GENWORTH FINANCIAL INC, 10-Q filed on 8/9/2017
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2017
Aug. 2, 2017
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Jun. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q2 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
499,143,133 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 61,944 
$ 60,572 
Equity securities available-for-sale, at fair value
855 
632 
Commercial mortgage loans
6,237 
6,111 
Restricted commercial mortgage loans related to securitization entities
118 
129 
Policy loans
1,824 
1,742 
Other invested assets
2,177 
2,071 
Restricted other invested assets related to securitization entities, at fair value
81 
312 
Total investments
73,236 
71,569 
Cash and cash equivalents
2,853 
2,784 
Accrued investment income
599 
659 
Deferred acquisition costs
2,378 
3,571 
Intangible assets and goodwill
334 
348 
Reinsurance recoverable
17,609 
17,755 
Other assets
715 
673 
Deferred tax asset
23 
Separate account assets
7,269 
7,299 
Total assets
105,016 
104,658 
Liabilities and equity
 
 
Future policy benefits
37,772 
37,063 
Policyholder account balances
24,971 
25,662 
Liability for policy and contract claims
9,239 
9,256 
Unearned premiums
3,400 
3,378 
Other liabilities ($4 and $1 of other liabilities are related to securitization entities)
2,629 
2,916 
Borrowings related to securitization entities ($12 are carried at fair value in each period)
63 
74 
Non-recourse funding obligations
310 
310 
Long-term borrowings
4,205 
4,180 
Deferred tax liability
162 
53 
Separate account liabilities
7,269 
7,299 
Total liabilities
90,020 
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 June 30, 2017 and December 31, 2016, respectively; 499 million and 498 million shares outstanding as of June 30, 2017 and December 31, 2016, respectively
Additional paid-in capital
11,969 
11,962 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,170 
1,253 
Net unrealized gains (losses) on other-than-temporarily impaired securities
10 
Net unrealized investment gains (losses)
1,180 1
1,262 1
Derivatives qualifying as hedges
2,064 2
2,085 2
Foreign currency translation and other adjustments
(149)
(253)
Total accumulated other comprehensive income (loss)
3,095 
3,094 
Retained earnings
653 
287 
Treasury stock, at cost (88 million shares as of June 30, 2017 and December 31, 2016)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
13,018 
12,644 
Noncontrolling interests
1,978 
1,823 
Total equity
14,996 
14,467 
Total liabilities and equity
$ 105,016 
$ 104,658 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Jun. 30, 2017
Dec. 31, 2016
Other liabilities, securitization entities
$ 4 
$ 1 
Borrowings related to securitization entities, fair value
$ 12 
$ 12 
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 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Revenues:
 
 
 
 
Premiums
$ 1,111 
$ 1,127 
$ 2,247 
$ 1,921 
Net investment income
801 
779 
1,591 
1,568 
Net investment gains (losses)
101 
30 
135 
11 
Policy fees and other income
210 
300 
421 
521 
Total revenues
2,223 
2,236 
4,394 
4,021 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,206 
1,193 
2,452 
2,053 
Interest credited
163 
173 
330 
350 
Acquisition and operating expenses, net of deferrals
240 
327 
510 
721 
Amortization of deferred acquisition costs and intangibles
139 
112 
233 
211 
Interest expense
74 
80 
136 
185 
Total benefits and expenses
1,822 
1,885 
3,661 
3,520 
Income from continuing operations before income taxes
401 
351 
733 
501 
Provision for income taxes
130 
110 
246 
133 
Income from continuing operations
271 
241 
487 
368 
Loss from discontinued operations, net of taxes
(21)
(40)
Net income
271 
220 
487 
328 
Less: net income attributable to noncontrolling interests
69 
48 
130 
103 
Net income available to Genworth Financial, Inc.'s common stockholders
202 
172 
357 
225 
Income from continuing operations available to Genworth Financial, Inc.'s common stockholders per share:
 
 
 
 
Basic
$ 0.40 
$ 0.39 
$ 0.72 
$ 0.53 
Diluted
$ 0.40 
$ 0.39 
$ 0.71 
$ 0.53 
Net income available to Genworth Financial, Inc.'s common stockholders per share:
 
 
 
 
Basic
$ 0.40 
$ 0.35 
$ 0.72 
$ 0.45 
Diluted
$ 0.40 
$ 0.34 
$ 0.71 
$ 0.45 
Weighted-average common shares outstanding:
 
 
 
 
Basic
499.0 
498.5 
498.8 
498.3 
Diluted
501.2 
500.4 
501.1 
499.9 
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(2)
(22)
(3)
(33)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
Net other-than-temporary impairments
(2)
(22)
(3)
(33)
Other investments gains (losses)
103 
52 
138 
44 
Net investment gains (losses)
$ 101 
$ 30 
$ 135 
$ 11 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Jun. 30, 2017
Jun. 30, 2016
Net income
$ 271 
$ 220 
$ 487 
$ 328 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(72)
745 
(84)
1,552 
Net unrealized gains (losses) on other-than-temporarily impaired securities
Derivatives qualifying as hedges
28 1
137 1
(21)1
394 1
Foreign currency translation and other adjustments
61 
180 
224 
Total other comprehensive income (loss)
17 
895 
76 
2,171 
Total comprehensive income
288 
1,115 
563 
2,499 
Less: comprehensive income attributable to noncontrolling interests
87 
40 
205 
196 
Total comprehensive income available to Genworth Financial, Inc.'s common stockholders
$ 201 
$ 1,075 
$ 358 
$ 2,303 
Condensed Consolidated Statements of Changes in Equity (USD $)
In Millions, unless otherwise specified
Total
Common stock
Additional paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Treasury stock, at cost
Total Genworth Financial, Inc.'s stockholders' equity
Noncontrolling interests
Balances at Dec. 31, 2015
$ 14,637 
$ 1 
$ 11,949 
$ 3,010 
$ 564 
$ (2,700)
$ 12,824 
$ 1,813 
Return of capital to noncontrolling interests
(70)
 
 
 
 
 
 
(70)
Comprehensive income:
 
 
 
 
 
 
 
 
Net income
328 
 
 
 
225 
 
225 
103 
Other comprehensive income, net of taxes
2,171 
 
 
2,078 
 
 
2,078 
93 
Total comprehensive income
2,499 
 
 
 
 
 
2,303 
196 
Dividends to noncontrolling interests
(64)
 
 
 
 
 
 
(64)
Stock-based compensation expense and exercises and other
 
 
 
 
Balances at Jun. 30, 2016
17,009 
11,955 
5,088 
789 
(2,700)
15,133 
1,876 
Balances 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
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
 
 
 
Net income
487 
 
 
 
357 
 
357 
130 
Other comprehensive income, net of taxes
76 
 
 
 
 
75 
Total comprehensive income
563 
 
 
 
 
 
358 
205 
Dividends to noncontrolling interests
(52)
 
 
 
 
 
 
(52)
Stock-based compensation expense and exercises and other
 
 
 
 
Balances at Jun. 30, 2017
$ 14,996 
$ 1 
$ 11,969 
$ 3,095 
$ 653 
$ (2,700)
$ 13,018 
$ 1,978 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
6 Months Ended
Jun. 30, 2017
Jun. 30, 2016
Cash flows from operating activities:
 
 
Net income
$ 487 
$ 328 
Less loss from discontinued operations, net of taxes
40 
Adjustments to reconcile net income to net cash from operating activities:
 
 
Gain on sale of business
(26)
Amortization of fixed maturity securities discounts and premiums and limited partnerships
(76)
(67)
Net investment gains
(135)
(11)
Charges assessed to policyholders
(365)
(384)
Acquisition costs deferred
(44)
(91)
Amortization of deferred acquisition costs and intangibles
233 
211 
Deferred income taxes
166 
Trading securities, held-for-sale investments and derivative instruments
431 
743 
Stock-based compensation expense
18 
16 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(23)
(186)
Insurance reserves
806 
332 
Current tax liabilities
(32)
56 
Other liabilities, policy and contract claims and other policy-related balances
(158)
101 
Net cash from operating activities
1,308 
1,066 
Cash flows used by investing activities:
 
 
Fixed maturity securities
2,358 
1,680 
Commercial mortgage loans
307 
364 
Restricted commercial mortgage loans related to securitization entities
11 
20 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
2,587 
2,772 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(4,733)
(5,685)
Commercial mortgage loans
(431)
(317)
Other invested assets, net
(638)
(67)
Policy loans, net
21 
(90)
Proceeds from sale of businesses, net of cash transferred
39 
Payments for business purchased, net of cash acquired
(5)
Net cash used by investing activities
(523)
(1,284)
Cash flows used by financing activities:
 
 
Deposits to universal life and investment contracts
429 
810 
Withdrawals from universal life and investment contracts
(1,091)
(1,021)
Redemption of non-recourse funding obligations
(1,620)
Repayment and repurchase of long-term debt
(362)
Repayment of borrowings related to securitization entities
(12)
(30)
Return of capital to noncontrolling interests
(70)
Dividends paid to noncontrolling interests
(52)
(64)
Other, net
(29)
Net cash used by financing activities
(755)
(2,348)
Effect of exchange rate changes on cash and cash equivalents
39 
30 
Net change in cash and cash equivalents
69 
(2,536)
Cash and cash equivalents at beginning of period
2,784 
5,993 
Cash and cash equivalents at end of period
$ 2,853 
$ 3,457 
Formation of Genworth and Basis of Presentation
Formation of Genworth and Basis of Presentation

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“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 unaudited condensed financial statements include on a consolidated basis the accounts of Genworth Financial and the affiliate companies in which it holds a majority voting interest or where it is the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.

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

We operate our business through the following five operating segments:

 

    U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.

 

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

 

    Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

 

    U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.

 

    Runoff. The Runoff segment includes the results of non-strategic products which 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 and guaranteed investment contracts.

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2016 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

Accounting Changes
Accounting Changes

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

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.

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 any significant impact from this guidance on our consolidated financial statements.

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.

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.

Accounting Pronouncements Not Yet Adopted

In May 2017, the Financial Accounting Standards Board (“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. The guidance is effective, prospectively, for us on January 1, 2018, accordingly, the guidance will not have any impact at adoption.

In March 2017, the FASB issued new guidance shortening the amortization period for the premium component of callable debt securities purchased 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, 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 accounting for gains and losses from the derecognition of nonfinancial assets 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, and clarifies the accounting for partial sales. The new guidance is currently effective for us on January 1, 2018. We do not expect any significant impacts from this guidance on our consolidated financial statements.

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 do not expect any significant impacts from this new guidance on our consolidated financial statements.

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. The guidance is currently effective for us on January 1, 2018. We are still in process of evaluating the impact the guidance may have on our consolidated financial statements, including any cumulative effect adjustment that will be recorded directly to retained earnings as of the beginning of the period of adoption.

Earnings Per Share
Earnings Per Share

(3) Earnings Per Share

Basic and diluted earnings per share are calculated by dividing each income (loss) category presented below by the weighted-average basic and diluted common shares outstanding for the periods indicated:

 

     Three months ended
June 30,
    Six months ended
June 30,
 

(Amounts in millions, except per share amounts)

       2017              2016         2017      2016  

Weighted-average shares used in basic earnings per share calculations

     499.0      498.5     498.8      498.3  

Potentially dilutive securities:

          

Stock options, restricted stock units and stock appreciation rights

     2.2      1.9     2.3      1.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used in diluted earnings per share calculations

     501.2      500.4     501.1      499.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from continuing operations:

          

Income from continuing operations

   $ 271    $ 241   $ 487    $ 368  

Less: income from continuing operations attributable to noncontrolling interests

     69      48     130      103  
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 202    $ 193   $ 357    $ 265  
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic per share

   $ 0.40    $ 0.39   $ 0.72    $ 0.53  
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted per share

   $ 0.40    $ 0.39   $ 0.71    $ 0.53  
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss from discontinued operations:

          

Loss from discontinued operations, net of taxes

   $ —      $ (21   $ —      $ (40

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

   $ —      $ (21   $ —      $ (40
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic per share

   $ —      $ (0.04   $ —      $ (0.08
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted per share

   $ —      $ (0.04   $ —      $ (0.08
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income:

          

Income from continuing operations

   $ 271    $ 241   $ 487    $ 368  

Loss from discontinued operations, net of taxes

     —        (21     —        (40
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

     271      220     487      328  

Less: net income attributable to noncontrolling interests

     69      48     130      103  
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 202    $ 172   $ 357    $ 225  
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic per share

   $ 0.40    $ 0.35   $ 0.72    $ 0.45  
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted per share

   $ 0.40    $ 0.34   $ 0.71    $ 0.45  
  

 

 

    

 

 

   

 

 

    

 

 

 
Investments
Investments

(4) Investments

(a) Net Investment Income

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 

(Amounts in millions)

       2017             2016             2017             2016      

Fixed maturity securities—taxable

   $ 649   $ 634   $ 1,290     1,275

Fixed maturity securities—non-taxable

     3     3     6     6

Commercial mortgage loans

     76     77     153     158

Restricted commercial mortgage loans related to securitization entities

     2     3     4     5

Equity securities

     9     7     17     12

Other invested assets

     35     33     67     71

Restricted other invested assets related to securitization entities

     1     1     1     3

Policy loans

     39     34     81     69

Cash, cash equivalents and short-term investments

     10     6     16     11
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     824     798     1,635     1,610

Expenses and fees

     (23     (19     (44     (42
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 801   $ 779   $ 1,591   $ 1,568
  

 

 

   

 

 

   

 

 

   

 

 

 

(b) Net Investment Gains (Losses)

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 

(Amounts in millions)

       2017             2016             2017             2016      

Available-for-sale securities:

        

Realized gains

   $ 74   $ 150   $ 137   $ 166

Realized losses

     (11     (28     (45     (51
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     63     122     92     115
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (2     (22     (3     (33

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

     —       —       —       —  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (2     (22     (3     (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     1     16     1     44

Commercial mortgage loans

     1     1     2     2

Net gains (losses) related to securitization entities

     2     (61     4     (53

Derivative instruments (1)

     36     (24     39     (62

Other

     —       (2     —       (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 101   $ 30   $ 135   $ 11
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  See note 5 for additional information on the impact of derivative instruments included in net investment gains (losses).

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended June 30, 2017 and 2016 was $228 million and $300 million, respectively, which was approximately 95% and 92%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2017 and 2016 was $1,104 million and $540 million, respectively, which was approximately 96% and 92%, respectively, of book value.

The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in other comprehensive income (loss) (“OCI”) as of and for the periods indicated:

 

     As of or for the
three months ended

June 30,
     As of or for the
six months ended
June 30,
 

(Amounts in millions)

       2017              2016              2017              2016      

Beginning balance

   $ 41    $ 63    $ 42    $ 64

Additions:

           

Other-than-temporary impairments not previously recognized

     —        1      —        1

Reductions:

           

Securities sold, paid down or disposed

     (3      (2      (4      (3
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 38    $ 62    $ 38    $ 62
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 were as follows as of the dates indicated:

 

(Amounts in millions)

   June 30,
2017
     December 31,
2016
 

Net unrealized gains (losses) on investment securities:

     

Fixed maturity securities

   $ 4,797    $ 3,656

Equity securities

     169      12
  

 

 

    

 

 

 

Subtotal (1)

     4,966      3,668

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

     (3,038      (1,611

Income taxes, net

     (665      (711
  

 

 

    

 

 

 

Net unrealized investment gains (losses)

     1,263      1,346

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

     83      84
  

 

 

    

 

 

 

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

   $ 1,180    $ 1,262
  

 

 

    

 

 

 

 

(1)  Excludes foreign exchange.

The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the periods indicated:

 

     As of or for the
three months ended
June 30,
 

(Amounts in millions)

   2017      2016  

Beginning balance

   $ 1,243    $ 2,057

Unrealized gains (losses) arising during the period:

     

Unrealized gains (losses) on investment securities

     995      1,760

Adjustment to deferred acquisition costs

     (741      (132

Adjustment to present value of future profits

     (28      5

Adjustment to sales inducements

     (6      (21

Adjustment to benefit reserves

     (269      (357

Provision for income taxes

     17      (440
  

 

 

    

 

 

 

Change in unrealized gains (losses) on investment securities

     (32      815

Reclassification adjustments to net investment (gains) losses, net of taxes of $21 and $35

     (40      (65
  

 

 

    

 

 

 

Change in net unrealized investment gains (losses)

     (72      750

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

     (9      18
  

 

 

    

 

 

 

Ending balance

   $ 1,180    $ 2,789
  

 

 

    

 

 

 

 

     As of or for the
six months ended
June 30,
 

(Amounts in millions)

   2017      2016  

Beginning balance

   $ 1,262    $ 1,254

Unrealized gains (losses) arising during the period:

     

Unrealized gains (losses) on investment securities

     1,387      3,356

Adjustment to deferred acquisition costs

     (1,046      (274

Adjustment to present value of future profits

     (33      (29

Adjustment to sales inducements

     (11      (40

Adjustment to benefit reserves

     (337      (531

Provision for income taxes

     15      (876
  

 

 

    

 

 

 

Change in unrealized gains (losses) on investment securities

     (25      1,606

Reclassification adjustments to net investment (gains) losses, net of taxes of $31 and $29

     (58      (53
  

 

 

    

 

 

 

Change in net unrealized investment gains (losses)

     (83      1,553

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

     (1      18
  

 

 

    

 

 

 

Ending balance

   $ 1,180    $ 2,789
  

 

 

    

 

 

 

 

(d) Fixed Maturity and Equity Securities

As of June 30, 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

  $ 4,861   $ 775   $ —     $ (7   $ —     $ 5,629

State and political subdivisions

    2,604     233     —       (31     —       2,806

Non-U.S. government

    1,997     108     —       (14     —       2,091

U.S. corporate:

           

Utilities

    4,331     534     —       (17     —       4,848

Energy

    2,200     184     —       (14     —       2,370

Finance and insurance

    6,026     578     —       (14     —       6,590

Consumer—non-cyclical

    4,296     497     —       (11     —       4,782

Technology and communications

    2,502     187     —       (14     —       2,675

Industrial

    1,250     99     —       (5     —       1,344

Capital goods

    2,021     272     —       (6     —       2,287

Consumer—cyclical

    1,497     110     —       (8     —       1,599

Transportation

    1,082     103     —       (6     —       1,179

Other

    375     23     —       (1     —       397
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    25,580     2,587     —       (96     —       28,071
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    1,009     48     —       (4     —       1,053

Energy

    1,313     131     —       (10     —       1,434

Finance and insurance

    2,418     176     —       (4     —       2,590

Consumer—non-cyclical

    722     28     —       (4     —       746

Technology and communications

    979     67     —       (3     —       1,043

Industrial

    948     70     —       (3     —       1,015

Capital goods

    545     31     —       (2     —       574

Consumer—cyclical

    484     11     —       (1     —       494

Transportation

    638     70     —       (4     —       704

Other

    2,587     195     —       (5     —       2,777
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,643     827     —       (40     —       12,430
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,045     269     13     (8     —       4,319

Commercial mortgage-backed

    3,330     111     2     (37     —       3,406

Other asset-backed

    3,180     18     1     (7     —       3,192
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,240     4,928     16     (240     —       61,944

Equity securities

    692     176     —       (13     —       855
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 57,932   $ 5,104   $ 16   $ (253   $ —     $ 62,799
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 June 30, 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

  $ 313   $ (7     23   $ —     $ —         —     $ 313   $ (7 )       23

State and political subdivisions

    364     (15     70     149     (16     13     513     (31 )       83

Non-U.S. government

    695     (13     42     16     (1 )       8     711     (14 )       50

U.S. corporate

    2,954     (70     434     443     (26     57     3,397     (96 )       491

Non-U.S. corporate

    1,297     (23     208     281     (17     37     1,578     (40 )       245

Residential mortgage-backed

    567     (7     77     51     (1 )       31     618     (8 )       108

Commercial mortgage-backed

    956     (36     136     25     (1 )       5     981     (37 )       141

Other asset-backed

    761     (4     137     250     (3 )       52     1,011     (7 )       189
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    7,907     (175     1,127     1,215     (65     203     9,122     (240     1,330

Equity securities

    74     (4     152     107     (9 )       51     181     (13 )       203
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,981   $ (179     1,279   $ 1,322   $ (74     254   $ 9,303   $ (253     1,533
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 7,907   $ (175     1,127   $ 1,199   $ (61     200   $ 9,106   $ (236     1,327

20%-50% Below cost

    —       —       —       16     (4 )       3     16     (4 )       3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    7,907     (175     1,127     1,215     (65 )       203     9,122     (240     1,330
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    72     (3     151     107     (9 )       51     179     (12 )       202

20%-50% Below cost

    2     (1     1     —       —         —       2     (1 )       1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    74     (4     152     107     (9 )       51     181     (13 )       203
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,981   $ (179     1,279   $ 1,322   $ (74     254   $ 9,303   $ (253     1,533
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 7,676   $ (168     1,098   $ 1,075   $ (58     194   $ 8,751   $ (226     1,292

Below investment grade

    305     (11     181     247     (16 )       60     552     (27 )       241
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,981   $ (179     1,279   $ 1,322   $ (74     254   $ 9,303   $ (253     1,533
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 June 30, 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

  $ 505     $ (16     79     $ 32     $ (1     5   $ 537   $ (17     84

Energy

    203       (3     32       153       (11     18     356     (14     50

Finance and insurance

    757       (13     109       76       (1     9     833     (14     118

Consumer—non-cyclical

    496       (11     72       —         —         —       496     (11     72

Technology and communications

    257       (7     39       79       (7     11     336     (14     50

Industrial

    105       (2     15       47       (3     7     152     (5     22

Capital goods

    207       (6     32       —         —         —       207     (6     32

Consumer—cyclical

    190       (6     26       48       (2     6     238     (8     32

Transportation

    202       (5     27       8       (1     1     210     (6     28

Other

    32       (1     3       —         —         —       32     (1     3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    2,954       (70     434       443       (26     57     3,397     (96     491
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    165       (3     18       14       (1     1     179     (4     19

Energy

    122       (2     22       70       (8     13     192     (10     35

Finance and insurance

    224       (3     38       31       (1     6     255     (4     44

Consumer—non-cyclical

    147       (3     19       10       (1     —       157     (4     19

Technology and communications

    107       (2     20       12       (1     2     119     (3     22

Industrial

    62       (2     9       32       (1     4     94     (3     13

Capital goods

    48       (1     7       29       (1     2     77     (2     9

Consumer—cyclical

    78       (1     15       —         —         —       78     (1     15

Transportation

    93       (3     17       25       (1     2     118     (4     19

Other

    251       (3     43       58       (2     7     309     (5     50
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    1,297       (23     208       281       (17     37     1,578     (40     245
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 4,251     $ (93     642     $ 724     $ (43     94   $ 4,975   $ (136     736
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 2% as of June 30, 2017.

 

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

Of the $61 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB” and approximately 78% of the unrealized losses were related to investment grade securities as of June 30, 2017. These unrealized losses were predominantly attributable to corporate securities including variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 5% as of June 30, 2017. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of June 30, 2017:

 

    Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

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

Fixed maturity securities:

               

State and political subdivisions

  $ 10   $ (2     1     1   $ —     $ —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 10   $ (2     1     1   $ —     $ —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

(Dollar amounts in millions)

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

Fixed maturity securities:

               

Non-U.S. corporate:

               

Energy

    3     (1     —       1     —       —       —         —  

Other

    3     (1     —       1     —       —       —         —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    6     (2     —       2     —       —       —         —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 6   $ (2     —       2   $ —     $ —       —       —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

State and political subdivisions

As indicated above, $2 million of gross unrealized losses were related to a state and political subdivision fixed maturity security that has been in a continuous loss position for more than 12 months and was more than 20% below cost. The unrealized loss for this security was 21% below cost, primarily related to widening of credit spreads since acquisition as a result of higher risk premiums being attributed to this security from uncertainty related to special revenues supporting this type of obligation as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, the fair value of this security class has been negatively impacted as a result of having certain bond insurers associated with the security. In our analysis of impairment for this security, we expect to recover our amortized cost from the cash flows of the underlying security before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of this security and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.

Non-U.S. corporate

As indicated above, $2 million of gross unrealized losses were related to non-U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for non-U.S. corporate fixed maturity securities, all were below investment grade and not concentrated in any one sector.

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

 

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

>50% Below cost

    —       —       —       —       —         —       —       —         —  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30, 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

   $ 1,883    $ 1,906

Due after one year through five years

     10,533      10,967

Due after five years through ten years

     12,183      12,722

Due after ten years

     22,086      25,432
  

 

 

    

 

 

 

Subtotal

     46,685      51,027

Residential mortgage-backed

     4,045      4,319

Commercial mortgage-backed

     3,330      3,406

Other asset-backed

     3,180      3,192
  

 

 

    

 

 

 

Total

   $ 57,240    $ 61,944
  

 

 

    

 

 

 

As of June 30, 2017, $11,818 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of June 30, 2017, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 23%, 14% and 14%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of June 30, 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.

 

(e) Commercial Mortgage Loans

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

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

 

     June 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Property type:

          

Retail

   $ 2,199      35   $ 2,178      36

Industrial

     1,590      25     1,533      25

Office

     1,480      24     1,430      23

Apartments

     470      8     455      7

Mixed use

     234      4     245      4

Other

     277      4     284      5
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,250      100     6,125      100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (3        (2   

Allowance for losses

     (10        (12   
  

 

 

      

 

 

    

Total

   $ 6,237      $ 6,111   
  

 

 

      

 

 

    

 

     June 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Geographic region:

          

South Atlantic

   $ 1,608      26   $ 1,546      25

Pacific

     1,603      26     1,567      27

Middle Atlantic

     908      14     915      15

Mountain

     547      9     554      9

West North Central

     442      7     435      7

East North Central

     383      6     388      6

West South Central

     318      5     311      5

New England

     233      4     206      3

East South Central

     208      3     203      3
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,250      100     6,125      100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (3        (2   

Allowance for losses

     (10        (12   
  

 

 

      

 

 

    

Total

   $ 6,237      $ 6,111   
  

 

 

      

 

 

    

 

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

 

     June 30, 2017  

(Amounts in millions)

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

past due
    Total
past due
    Current     Total  

Property type:

            

Retail

   $  —       $ —       $  —       $  —       $ 2,199   $ 2,199

Industrial

     —         —         —         —         1,590     1,590

Office

     —         —         —         —         1,480     1,480

Apartments

     —         —         —         —         470     470

Mixed use

     —         —         —         —         234     234

Other

     —         —         —         —         277     277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $  —       $ —       $ —       $ —       $ 6,250   $ 6,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2016  

(Amounts in millions)

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

Property type:

            

Retail

   $ —       $ —       $ —       $ —       $ 2,178   $ 2,178

Industrial

     1       —         12       13       1,520     1,533

Office

     —         —         —         —         1,430     1,430

Apartments

     —         —         —         —         455     455

Mixed use

     —         —         —         —         245     245

Other

     —         —         —         —         284     284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1     $ —       $ 12     $ 13     $ 6,112   $ 6,125
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2017 and December 31, 2016, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of June 30, 2017 and December 31, 2016.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of June 30, 2017, none of our commercial mortgage loans were greater than 90 days past due.

During the six months ended June 30, 2017 and the year ended December 31, 2016, we modified or extended 5 and 16 commercial mortgage loans, respectively, with a total carrying value of $8 million and $85 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower, except during the year ended December 31, 2016, one loan with a carrying value $1 million at the time of modification was considered a troubled debt restructuring. This loan was sold in the fourth quarter of 2016.

 

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

 

     Three months ended
June 30,
     Six months ended
June 30,
 

(Amounts in millions)

   2017      2016      2017      2016  

Allowance for credit losses:

           

Beginning balance

   $ 11    $ 15    $ 12    $ 15

Charge-offs

     —        (4      —        (4

Recoveries

     —        —        —        —  

Provision

     (1      2      (2      2
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance

   $ 10    $ 13    $ 10    $ 13
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending allowance for individually impaired loans

   $ —      $ —      $ —      $ —  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 10    $ 13    $ 10    $ 13
  

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment:

           

Ending balance

   $ 6,250    $ 6,136    $ 6,250    $ 6,136
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance of individually impaired loans

   $ —      $ 23    $ —      $ 23
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 6,250    $ 6,113    $ 6,250    $ 6,113
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2017, we had no individually impaired commercial mortgage loans. As of June 30, 2016, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, an individually impaired commercial mortgage loan included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, and an individually impaired loan within the industrial property type had a recorded investment of $13 million, an unpaid principal balance of $16 million and total charge-offs of $3 million. As of December 31, 2016, we had one individually impaired loan within the industrial property type with a recorded investment of $12 million, an unpaid principal balance of $15 million and charge-offs of $3 million.

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

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

 

     June 30, 2017  

(Amounts in millions)

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

Property type:

            

Retail

   $ 762   $ 487   $ 939   $ 11   $ —       $ 2,199  

Industrial

     600     418     570     2     —         1,590  

Office

     421     325     706     28     —         1,480  

Apartments

     187     90     188     5     —         470  

Mixed use

     62     88     84     —       —         234  

Other

     52     33     192     —       —         277  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,084   $ 1,441   $ 2,679   $ 46   $ —       $ 6,250  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     33     23     43     1     —       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.19     1.89     1.62     0.89     —         1.87  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2016  

(Amounts in millions)

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

Property type:

            

Retail

   $ 743   $ 511   $ 913   $ 11   $ —       $ 2,178  

Industrial

     605     430     484     14     —         1,533  

Office

     431     310     656     26     7       1,430  

Apartments

     188     89     173     5     —         455  

Mixed use

     67     87     91     —       —         245  

Other

     60     30     194     —       —         284  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,094   $ 1,457   $ 2,511   $ 56   $ 7     $ 6,125