GENWORTH FINANCIAL INC, 10-Q filed on 11/8/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Oct. 28, 2016
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
498,369,894 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 63,780 
$ 58,197 
Equity securities available-for-sale, at fair value
590 
310 
Commercial mortgage loans
6,017 
6,170 
Restricted commercial mortgage loans related to securitization entities
134 
161 
Policy loans
1,751 
1,568 
Other invested assets
2,676 
2,309 
Restricted other invested assets related to securitization entities, at fair value
312 
413 
Total investments
75,260 
69,128 
Cash and cash equivalents
3,078 
5,965 
Accrued investment income
677 
653 
Deferred acquisition costs
3,982 
4,398 
Intangible assets and goodwill
258 
357 
Reinsurance recoverable
17,542 
17,245 
Other assets
570 
520 
Deferred tax asset
155 
Separate account assets
7,485 
7,883 
Assets held for sale
127 
Total assets
108,852 
106,431 
Liabilities and equity
 
 
Future policy benefits
37,405 
36,475 
Policyholder account balances
25,867 
26,209 
Liability for policy and contract claims
8,869 
8,095 
Unearned premiums
3,464 
3,308 
Other liabilities ($2 and $46 of other liabilities are related to securitization entities)
3,280 
3,004 
Borrowings related to securitization entities ($11 and $81 are at fair value)
78 
179 
Non-recourse funding obligations
310 
1,920 
Long-term borrowings
4,194 
4,570 
Deferred tax liability
1,151 
24 
Separate account liabilities
7,485 
7,883 
Liabilities held for sale
127 
Total liabilities
92,103 
91,794 
Commitments and contingencies
   
   
Equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 587 million and 586 million shares issued as of September 30, 2016 and December 31, 2015, respectively; 498 million shares outstanding as of September 30, 2016 and December 31, 2015
Additional paid-in capital
11,959 
11,949 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
2,836 
1,236 
Net unrealized gains (losses) on other-than-temporarily impaired securities
24 
18 
Net unrealized investment gains (losses)
2,860 1
1,254 1
Derivatives qualifying as hedges
2,493 2
2,045 2
Foreign currency translation and other adjustments
(151)
(289)
Total accumulated other comprehensive income (loss)
5,202 
3,010 
Retained earnings
409 
564 
Treasury stock, at cost (88 million shares as of September 30, 2016 and December 31, 2015)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
14,871 
12,824 
Noncontrolling interests
1,878 
1,813 
Total equity
16,749 
14,637 
Total liabilities and equity
$ 108,852 
$ 106,431 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Other liabilities, securitization entities
$ 2 
$ 46 
Borrowings related to securitization entities, fair value
$ 11 
$ 81 
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
587,000,000 
586,000,000 
Class A common stock, shares outstanding
498,000,000 
498,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Revenues:
 
 
 
 
Premiums
$ 1,108 
$ 1,145 
$ 3,029 
$ 3,422 
Net investment income
805 
783 
2,373 
2,357 
Net investment gains (losses)
20 
(51)
31 
(59)
Policy fees and other income
217 
223 
738 
672 
Total revenues
2,150 
2,100 
6,171 
6,392 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,662 
1,290 
3,715 
3,714 
Interest credited
173 
179 
523 
540 
Acquisition and operating expenses, net of deferrals
269 
314 
990 
876 
Amortization of deferred acquisition costs and intangibles
94 
563 
305 
759 
Interest expense
77 
105 
262 
315 
Total benefits and expenses
2,275 
2,451 
5,795 
6,204 
Income (loss) from continuing operations before income taxes
(125)
(351)
376 
188 
Provision (benefit) for income taxes
222 
(134)
355 
27 
Income (loss) from continuing operations
(347)
(217)
21 
161 
Income (loss) from discontinued operations, net of taxes
15 
(21)
(25)
(334)
Net loss
(332)
(238)
(4)
(173)
Less: net income attributable to noncontrolling interests
48 
46 
151 
150 
Net loss available to Genworth Financial, Inc.'s common stockholders
(380)
(284)
(155)
(323)
Income (loss) from continuing operations available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ (0.79)
$ (0.53)
$ (0.26)
$ 0.02 
Diluted
$ (0.79)
$ (0.53)
$ (0.26)
$ 0.02 
Net loss available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ (0.76)
$ (0.57)
$ (0.31)
$ (0.65)
Diluted
$ (0.76)
$ (0.57)
$ (0.31)
$ (0.65)
Weighted-average common shares outstanding:
 
 
 
 
Basic
498.3 
497.4 
498.3 
497.3 
Diluted
498.3 1
497.4 1
498.3 1
499.0 1
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(2)
(10)
(35)
(13)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
Net other-than-temporary impairments
(2)
(9)
(35)
(12)
Other investments gains (losses)
22 
(42)
66 
(47)
Net investment gains (losses)
$ 20 
$ (51)
$ 31 
$ (59)
[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 three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million, 1.3 million and 1.8 million, respectively, 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 three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million, 498.7 million and 500.1 million, respectively.
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Net loss
$ (332)
$ (238)
$ (4)
$ (173)
Other comprehensive income (loss), net of taxes:
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
72 
87 
1,624 
(728)
Net unrealized gains (losses) on other-than-temporarily impaired securities
Derivatives qualifying as hedges
54 1
217 1
448 1
60 1
Foreign currency translation and other adjustments
(1)
(302)
223 
(619)
Total other comprehensive income (loss)
130 
2,301 
(1,287)
Total comprehensive income (loss)
(202)
(236)
2,297 
(1,460)
Less: comprehensive income (loss) attributable to noncontrolling interests
64 
(121)
260 
(145)
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ (266)
$ (115)
$ 2,037 
$ (1,315)
Condensed Consolidated Statements of Changes in Equity (USD $)
In Millions, unless otherwise specified
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 at Dec. 31, 2014
$ 16,797 
$ 1 
$ 11,997 
$ 4,446 
$ 1,179 
$ (2,700)
$ 14,923 
$ 1,874 
Additional sale of subsidiary shares to noncontrolling interests
226 
(65)
24 
(41)
267 
Repurchase of subsidiary shares
(17)
(17)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
(173)
(323)
(323)
150 
Other comprehensive income (loss), net of taxes
(1,287)
(992)
(992)
(295)
Total comprehensive income (loss)
(1,460)
 
 
 
 
 
(1,315)
(145)
Dividends to noncontrolling interests
(145)
(145)
Stock-based compensation expense and exercises and other
15 
12 
12 
Balances at Sep. 30, 2015
15,416 
11,944 
3,478 
856 
(2,700)
13,579 
1,837 
Balances at Dec. 31, 2015
14,637 
11,949 
3,010 
564 
(2,700)
12,824 
1,813 
Return of capital to noncontrolling interests
(70)
(70)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
(4)
(155)
(155)
151 
Other comprehensive income (loss), net of taxes
2,301 
2,192 
2,192 
109 
Total comprehensive income (loss)
2,297 
 
 
 
 
 
2,037 
260 
Dividends to noncontrolling interests
(126)
(126)
Stock-based compensation expense and exercises and other
11 
10 
10 
Balances at Sep. 30, 2016
$ 16,749 
$ 1 
$ 11,959 
$ 5,202 
$ 409 
$ (2,700)
$ 14,871 
$ 1,878 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Cash flows from operating activities:
 
 
Net loss
$ (4)
$ (173)
Less loss from discontinued operations, net of taxes
25 
334 
Adjustments to reconcile net loss to net cash from operating activities:
 
 
Gain on sale of businesses
(26)
Amortization of fixed maturity securities discounts and premiums and limited partnerships
(112)
(80)
Net investment losses (gains)
(31)
59 
Charges assessed to policyholders
(574)
(586)
Acquisition costs deferred
(124)
(226)
Amortization of deferred acquisition costs and intangibles
305 
759 
Deferred income taxes
173 
(117)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
759 
(247)
Stock-based compensation expense
25 
14 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(258)
(133)
Insurance reserves
691 
1,270 
Current tax liabilities
44 
(71)
Other liabilities, policy and contract claims and other policy-related balances
905 
352 
Cash from operating activities-held for sale
Net cash from operating activities
1,798 
1,158 
Cash flows from investing activities:
 
 
Fixed maturity securities
2,646 
3,389 
Commercial mortgage loans
555 
640 
Restricted commercial mortgage loans related to securitization entities
27 
27 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
4,064 
1,333 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(8,758)
(6,836)
Commercial mortgage loans
(405)
(678)
Other invested assets, net
(138)
(39)
Policy loans, net
(80)
23 
Proceeds from sale of businesses, net of cash transferred
39 
Cash from investing activities-held for sale
(22)
Net cash from investing activities
(2,050)
(2,163)
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
1,028 
1,693 
Withdrawals from universal life and investment contracts
(1,463)
(1,677)
Redemption of non-recourse funding obligations
(1,620)
(45)
Proceeds from issuance of long-term debt
150 
Repayment and repurchase of long-term debt
(362)
(120)
Repayment of borrowings related to securitization entities
(37)
(26)
Proceeds from sale of subsidiary shares to noncontrolling interests
226 
Repurchase of subsidiary shares
(17)
Return of capital to noncontrolling interests
(70)
Dividends paid to noncontrolling interests
(126)
(145)
Other, net
(49)
(25)
Cash from financing activities-held for sale
(33)
Net cash from financing activities
(2,699)
(19)
Effect of exchange rate changes on cash and cash equivalents (includes $- and $(8) related to businesses held for sale)
36 
(86)
Net change in cash and cash equivalents
(2,915)
(1,110)
Cash and cash equivalents at beginning of period
5,993 
4,918 
Cash and cash equivalents at end of period
3,078 
3,808 
Less cash and cash equivalents held for sale at end of period
142 
Cash and cash equivalents of continuing operations at end of period
$ 3,078 
$ 3,666 
Condensed Consolidated Statements of Cash Flows (Parenthetical) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Effect of exchange rate changes on cash and cash equivalents related to businesses held for sale
$ 0 
$ (8)
Formation of Genworth and Basis of Presentation
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 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.

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,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.

We operate our business through the following five 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.

 

    Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

 

    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 non-strategic products which are no longer actively sold but we continue to service our existing blocks of business. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes and guaranteed investment contracts.

In addition to our five 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 May 9, 2016, Genworth Mortgage Insurance Corporation (“GMICO”), our wholly-owned indirect subsidiary, completed the sale of our European mortgage insurance business. As the held-for-sale criteria were satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 14 for additional information.

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. 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 2015 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

On October 21, 2016, we entered into a definitive agreement with China Oceanwide Holdings Group Co., Ltd. (“China Oceanwide”) under which 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. The acquisition will be completed through Asia Pacific Global Capital Co. Ltd., one of China Oceanwide’s investment platforms. The transaction is subject to approval by our stockholders as well as other closing conditions, including the receipt of required regulatory approvals.

Accounting Changes
Accounting Changes

(2) Accounting Changes

Accounting Pronouncement Recently Adopted

On January 1, 2016, we adopted new accounting guidance related to consolidation. The new guidance primarily impacts limited partnerships and similar legal entities, evaluation of fees paid to a decision maker as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination and certain investment funds. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In September 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance related to the statement of cash flows classification of certain cash payments and cash receipts. The guidance will reduce diversity in practice related to eight specific cash flow issues. The new guidance is effective for us on January 1, 2018, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In June 2016, the FASB issued new guidance related to accounting for credit losses on financial instruments. The guidance requires that entities 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 receivables. 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. The new guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued 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, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued 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. The guidance is effective for us on January 1, 2017, with early adoption permitted. We do not expect any significant impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued 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. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued 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. The guidance is effective for us on January 1, 2017, with early adoption permitted. This guidance is consistent with our accounting for derivative contract novations and, accordingly, we do not expect any impact on our consolidated financial statements.

In February 2016, the FASB issued new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-to-use asset and a corresponding liability on the balance sheet. The guidance is effective for us on January 1, 2019, with early adoption permitted. We are still in the process of evaluating the impact this guidance will have on our consolidated financial statements.

Earnings (Loss) Per Share
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
September 30,
    Nine months ended
September 30,
 

(Amounts in millions, except per share amounts)

      2016           2015        2016     2015  

Weighted-average common shares used in basic earnings (loss) per common share calculations

     498.3       497.4       498.3       497.3  

Potentially dilutive securities:

        

Stock options, restricted stock units and stock appreciation rights

     —         —         —         1.7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares used in diluted earnings (loss) per common share calculations (1)

     498.3       497.4       498.3       499.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations:

        

Income (loss) from continuing operations

   $ (347   $ (217   $ 21     $ 161  

Less: income from continuing operations attributable to noncontrolling interests

     48       46       151       150  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations available to Genworth Financial, Inc.’s common stockholders

   $ (395   $ (263   $ (130   $ 11  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

   $ (0.79   $ (0.53   $ (0.26   $ 0.02  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

   $ (0.79   $ (0.53   $ (0.26   $ 0.02  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations:

        

Income (loss) from discontinued operations, net of taxes

   $ 15     $ (21   $ (25   $ (334

Less: income from discontinued operations, net of taxes, attributable to noncontrolling interests

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders

   $ 15     $ (21   $ (25   $ (334
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

   $ 0.03     $ (0.04   $ (0.05   $ (0.67
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

   $ 0.03     $ (0.04   $ (0.05   $ (0.67
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss:

        

Income (loss) from continuing operations

   $ (347   $ (217   $ 21     $ 161  

Income (loss) from discontinued operations, net of taxes

     15       (21     (25     (334
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (332     (238     (4     (173

Less: net income attributable to noncontrolling interests

     48       46       151       150  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss available to Genworth Financial, Inc.’s common stockholders

   $ (380   $ (284   $ (155   $ (323
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

   $ (0.76   $ (0.57   $ (0.31   $ (0.65
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

   $ (0.76   $ (0.57   $ (0.31   $ (0.65
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million, 1.3 million and 1.8 million, respectively, 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 three months ended September 30, 2016 and 2015 and the nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million, 498.7 million and 500.1 million, respectively.
Investments
Investments

(4) Investments

(a) Net Investment Income

Sources of net investment income were as follows for the periods indicated:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 

(Amounts in millions)

       2016             2015             2016             2015      

Fixed maturity securities—taxable

   $ 655     $ 647     $ 1,930     $ 1,924  

Fixed maturity securities—non-taxable

     3       3       9       9  

Commercial mortgage loans

     79       84       237       252  

Restricted commercial mortgage loans related to securitization entities

     3       3       8       10  

Equity securities

     8       3       20       11  

Other invested assets

     34       26       105       103  

Restricted other invested assets related to securitization entities

     —         1       3       3  

Policy loans

     38       33       107       101  

Cash, cash equivalents and short-term investments

     5       3       16       10  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     825       803       2,435       2,423  

Expenses and fees

     (20     (20     (62     (66
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 805     $ 783     $ 2,373     $ 2,357  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(b) Net Investment Gains (Losses)

The following table sets forth net investment gains (losses) for the periods indicated:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 

(Amounts in millions)

       2016             2015             2016             2015      

Available-for-sale securities:

        

Realized gains

   $ 39     $ 14     $ 205     $ 49  

Realized losses

     (24     (18     (75     (36
  

 

 

   

 

 

   

 

 

   

 

 

 

Net realized gains (losses) on available-for-sale securities

     15       (4     130       13  
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (2     (10     (35     (13

Portion of other-than-temporary impairments included in other comprehensive income (loss)

     —         1       —         1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (2     (9     (35     (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     (4     12       40       2  

Commercial mortgage loans

     (1     1       1       5  

Net gains (losses) related to securitization entities

     2       (1     (51     9  

Derivative instruments (1)

     10       (53     (52     (79

Contingent consideration adjustment

     —         2       (2     2  

Other

     —         1       —         1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 20     $ (51   $ 31     $ (59
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 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 three months ended September 30, 2016 and 2015 was $293 million and $186 million, respectively, which was approximately 95% and 93%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2016 and 2015 was $833 million and $470 million, respectively, which was approximately 93% and 94%, respectively, of book value.

 

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 (loss) (“OCI”) as of and for the periods indicated:

 

     As of or for the
three months ended
September 30,
    As of or for the
nine months ended
September 30,
 

(Amounts in millions)

      2016           2015          2016         2015    

Beginning balance

   $ 62     $ 75     $ 64     $ 83  

Additions:

        

Other-than-temporary impairments not previously recognized

     —         —         1       —    

Reductions:

        

Securities sold, paid down or disposed

     (8     (9     (11     (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 54     $ 66     $ 54     $ 66  
  

 

 

   

 

 

   

 

 

   

 

 

 

(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)

  September 30, 2016     December 31, 2015  

Net unrealized gains (losses) on investment securities:

   

Fixed maturity securities

  $ 6,621     $ 3,140  

Equity securities

    (2     (10
 

 

 

   

 

 

 

Subtotal

    6,619       3,130  

Adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves

    (2,045     (1,070

Income taxes, net

    (1,595     (711
 

 

 

   

 

 

 

Net unrealized investment gains (losses)

    2,979       1,349  

Less: net unrealized investment gains (losses) attributable to noncontrolling interests

    119       95  
 

 

 

   

 

 

 

Net unrealized investment gains (losses) attributable to Genworth Financial, Inc.

  $ 2,860     $ 1,254  
 

 

 

   

 

 

 

 

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
September 30,
 

(Amounts in millions)

   2016     2015  

Beginning balance

   $ 2,789     $ 1,628  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     228       70  

Adjustment to deferred acquisition costs

     (17     32  

Adjustment to present value of future profits

     3       (5

Adjustment to sales inducements

     (6     9  

Adjustment to benefit reserves

     (81     23  

Provision for income taxes

     (41     (50
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     86       79  

Reclassification adjustments to net investment (gains) losses, net of taxes of $4 and $(5)

     (9     8  
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     77       87  

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

     6       (16
  

 

 

   

 

 

 

Ending balance

   $ 2,860     $ 1,731  
  

 

 

   

 

 

 

 

     As of or for the
nine months ended
September 30,
 

(Amounts in millions)

   2016     2015  

Beginning balance

   $ 1,254     $ 2,453  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     3,584       (1,393

Adjustment to deferred acquisition costs

     (291     102  

Adjustment to present value of future profits

     (26     45  

Adjustment to sales inducements

     (46     12  

Adjustment to benefit reserves

     (612     111  

Provision for income taxes

     (917     396  
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     1,692       (727

Reclassification adjustments to net investment (gains) losses, net of taxes of $33 and $—

     (62     (1
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     1,630       (728

Less: change in net unrealized investment gains (losses) attributable to noncontrolling interests

     24       (6
  

 

 

   

 

 

 

Ending balance

   $ 2,860     $ 1,731  
  

 

 

   

 

 

 

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

U.S. government, agencies and government-sponsored enterprises

  $ 5,416     $ 1,288     $ —       $ (1   $ —       $ 6,703  

State and political subdivisions

    2,491       350       —         (17     —         2,824  

Non-U.S. government

    2,052       175       —         —         —         2,227  

U.S. corporate:

           

Utilities

    4,073       678       —         (2     —         4,749  

Energy

    2,124       177       —         (22     —         2,279  

Finance and insurance

    5,711       615       23       (9     —         6,340  

Consumer—non-cyclical

    4,190       689       —         (1     —         4,878  

Technology and communications

    2,486       248       —         (8     —         2,726  

Industrial

    1,181       114       —         (4     —         1,291  

Capital goods

    1,876       319       —         —         —         2,195  

Consumer—cyclical

    1,506       158       —         (4     —         1,660  

Transportation

    1,077       138       —         —         —         1,215  

Other

    335       27       —         —         —         362  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    24,559       3,163       23       (50     —         27,695  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    899       64       —         (2     —         961  

Energy

    1,281       129       —         (15     —         1,395  

Finance and insurance

    2,458       201       —         (1     —         2,658  

Consumer—non-cyclical

    768       55       —         (1     —         822  

Technology and communications

    968       80       —         (1     —         1,047  

Industrial

    955       68       —         (5     —         1,018  

Capital goods

    545       36       —         (1     —         580  

Consumer—cyclical

    490       15       —         —         —         505  

Transportation

    605       81       —         (3     —         683  

Other

    3,039       305       —         (5     —         3,339  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    12,008       1,034       —         (34     —         13,008  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,418       396       11       (2     —         4,823  

Commercial mortgage-backed

    2,983       192       2       (4     —         3,173  

Other asset-backed

    3,324       28       1       (26     —         3,327  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,251       6,626       37       (134     —         63,780  

Equity securities

    599       26       —         (35     —         590  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 57,850     $ 6,652     $ 37     $ (169   $ —       $ 64,370  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

As of December 31, 2015, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

U.S. government, agencies and government-sponsored enterprises

  $ 5,487     $ 732     $ —       $ (16   $ —       $ 6,203  

State and political subdivisions

    2,287       181       —         (30     —         2,438  

Non-U.S. government

    1,910       110       —         (5     —         2,015  

U.S. corporate:

           

Utilities

    3,355       364       —         (26     —         3,693  

Energy

    2,560       103       —         (162     —         2,501  

Finance and insurance

    5,268       392       15       (43     —         5,632  

Consumer—non-cyclical

    3,755       371       —         (30     —         4,096  

Technology and communications

    2,108       123       —         (38     —         2,193  

Industrial

    1,164       53       —         (44     —         1,173  

Capital goods

    1,774       188       —         (12     —         1,950  

Consumer—cyclical

    1,602       95       —         (22     —         1,675  

Transportation

    1,023       75       —         (12     —         1,086  

Other

    385       22       —         (5     —         402  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    22,994       1,786       15       (394     —         24,401  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    815       37       —         (9     —         843  

Energy

    1,700       64       —         (78     —         1,686  

Finance and insurance

    2,327       152       2       (8     —         2,473  

Consumer—non-cyclical

    746       24       —         (18     —         752  

Technology and communications

    978       36       —         (26     —         988  

Industrial

    1,063       19       —         (96     —         986  

Capital goods

    602       19       —         (17     —         604  

Consumer—cyclical

    522       8       —         (4     —         526  

Transportation

    559       52       —         (6     —         605  

Other

    2,574       187       —         (25     —         2,736  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,886       598       2       (287     —         12,199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,777       330       11       (17     —         5,101  

Commercial mortgage-backed

    2,492       84       3       (20     —         2,559  

Other asset-backed

    3,328       11       1       (59     —         3,281  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    55,161       3,832       32       (828     —         58,197  

Equity securities

    325       8       —         (23     —         310  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 55,486     $ 3,840     $ 32     $ (851   $ —       $ 58,507  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2016:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

U.S. government, agencies and government-sponsored enterprises

  $ 300     $ (1     6     $ —       $ —          —       $ 300     $ (1     6  

State and political subdivisions

    92       (1     14       143       (16     12       235       (17     26  

U.S. corporate

    808       (18     120       693       (32     104       1,501       (50     224  

Non-U.S. corporate

    261       (6     48       414       (28     56       675       (34     104  

Residential mortgage-backed

    67       (1     22       57       (1     30       124       (2     52  

Commercial mortgage-backed

    234       (3     34       27       (1     10       261       (4     44  

Other asset-backed

    433       (4     70       356       (22     68       789       (26     138  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    2,195       (34     314       1,690       (100     280       3,885       (134     594  

Equity securities

    94       (5     191       123       (30     47       217       (35     238  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,289     $ (39     505     $ 1,813     $ (130     327     $ 4,102     $ (169     832  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 2,195     $ (34     314     $ 1,604     $ (69     270     $ 3,799     $ (103     584  

20%-50% Below cost

    —         —         —         86       (31     10       86       (31     10  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    2,195       (34     314       1,690       (100     280       3,885       (134     594  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    93       (4     181       55       (10     22       148       (14     203  

20%-50% Below cost

    1       (1     10       68       (20     25       69       (21     35  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    94       (5     191       123       (30     47       217       (35     238  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,289     $ (39     505     $ 1,813     $ (130     327     $ 4,102     $ (169     832  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 2,098     $ (25     297     $ 1,351     $ (100     245     $ 3,449     $ (125     542  

Below investment grade

    191       (14     208       462       (30     82       653       (44     290  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,289     $ (39     505     $ 1,813     $ (130     327     $ 4,102     $ (169     832  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of September 30, 2016:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

U.S. corporate:

                 

Utilities

  $ 113     $ (1     22     $ 23     $ (1     4     $ 136     $ (2     26  

Energy

    112       (7     13       290       (15     46       402       (22     59  

Finance and insurance

    227       (3     32       108       (6     16       335       (9     48  

Consumer—non-cyclical

    108       (1     15       —         —         —         108       (1     15  

Technology and communications

    101       (2     15       138       (6     19       239       (8     34  

Industrial

    34       (1     6       108       (3     13       142       (4     19  

Consumer—cyclical

    113       (3     17       26       (1     6       139       (4     23  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    808       (18     120       693       (32     104       1,501       (50     224  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    16       (1     2       14       (1     1       30       (2     3  

Energy

    72       (1     11       122       (14     22       194       (15     33  

Finance and insurance

    72       (1     15       —         —         —         72       (1     15  

Consumer—non-cyclical

    49       (1     5       —         —         —         49       (1     5  

Technology and communications

    —         —         —         28       (1     3       28       (1     3  

Industrial

    26       (1     6       103       (4     15       129       (5     21  

Capital goods

    —         —         —         34       (1     3       34       (1     3  

Transportation

    —         —         —         49       (3     4       49       (3     4  

Other

    26       (1     9       64       (4     8       90       (5     17  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    261       (6     48       414       (28     56       675       (34     104  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 1,069     $ (24     168     $ 1,107     $ (60     160     $ 2,176     $ (84     328  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2016.

Fixed Maturity Securities In A Continuous Unrealized Loss Position For 12 Months Or More

Of the $69 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-” and approximately 65% of the unrealized losses were related to investment grade securities as of September 30, 2016. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 4% as of September 30, 2016. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of September 30, 2016:

 

    Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

State and political subdivisions

  $ 9     $ (3     2     1     $ —       $ —         —       —    

U.S. corporate:

               

Energy

    13       (4     2       1       —         —         —         —    

Finance and insurance

    12       (3     2       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    25       (7     4       2       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Structured securities:

               

Other asset-backed

    43       (17     10       4       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    43       (17     10       4       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 77     $ (27     16     7     $ —       $ —         —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Below Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

U.S. corporate:

               

Energy

  $ 4     $ (2     1     1     $ —       $ —         —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    4       (2     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

               

Energy

    3       (1     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    3       (1     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Structured securities:

               

Other asset-backed

    2       (1     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    2       (1     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 9     $ (4     3     3     $ —       $ —         —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

U.S. corporate

As indicated above, $9 million of gross unrealized losses were related to U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for U.S. corporate fixed maturity securities, $6 million, or 67%, related to the energy sector and $3 million, or 33%, related to the finance and insurance sector. Ongoing low oil prices and market volatility adversely impacted the fair value of these securities.

We expect that our investments in U.S. corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in U.S. corporate securities may perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of U.S. corporate securities in the future.

Structured Securities

Of the $18 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, none related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

While we consider the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: (i) the payment history, including failure to make scheduled payments; (ii) current payment status; (iii) current and historical outstanding balances; (iv) current levels of subordination and losses incurred to date; and (v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: (i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this information; (ii) current payment status; (iii) loan to collateral value ratios, as applicable; (iv) vintage; and (v) other underlying characteristics such as current financial condition.

We use our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of September 30, 2016.

Despite the considerable analysis and rigor employed on our structured securities, it is reasonably possible that the underlying collateral of these investments may perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2015:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

U.S. government, agencies and government-sponsored enterprises

  $ 883     $ (16     32     $ —       $ —          —       $ 883     $ (16     32  

State and political subdivisions

    464       (15     81       163       (15     17       627       (30     98  

Non-U.S. government

    366       (5     49       —         —          —         366       (5     49  

U.S. corporate

    5,836       (332     817       466       (62     83       6,302       (394     900  

Non-U.S. corporate

    3,016       (170     400       486       (117     87       3,502       (287     487  

Residential mortgage-backed

    756       (10     88       103       (7     38       859       (17     126  

Commercial mortgage-backed

    780       (19     116       39       (1     13       819       (20     129  

Other asset-backed

    1,944       (22     349       336       (37     55       2,280       (59     404  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    14,045       (589     1,932       1,593       (239     293       15,638       (828     2,225  

Equity securities

    153       (23     64       —         —          —         153       (23     64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 14,198     $ (612     1,996     $ 1,593     $ (239     293     $ 15,791     $ (851     2,289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 13,726     $ (472     1,877     $ 1,259     $ (78     238     $ 14,985     $ (550     2,115  

20%-50% Below cost

    319       (116     54       316       (139     50       635       (255     104  

>50% Below cost

    —         (1     1       18       (22     5       18       (23     6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    14,045       (589     1,932       1,593       (239     293       15,638       (828     2,225  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    133       (18     56       —         —          —         133       (18     56  

20%-50% Below cost

    20       (5     8       —         —          —         20       (5     8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    153       (23     64       —         —          —         153       (23     64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 14,198     $ (612     1,996     $ 1,593     $ (239     293     $ 15,791     $ (851     2,289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 13,342     $ (524     1,834     $ 1,245     $ (135     225     $ 14,587     $ (659     2,059  

Below investment grade

    856       (88     162       348       (104     68       1,204       (192     230  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 14,198     $ (612     1,996     $ 1,593     $ (239     293     $ 15,791     $ (851     2,289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of December 31, 2015:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

U.S. corporate:

                 

Utilities

  $ 485     $ (25     74     $ 14     $ (1     7     $ 499     $ (26     81  

Energy

    1,162       (134     163       131       (28     22       1,293       (162     185  

Finance and insurance

    1,142       (35     160       94       (8     15       1,236       (43     175  

Consumer—non-cyclical

    836       (26     107       51       (4     10       887       (30     117  

Technology and communications

    658       (36     95       23       (2     5       681       (38     100  

Industrial

    476       (33     64       44       (11     9       520       (44     73  

Capital goods

    293       (10     48       26       (2     4       319       (12     52  

Consumer—cyclical

    427       (18     60       63       (4     10       490       (22     70  

Transportation

    273       (10     38       20       (2     1       293       (12     39  

Other

    84       (5     8       —         —         —         84       (5     8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    5,836       (332     817       466       (62     83       6,302       (394     900  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    130       (6     20       32       (3     6       162       (9     26  

Energy

    589       (48     71       127       (30     20       716       (78     91  

Finance and insurance

    478       (7     77       30       (1     8       508       (8     85  

Consumer—non-cyclical

    261       (14     27       37       (4     4       298       (18     31  

Technology and communications

    324       (15     37       33       (11     9       357       (26     46  

Industrial

    495       (54     67       110       (42     18       605       (96     85  

Capital goods

    154       (8     22       41       (9     9       195       (17     31  

Consumer—cyclical

    155       (4     20       —         —         —         155       (4     20  

Transportation

    147       (6     17       —         —         —         147       (6     17  

Other

    283       (8     42       76       (17     13       359       (25     55  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    3,016       (170     400       486       (117     87       3,502       (287     487  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 8,852     $ (502     1,217     $ 952     $ (179     170     $ 9,804     $ (681     1,387  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2016 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

   Amortized
cost or
cost
     Fair
value
 

Due one year or less

   $ 1,752      $ 1,775  

Due after one year through five years

     10,704        11,309  

Due after five years through ten years

     12,300        13,129  

Due after ten years

     21,770        26,244  
  

 

 

    

 

 

 

Subtotal

     46,526        52,457  

Residential mortgage-backed

     4,418        4,823  

Commercial mortgage-backed

     2,983        3,173  

Other asset-backed

     3,324        3,327  
  

 

 

    

 

 

 

Total

   $ 57,251      $ 63,780  
  

 

 

    

 

 

 

As of September 30, 2016, $10,260 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2016, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 22%, 14% and 14%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of September 30, 2016, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for loan losses.

 

We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:

 

     September 30,
2016
    December 31,
2015
 

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Property type:

          

Retail

   $ 2,099        35   $ 2,116        34

Industrial

     1,544        26       1,562        25  

Office

     1,421        23       1,516        24  

Apartments

     449        7       465        8  

Mixed use

     232        4       234        4  

Other

     287        5       294        5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,032        100     6,187        100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (2        (2   

Allowance for losses

     (13        (15   
  

 

 

      

 

 

    

Total

   $ 6,017        $ 6,170     
  

 

 

      

 

 

    

 

     September 30,
2016
    December 31,
2015
 

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Geographic region:

          

Pacific

   $ 1,563        27   $ 1,581        26

South Atlantic

     1,506        25       1,574        25  

Middle Atlantic

     886        15       890        14  

Mountain

     549        9       585        10  

West North Central

     443        7       416        7  

East North Central

     382        6       386        6  

West South Central

     305        5       294        5  

New England

     208        3       268        4  

East South Central

     190        3       193        3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,032        100     6,187        100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (2        (2   

Allowance for losses

     (13        (15   
  

 

 

      

 

 

    

Total

   $ 6,017        $ 6,170     
  

 

 

      

 

 

    

 

The following tables set forth the aging of past due commercial mortgage loans by property type as of the dates indicated:

 

     September 30, 2016  

(Amounts in millions)

   31 - 60 days
past due
    61 - 90 days
past due
    Greater than
90 days past
due
    Total
past due
    Current     Total  

Property type:

            

Retail

   $ —       $ —       $ 5     $ 5     $ 2,094     $ 2,099  

Industrial

     —         —         12       12       1,532       1,544  

Office

     —         —         4       4       1,417       1,421  

Apartments

     —         —         —         —         449       449  

Mixed use

     —         —         —         —         232       232  

Other

     —         —         —         —         287       287  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ —       $ —       $ 21     $ 21     $ 6,011     $ 6,032  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2015  

(Amounts in millions)

   31 - 60 days
past due
    61 - 90 days
past due
    Greater than
90 days past
due
    Total
past due
    Current     Total  

Property type:

            

Retail

   $ —       $ —       $ —       $ —       $ 2,116     $ 2,116  

Industrial

     —         —         —         —         1,562       1,562  

Office

     6       —         5       11       1,505       1,516  

Apartments

     —         —         —         —         465       465  

Mixed use

     —         —         —         —         234       234  

Other

     —         —         —         —         294       294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 6     $ —       $ 5     $ 11     $ 6,176     $ 6,187  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2016 and December 31, 2015, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of September 30, 2016 and December 31, 2015.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of September 30, 2016, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of the loans was expected to be recoverable.

During the nine months ended September 30, 2016 and the year ended December 31, 2015, we modified or extended 10 and 21 commercial mortgage loans, respectively, with a total carrying value of $63 million and $110 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower, but one loan with a carrying value $1 million at the time of modification was considered a troubled debt restructuring. This loan was impaired in the third quarter and the recorded investment was less than $1 million as of September 30, 2016.

 

The following table sets forth the allowance for credit losses and recorded investment in commercial mortgage loans as of or for the periods indicated:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 

(Amounts in millions)

     2016          2015       2016     2015  

Allowance for credit losses:

         

Beginning balance

   $ 13      $ 18     $ 15     $ 22  

Charge-offs

     —          (1     (4     (4

Provision

     —          —         2       (1
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13      $ 17     $ 13     $ 17  
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending allowance for individually impaired loans

   $ —        $ —       $ —       $ —    
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending allowance for loans not individually impaired that were evaluated collectively for impairment

   $ 13      $ 17     $ 13     $ 17  
  

 

 

    

 

 

   

 

 

   

 

 

 

Recorded investment:

         

Ending balance

   $ 6,032      $ 6,151     $ 6,032     $ 6,151  
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ 17      $ 19     $ 17     $ 19  
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance of loans not individually impaired that were evaluated collectively for impairment

   $ 6,015      $ 6,132     $ 6,015     $ 6,132  
  

 

 

    

 

 

   

 

 

   

 

 

 

As of September 30, 2016, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $7 million, charge-offs of $2 million and an average recorded investment of $3 million.

As of December 31, 2015, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million, which were recorded in the first quarter of 2014. As of December 31, 2015, this loan had interest income of $1 million. In the second quarter of 2016, we recorded additional charge-offs of $2 million related to this loan. As of September 30, 2016, the individually impaired loan within the industrial property type had a recorded investment of $12 million, an unpaid principal balance of $15 million and total charge-offs of $3 million.

As of December 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the third quarter of 2015.

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

The following tables set forth the loan-to-value of commercial mortgage loans by property type as of the dates indicated:

 

    September 30, 2016  

(Amounts in millions)

  0% - 50%     51% - 60%     61% - 75%     76% - 100%     Greater
than 100% 
(1)
    Total  

Property type:

           

Retail

  $ 763     $ 495     $ 812     $ 29     $ —        $ 2,099  

Industrial

    631