GENWORTH FINANCIAL INC, 10-K filed on 2/28/2018
Annual Report
Document and Entity Information (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Feb. 16, 2018
Jun. 30, 2017
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2017 
 
 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
GNW 
 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
 
Entity Central Index Key
0001276520 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
499,195,293 
 
Entity Public Float
 
 
$ 1.9 
Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 62,525 
$ 60,572 
Equity securities available-for-sale, at fair value
820 
632 
Commercial mortgage loans
6,341 
6,111 
Restricted commercial mortgage loans related to securitization entities
107 
129 
Policy loans
1,786 
1,742 
Other invested assets
1,813 
2,071 
Restricted other invested assets related to securitization entities, at fair value
312 
Total investments
73,392 
71,569 
Cash and cash equivalents
2,875 
2,784 
Accrued investment income
644 
659 
Deferred acquisition costs
2,329 
3,571 
Intangible assets and goodwill
301 
348 
Reinsurance recoverable
17,569 
17,755 
Other assets
453 
673 
Deferred tax asset
504 
Separate account assets
7,230 
7,299 
Total assets
105,297 
104,658 
Liabilities and equity
 
 
Future policy benefits
38,472 
37,063 
Policyholder account balances
24,195 
25,662 
Liability for policy and contract claims
9,594 
9,256 
Unearned premiums
3,967 
3,378 
Other liabilities ($1 of other liabilities are related to securitization entities as of December 31, 2016)
1,910 
2,916 
Borrowings related to securitization entities ($12 are carried at fair value in each period)
40 
74 
Non-recourse funding obligations
310 
310 
Long-term borrowings
4,224 
4,180 
Deferred tax liability
27 
53 
Separate account liabilities
7,230 
7,299 
Total liabilities
89,969 
90,191 
Commitments and contingencies
   
   
Equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 588 million and 587 million shares issued as of December 31, 2017 and 2016, respectively; 499 million and 498 million shares outstanding as of December 31, 2017 and 2016, respectively
Additional paid-in capital
11,977 
11,962 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,075 
1,253 
Net unrealized gains (losses) on other-than-temporarily impaired securities
10 
Net unrealized investment gains (losses)
1,085 
1,262 
Derivatives qualifying as hedges
2,065 
2,085 
Foreign currency translation and other adjustments
(123)
(253)
Total accumulated other comprehensive income (loss)
3,027 
3,094 
Retained earnings
1,113 
287 
Treasury stock, at cost (88 million shares as of December 31, 2017 and 2016)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
13,418 
12,644 
Noncontrolling interests
1,910 
1,823 
Total equity
15,328 
14,467 
Total liabilities and equity
$ 105,297 
$ 104,658 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Other liabilities, securitization entities
 
$ 1 
Borrowings related to securitization entities, fair value
 
$ 12 1
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
588,000,000 
587,000,000 
Class A common stock, shares outstanding
499,000,000 
498,000,000 
Treasury stock, shares
88,000,000 
88,000,000 
Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenues:
 
 
 
Premiums
$ 4,004 
$ 4,160 
$ 4,579 
Net investment income
3,200 
3,159 
3,138 
Net investment gains (losses)
265 
72 
(75)
Policy fees and other income
826 
978 
906 
Total revenues
8,295 
8,369 
8,548 
Benefits and expenses:
 
 
 
Benefits and other changes in policy reserves
5,179 
5,245 
5,149 
Interest credited
646 
696 
720 
Acquisition and operating expenses, net of deferrals
1,022 
1,273 
1,309 
Amortization of deferred acquisition costs and intangibles
435 
498 
966 
Interest expense
284 
337 
419 
Total benefits and expenses
7,566 
8,049 
8,563 
Income (loss) from continuing operations before income taxes
729 
320 
(15)
Provision (benefit) for income taxes
(207)
358 
(9)
Income (loss) from continuing operations
936 
(38)
(6)
Loss from discontinued operations, net of taxes
(9)
(29)
(407)
Net income (loss)
927 
(67)
(413)
Less: net income attributable to noncontrolling interests
110 
210 
202 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
817 
(277)
(615)
Income (loss) from continuing operations available to Genworth Financial, Inc.'s common stockholders per share:
 
 
 
Basic
$ 1.66 
$ (0.50)
$ (0.42)
Diluted
$ 1.65 
$ (0.50)
$ (0.42)
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per share:
 
 
 
Basic
$ 1.64 
$ (0.56)
$ (1.24)
Diluted
$ 1.63 
$ (0.56)
$ (1.24)
Weighted-average common shares outstanding:
 
 
 
Basic
499.0 
498.3 
497.4 
Diluted
501.4 1
498.3 1
497.4 1
Supplemental disclosures:
 
 
 
Total other-than-temporary impairments
(6)
(40)
(28)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
Net other-than-temporary impairments
(6)
(40)
(27)
Other investment gains (losses)
271 
112 
(48)
Net investment gains (losses)
$ 265 
$ 72 
$ (75)
[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 years ended December 31, 2016 and 2015, we were required to use basic weighted-average common shares outstanding as the inclusion of shares for stock options, restricted stock units ("RSUs") and stock appreciation rights ("SARs") of 2.0 million and 1.6 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 years ended December 31, 2016 and 2015, dilutive potential weighted-average common shares outstanding would have been 500.3 million and 499.0 million, respectively.
Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 12 Months Ended
Dec. 31, 2017
Sep. 30, 2017
Jun. 30, 2017
Mar. 31, 2017
Dec. 31, 2016
Sep. 30, 2016
Jun. 30, 2016
Mar. 31, 2016
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Net income (loss)
$ 265 1
$ 175 1
$ 271 1
$ 216 1
$ (63)2
$ (332)2
$ 220 2
$ 108 2
$ 927 
$ (67)
$ (413)
Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
 
 
 
 
 
 
 
 
(187)
(1,209)
Net unrealized gains (losses) on other-than-temporarily impaired securities
 
 
 
 
 
 
 
 
(9)
(4)
Derivatives qualifying as hedges
 
 
 
 
 
 
 
 
(20)
40 
(25)
Foreign currency translation and other adjustments
 
 
 
 
 
 
 
 
251 
54 
(530)
Total other comprehensive income (loss)
 
 
 
 
 
 
 
 
45 
91 
(1,768)
Total comprehensive income (loss)
 
 
 
 
 
 
 
 
972 
24 
(2,181)
Less: comprehensive income (loss) attributable to noncontrolling interests
 
 
 
 
 
 
 
 
222 
217 
(106)
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
 
 
 
 
 
 
 
 
$ 750 
$ (193)
$ (2,075)
[1] In the fourth quarter of 2017, we recorded $456 million of net tax benefits primarily from changes in U.S. tax legislation under the TCJA and other items. These tax benefits were mostly related to a $258 million release of a valuation allowance recorded in 2016, the impact from changes in the federal tax rate and the release of shareholder liability taxes, partially offset by higher transition taxes. Our valuation allowance was reduced by $258 million principally related to the TCJA and from improvements in business performance, mostly in our U.S. mortgage insurance business, as well as lower operating earnings volatility in our U.S. life insurance businesses. Our Australian mortgage insurance business completed a review of the premium earnings pattern, as described above, which resulted in an unfavorable adjustment of $152 million, net of taxes and noncontrolling interests. A portion of this loss, $11 million, was recorded in Corporate and Other activities in connection with our allocation methodology for income taxes. We also completed our annual review of assumptions in our life insurance business in the fourth quarter of 2017, as described above, which resulted in a $74 million unfavorable adjustment, net of taxes, in our universal and term universal life insurance products.
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, beginning 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
(68)
 
 
 
 
 
 
(68)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
(413)
 
 
 
(615)
 
(615)
202 
Other comprehensive income (loss), net of taxes
(1,768)
 
 
(1,460)
 
 
(1,460)
(308)
Total comprehensive income (loss)
(2,181)
 
 
 
 
 
(2,075)
(106)
Dividends to noncontrolling interests
(157)
 
 
 
 
 
 
(157)
Stock-based compensation expense and exercises and other
20 
 
17 
 
 
 
17 
Balances, ending 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)
(67)
 
 
 
(277)
 
(277)
210 
Other comprehensive income (loss), net of taxes
91 
 
 
84 
 
 
84 
Total comprehensive income (loss)
24 
 
 
 
 
 
(193)
217 
Dividends to noncontrolling interests
(138)
 
 
 
 
 
 
(138)
Stock-based compensation expense and exercises and other
14 
 
13 
 
 
 
13 
Balances, ending at Dec. 31, 2016
14,467 
11,962 
3,094 
287 
(2,700)
12,644 
1,823 
Cumulative effect of change in accounting, net of taxes
 
 
 
 
 
Repurchase of subsidiary shares
(33)
 
 
 
 
 
 
(33)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
927 
 
 
 
817 
 
817 
110 
Other comprehensive income (loss), net of taxes
45 
 
 
(67)
 
 
(67)
112 
Total comprehensive income (loss)
972 
 
 
 
 
 
750 
222 
Dividends to noncontrolling interests
(107)
 
 
 
 
 
 
(107)
Stock-based compensation expense and exercises and other
20 
 
15 
 
 
 
15 
Balances, ending at Dec. 31, 2017
$ 15,328 
$ 1 
$ 11,977 
$ 3,027 
$ 1,113 
$ (2,700)
$ 13,418 
$ 1,910 
Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from (used by) operating activities:
 
 
 
Net income (loss)
$ 927 
$ (67)
$ (413)
Less loss from discontinued operations, net of taxes
29 
407 
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
 
(Gain) loss on sale of businesses
(26)
141 
Amortization of fixed maturity securities discounts and premiums and limited partnerships
(147)
(138)
(106)
Net investment (gains) losses
(265)
(72)
75 
Charges assessed to policyholders
(713)
(782)
(788)
Acquisition costs deferred
(88)
(150)
(293)
Amortization of deferred acquisition costs and intangibles
435 
498 
966 
Deferred income taxes
(368)
145 
(196)
Trading securities, held-for-sale investments and derivative instruments
703 
709 
(239)
Stock-based compensation expense
42 
32 
16 
Change in certain assets and liabilities:
 
 
 
Accrued investment income and other assets
30 
(358)
(106)
Insurance reserves
1,625 
1,315 
1,847 
Current tax liabilities
(4)
32 
(15)
Other liabilities, policy and contract claims and other policy-related balances
368 
685 
293 
Cash from operating activities-held for sale
Net cash from operating activities
2,554 
1,852 
1,591 
Cash flows used by investing activities:
 
 
 
Fixed maturity securities
4,766 
3,889 
4,541 
Commercial mortgage loans
579 
700 
882 
Restricted commercial mortgage loans related to securitization entities
22 
32 
41 
Proceeds from sales of investments:
 
 
 
Fixed maturity and equity securities
4,226 
5,629 
4,391 
Purchases and originations of investments:
 
 
 
Fixed maturity and equity securities
(8,888)
(11,529)
(9,750)
Commercial mortgage loans
(806)
(649)
(956)
Other invested assets, net
(701)
(154)
175 
Policy loans, net
48 
(77)
25 
Proceeds from sale of businesses, net of cash transferred
39 
273 
Payments for businesses purchased, net of cash acquired
(5)
Cash used by investing activities-held for sale
(26)
Net cash from (used by) investing activities
(759)
(2,120)
(404)
Cash flows used by financing activities:
 
 
 
Deposits to universal life and investment contracts
857 
1,349 
2,257 
Withdrawals from universal life and investment contracts
(2,397)
(2,004)
(2,144)
Redemption and repurchase of non-recourse funding obligations
(1,620)
(61)
Proceeds from issuance of long-term debt
150 
Repayment and repurchase of long-term debt
(362)
(120)
Repayment of borrowings related to securitization entities
(34)
(42)
(36)
Repurchase of subsidiary shares
(33)
(68)
Return of capital to noncontrolling interests
(70)
Dividends paid to noncontrolling interests
(107)
(138)
(157)
Proceeds from sale of subsidiary shares to noncontrolling interests
226 
Other, net
(54)
(44)
(98)
Cash from financing activities-held for sale
Net cash from (used by) financing activities
(1,768)
(2,931)
(42)
Effect of exchange rate changes on cash and cash equivalents (includes $-, $- and $(35) related to businesses held for sale
64 
(10)
(70)
Net change in cash and cash equivalents
91 
(3,209)
1,075 
Cash and cash equivalents at beginning of period
2,784 
5,993 
4,918 
Cash and cash equivalents at end of period
2,875 
2,784 
5,993 
Less cash and cash equivalents held for sale at end of period
28 
Cash and cash equivalents of continuing operations at end of period
$ 2,875 
$ 2,784 
$ 5,965 
Consolidated Statements of Cash Flows (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Effect of exchange rate changes on cash and cash equivalents related to businesses held for sale
$ 0 
$ 0 
$ (35)
Nature of Business and Formation of Genworth
Nature of Business and Formation of Genworth

(1) Nature of Business and Formation of Genworth

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth’s common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). 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’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction.

The accompanying financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or power to direct activities of certain variable interest entities (“VIEs”), which we refer to as “Genworth,” the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We operate our business through the following 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 have not been 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 (“FABNs”) and guaranteed investment contracts (“GICs”).

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. See note 24 for additional information related to discontinued operations.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

(2) Summary of Significant Accounting Policies

Our consolidated financial statements have been prepared on the basis of U.S. generally accepted accounting principles (“U.S. GAAP”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. Certain prior year amounts have been reclassified to conform to the current year presentation.

a) Premiums

For traditional long-duration insurance contracts, we report premiums as earned when due. For short-duration insurance contracts, we report premiums as revenue over the terms of the related insurance policies on a pro-rata basis or in proportion to expected claims.

For single premium mortgage insurance contracts, we report premiums over the estimated policy life in accordance with the expected pattern of risk emergence as further described in our accounting policy for unearned premiums. In addition, we have a practice of refunding the post-delinquent premiums in our U.S. mortgage insurance business to the insured party if the delinquent loan goes to claim. We record a liability for premiums received on the delinquent loans where our practice is to refund post-delinquent premiums.

Premiums received under annuity contracts without significant mortality risk and premiums received on investment and universal life insurance products are not reported as revenues but rather as deposits and are included in liabilities for policyholder account balances.

b) Net Investment Income and Net Investment Gains and Losses

Investment income is recognized when earned. Income or losses upon call or prepayment of available-for-sale fixed maturity securities is recognized in net investment income, except for hybrid securities where the income or loss upon call is recognized in net investment gains and losses. Investment gains and losses are calculated on the basis of specific identification on the trade date.

Investment income on mortgage-backed and asset-backed securities is initially based upon yield, cash flow and prepayment assumptions at the date of purchase. Subsequent revisions in those assumptions are recorded using the retrospective or prospective method. Under the retrospective method used for mortgage-backed and asset-backed securities of high credit quality (ratings equal to or greater than “AA” or that are backed by a U.S. agency) which cannot be contractually prepaid in such a manner that we would not recover a substantial portion of the initial investment, amortized cost of the security is adjusted to the amount that would have existed had the revised assumptions been in place at the date of purchase. The adjustments to amortized cost are recorded as a charge or credit to net investment income. Under the prospective method, which is used for all other mortgage-backed and asset-backed securities, future cash flows are estimated and interest income is recognized going forward using the new internal rate of return.

c) Policy Fees and Other Income

Policy fees and other income consists primarily of insurance charges assessed on universal and term universal life insurance contracts and fees assessed against customer account values. For universal and term universal life insurance contracts, charges to policyholder accounts for cost of insurance are recognized as revenue when due. Variable product fees are charged to variable annuity contractholders and variable life insurance policyholders based upon the daily net assets of the contractholder’s and policyholder’s account values and are recognized as revenue when charged. Policy surrender fees are recognized as income when the policy is surrendered.

d) Investment Securities

At the time of purchase, we designate our investment securities as either available-for-sale or trading and report them in our consolidated balance sheets at fair value. Our portfolio of fixed maturity securities comprises primarily investment grade securities. Changes in the fair value of available-for-sale investments, net of the effect on deferred acquisition costs (“DAC”), present value of future profits (“PVFP”), benefit reserves and deferred income taxes, are reflected as unrealized investment gains or losses in a separate component of accumulated other comprehensive income (loss). Realized and unrealized gains and losses related to trading securities are reflected in net investment gains (losses). Trading securities are included in other invested assets in our consolidated balance sheets and primarily represent fixed maturity securities where we utilized the fair value option.

Other-Than-Temporary Impairments On Available-For-Sale Securities

As of each balance sheet date, we evaluate securities in an unrealized loss position for other-than-temporary impairments. For debt securities, we consider all available information relevant to the collectability of the security, including information about past events, current conditions, and reasonable and supportable forecasts, when developing the estimate of cash flows expected to be collected. More specifically for mortgage-backed and asset-backed securities, we also utilize performance indicators of the underlying assets including default or delinquency rates, loan to collateral value ratios, third-party credit enhancements, current levels of subordination, vintage and other relevant characteristics of the security or underlying assets to develop our estimate of cash flows. Estimating the cash flows expected to be collected is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Where possible, this data is benchmarked against third-party sources.

We recognize other-than-temporary impairments on debt securities in an unrealized loss position when one of the following circumstances exists:

 

    we do not expect full recovery of our amortized cost basis when due,

 

    the present value of cash flows expected to be collected is less than our amortized cost basis,

 

    we intend to sell a security or

 

    it is more likely than not that we will be required to sell a security prior to recovery.

For other-than-temporary impairments recognized during the period, we present the total other-than-temporary impairments, the portion of other-than-temporary impairments included in other comprehensive income (loss) (“OCI”) and the net other-than-temporary impairments as supplemental disclosure presented on the face of our consolidated statements of income.

Total other-than-temporary impairments that emerged in the current period are calculated as the difference between the amortized cost and fair value. For other-than-temporarily impaired securities where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery, total other-than-temporary impairments are adjusted by the portion of other-than-temporary impairments recognized in OCI (“non-credit”). Net other-than-temporary impairments recorded in net income (loss) represent the credit loss on the other-than-temporarily impaired securities with the offset recognized as an adjustment to the amortized cost to determine the new amortized cost basis of the securities.

For securities that were deemed to be other-than-temporarily impaired and a non-credit loss was recorded in OCI, the amount recorded as an unrealized gain (loss) represents the difference between the current fair value and the new amortized cost for each period presented. The unrealized gain (loss) on an other-than-temporarily impaired security is recorded as a separate component in OCI until the security is sold or until we record an other-than-temporary impairment where we intend to sell the security or will be required to sell the security prior to recovery.

To estimate the amount of other-than-temporary impairment attributed to credit losses on debt securities where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery, we determine our best estimate of the present value of the cash flows expected to be collected from a security using the effective yield on the security prior to recording any other-than-temporary impairment. If the present value of the discounted cash flows is lower than the amortized cost of the security, the difference between the present value and amortized cost represents the credit loss associated with the security with the remaining difference between fair value and amortized cost recorded as a non-credit other-than-temporary impairment in OCI.

The evaluation of other-than-temporary impairments is subject to risks and uncertainties and is intended to determine the appropriate amount and timing for recognizing an impairment charge. The assessment of whether such impairment has occurred is based on management’s best estimate of the cash flows expected to be collected at the individual security level. We regularly monitor our investment portfolio to ensure that securities that may be other-than-temporarily impaired are identified in a timely manner and that any impairment charge is recognized in the proper period.

While the other-than-temporary impairment model for debt securities generally includes fixed maturity securities, there are certain hybrid securities that are classified as fixed maturity securities where the application of a debt impairment model depends on whether there has been any evidence of deterioration in credit of the issuer, such as a downgrade to below investment grade. Under certain circumstances, evidence of deterioration in credit of the issuer may result in the application of the equity securities impairment model.

For equity securities, we recognize an impairment charge in the period in which we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period on a security-by-security basis based upon consideration of all the evidence available to us, including the magnitude of an unrealized loss and its duration. In any event, this period does not exceed 15 months for common equity securities. We measure other-than-temporary impairments based upon the difference between the amortized cost of a security and its fair value.

e) Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value.

Fair value measurements are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. All assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

    Level 1—Quoted prices for identical instruments in active markets.

 

    Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

    Level 3—Instruments whose significant value drivers are unobservable.

Level 1 primarily consists of financial instruments whose value is based on quoted market prices such as actively traded equity securities and actively traded mutual fund investments.

Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. These models are primarily industry-standard models that consider various inputs, such as interest rate, credit spread and foreign exchange rates for the underlying financial instruments. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: certain public and private corporate fixed maturity and equity securities; government or agency securities; certain mortgage-backed and asset-backed securities; securities held as collateral; and certain non-exchange-traded derivatives such as interest rate or cross currency swaps.

Level 3 comprises financial instruments whose fair value is estimated based on industry-standard pricing methodologies and internally developed models utilizing significant inputs not based on, nor corroborated by, readily available market information. In certain instances, this category may also utilize non-binding broker quotes. This category primarily consists of certain less liquid fixed maturity, equity and trading securities and certain derivative instruments or embedded derivatives where we cannot corroborate the significant valuation inputs with market observable data.

As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability, such as the relative impact on the fair value as a result of including a particular input. We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. See note 16 for additional information related to fair value measurements.

f) Commercial Mortgage Loans

The carrying value of commercial mortgage loans is stated at original cost, net of principal payments, amortization and allowance for loan losses. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are deferred and amortized on an effective yield basis over the term of the loan. Commercial mortgage loans are considered past due when contractual payments have not been received from the borrower by the required payment date.

“Impaired” loans are defined by U.S. GAAP as loans for which it is probable that the lender will be unable to collect all amounts due according to original contractual terms of the loan agreement. In determining whether it is probable that we will be unable to collect all amounts due, we consider current payment status, debt service coverage ratios, occupancy levels and current loan-to-value. Impaired loans are carried on a non-accrual status. Loans are placed on non-accrual status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due. Income on impaired loans is not recognized until the loan is sold or the cash received exceeds the carrying amount recorded.

We evaluate the impairment of commercial mortgage loans first on an individual loan basis. If an individual loan is not deemed impaired, then we evaluate the remaining loans collectively to determine whether an impairment should be recorded.

For individually impaired loans, we record an impairment charge when it is probable that a loss has been incurred. The impairment is recorded as an increase in the allowance for loan losses. All losses of principal are charged to the allowance for loan losses in the period in which the loan is deemed to be uncollectible.

For loans that are not individually impaired where we evaluate the loans collectively, the allowance for loan losses is maintained at a level that we determine is adequate to absorb estimated probable incurred losses in the loan portfolio. Our process to determine the adequacy of the allowance utilizes an analytical model based on historical loss experience adjusted for current events, trends and economic conditions that would result in a loss in the loan portfolio over the next 12 months. Key inputs into our evaluation include debt service coverage ratios, loan-to-value, property-type, occupancy levels, geographic region, and probability weighting of the scenarios generated by the model. The actual amounts realized could differ in the near term from the amounts assumed in arriving at the allowance for loan losses reported in the consolidated financial statements. Additions and reductions to the allowance through periodic provisions or benefits are recorded in net investment gains (losses). See note 4 for additional disclosures related to commercial mortgage loans.

g) Repurchase Agreements

We previously had a repurchase program in which we sold an investment security at a specified price and agreed to repurchase that security at another specified price at a later date. Repurchase agreements were treated as collateralized financing transactions and were carried at the amounts at which the securities were subsequently reacquired, including accrued interest, as specified in the respective agreement. The market value of securities to be repurchased was monitored and collateral levels were adjusted where appropriate to protect the parties against credit exposure. Cash received was invested in fixed maturity securities. See note 12 for additional information related to our repurchase agreements.

h) Securities Lending Activity

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary. See note 12 for additional information related to our securities lending activity.

i) Cash and Cash Equivalents

Certificates of deposit, money market funds and other time deposits with original maturities of 90 days or less are considered cash equivalents in the consolidated balance sheets and consolidated statements of cash flows. Items with maturities greater than 90 days but less than one year at the time of acquisition are considered short-term investments.

j) Deferred Acquisition Costs

Acquisition costs include costs that are directly related to the successful acquisition of new or renewal insurance contracts. Acquisition costs are deferred and amortized to the extent they are recoverable from future profits.

Long-Duration Contracts. Acquisition costs include commissions in excess of ultimate renewal commissions and for contracts issued, certain other costs such as underwriting, medical inspection and issuance expenses. DAC for traditional long-duration insurance contracts, including term life and long-term care insurance, is amortized as a level percentage of premiums based on assumptions, including, investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured life expectancy or longevity, insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, established when the contract is issued. Amortization is adjusted each period to reflect actual lapse or termination rates.

Amortization for deferred annuity and universal life insurance contracts is based on expected gross profits. Expected gross profits are adjusted quarterly to reflect actual experience to date or for changes in underlying assumptions relating to future gross profits. Estimates of gross profits for DAC amortization are based on assumptions including interest rates, policyholder persistency or lapses, insured life expectancy or longevity and expenses.

We are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. These “shadow accounting” adjustments result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statement of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, based on changes in net unrealized investment (gains) losses, these shadow adjustments may reverse from period to period.

Therefore, DAC amortized based on expected gross-profits is adjusted to reflect the effects that would have been recognized had the unrealized investment (gains) losses been actually realized with a corresponding amount recorded in other comprehensive income (loss). DAC associated with traditional long-duration insurance contracts is not adjusted for unrealized investment (gains) or losses unless a premium deficiency would have resulted upon the (gain) or loss being realized.

Short-Duration Contracts. Acquisition costs primarily consist of commissions and premium taxes and are amortized ratably over the terms of the underlying policies.

We regularly review our assumptions and test DAC for recoverability at least annually. For deferred annuity and universal life insurance contracts, if the present value of expected future gross profits is less than the unamortized DAC for a line of business, a charge to income (loss) is recorded for additional DAC amortization. For traditional long-duration and short-duration contracts, if the benefit reserve plus anticipated future premiums and interest income for a line of business are less than the current estimate of future benefits and expenses (including any unamortized DAC), a charge to income (loss) is recorded for additional DAC amortization or for increased benefit reserves. See note 6 for additional information related to DAC including loss recognition and recoverability.

k) Intangible Assets

Present Value of Future Profits. In conjunction with the acquisition of a block of insurance policies or investment contracts, a portion of the purchase price is assigned to the right to receive future gross profits arising from existing insurance and investment contracts. This intangible asset, called PVFP, represents the actuarially estimated present value of future cash flows from the acquired policies. PVFP is amortized, net of accreted interest, in a manner similar to the amortization of DAC.

We regularly review our PVFP assumptions and periodically test PVFP for recoverability similar to our treatment of DAC. See note 7 for additional information related to PVFP including recoverability.

Deferred Sales Inducements to Contractholders. We defer sales inducements to contractholders for features on variable annuities that entitle the contractholder to an incremental amount to be credited to the account value upon making a deposit, and for fixed annuities with crediting rates higher than the contract’s expected ongoing crediting rates for periods after the inducement. Deferred sales inducements to contractholders are reported as a separate intangible asset and amortized in benefits and other changes in policy reserves using the same methodology and assumptions used to amortize DAC.

Other Intangible Assets. We amortize the costs of other intangibles over their estimated useful lives unless such lives are deemed indefinite. Amortizable intangible assets are tested for impairment based on undiscounted cash flows, which requires the use of estimates and judgment, and, if impaired, written down to fair value based on either discounted cash flows or appraised values. Intangible assets with indefinite lives are tested at least annually for impairment using a qualitative or quantitative assessment and are written down to fair value as required.

 

l) Goodwill

Goodwill is not amortized but is tested for impairment annually or between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The determination of fair value requires the use of estimates and judgment, at the “reporting unit” level. A reporting unit is the operating segment, or a business, one level below that operating segment (the “component” level) if discrete financial information is prepared and regularly reviewed by management at the component level. If the reporting unit’s fair value is below its carrying value, we must determine the amount of implied goodwill that would be established if the reporting unit was hypothetically purchased on the impairment assessment date. We recognize an impairment charge for any amount by which the carrying amount of a reporting unit’s goodwill exceeds the amount of implied goodwill. No goodwill impairment charges were recorded in 2017, 2016 or 2015.

m) Reinsurance

Premium revenue, benefits and acquisition and operating expenses, net of deferrals, are reported net of the amounts relating to reinsurance ceded to and assumed from other companies. Amounts due from reinsurers for incurred and estimated future claims are reflected in the reinsurance recoverable asset. Amounts received from reinsurers that represent recovery of acquisition costs are netted against DAC so that the net amount is capitalized. The cost of reinsurance is accounted for over the terms of the related treaties using assumptions consistent with those used to account for the underlying reinsured policies. Premium revenue, benefits and acquisition and operating expenses, net of deferrals, for reinsurance contracts that do not qualify for reinsurance accounting are accounted for under the deposit method of accounting.

n) Derivatives

Derivative instruments are used to manage risk through one of four principal risk management strategies including: (i) liabilities; (ii) invested assets; (iii) portfolios of assets or liabilities; and (iv) forecasted transactions.

On the date we enter into a derivative contract, management designates the derivative as a hedge of the identified exposure (cash flow or foreign currency). If a derivative does not qualify for hedge accounting, the changes in its fair value and all scheduled periodic settlement receipts and payments are reported in income (loss).

We formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. In this documentation, we specifically identify the asset, liability or forecasted transaction that has been designated as a hedged item, state how the hedging instrument is expected to hedge the risks related to the hedged item, and set forth the method that will be used to retrospectively and prospectively assess the hedging instrument’s effectiveness and the method that will be used to measure hedge ineffectiveness. We generally determine hedge effectiveness based on total changes in fair value of the hedged item attributable to the hedged risk and the total changes in fair value of the derivative instrument.

We discontinue hedge accounting prospectively when: (i) it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (ii) the derivative expires or is sold, terminated or exercised; (iii) the derivative is de-designated as a hedge instrument; or (iv) it is no longer probable that the forecasted transaction will occur.

 

For all qualifying and highly effective cash flow hedges, the effective portion of changes in fair value of the derivative instrument is reported as a component of OCI. The ineffective portion of changes in fair value of the derivative instrument is reported as a component of income (loss). When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative continues to be carried in the consolidated balance sheets at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in income (loss). When the hedged forecasted transaction is no longer probable, but is reasonably possible, the accumulated gain or loss remains in OCI and is recognized when the transaction affects income (loss); however, prospective hedge accounting for the transaction is terminated. In all other situations in which hedge accounting is discontinued on a cash flow hedge, amounts previously deferred in OCI are reclassified into income (loss) when income (loss) is impacted by the variability of the cash flow of the hedged item.

We may enter into contracts that are not themselves derivative instruments but contain embedded derivatives. For each contract, we assess whether the economic characteristics of the embedded derivative are clearly and closely related to those of the host contract and determine whether a separate instrument with the same terms as the embedded instrument would meet the definition of a derivative instrument.

If it is determined that the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and that a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract and accounted for as a stand-alone derivative. Such embedded derivatives are recorded in the consolidated balance sheets at fair value and are classified consistent with their host contract. Changes in their fair value are recognized in current period income (loss). If we are unable to properly identify and measure an embedded derivative for separation from its host contract, the entire contract is carried in the consolidated balance sheets at fair value, with changes in fair value recognized in current period income (loss).

Changes in the fair value of non-qualifying derivatives, including embedded derivatives and hedge ineffectiveness on cash flow hedges are reported in net investment gains (losses).

The majority of our derivative arrangements require the posting of collateral upon meeting certain net exposure thresholds. The amounts recognized for derivative counterparty collateral received by us was recorded in cash and cash equivalents with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us. We also receive non-cash collateral that is not recognized in our balance sheet unless we exercise our right to sell or re-pledge the underlying asset. As of December 31, 2017 and 2016, the fair value of non-cash collateral received was $70 million and $24 million, respectively, and the underlying assets were not sold or re-pledged. We have pledged $288 million and $384 million of fixed maturity securities as of December 31, 2017 and 2016, respectively. Additionally, as of December 31, 2017 and 2016, we pledged $59 million and $173 million, respectively, of cash as collateral to derivative counterparties. Fixed maturity securities that we pledge as collateral remain on our balance sheet within fixed maturity securities available-for-sale. Any cash collateral pledged to a derivative counterparty is derecognized with a receivable recorded in other assets for the right to receive our cash collateral back from the counterparty. Derivatives previously cleared through a Central Clearing Party, such as the Chicago Mercantile Exchange, required us to post cash collateral for daily changes in the fair value of the derivative contract, commonly referred to as variation margin. In the third quarter of 2017, recent central clearing parties rule changes impacted our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract.

 

o) Separate Accounts and Related Insurance Obligations

Separate account assets represent funds for which the investment income and investment gains and losses accrue directly to the contractholders and are reflected in our consolidated balance sheets at fair value, reported as summary total separate account assets with an equivalent summary total reported for liabilities. Amounts assessed against the contractholders for mortality, administrative and other services are included in revenues. Changes in liabilities for minimum guarantees are included in benefits and other changes in policy reserves. Net investment income, net investment gains (losses) and the related liability changes associated with the separate account are offset within the same line item in the consolidated statements of income. There were no gains or losses on transfers of assets from the general account to the separate account.

We offer certain minimum guarantees associated with our variable annuity contracts. Our variable annuity contracts usually contain a basic guaranteed minimum death benefit (“GMDB”) which provides a minimum benefit to be paid upon the annuitant’s death equal to the larger of account value and the return of net deposits. Some variable annuity contracts permit contractholders to purchase through riders, at an additional charge, enhanced death benefits such as the highest contract anniversary value (“ratchets”), accumulated net deposits at a stated rate (“rollups”), or combinations thereof.

Additionally, some of our variable annuity contracts provide the contractholder with living benefits such as a guaranteed minimum withdrawal benefit (“GMWB”) or certain types of guaranteed annuitization benefits. The GMWB allows contractholders to withdraw a pre-defined percentage of account value or benefit base each year, either for a specified period of time or for life. The guaranteed annuitization benefit generally provides for a guaranteed minimum level of income upon annuitization accompanied by the potential for upside market participation.

Most of our reserves for additional insurance and annuitization benefits are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future experience. The projections utilize stochastic scenarios of separate account returns incorporating reversion to the mean, as well as assumptions for mortality and lapses. Some of our minimum guarantees, mainly GMWBs, are accounted for as embedded derivatives; see notes 5 and 16 for additional information on these embedded derivatives and related fair value measurement disclosures.

p) Insurance Reserves

Future Policy Benefits

The liability for future policy benefits is equal to the present value of expected benefits and expenses less the present value of expected future net premiums based on assumptions, including, investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured life expectancy or longevity, insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses, all of which are locked-in at the time the policies are issued or acquired. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used.

The liability for future policy benefits is evaluated at least annually to determine if a premium deficiency exists. Loss recognition testing is generally performed at the line of business level, with acquired blocks and certain reinsured blocks tested separately. If the liability for future policy benefits plus the current present value of expected future premiums are less than the current present value of expected future benefits and expenses (including any unamortized DAC), a charge to income (loss) is recorded for accelerated DAC amortization and, if necessary, a premium deficiency reserve is established. If a charge is recorded, DAC amortization and the liability for future policy benefits are measured using updated assumptions, which become the new locked-in assumptions utilized going forward unless another premium deficiency charge is recorded. Our estimates of future premiums used in loss recognition testing for our long-term care insurance business include assumptions for significant premium rate increases that have been filed and approved or are anticipated to be approved. Estimates of future premiums also include significant anticipated (but not yet filed) future rate increases or benefit reductions. These anticipated future increases are based on our best estimate of the rate increases we expect to obtain, considering, among other factors, our historical experience from prior rate increase approvals and based on our best estimate of expected claim costs.

We are also required to accrue additional future policy benefit reserves when the overall reserve is adequate, but profits are projected in early periods followed by losses projected in later periods. When this pattern of profits followed by losses exists, we ratably accrue this additional profits followed by losses liability over time, increasing reserves in the profitable periods to offset estimated losses expected during the periods that follow. We calculate and adjust the additional reserves using our current best estimate of the amount necessary to offset the losses in future periods, based on the pattern of expected income and current best estimate assumptions consistent with our loss recognition testing. We adjust the accrual rate prospectively, going forward over the remaining profit periods, without any catch-up adjustment.

For long-term care insurance products, benefit reductions are treated as partial lapse of coverage with the balance of our future policy benefits and DAC both reduced in proportion to the reduced coverage. For level premium term life insurance products, we floor the liability for future policy benefits on each policy at zero.

Estimates and actuarial assumptions used for establishing the liability for future policy benefits and in loss recognition testing involve the exercise of significant judgment, and changes in assumptions or deviations of actual experience from assumptions can have material impacts on our liability for future policy benefits and net income (loss). Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition. The risk that our claims experience may differ significantly from our pricing and valuation assumptions is particularly significant for our long-term care insurance products. Long-term care insurance policies provide for long-duration coverage and, therefore, our actual claims experience will emerge over many years after pricing and locked-in valuation assumptions have been established.

Policyholder Account Balances

The liability for policyholder account balances represents the contract value that has accrued to the benefit of the policyholder as of the balance sheet date for investment-type and universal life insurance contracts. We are also required to establish additional benefit reserves for guarantees or product features in addition to the contract value where the additional benefit reserves are calculated by applying a benefit ratio to accumulated contractholder assessments, and then deducting accumulated paid claims. The benefit ratio is equal to the ratio of benefits to assessments, accumulated with interest and considering both past and anticipated future experience.

 

Investment-type contracts are broadly defined to include contracts without significant mortality or morbidity risk. Payments received from sales of investment contracts are recognized by providing a liability equal to the current account value of the policyholders’ contracts. Interest rates credited to investment contracts are guaranteed for the initial policy term with renewal rates determined as necessary by management.

q) Liability for Policy and Contract Claims

The liability for policy and contract claims, or claim reserves, represents the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. The estimated liability includes requirements for future payments of: (a) claims that have been reported to the insurer; (b) claims related to insured events that have occurred but that have not been reported to the insurer as of the date the liability is estimated; and (c) claim adjustment expenses. Claim adjustment expenses include costs incurred in the claim settlement process such as legal fees and costs to record, process and adjust claims.

Our liability for policy and contract claims is reviewed regularly, with changes in our estimates of future claims recorded through net income (loss). Estimates and actuarial assumptions used for establishing the liability for policy and contract claims involve the exercise of significant judgment, and changes in assumptions or deviations of actual experience from assumptions can have material impacts on our liability for policy and contract claims and net income (loss). Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition.

The liability for policy and contract claims for our long-term care insurance products represents the present value of the amount needed to provide for the estimated ultimate cost of settling claims relating to insured events that have occurred on or before the end of the respective reporting period. Key assumptions include investment returns, health care experience (including type of care and cost of care), policyholder persistency or lapses (i.e., the probability that a policy or contract will remain in-force from one period to the next), insured mortality (i.e., life expectancy or longevity), insured morbidity (i.e., frequency and severity of claim, including claim termination rates and benefit utilization rates) and expenses. Claim termination rates refer to the expected rates at which claims end. Benefit utilization rates estimate how much of the available policy benefits are expected to be used. Both claim termination rates and benefit utilization rates are influenced by, among other things, gender, age at claim, diagnosis, type of care needed, benefit period, and daily benefit amount. Because these assumptions relate to factors that are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. Small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our reserves, results of operations and financial condition.

The liabilities for our mortgage insurance policies represent our best estimates of the liabilities at the time based on known facts, trends and other external factors, including economic conditions, housing prices and employment rates. For our mortgage insurance policies, reserves for losses and loss adjustment expenses are based on notices of mortgage loan defaults and estimates of defaults that have been incurred but have not been reported by loan servicers, using assumptions of claim rates for loans in default and the average amount paid for loans that result in a claim. As is common accounting practice in the mortgage insurance industry and in accordance with U.S. GAAP, we begin to provide for the ultimate claim payment relating to a potential claim on a defaulted loan when the status of that loan first goes delinquent. Over time, as the status of the underlying delinquent loans move toward foreclosure and the likelihood of the associated claim loss increases, the amount of the loss reserves associated with the potential claims may also increase.

Management considers the liability for policy and contract claims provided to be its best estimate to cover the losses that have occurred. Management monitors actual experience, and where circumstances warrant, will revise its assumptions. The methods of determining such estimates and establishing the reserves are reviewed periodically and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses greater or less than the liability for policy and contract claims provided.

r) Unearned Premiums

For single premium insurance contracts, we recognize premiums over the policy life in accordance with the expected pattern of risk emergence. We recognize a portion of the revenue in premiums earned in the current period, while the remaining portion is deferred as unearned premiums and earned over time in accordance with the expected pattern of risk emergence. If single premium policies are cancelled and the premium is non-refundable, then the remaining unearned premium related to each cancelled policy is recognized to earned premiums upon notification of the cancellation. Expected pattern of risk emergence on which we base premium recognition is inherently judgmental and is based on actuarial analysis of historical experience. We periodically review our premium earnings recognition models with any adjustments to the estimates reflected as a cumulative adjustment in current period income (loss). For the years ended December 31, 2017, 2016 and 2015, we reviewed our premium recognition factors for our mortgage insurance businesses. These reviews included the consideration of recent and projected loss experience, policy cancellation experience and refinement of actuarial methods. In 2017, adjustments associated with this review resulted in a decrease in earned premiums of $468 million in our Australian mortgage insurance business. In 2016, we did not have any adjustments associated with this review. In 2015, adjustments associated with this review resulted in an increase in earned premiums of $8 million primarily in our Australian mortgage insurance business.

s) Stock-Based Compensation

We determine a grant date fair value and recognize the related compensation expense, adjusted for expected forfeitures, through the income statement over the respective vesting period of the awards.

t) Employee Benefit Plans

We provide employees with a defined contribution pension plan and recognize expense throughout the year based on the employee’s age, service and eligible pay. We make an annual contribution to the plan. We also provide employees with defined contribution savings plans. We recognize expense for our contributions to the savings plans at the time employees make contributions to the plans.

Some employees participate in defined benefit pension and postretirement benefit plans. We recognize expense for these plans based upon actuarial valuations performed by external experts. We estimate aggregate benefits by using assumptions for employee turnover, future compensation increases, rates of return on pension plan assets and future health care costs. We recognize an expense for differences between actual experience and estimates over the average future service period of participants. We recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in our consolidated balance sheets and recognize changes in that funded status in the year in which the changes occur through OCI.

 

u) Income Taxes

We determine deferred tax assets and/or liabilities by multiplying the differences between the financial reporting and tax reporting bases for assets and liabilities by the enacted tax rates expected to be in effect when such differences are recovered or settled if there is no change in law. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances on deferred tax assets are estimated based on our assessment of the realizability of such amounts.

Under U.S. GAAP, we are generally required to record U.S. deferred taxes on the anticipated repatriation of foreign income as the income is recognized for financial reporting purposes. An exception under certain accounting guidance permits us not to record a U.S. deferred tax liability for foreign income that we expect to reinvest in our foreign operations and for which remittance will be postponed indefinitely. If it becomes apparent that we cannot positively assert that some or all undistributed income will be reinvested indefinitely, the related deferred taxes are recorded in that period. In determining indefinite reinvestment, we regularly evaluate the capital needs of our domestic and foreign operations considering all available information, including operating and capital plans, regulatory capital requirements, parent company financing and cash flow needs, as well as the applicable tax laws to which our domestic and foreign subsidiaries are subject. Our estimates are based on our historical experience and our expectation of future performance. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future capital needs, which are impacted by such things as regulatory requirements, policyholder behavior, competitor pricing, new product introductions, and specific industry and market conditions.

Similarly, under another exception to the recognition of deferred taxes under U.S. GAAP, we do not record deferred taxes on U.S. domestic subsidiary entities for the excess of the financial statement carrying amount over the tax basis in the stock of the subsidiary (commonly referred to as “outside basis difference”) if we have the ability under the tax law and intent to recover the basis difference in a tax free manner. Deferred taxes would be recognized in the period of a change to our ability or intent.

On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was signed into law. In connection with the new mandatory repatriation provisions within the TCJA, we recorded a favorable adjustment to our deferred tax liability of $127 million on the outside basis difference of our foreign subsidiaries which reduced our liability to zero as of December 31, 2017. This favorable impact was partially offset by higher taxes of $63 million associated with accumulated post-1986 deferred foreign income that was not previously taxed (“transition tax”).

Our companies have elected to file a single U.S. consolidated income tax return (the “life/non-life consolidated return”). All companies domesticated in the United States and our former Bermuda and Guernsey subsidiaries, which have elected to be taxed as U.S. domestic companies, are included in the life/non-life consolidated return as allowed by the tax law and regulations. We have a tax sharing agreement (the “life/non-life tax sharing agreement”) in place and all intercompany balances related to this agreement are settled at least annually.

v) Foreign Currency Translation

The determination of the functional currency is made based on the appropriate economic and management indicators. The assets and liabilities of foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Translation adjustments are included as a separate component of accumulated other comprehensive income (loss). Revenues and expenses of the foreign operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. Gains and losses from foreign currency transactions are reported in income (loss) and have not been material in any years presented in our consolidated statements of income.

w) Variable Interest Entities

We are involved in certain entities that are considered VIEs as defined under U.S. GAAP, and, accordingly, we evaluate the VIE to determine whether we are the primary beneficiary and are required to consolidate the assets and liabilities of the entity. The primary beneficiary of a VIE is the enterprise that has the power to direct the activities of a VIE that most significantly impacts the VIE’s economic performance and has the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. The determination of the primary beneficiary for a VIE can be complex and requires management judgment regarding the expected results of the entity and how those results are absorbed by variable interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIEs.

Our primary involvement related to VIEs includes securitization transactions, certain investments and certain mortgage insurance policies.

We have retained interests in VIEs where we are the servicer and transferor of certain assets that were sold to a newly created VIE. Additionally, for certain securitization transactions, we were the transferor of certain assets that were sold to a newly created VIE but did not retain any beneficial interest in the VIE other than acting as the servicer of the underlying assets.

We hold investments in certain structures that are considered VIEs. Our investments represent beneficial interests that are primarily in the form of structured securities or alternative investments. Our involvement in these structures typically represent a passive investment in the returns generated by the VIE and typically do not result in having significant influence over the economic performance of the VIE.

We also provide mortgage insurance on certain residential mortgage loans originated and securitized by third parties using VIEs to issue mortgage-backed securities. While we provide mortgage insurance on the underlying loans, we do not typically have any ongoing involvement with the VIE other than our mortgage insurance coverage and do not act in a servicing capacity for the underlying loans held by the VIE.

See note 17 for additional information related to these consolidated entities.

x) Accounting Changes

Simplified Share-Based Payment Transactions

On January 1, 2017, we adopted new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.

Transition to the Equity Method of Accounting

On January 1, 2017, we adopted new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. We did not have a significant impact from this guidance on our consolidated financial statements.

Assessment of Contingent Put and Call Options

On January 1, 2017, we adopted new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. This guidance is consistent with our previous accounting practices and, accordingly, did not have any impact on our consolidated financial statements.

Derivative Contract Novations

On January 1, 2017, we adopted new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, did not have any impact on our consolidated financial statements.

Short-Duration Contracts

On December 31, 2016, we adopted new disclosure requirements for short-duration insurance contracts. The new guidance requires additional disclosures on short-duration policy and contract claims liabilities for incurred and paid claims development, unpaid claims and claims frequency. This new guidance did not have any impact on our consolidated financial statements but did impact our disclosures. See note 10 for more information related to our short-duration contracts.

Technical Corrections and Improvements

In March 2016, the Financial Accounting Standards Board (“the FASB”) issued new guidance to remove inconsistencies as well as make technical clarifications and minor improvements intended to make it easier to understand and implement certain accounting guidance. Impacts of the new guidance for us includes: promoting consistent use of the terms “participating insurance” and “reinsurance recoverable,” removing the term “debt” from the master glossary; adding a reference to use when accounting for internal-use software licensed from third parties; clarifying that loans issued under the Federal Housing Administration and the Veterans Administration do not have to be fully insured by those programs to recognize profit using the full-accrual method; clarifying the difference between a “valuation approach” and a “valuation technique” when applying fair value guidance and require disclosure when there has been a change in either a valuation approach, a valuation technique, or both; clarifying that for an amount of an obligation under an arrangement to be considered fixed at the reporting date, the amount that must be fixed is not the amount that is the organization’s portion of the obligation, but, rather, is the obligation in its entirety; and adding guidance on the accounting for the sale of servicing rights when the transferor retains loans. Most of the amendments were adopted on December 31, 2016 and in some cases on January 1, 2017, using a prospective method. We did not have any significant impact from this guidance on our consolidated financial statements.

Consolidation

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 significant impact on our consolidated financial statements.

Debt Issuance Costs

On December 31, 2015, we early adopted new accounting guidance related to the presentation of debt issuance costs. The new guidance requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance was applied on a retrospective basis. We also adopted new guidance that allows debt issuance costs related to revolving credit facilities to be presented as either an asset or as a direct deduction from the carrying amount of that debt liability. We elected to continue to present debt issuance costs related to revolving credit facilities in other assets in our consolidated balance sheet. See note 12 for more information related to our long-term debt and non-recourse funding obligations.

Financial Assets and Liabilities of a Collateralized Financing Entity

On January 1, 2015, we early adopted new accounting guidance related to measuring the financial assets and financial liabilities of a consolidated collateralized financing entity. The guidance addresses the accounting for the measurement difference between the fair value of financial assets and the fair value of financial liabilities of a collateralized financing entity. The new guidance provides an alternative whereby a reporting entity could measure the financial assets and financial liabilities of the collateralized financing entity in its consolidated financial statements using the more observable of the fair values. There was no impact on our consolidated financial statements.

Repurchase Financings

On January 1, 2015, we adopted new accounting guidance related to the accounting for repurchase-to-maturity transactions and repurchase financings. The new guidance changed the accounting for repurchase-to-maturity transactions and repurchase financing such that they were consistent with secured borrowing accounting. In addition, the guidance required new disclosures for all repurchase agreements and securities lending transactions which were effective beginning in the second quarter of 2015. We do not have repurchase-to-maturity transactions, but have repurchase agreements and securities lending transactions that are subject to additional disclosures. This new guidance did not have an impact on our consolidated financial statements but did impact our disclosures.

Investments In Affordable Housing Projects

On January 1, 2015, we adopted new accounting guidance related to the accounting for investments in affordable housing projects that qualify for the low-income housing tax credit. The new guidance permits reporting entities to make an accounting policy election to account for investments in qualified affordable housing projects by amortizing the initial cost of the investment in proportion to the tax benefits received and recognize the net investment performance as a component of income tax expense (called the proportional amortization method) if certain conditions are met. The new guidance requires use of the equity method or cost method for investments in qualified affordable housing projects not accounted for using the proportional amortization method. The adoption of this new guidance did not have a significant impact on our consolidated financial statements.

Share-Based Payment Awards

On January 1, 2015, we early adopted new accounting guidance related to the accounting for share-based payment awards when the terms of an award provide that a performance target can be achieved after the requisite service period. The guidance requires that such performance targets should not be reflected in estimating the grant-date fair value of an award, and that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved. We have performance stock unit grants where awards for employees who are retirement eligible can vest on a pro-rata basis upon retirement even if retirement occurs before the performance target is achieved. There was no impact on our consolidated financial statements from the adoption of this accounting guidance.

y) Accounting Pronouncements Not Yet Adopted

In February 2018, the FASB issued new guidance on the tax effects currently recorded in accumulated other comprehensive income that do not reflect the new tax rate enacted under the TCJA, or “stranded tax effects.” Under current U.S. GAAP, deferred tax assets and liabilities are adjusted for the effect of a change in tax laws or rates with the effect included in income (loss) from continuing operations in the period that the changes were enacted. This also includes situations in which the related tax effects were originally recognized in other comprehensive income as opposed to income (loss) from continuing operations. Under this new accounting guidance a reclassification from accumulated other comprehensive income to retained earnings, or a modified retrospective approach, is allowed for stranded tax effects that resulted from the TCJA. This new guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are currently evaluating early adoption of this new accounting guidance.

In August 2017, the FASB issued new guidance to amend the hedge accounting model to enable entities to better portray the economics of their derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain situations, the amendments also simplify the application of hedge accounting. We adopted this new accounting guidance early on January 1, 2018 using the modified retrospective method and will record a previously recognized gain of $2 million to accumulated other comprehensive income with a corresponding decrease to retained earnings at adoption.

In May 2017, the FASB issued new guidance to clarify when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if there are changes to the fair value, vesting conditions or classification as a liability or equity of the share-based compensation. We adopted this new accounting guidance prospectively on January 1, 2018 and therefore, the guidance did not have any impact at adoption.

In March 2017, the FASB issued new guidance shortening the amortization period of certain callable debt securities held at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us on January 1, 2019 using the modified retrospective method, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In February 2017, the FASB issued new guidance to clarify the scope and accounting for gains and losses from the derecognition of nonfinancial assets or an in substance nonfinancial asset that is not a business and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control. We adopted this new accounting guidance on January 1, 2018 using the modified retrospective method, which did not have any significant impact on our consolidated financial statements at adoption.

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance states goodwill impairment is equal to the difference between the carrying value and fair value of the reporting unit up to the amount of recorded goodwill. The new guidance is currently effective for us on January 1, 2020, with early adoption permitted for testing dates after January 1, 2017. We plan to early adopt this new accounting guidance prospectively starting with our 2018 goodwill impairment test.

In November 2016, the FASB issued new accounting guidance related to the classification and presentation of changes in restricted cash. The new guidance requires that changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents be shown in the statement of cash flows and requires additional disclosures related to restricted cash and restricted cash equivalents. We adopted this new accounting guidance retrospectively on January 1, 2018, and will modify the line item descriptions on our consolidated balance sheet and statement of cash flows in our first quarter 2018 consolidated financial statements filed on Form 10-Q. The other impacts from this new accounting guidance did not have a significant impact on our consolidated financial statements or disclosures.

In October 2016, the FASB issued new guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. We adopted this new accounting guidance on January 1, 2018 using the modified retrospective method, which did not have any significant impact on our consolidated financial statements or disclosures at adoption.

In August 2016, 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. We adopted this new accounting guidance retrospectively on January 1, 2018. Upon adoption, we will reclassify a $20 million make-whole premium that was incurred in the first quarter of 2016 previously included in the operating activities section of the statement of cash flows, within the line item “other liabilities, policy and contract claims and other policy-related balances” to the financing activities section within the line item “repayment and repurchase of long-term debt” in our 2018 annual consolidated financial statements filed on Form 10-K. The reclassification will result in an increase in net cash used by financing activities and an increase in net cash from operating activities. The remaining specific cash flow issues did not have a significant impact 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, the modified retrospective method will be used and a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded. We are in process of evaluating the impact the guidance may have 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 using the modified retrospective method, with early adoption permitted. While we are still evaluating the full impact, at this time we do not expect any significant impact from this guidance on our consolidated financial statements.

In January 2016, the FASB issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to the current financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in net income (loss). The new guidance also clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with other deferred tax assets. We adopted this new accounting guidance on January 1, 2018 using the modified retrospective method and will reclassify, before any adjustments for DAC and other intangible amortization and certain benefit reserves and taxes, $65 million of gains related to equity securities from accumulated other comprehensive income and $22 million of gains related to limited partnerships previously recorded at cost to cumulative effect of change in accounting within retained earnings.

In May 2014, the FASB issued new accounting guidance related to revenue from contracts with customers, which was adopted by us on January 1, 2018 using the modified retrospective method. The key principle of the new guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. Insurance contracts are specifically excluded from this new guidance. The FASB has clarified the scope that all of our insurance contracts, including mortgage insurance and investment contracts are excluded from the scope of this new guidance. We have evaluated our in scope revenues and, as of the adoption date, have no change in our revenue recognition timing or measurement. Accordingly, we did not have any significant impact to our consolidated financial statements upon adoption of this new accounting guidance.

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 years ended December 31:

 

(Amounts in millions, except per share amounts)

   2017     2016     2015  

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

     499.0     498.3     497.4

Potentially dilutive securities:

      

Stock options, restricted stock units and stock appreciation rights

     2.4     —       —  
  

 

 

   

 

 

   

 

 

 

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

     501.4     498.3     497.4
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations:

      

Income (loss) from continuing operations

   $ 936   $ (38   $ (6

Less: income from continuing operations attributable to noncontrolling interests

     110     210     202
  

 

 

   

 

 

   

 

 

 

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

   $ 826   $ (248   $ (208
  

 

 

   

 

 

   

 

 

 

Basic per share

   $ 1.66   $ (0.50   $ (0.42
  

 

 

   

 

 

   

 

 

 

Diluted per share

   $ 1.65   $ (0.50   $ (0.42
  

 

 

   

 

 

   

 

 

 

Loss from discontinued operations:

      

Loss from discontinued operations, net of taxes

   $ (9   $ (29   $ (407

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

     —       —       —  
  

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders

   $ (9   $ (29   $ (407
  

 

 

   

 

 

   

 

 

 

Basic per share

   $ (0.02   $ (0.06   $ (0.82
  

 

 

   

 

 

   

 

 

 

Diluted per share

   $ (0.02   $ (0.06   $ (0.82
  

 

 

   

 

 

   

 

 

 

Net income (loss):

      

Income (loss) from continuing operations

   $ 936   $ (38   $ (6

Loss from discontinued operations, net of taxes

     (9     (29     (407
  

 

 

   

 

 

   

 

 

 

Net income (loss)

     927     (67     (413

Less: net income attributable to noncontrolling interests

     110     210     202
  

 

 

   

 

 

   

 

 

 

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

   $ 817   $ (277   $ (615
  

 

 

   

 

 

   

 

 

 

Basic per share

   $ 1.64   $ (0.56   $ (1.24
  

 

 

   

 

 

   

 

 

 

Diluted per share

   $ 1.63   $ (0.56   $ (1.24
  

 

 

   

 

 

   

 

 

 

 

(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 years ended December 31, 2016 and 2015, we were required to use basic weighted-average common shares outstanding as the inclusion of shares for stock options, restricted stock units (“RSUs”) and stock appreciation rights (“SARs”) of 2.0 million and 1.6 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 years ended December 31, 2016 and 2015, dilutive potential weighted-average common shares outstanding would have been 500.3 million and 499.0 million, respectively.
Investments
Investments

(4) Investments

(a) Net Investment Income

Sources of net investment income were as follows for the years ended December 31:

 

(Amounts in millions)

  2017     2016     2015  

Fixed maturity securities—taxable

  $ 2,578   $ 2,565   $ 2,558

Fixed maturity securities—non-taxable

    12     12     12

Commercial mortgage loans

    306     318     337

Restricted commercial mortgage loans related to securitization entities (1)

    9     10     14

Equity securities

    36     28     15

Other invested assets (2)

    157     141     135

Restricted other invested assets related to securitization entities (1)

    1     3     5

Policy loans

    153     146     137

Cash, cash equivalents and short-term investments

    36     20     13
 

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

    3,288     3,243     3,226

Expenses and fees

    (88     (84     (88
 

 

 

   

 

 

   

 

 

 

Net investment income

  $ 3,200   $ 3,159   $ 3,138
 

 

 

   

 

 

   

 

 

 

 

(1)  See note 17 for additional information related to consolidated securitization entities.
(2)  Included in other invested assets was $2 million, $11 million and $9 million of net investment income related to trading securities for the years ended December 31, 2017, 2016 and 2015, respectively.

(b) Net Investment Gains (Losses)

The following table sets forth net investment gains (losses) for the years ended December 31:

 

(Amounts in millions)

   2017     2016     2015  

Available-for-sale securities:

      

Realized gains

   $ 229   $ 249   $ 102

Realized losses

     (66     (121     (82
  

 

 

   

 

 

   

 

 

 

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

     163     128     20
  

 

 

   

 

 

   

 

 

 

Impairments:

      

Total other-than-temporary impairments

     (6     (40     (28

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

     —       —       1
  

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (6     (40     (27
  

 

 

   

 

 

   

 

 

 

Trading securities

     1     10     (7

Commercial mortgage loans

     3     1     7

Net gains (losses) related to securitization entities (1)

     7     (50     5

Derivative instruments (2)

     97     20     (76

Contingent consideration adjustment

     —       (2     2

Other

     —       5     1
  

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 265   $ 72   $ (75
  

 

 

   

 

 

   

 

 

 

 

(1)  See note 17 for additional information related to consolidated securitization entities.
(2)  See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield, and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the years ended December 31, 2017, 2016 and 2015 was $2,023 million, $1,881 million and $1,827 million, respectively, which was approximately 97%, 95% and 96%, 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 OCI as of and for the years ended December 31:

 

(Amounts in millions)

   2017      2016      2015  

Beginning balance

   $ 42    $ 64    $ 83

Additions:

        

Other-than-temporary impairments not previously recognized

     —        1      —  

Reductions:

        

Securities sold, paid down or disposed

     (10      (23      (19
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 32    $ 42    $ 64
  

 

 

    

 

 

    

 

 

 

(c) Unrealized Investment Gains and Losses

Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of December 31:

 

(Amounts in millions)

   2017      2016      2015  

Net unrealized gains (losses) on investment securities:

        

Fixed maturity securities

   $ 5,125    $ 3,656    $ 3,140

Equity securities

     69      12      (10
  

 

 

    

 

 

    

 

 

 

Subtotal (1)

     5,194      3,668      3,130

Adjustments to DAC, PVFP, sales inducements and benefit reserves

     (3,451      (1,611      (1,070

Income taxes, net

     (583      (711      (711
  

 

 

    

 

 

    

 

 

 

Net unrealized investment gains (losses)

     1,160      1,346      1,349

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

     75      84      95
  

 

 

    

 

 

    

 

 

 

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

   $ 1,085    $ 1,262    $ 1,254
  

 

 

    

 

 

    

 

 

 

 

(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 years ended December 31:

 

(Amounts in millions)

   2017      2016      2015  

Beginning balance

   $ 1,262    $ 1,254    $ 2,453

Unrealized gains (losses) arising during the period:

        

Unrealized gains (losses) on investment securities

     1,683      626      (2,467

Adjustment to DAC (1)

Adjustment to PVFP

    

(1,000

(33


    

(499

(5


    

177

89


Adjustment to sales inducements

     (4      (16      30

Adjustment to benefit reserves

     (803      (21      290

Provision for income taxes

     73      (31      663
  

 

 

    

 

 

    

 

 

 

Change in unrealized gains (losses) on investment securities

     (84      54      (1,218

Reclassification adjustments to net investment (gains) losses, net of taxes of $55, $31 and $(2)

     (102      (57      5
  

 

 

    

 

 

    

 

 

 

Change in net unrealized investment gains (losses)

     (186      (3      (1,213

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

     (9      (11      (14
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 1,085    $ 1,262    $ 1,254
  

 

 

    

 

 

    

 

 

 

 

(1)  See note 6 for additional information.

 

(d) Fixed Maturity and Equity Securities

As of December 31, 2017, 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

  $ 4,681   $ 870   $ —       $ (3   $ —       $ 5,548

State and political subdivisions

    2,678     270     —         (22     —         2,926

Non-U.S. government

    2,147     106     —         (20     —         2,233

U.S. corporate:

           

Utilities

    4,396     611     —         (9     —         4,998

Energy

    2,239     227     —         (8     —         2,458

Finance and insurance

    5,984     556     —         (12     —         6,528

Consumer—non-cyclical

    4,314     530     —         (13     —         4,831

Technology and communications

    2,665     192     —         (12     —         2,845

Industrial

    1,241     106     —         (1     —         1,346

Capital goods

    2,087     273     —         (5     —         2,355

Consumer—cyclical

    1,493     116     —         (4     —         1,605

Transportation

    1,160     134     —         (3     —         1,291

Other

    355     25     —         (1     —         379
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    25,934     2,770     —         (68     —         28,636
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    979     42     —         (4     —         1,017

Energy

    1,337     158     —         (5     —         1,490

Finance and insurance

    2,567     174     —         (6     —         2,735

Consumer—non-cyclical

    686     30     —         (4     —         712

Technology and communications

    913     71     —         (2     —         982

Industrial

    958     88     —         (2     —         1,044

Capital goods

    614     33     —         (2     —         645

Consumer—cyclical

    532     9     —         (1     —         540

Transportation

    656     68     —         (3     —         721

Other

    2,536     193     —         (4     —         2,725
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,778     866     —         (33     —         12,611
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    3,831     223     14     (11     —         4,057

Commercial mortgage-backed

    3,387     94     2     (37     —         3,446

Other asset-backed

    3,056     17     1     (6     —         3,068
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,492     5,216     17     (200     —         62,525

Equity securities

    756     72     —         (8     —         820
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 58,248   $ 5,288   $ 17   $ (208   $ —       $ 63,345
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

As of December 31, 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

  $ 5,439   $ 647   $ —       $ (50   $ —       $ 6,036

State and political subdivisions

    2,515     182     —         (50     —         2,647

Non-U.S. government

    2,024     101     —         (18     —         2,107

U.S. corporate:

           

Utilities

    4,137     454     —         (41     —         4,550

Energy

    2,167     157     —         (24     —         2,300

Finance and insurance

    5,719     424     —         (46     —         6,097

Consumer—non-cyclical

    4,335     433     —         (34     —         4,734

Technology and communications

    2,473     157     —         (32     —         2,598

Industrial

    1,161     76     —         (14     —         1,223

Capital goods

    2,043     228     —         (13     —         2,258

Consumer—cyclical

    1,455     92     —         (17     —         1,530

Transportation

    1,121     86     —         (17     —         1,190

Other

    332     17     —         (1     —         348
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    24,943     2,124     —         (239     —         26,828
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    940     40     —         (11     —         969

Energy

    1,234     109     —         (12     —         1,331

Finance and insurance

    2,413     134     —         (9     —         2,538

Consumer—non-cyclical

    711     17     —         (14     —         714

Technology and communications

    953     44     —         (10     —         987

Industrial

    928     39     —         (9     —         958

Capital goods

    518     21     —         (4     —         535

Consumer—cyclical

    434     10     —         (2     —         442

Transportation

    619     65     —         (7     —         677

Other

    2,967     190     —         (13     —         3,144
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,717     669     —         (91     —         12,295
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,122     259     10     (12     —         4,379

Commercial mortgage-backed

    3,084     98     3     (56     —         3,129

Other asset-backed

    3,170     15     1     (35     —         3,151
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,014     4,095     14     (551     —         60,572

Equity securities

    628     31     —         (27     —         632
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 57,642   $ 4,126   $ 14   $ (578   $ —       $ 61,204
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2017:

 

    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

  $ 78   $ (1     21   $ 94   $ (2     7   $ 172   $ (3     28

State and political subdivisions

    125     (1     35     327     (21     42     452     (22     77

Non-U.S. government

    583     (7     26     239     (13     20     822     (20     46

U.S. corporate

    1,871     (26     296     1,347     (42     190     3,218     (68     486

Non-U.S. corporate

    1,323     (12     217     548     (21     77     1,871     (33     294

Residential mortgage-backed

    707     (7     81     130     (4     46     837     (11     127

Commercial mortgage-backed

    476     (4     69     646     (33     90     1,122     (37     159

Other asset-backed

    853     (4     160     230     (2     57     1,083     (6     217
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    6,016     (62     905     3,561     (138     529     9,577     (200     1,434

Equity securities

    74     (3     134     100     (5     58     174     (8     192
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 6,090   $ (65     1,039   $ 3,661   $ (143     587   $ 9,751   $ (208     1,626
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 6,016   $ (62     905   $ 3,555   $ (136     526   $ 9,571   $ (198     1,431

20%-50% Below cost

    —       —       —       6     (2     3     6     (2     3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    6,016     (62     905     3,561     (138     529     9,577     (200     1,434
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    74     (3     134     100     (5     58     174     (8     192
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    74     (3     134     100     (5     58     174     (8     192
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 6,090   $ (65     1,039   $ 3,661   $ (143     587   $ 9,751   $ (208     1,626
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 5,867   $ (55     898   $ 3,488   $ (135     528   $ 9,355   $ (190     1,426

Below investment grade

    223     (10     141     173     (8     59     396     (18     200
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 6,090   $ (65     1,039   $ 3,661   $ (143     587   $ 9,751   $ (208     1,626
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2017:

 

    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

  $ 181   $ (2     33   $ 219   $ (7     36   $ 400   $ (9     69

Energy

    106     (1     22     140     (7     15     246     (8     37

Finance and insurance

    626     (6     91     222     (6     30     848     (12     121

Consumer—non-cyclical

    299     (7     46     221     (6     31     520     (13     77

Technology and

                 

communications

    217     (4     32     210     (8     29     427     (12     61

Industrial

    —       —       —       62     (1     9     62     (1     9

Capital goods

    176     (2     25     81     (3     14     257     (5     39

Consumer—cyclical

    137     (2     24     95     (2     13     232     (4     37

Transportation

    117     (1     21     97     (2     13     214     (3     34

Other

    12     (1     2     —       —       —       12     (1     2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    1,871     (26     296     1,347     (42     190     3,218     (68     486
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    113     (1     23     72     (3     8     185     (4     31

Energy

    118     (2     19     74     (3     12     192     (5     31

Finance and insurance

    347     (3     56     117     (3     19     464     (6     75

Consumer—non-cyclical

    69     (1     11     60     (3     6     129     (4     17

Technology and

                 

communications

    107     (1     18     30     (1     6     137     (2     24

Industrial

    52     —       9     38     (2     5     90     (2     14

Capital goods

    54     —       11     46     (2     3     100     (2     14

Consumer—cyclical

    131     (1     21     —       —       —       131     (1     21

Transportation

    47     (1     7     64     (2     8     111     (3     15

Other

    285     (2     42     47     (2     10     332     (4     52
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    1,323     (12     217     548     (21     77     1,871     (33     294
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 3,194   $ (38     513   $ 1,895   $ (63     267   $ 5,089   $ (101     780
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 the increase in interest rates, 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 1% as of December 31, 2017.

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

Of the $136 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 “A+” and approximately 95% of the unrealized losses were related to investment grade securities as of December 31, 2017. The average fair value percentage below cost for these securities was approximately 4% as of December 31, 2017. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment and commercial mortgage-backed securities. As of December 31, 2017, we had non-U.S. corporate securities with unrealized losses of $2 million that have been in a continuous unrealized losses position for 12 months or more with a fair value that was more than 20% below cost.

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.

 

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, 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

  $ 1,074   $ (50     37   $ —     $ —         —     $ 1,074   $ (50     37

State and political subdivisions

    644     (32     109     142     (18     12     786     (50     121

Non-U.S. government

    497     (18     51     —       —         —       497     (18     51

U.S. corporate

    5,221     (190     711     662     (49     94     5,883     (239     805

Non-U.S. corporate

    2,257     (66     330     408     (25     57     2,665     (91     387

Residential mortgage-backed

    725     (11     100     58     (1     35     783     (12     135

Commercial mortgage-backed

    1,091     (55     168     25     (1     9     1,116     (56     177

Other asset-backed

    1,069     (13     184     328     (22     68     1,397     (35     252
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    12,578     (435     1,690     1,623     (116     275     14,201     (551     1,965

Equity securities

    119     (9     182     114     (18     47     233     (27     229
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697   $ (444     1,872   $ 1,737   $ (134     322   $ 14,434   $ (578     2,194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 12,578   $ (435     1,690   $ 1,543   $ (90     267   $ 14,121   $ (525     1,957

20%-50% Below cost

    —       —       —       80     (26     8     80     (26     8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    12,578     (435     1,690     1,623     (116     275     14,201     (551     1,965
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    118     (8     167     101     (14     38     219     (22     205

20%-50% Below cost

    1     (1     15     13     (4     9     14     (5     24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    119     (9     182     114     (18     47     233     (27     229
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697   $ (444     1,872   $ 1,737   $ (134     322   $ 14,434   $ (578     2,194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 12,339   $ (432     1,657   $ 1,354   $ (108     250   $ 13,693   $ (540     1,907

Below investment grade

    358     (12     215     383     (26     72     741     (38     287
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697   $ (444     1,872   $ 1,737   $ (134     322   $ 14,434   $ (578     2,194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 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

  $ 855   $ (39     130   $ 21   $ (2     5   $ 876   $ (41     135

Energy

    190     (5     30     276     (19     38     466     (24     68

Finance and insurance

    1,438     (38     177     113     (8     15     1,551     (46     192

Consumer—non-cyclical

    921     (34     117     —       —       —       921     (34     117

Technology and communications

    507     (22     70     126     (10     17     633     (32     87

Industrial

    226     (7     38     77     (7     10     303     (14     48

Capital goods

    322     (12     50     6     (1     1     328     (13     51

Consumer—cyclical

    431     (16     56     26     (1     6     457     (17     62

Transportation

    302     (16     41     17     (1     2     319     (17     43

Other

    29     (1     2     —       —       —       29     (1     2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    5,221     (190     711     662     (49     94     5,883     (239     805
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    240     (10     32     14     (1     1     254     (11     33

Energy

    105     (3     18     91     (9     16     196     (12     34

Finance and insurance

    474     (8     79     71     (1     16     545     (9     95

Consumer—non-cyclical

    308     (14     30     —       —       —       308     (14     30

Technology and communications

    232     (9     34     28     (1     2     260     (10     36

Industrial

    165     (5     21     91     (4     10     256     (9     31

Capital goods

    104     (2     14     28     (2     2     132     (4     16

Consumer—cyclical

    90     (2     17     —       —       —       90     (2     17

Transportation

    106     (5     16     25     (2     2     131     (7     18

Other

    433     (8     69     60     (5     8     493     (13     77
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    2,257     (66     330     408     (25     57     2,665     (91     387
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 7,478   $ (256     1,041   $ 1,070   $ (74     151   $ 8,548   $ (330     1,192
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The scheduled maturity distribution of fixed maturity securities as of December 31, 2017 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

   $ 1,723    $ 1,738

Due after one year through five years

     10,835      11,197

Due after five years through ten years

     12,326      12,865

Due after ten years

     22,334      26,154
  

 

 

    

 

 

 

Subtotal

     47,218      51,954

Residential mortgage-backed

     3,831      4,057

Commercial mortgage-backed

     3,387      3,446

Other asset-backed

     3,056      3,068
  

 

 

    

 

 

 

Total

   $ 57,492    $ 62,525
  

 

 

    

 

 

 

As of December 31, 2017, $12,960 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of December 31, 2017, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 22%, 15% and 13%, 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 December 31, 2017, 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.

As of December 31, 2017 and 2016, $43 million and $42 million, respectively, of securities were on deposit with various state government insurance departments in order to comply with relevant insurance regulations.

(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 December 31:

 

     2017