disclosures related to reinsurance recoverables.
The new guidance retains most of the existing impairment guidance for
available-for-sale
fixed maturity securities but amends the presentation of credit losses to reflect an allowance for credit losses as opposed to a write-down of the amortized cost of the investment and permits the reversal of credit losses through net income (loss) when reassessing changes in credit losses each reporting period.
Available-for-sale
fixed maturity securities in an unrealized loss position are evaluated to determine whether the decline in fair value is related to credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency/agencies and adverse conditions specifically related to the security, among other factors. If a credit loss exists, the present value of cash flows
expected to be collected from the security are compared to the amortized cost basis of the security. If the present
 
value of cash flows expected to be collected is less than the amortized cost basis, an allowance for credit losses is recorded, limited by the amount that the fair value is less than the amortized cost basis. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with internal assumptions and judgments. When developing the estimate of cash flows expected to be collected, we utilize an analytical model that provides for various loss scenarios and consider the industry sector, current levels of subordination, geographic location and other relevant characteristics of the security or underlying assets, as well as reasonable and supportable forecasts. Losses are written off against the allowance when deemed uncollectible or when we intend to sell or expect we will be required to sell a security prior to recovering our amortized cost. We exclude accrued interest related to
available-for-sale
fixed maturity securities from the estimate of allowance for credit losses. Accrued interest is included in accrued investment income in our condensed consolidated balance sheet and had a carrying value of $544 million as of June 30, 2020. We do not measure an allowance for credit losses related to accrued interest as uncollectible accrued interest related to our
available-for-sale
fixed maturity securities are written off after 90 days and once collectability is determined to be uncertain and not probable. Amounts written off related to accrued interest are recorded as a credit loss expense included in net investment gains (losses). We adopted the guidance related to our
available-for-sale
fixed maturity securities for which a previous other-than-temporary impairment was recognized prior to the date of adoption using the prospective method and the modified retrospective method for all other
available-for-sale
fixed maturity securities, which did not have any impact upon adoption.
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 deferred acquisition costs (“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.
We expect this guidance to be effective for us on January 1, 2023, subject to the FASB finalizing an additional
one-year
delay, 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 condensed consolidated financial statements.
 
v3.20.2
Earnings (Loss) Per Share
6 Months Ended
Jun. 30, 2020
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 periods indicated:
   
Three months ended
   
Six months ended
 
   
June 30,
   
June 30,
 
(Amounts in millions, except per share amounts)
 
2020
   
2019
   
2020
   
2019
 
Weighted-average shares used in basic earnings per share calculations
     505.4       503.4        504.8       502.3  
Potentially dilutive securities:
         
Stock options, restricted stock units and stock appreciation rights
     7.1       5.3        6.3       6.4  
  
 
 
   
 
 
    
 
 
   
 
 
 
Weighted-average shares used in diluted earnings per share calculations
     512.5       508.7        511.1       508.7  
  
 
 
   
 
 
    
 
 
   
 
 
 
Income from continuing operations:
         
Income from continuing operations
   $ 102     $ 158      $ 30     $ 326  
Less: net income from continuing operations attributable to noncontrolling interests
     23       15        17       35  
  
 
 
   
 
 
    
 
 
   
 
 
 
Income from continuing operations available to Genworth Financial, Inc.’s common stockholders
   $ 79     $ 143      $ 13     $ 291  
  
 
 
   
 
 
    
 
 
   
 
 
 
Basic per share
   $ 0.16     $ 0.29      $ 0.03     $ 0.58  
  
 
 
   
 
 
    
 
 
   
 
 
 
Diluted per share
   $ 0.15     $ 0.28      $ 0.03     $ 0.57  
  
 
 
   
 
 
    
 
 
   
 
 
 
Income (loss) from discontinued operations:
         
Income (loss) from discontinued operations, net of taxes
   $ (520   $ 60      $ (520   $ 122  
Less: net income from discontinued operations attributable to noncontrolling interests
     —         35        —         71  
  
 
 
   
 
 
    
 
 
   
 
 
 
Income (loss) from discontinued operations available to Genworth Financial, Inc.’s common stockholders
   $ (520   $ 25      $ (520   $ 51  
  
 
 
   
 
 
    
 
 
   
 
 
 
Basic per share
   $ (1.03   $ 0.05      $ (1.03   $ 0.10  
  
 
 
   
 
 
    
 
 
   
 
 
 
Diluted per share
   $ (1.01   $ 0.05      $ (1.02   $ 0.10  
  
 
 
   
 
 
    
 
 
   
 
 
 
Net income (loss):
         
Income from continuing operations
   $ 102     $ 158      $ 30     $ 326  
Income (loss) from discontinued operations, net of taxes
     (520     60        (520     122  
  
 
 
   
 
 
    
 
 
   
 
 
 
Net income (loss)
     (418     218        (490     448  
Less: net income attributable to noncontrolling interests
     23       50        17       106  
  
 
 
   
 
 
    
 
 
   
 
 
 
Net income (loss) available to Genworth Financial, Inc.’s common stockholders
   $ (441   $ 168      $ (507   $ 342  
  
 
 
   
 
 
    
 
 
   
 
 
 
Basic per share
(1)
   $ (0.87   $ 0.33      $ (1.00   $ 0.68  
  
 
 
   
 
 
    
 
 
   
 
 
 
Diluted per share
   $ (0.86   $ 0.33      $ (0.99   $ 0.67  
  
 
 
   
 
 
    
 
 
   
 
 
 
 
(1)
May not total due to whole number calculation.
v3.20.2
Investments
6 Months Ended
Jun. 30, 2020
Investments
(4) Investments
(a) Net Investment Income
Sources of net investment income were as follows for the periods indicated:
 
    
Three months ended
   
Six months ended
 
    
June 30,
   
June 30,
 
(Amounts in millions)
  
2020
   
2019
   
2020
   
2019
 
Fixed maturity securities—taxable
   $ 601     $ 634     $ 1,223     $ 1,247  
Fixed maturity
securities—non-taxable
     1       2       3       4  
Equity securities
     2       5       4       9  
Commercial mortgage loans
     84       85       169       167  
Policy loans
     49       45       98       91  
Other invested assets
     66       59       113       118  
Cash, cash equivalents, restricted cash and short-term investments
     4       11       15       22  
  
 
 
   
 
 
   
 
 
   
 
 
 
Gross investment income before expenses and fees
     807       841       1,625       1,658  
Expenses and fees
     (21     (25     (46     (48
  
 
 
   
 
 
   
 
 
   
 
 
 
Net investment income
   $ 786     $ 816     $ 1,579     $ 1,610  
  
 
 
   
 
 
   
 
 
   
 
 
 
(b) Net Investment Gains (Losses)
The following table sets forth net investment gains (losses) for the periods indicated:
 
    
Three months ended
   
Six months ended
 
    
June 30,
   
June 30,
 
(Amounts in millions)
  
2020
   
2019
   
2020
   
2019
 
Available-for-sale
fixed maturity securities:
        
Realized gains
   $ 119     $ 10     $ 133     $ 74  
Realized losses
     (5     (21     (6     (27
  
 
 
   
 
 
   
 
 
   
 
 
 
Net realized gains (losses) on
available-for-sale
fixed maturity securities
     114       (11     127       47  
  
 
 
   
 
 
   
 
 
   
 
 
 
Impairments:
        
Total other-than-temporary impairments
     —         —         —         —    
Portion of other-than-temporary impairments included in other comprehensive income (loss)
     —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
 
Net other-than-temporary impairments
     —         —         —         —    
  
 
 
   
 
 
   
 
 
   
 
 
 
Net change in allowance for credit losses on
available-for-sale
fixed maturity securities
     (7     —         (7     —    
Net realized gains (losses) on equity securities sold
     —         —         —         3  
Net unrealized gains (losses) on equity securities still held
     9       5       (10     17  
Limited partnerships
     37       (11     (3     4  
Commercial mortgage loans
     1       1       1       —    
Derivative instruments
(1)
     10       (30     (95     (42
Other
     (5     —         (6     —    
  
 
 
   
 
 
   
 
 
   
 
 
 
Net investment gains (losses)
   $ 159     $ (46   $ 7     $ 29  
  
 
 
   
 
 
   
 
 
   
 
 
 
 
(1)
 
See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).
See note 2 for a discussion of our policy for evaluating and measuring the allowance for credit losses related to our
available-for-sale
fixed maturity securities. The following table represents the allowance for credit losses aggregated by security type for
available-for-sale
fixed maturity investments as of and for the three and six months ended June 30, 2020:
 
         
Increase from
   
Increase
                               
         
securities
   
(decrease)
         
Decrease
                   
         
without
   
from securities
         
due to change
                   
         
allowance in
   
with allowance
         
in intent or
                   
   
Beginning
   
previous
   
in previous
   
Securities
   
requirement
               
Ending
 
(Amounts in millions)
 
balance
   
periods
   
periods
   
sold
   
to sell
   
Write-offs
   
Recoveries
   
balance
 
Fixed maturity securities:
               
Non-U.S.
corporate
  $ —       $ 4     $ —       $ —       $ —       $ —       $ —       $ 4  
Commercial mortgage-backed
    —         3       —         —         —         —         —         3  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
available-for-sale
fixed maturity securities
  $     $ 7     $ —       $ —       $ —       $ —       $ —       $ 7  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
The following represents the activity for credit losses recognized in net income (loss) on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (“OCI”) as of and for the periods indicated:
 
    
Three months
    
Six months
 
    
ended
    
ended
 
    
June 30,
    
June 30,
 
(Amounts in millions)
  
2019
    
2019
 
Beginning balance
   $ 23      $ 24  
Reductions:
     
Securities sold, paid down or disposed
     —          (1
  
 
 
    
 
 
 
Ending balance
   $ 23      $ 23  
  
 
 
    
 
 
 
(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 the dates indicated:
 
(Amounts in millions)
 
June 30, 2020
   
December 31, 2019
 
Net unrealized gains (losses) on fixed maturity securities without an allowance for credit losses
(1)
   $ 8,766     $ 6,676  
Net unrealized gains (losses) on fixed maturity securities with an allowance for credit losses
(1)
     (10     —    
Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves
     (6,420     (4,789
Income taxes, net
     (501     (406
  
 
 
   
 
 
 
Net unrealized investment gains (losses)
     1,835       1,481  
Less: net unrealized investment gains (losses) attributable to noncontrolling interests
     24       25  
  
 
 
   
 
 
 
Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.
   $ 1,811     $ 1,456  
  
 
 
   
 
 
 
 
(1)
 
Excludes foreign exchange.
The change in net unrealized gains (losses) on
available-for-sale
investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:
 
    
As of or for the
 
    
three months ended
 
    
June 30,
 
(Amounts in millions)
  
2020
   
2019
 
Beginning balance
   $ 1,140     $ 943  
Unrealized gains (losses) arising during the period:
    
Unrealized gains (losses) on fixed maturity securities
     3,911       1,957  
Adjustment to deferred acquisition costs
     (111     (52
Adjustment to present value of future profits
     5       (2
Adjustment to sales inducements
     (34     (12
Adjustment to benefit reserves
     (2,802     (1,412
Provision for income taxes
     (207     (104
  
 
 
   
 
 
 
Change in unrealized gains (losses) on investment securities
     762       375  
Reclassification adjustments to net investment (gains) losses, net of taxes of $24 and $(1)
     (88     1  
  
 
 
   
 
 
 
Change in net unrealized investment gains (losses)
     674       376  
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
     3       14  
  
 
 
   
 
 
 
Ending balance
   $ 1,811     $ 1,305  
  
 
 
   
 
 
 
    
As of or for the
 
    
six months ended
 
    
June 30,
 
(Amounts in millions)
  
2020
   
2019
 
Beginning balance
   $ 1,456     $ 595  
Unrealized gains (losses) arising during the period:
    
Unrealized gains (losses) on fixed maturity securities
     2,199       3,956  
Adjustment to deferred acquisition costs
     57       (1,041
Adjustment to present value of future profits
     4       (55
Adjustment to sales inducements
     2       (31
Adjustment to benefit reserves
     (1,694     (1,800
Provision for income taxes
     (120     (227
  
 
 
   
 
 
 
Change in unrealized gains (losses) on investment securities
     448       802  
Reclassification adjustments to net investment (gains) losses, net of taxes of $25 and $12
     (94     (46
  
 
 
   
 
 
 
Change in net unrealized investment gains (losses)
     354       756  
Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests
     (1     46  
  
 
 
   
 
 
 
Ending balance
   $ 1,811     $ 1,305  
  
 
 
   
 
 
 
Amounts reclassified out of accumulated other comprehensive income (loss) to net investment gains (losses) include realized gains (losses) on sales of securities, which are determined on a specific identification basis.
 
(d) Fixed Maturity Securities
As of June 30, 2020, the amortized cost or cost, gross unrealized gains (losses), allowance for credit losses and fair value of our fixed maturity securities classified as
available-for-sale
were as follows:
 
   
Amortized
   
Gross
   
Gross
   
Allowance
       
   
cost or
   
unrealized
   
unrealized
   
for credit
   
Fair
 
(Amounts in millions)
 
cost
   
gains
   
losses
   
losses
   
value
 
Fixed maturity securities:
            
U.S. government, agencies and government-sponsored enterprises
   $ 3,877      $ 1,725      $ —       $ —       $ 5,602  
State and political subdivisions
     2,503        496        (1     —         2,998  
Non-U.S.
government
     1,424        125        (7     —         1,542  
U.S. corporate:
                                      
Utilities
     4,392        879        (1     —         5,270  
Energy
     2,454        203        (63     —         2,594  
Finance and insurance
     7,400        1,017        (14     —         8,403  
Consumer—non-cyclical
     5,132        1,147        (2     —         6,277  
Technology and communications
     2,912        503        (4     —         3,411  
Industrial
     1,350        157        (4     —         1,503  
Capital goods
     2,580        454        (6     —         3,028  
Consumer—cyclical
     1,748        224        (6     —         1,966  
Transportation
     1,335        254        (24     —         1,565  
Other
     340        38        —         —         378  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Total U.S. corporate
     29,643        4,876        (124     —         34,395  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Non-U.S.
corporate:
                                      
Utilities
     811        68        —         —         879  
Energy
     1,141        148        (14     —         1,275  
Finance and insurance
     2,199        284        (16     (1     2,466  
Consumer—non-cyclical
     692        86        (1     —         777  
Technology and communications
     1,066        182        (1     —         1,247  
Industrial
     883        116        (4     —         995  
Capital goods
     565        50        (2     —         613  
Consumer—cyclical
     380        27        —         —         407  
Transportation
     560        84        (6     (3     635  
Other
     1,376        218        (3     —         1,591  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Total
non-U.S.
corporate
     9,673        1,263        (47     (4     10,885  
  
 
 
    
 
 
    
 
 
   
 
 
   
 
 
 
Residential mortgage-backed
     1,927        259        (2     —         2,184  
Commercial mortgage-backed
     2,800        225        (52     (3     2,970  
Other asset-backed
     2,987        30        (49     —         2,968