GENWORTH FINANCIAL INC, 10-Q filed on 11/3/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 26, 2017
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2017 
 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Trading Symbol
GNW 
 
Entity Registrant Name
GENWORTH FINANCIAL INC 
 
Entity Central Index Key
0001276520 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
499,158,848 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 62,552 
$ 60,572 
Equity securities available-for-sale, at fair value
765 
632 
Commercial mortgage loans
6,268 
6,111 
Restricted commercial mortgage loans related to securitization entities
111 
129 
Policy loans
1,818 
1,742 
Other invested assets
1,590 
2,071 
Restricted other invested assets related to securitization entities, at fair value
312 
Total investments
73,104 
71,569 
Cash and cash equivalents
2,836 
2,784 
Accrued investment income
639 
659 
Deferred acquisition costs
2,342 
3,571 
Intangible assets and goodwill
315 
348 
Reinsurance recoverable
17,553 
17,755 
Other assets
552 
673 
Deferred tax asset
24 
Separate account assets
7,264 
7,299 
Total assets
104,629 
104,658 
Liabilities and equity
 
 
Future policy benefits
38,022 
37,063 
Policyholder account balances
24,531 
25,662 
Liability for policy and contract claims
9,384 
9,256 
Unearned premiums
3,512 
3,378 
Other liabilities ($1 of other liabilities are related to securitization entities in each period)
2,002 
2,916 
Borrowings related to securitization entities ($12 are carried at fair value in each period)
59 
74 
Non-recourse funding obligations
310 
310 
Long-term borrowings
4,224 
4,180 
Deferred tax liability
234 
53 
Separate account liabilities
7,264 
7,299 
Total liabilities
89,542 
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 September 30, 2017 and December 31, 2016, respectively; 499 million and 498 million shares outstanding as of September 30, 2017 and December 31, 2016, respectively
Additional paid-in capital
11,973 
11,962 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,098 
1,253 
Net unrealized gains (losses) on other-than-temporarily impaired securities
10 
Net unrealized investment gains (losses)
1,108 
1,262 
Derivatives qualifying as hedges
2,052 
2,085 
Foreign currency translation and other adjustments
(125)
(253)
Total accumulated other comprehensive income (loss)
3,035 
3,094 
Retained earnings
760 
287 
Treasury stock, at cost (88 million shares as of September 30, 2017 and December 31, 2016)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
13,069 
12,644 
Noncontrolling interests
2,018 
1,823 
Total equity
15,087 
14,467 
Total liabilities and equity
$ 104,629 
$ 104,658 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Other liabilities, securitization entities
$ 1 
$ 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 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Revenues:
 
 
 
 
Premiums
$ 1,135 
$ 1,108 
$ 3,382 
$ 3,029 
Net investment income
797 
805 
2,388 
2,373 
Net investment gains (losses)
85 
20 
220 
31 
Policy fees and other income
198 
217 
619 
738 
Total revenues
2,215 
2,150 
6,609 
6,171 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,344 
1,662 
3,796 
3,715 
Interest credited
164 
173 
494 
523 
Acquisition and operating expenses, net of deferrals
265 
269 
775 
990 
Amortization of deferred acquisition costs and intangibles
83 
94 
316 
305 
Interest expense
73 
77 
209 
262 
Total benefits and expenses
1,929 
2,275 
5,590 
5,795 
Income (loss) from continuing operations before income taxes
286 
(125)
1,019 
376 
Provision for income taxes
102 
222 
348 
355 
Income (loss) from continuing operations
184 
(347)
671 
21 
Income (loss) from discontinued operations, net of taxes
(9)
15 
(9)
(25)
Net income (loss)
175 
(332)
662 
(4)
Less: net income attributable to noncontrolling interests
68 
48 
198 
151 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
107 
(380)
464 
(155)
Income (loss) from continuing operations available to Genworth Financial, Inc.'s common stockholders per share:
 
 
 
 
Basic
$ 0.23 
$ (0.79)
$ 0.95 
$ (0.26)
Diluted
$ 0.23 
$ (0.79)
$ 0.94 
$ (0.26)
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per share:
 
 
 
 
Basic
$ 0.21 
$ (0.76)
$ 0.93 
$ (0.31)
Diluted
$ 0.21 
$ (0.76)
$ 0.93 
$ (0.31)
Weighted-average common shares outstanding:
 
 
 
 
Basic
499.1 
498.3 
498.9 
498.3 
Diluted
501.6 1
498.3 1
501.2 1
498.3 1
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(1)
(2)
(4)
(35)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
Net other-than-temporary impairments
(1)
(2)
(4)
(35)
Other investments gains (losses)
86 
22 
224 
66 
Net investment gains (losses)
$ 85 
$ 20 
$ 220 
$ 31 
[1] Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.'s common stockholders for the three and nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million and 1.8 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.'s common stockholders for the three months and nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million and 500.1 million, respectively.
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Net income (loss)
$ 175 
$ (332)
$ 662 
$ (4)
Other comprehensive income (loss), net of taxes:
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(89)
72 
(173)
1,624 
Net unrealized gains (losses) on other-than-temporarily impaired securities
Derivatives qualifying as hedges
(12)
54 
(33)
448 
Foreign currency translation and other adjustments
81 
(1)
261 
223 
Total other comprehensive income (loss)
(20)
130 
56 
2,301 
Total comprehensive income (loss)
155 
(202)
718 
2,297 
Less: comprehensive income attributable to noncontrolling interests
108 
64 
313 
260 
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ 47 
$ (266)
$ 405 
$ 2,037 
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 (loss):
 
 
 
 
 
 
 
 
Net income
(4)
 
 
 
(155)
 
(155)
151 
Other comprehensive income (loss) net of taxes
2,301 
 
 
2,192 
 
 
2,192 
109 
Total comprehensive income (loss)
2,297 
 
 
 
 
 
2,037 
260 
Dividends to noncontrolling interests
(126)
 
 
 
 
 
 
(126)
Stock-based compensation expense and exercises and other
11 
 
10 
 
 
 
10 
Balances at Sep. 30, 2016
16,749 
11,959 
5,202 
409 
(2,700)
14,871 
1,878 
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
 
 
 
 
 
Repurchase of subsidiary shares
(31)
 
 
 
 
 
 
(31)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income
662 
 
 
 
464 
 
464 
198 
Other comprehensive income (loss) net of taxes
56 
 
 
(59)
 
 
(59)
115 
Total comprehensive income (loss)
718 
 
 
 
 
 
405 
313 
Dividends to noncontrolling interests
(92)
 
 
 
 
 
 
(92)
Stock-based compensation expense and exercises and other
16 
 
11 
 
 
 
11 
Balances at Sep. 30, 2017
$ 15,087 
$ 1 
$ 11,973 
$ 3,035 
$ 760 
$ (2,700)
$ 13,069 
$ 2,018 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities:
 
 
Net income (loss)
$ 662 
$ (4)
Less loss from discontinued operations, net of taxes
25 
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
Gain on sale of business
(26)
Amortization of fixed maturity securities discounts and premiums and limited partnerships
(107)
(112)
Net investment gains
(220)
(31)
Charges assessed to policyholders
(534)
(574)
Acquisition costs deferred
(67)
(124)
Amortization of deferred acquisition costs and intangibles
316 
305 
Deferred income taxes
234 
173 
Trading securities, held-for-sale investments and derivative instruments
716 
759 
Stock-based compensation expense
29 
25 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(21)
(258)
Insurance reserves
1,202 
691 
Current tax liabilities
(27)
44 
Other liabilities, policy and contract claims and other policy-related balances
(260)
905 
Net cash from operating activities
1,932 
1,798 
Cash flows used by investing activities:
 
 
Fixed maturity securities
3,396 
2,646 
Commercial mortgage loans
454 
555 
Restricted commercial mortgage loans related to securitization entities
18 
27 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
3,269 
4,064 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(6,709)
(8,758)
Commercial mortgage loans
(608)
(405)
Other invested assets, net
(521)
(138)
Policy loans, net
28 
(80)
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
(678)
(2,050)
Cash flows used by financing activities:
 
 
Deposits to universal life and investment contracts
902 
1,028 
Withdrawals from universal life and investment contracts
(2,003)
(1,463)
Redemption of non-recourse funding obligations
(1,620)
Repayment and repurchase of long-term debt
(362)
Repayment of borrowings related to securitization entities
(16)
(37)
Repurchase of subsidiary shares
(31)
Return of capital to noncontrolling interests
(70)
Dividends paid to noncontrolling interests
(92)
(126)
Other, net
(30)
(49)
Net cash used by financing activities
(1,270)
(2,699)
Effect of exchange rate changes on cash and cash equivalents
68 
36 
Net change in cash and cash equivalents
52 
(2,915)
Cash and cash equivalents at beginning of period
2,784 
5,993 
Cash and cash equivalents at end of period
$ 2,836 
$ 3,078 
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 August 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance intended 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. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating adopting this new guidance early and the impact it may have on our consolidated financial statements.

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. 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.

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). As of September 30, 2017, we have approximately $45 million of cumulative unrealized gains related to equity securities included in accumulated other comprehensive income as well as approximately $25 million of gains related to limited partnership investments currently recorded at cost, that will be reclassed to cumulative effect of change in accounting within retained earnings upon adoption of this new accounting guidance. 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. This new guidance will be effective for us on January 1, 2018. We are still in process of evaluating the full impact the guidance may have on our consolidated financial statements.

Earnings (Loss) Per Share
Earnings (Loss) Per Share

(3) Earnings (Loss) Per Share

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

 

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

(Amounts in millions, except per share amounts)

   2017     2016     2017     2016  

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

     499.1       498.3       498.9       498.3  

Potentially dilutive securities:

        

Stock options, restricted stock units and stock appreciation rights

     2.5       —         2.3       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     501.6       498.3       501.2       498.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations:

        

Income (loss) from continuing operations

   $ 184     $ (347   $ 671     $ 21  

Less: income from continuing operations attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 116     $ (395   $ 473     $ (130
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share

   $ 0.23     $ (0.79   $ 0.95     $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share

   $ 0.23     $ (0.79   $ 0.94     $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations:

        

Income (loss) from discontinued operations, net of taxes

   $ (9   $ 15     $ (9   $ (25

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

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (9   $ 15     $ (9   $ (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share

   $ (0.02   $ 0.03     $ (0.02   $ (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share

   $ (0.02   $ 0.03     $ (0.02   $ (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss):

        

Income (loss) from continuing operations

   $ 184     $ (347   $ 671     $ 21  

Income (loss) from discontinued operations, net of taxes

     (9     15     (9     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     175     (332     662     (4

Less: net income attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 107     $ (380   $ 464     $ (155
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share

   $ 0.21     $ (0.76   $ 0.93     $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share

   $ 0.21     $ (0.76   $ 0.93     $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million and 1.8 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months and nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million and 500.1 million, respectively.
Investments
Investments

(4) Investments

(a) Net Investment Income

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

 

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

(Amounts in millions)

   2017     2016     2017     2016  

Fixed maturity securities—taxable

   $ 640     $ 655     $ 1,930       1,930  

Fixed maturity securities—non-taxable

     3     3     9     9

Commercial mortgage loans

     78     79     231     237

Restricted commercial mortgage loans related to securitization entities

     3     3     7     8

Equity securities

     9     8     26     20

Other invested assets

     39     34     106     105

Restricted other invested assets related to securitization entities

     —         —         1     3

Policy loans

     39     38     120     107

Cash, cash equivalents and short-term investments

     10     5     26     16
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     821     825     2,456       2,435  

Expenses and fees

     (24     (20     (68     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 797     $ 805     $ 2,388     $ 2,373  
  

 

 

   

 

 

   

 

 

   

 

 

 

(b) Net Investment Gains (Losses)

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

 

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

(Amounts in millions)

   2017     2016     2017     2016  

Available-for-sale securities:

        

Realized gains

   $ 40     $ 39     $ 177     $ 205  

Realized losses

     (10     (24     (55     (75
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     30     15     122     130
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (1     (2     (4     (35

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

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (1     (2     (4     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     —         (4     1     40

Commercial mortgage loans

     1     (1     3     1

Net gains (losses) related to securitization entities

     1     2     5     (51

Derivative instruments (1)

     54     10     93     (52

Contingent consideration adjustment

     —         —         —         (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 85     $ 20     $ 220     $ 31  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended September 30, 2017 and 2016 was $286 million and $293 million, respectively, which was approximately 97% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2017 and 2016 was $1,390 million and $833 million, respectively, which was approximately 96% and 93%, respectively, of book value.

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

 

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

(Amounts in millions)

   2017     2016     2017     2016  

Beginning balance

   $ 38     $ 62     $ 42     $ 64  

Additions:

        

Other-than-temporary impairments not previously recognized

     —         —         —         1

Reductions:

        

Securities sold, paid down or disposed

     (5     (8     (9     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 33     $ 54     $ 33     $ 54  
  

 

 

   

 

 

   

 

 

   

 

 

 

(c) Unrealized Investment Gains and Losses

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

 

(Amounts in millions)

   September 30, 2017     December 31, 2016  

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 4,878     $ 3,656  

Equity securities

     49     12
  

 

 

   

 

 

 

Subtotal (1)

     4,927       3,668  

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

     (3,134     (1,611

Income taxes, net

     (619     (711
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,174       1,346  

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

     66     84
  

 

 

   

 

 

 

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

   $ 1,108     $ 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
September 30,
 

(Amounts in millions)

   2017     2016  

Beginning balance

   $ 1,180     $ 2,789  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     (10     228

Adjustment to deferred acquisition costs

     (1     (17

Adjustment to present value of future profits

     (3     3

Adjustment to sales inducements

     —         (6

Adjustment to benefit reserves

     (92     (81

Provision for income taxes

     36     (41
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (70     86

Reclassification adjustments to net investment (gains) losses, net of taxes of $10 and $4

     (19     (9
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (89     77

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

     (17     6
  

 

 

   

 

 

 

Ending balance

   $ 1,108     $ 2,860  
  

 

 

   

 

 

 

 

     As of or for the
nine months
ended
September 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

     1,377       3,584  

Adjustment to deferred acquisition costs

     (1,047     (291

Adjustment to present value of future profits

     (36     (26

Adjustment to sales inducements

     (11     (46

Adjustment to benefit reserves

     (429     (612

Provision for income taxes

     51     (917
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (95     1,692  

Reclassification adjustments to net investment (gains) losses, net of taxes of $41 and $33

     (77     (62
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (172     1,630  

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

     (18     24
  

 

 

   

 

 

 

Ending balance

   $ 1,108     $ 2,860  
  

 

 

   

 

 

 

 

(d) Fixed Maturity and Equity Securities

As of September 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

  $ 4,893     $ 784     $ —       $ (7   $ —       $ 5,670  

State and political subdivisions

    2,639       247     —         (26     —         2,860  

Non-U.S. government

    2,143       107     —         (24     —         2,226  

U.S. corporate:

           

Utilities

    4,382       556     —         (15     —         4,923  

Energy

    2,243       207     —         (10     —         2,440  

Finance and insurance

    6,051       547     —         (11     —         6,587  

Consumer—non-cyclical

    4,330       508     —         (10     —         4,828  

Technology and communications

    2,558       193     —         (11     —         2,740  

Industrial

    1,247       102     —         (3     —         1,346  

Capital goods

    2,067       263     —         (9     —         2,321  

Consumer—cyclical

    1,506       111     —         (6     —         1,611  

Transportation

    1,188       124     —         (6     —         1,306  

Other

    358     24     —         (2     —         380
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    25,930       2,635       —         (83     —         28,482  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    1,022       45     —         (5     —         1,062  

Energy

    1,330       140     —         (7     —         1,463  

Finance and insurance

    2,524       177     —         (5     —         2,696  

Consumer—non-cyclical

    692     27     —         (3     —         716

Technology and communications

    945     71     —         (2     —         1,014  

Industrial

    979     81     —         (2     —         1,058  

Capital goods

    556     33     —         (2     —         587

Consumer—cyclical

    518     10     —         (1     —         527

Transportation

    650     71     —         (3     —         718

Other

    2,594       193     —         (5     —         2,782  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,810       848     —         (35     —         12,623  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    3,950       255     14     (10     —         4,209  

Commercial mortgage-backed

    3,346       105     2     (39     —         3,414  

Other asset-backed

    3,052       20     1     (5     —         3,068  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,763       5,001       17     (229     —         62,552  

Equity securities

    720     59     —         (14     —         765
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 58,483     $ 5,060     $ 17     $ (243   $ —       $ 63,317  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 September 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

  $ 283     $ (6     22   $ 31     $ (1 )       4   $ 314     $ (7 )       26

State and political subdivisions

    213     (5     45     230     (21 )       23     443     (26 )       68

Non-U.S. government

    922     (23     36     24     (1 )       14     946     (24 )       50

U.S. corporate

    2,335       (47     333     766     (36 )       106     3,101       (83 )       439

Non-U.S. corporate

    1,562       (22     222     261     (13 )       36     1,823       (35 )       258

Residential mortgage-backed

    656     (9     80     33     (1 )       28     689     (10 )       108

Commercial mortgage-backed

    837     (25     120     201     (14 )       30     1,038       (39 )       150

Other asset-backed

    736     (4     131     173     (1 )       40     909     (5 )       171
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    7,544       (141     989     1,719       (88 )       281     9,263       (229 )       1,270  

Equity securities

    82     (5     142     111     (9 )       89     193     (14 )       231
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,626     $ (146     1,131     $ 1,830     $ (97     370   $ 9,456     $ (243     1,501  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 7,544     $ (141     989   $ 1,719     $ (88     281   $ 9,263     $ (229     1,270  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    7,544       (141     989     1,719       (88 )       281     9,263       (229 )       1,270  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    79     (4     139     111     (9 )       89     190     (13 )       228

20%-50% Below cost

    3     (1     3     —         —         —         3     (1 )       3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    82     (5     142     111     (9 )       89     193     (14 )       231
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,626     $ (146     1,131     $ 1,830     $ (97     370   $ 9,456     $ (243     1,501  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 7,437     $ (139     984   $ 1,656     $ (90     287   $ 9,093     $ (229     1,271  

Below investment grade

    189     (7     147     174     (7 )       83     363     (14 )       230
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,626     $ (146     1,131     $ 1,830     $ (97     370   $ 9,456     $ (243     1,501  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

  $ 468     $ (10     69   $ 104     $ (5     17   $ 572     $ (15     86

Energy

    123     (1     22     146     (9     16     269     (10     38

Finance and insurance

    542     (7     75     154     (4     21     696     (11     96

Consumer—non-cyclical

    325     (7     50     84     (3     12     409     (10     62

Technology and communications

    208     (4     30     127     (7     19     335     (11     49

Industrial

    55     (1     12     56     (2     8     111     (3     20

Capital goods

    274     (8     31     8     (1     2     282     (9     33

Consumer—cyclical

    127     (2     18     70     (4     9     197     (6     27

Transportation

    190     (5     24     17     (1     2     207     (6     26

Other

    23     (2     2     —         —         —         23     (2     2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    2,335       (47     333     766     (36     106     3,101       (83     439
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    227     (4     31     19     (1     2     246     (5     33

Energy

    142     (3     21     69     (4     11     211     (7     32

Finance and insurance

    324     (3     49     50     (2     9     374     (5     58

Consumer—non-cyclical

    131     (2     16     34     (1     4     165     (3     20

Technology and communications

    80     (1     17     12     (1     2     92     (2     19

Industrial

    67     (1     10     11     (1     2     78     (2     12

Capital goods

    34     (1     6     34     (1     3     68     (2     9

Consumer—cyclical

    101     (1     15     —         —         —         101     (1     15

Transportation

    61     (1     13     32     (2     3     93     (3     16

Other

    395     (5     44     —         —         —         395     (5     44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    1,562       (22     222     261     (13     36     1,823       (35     258
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 3,897     $ (69     555   $ 1,027     $ (49     142   $ 4,924     $ (118     697
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 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 2% as of September 30, 2017.

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

Of the $88 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 92% of the unrealized losses were related to investment grade securities as of September 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 September 30, 2017. As of September 30, 2017, the company did not have any 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 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 September 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

   $ 1,943      $ 1,966  

Due after one year through five years

     10,901        11,333  

Due after five years through ten years

     12,363        12,933  

Due after ten years

     22,208        25,629  
  

 

 

    

 

 

 

Subtotal

     47,415        51,861  

Residential mortgage-backed

     3,950        4,209  

Commercial mortgage-backed

     3,346        3,414  

Other asset-backed

     3,052        3,068  
  

 

 

    

 

 

 

Total

   $ 57,763      $ 62,552  
  

 

 

    

 

 

 

As of September 30, 2017, $12,426 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2017, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 23%, 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 September 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:

 

     September 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 2,220       35   $ 2,178       36

Industrial

     1,608       26     1,533       25

Office

     1,465       23     1,430       23

Apartments

     489     8     455     7

Mixed use

     222     4     245     4

Other

     277     4     284     5
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,281       100     6,125       100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     (3       (2  

Allowance for losses

     (10       (12  
  

 

 

     

 

 

   

Total

   $ 6,268       $ 6,111    
  

 

 

     

 

 

   

 

     September 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic region:

        

South Atlantic

   $ 1,620       26   $ 1,546       25

Pacific

     1,600       26     1,567       27

Middle Atlantic

     904     14     915     15

Mountain

     556     9     554     9

West North Central

     441     7     435     7

East North Central

     386     6     388     6

West South Central

     327     5     311     5

New England

     237     4     206     3

East South Central

     210     3     203     3
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,281       100     6,125       100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     (3       (2  

Allowance for losses

     (10       (12  
  

 

 

     

 

 

   

Total

   $ 6,268       $ 6,111    
  

 

 

     

 

 

   

 

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

 

     September 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

   $ —       $ —       $ —       $ —       $ 2,220     $ 2,220  

Industrial

     —         —         —         —         1,608       1,608  

Office

     6     —         —         6     1,459       1,465  

Apartments

     —         —         —         —         489     489

Mixed use

     —         —         —         —         222     222

Other

     —         —         —         —         277     277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 6     $ —       $ —       $ 6     $ 6,275     $ 6,281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% 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 September 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. As of September 30, 2017, we had one commercial mortgage loan past due for less than 90 days on non-accrual status due to the borrower filing for bankruptcy in September 2017. We did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of December 31, 2016.

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

During the nine months ended September 30, 2017 and the year ended December 31, 2016, we modified or extended 7 and 16 commercial mortgage loans, respectively, with a total carrying value of $19 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
September 30,
     Nine months ended
September 30,
 

(Amounts in millions)

       2017              2016              2017             2016      

Allowance for credit losses:

          

Beginning balance

   $ 10      $ 13      $ 12     $ 15  

Charge-offs

     —          —          —         (4

Recoveries

     —          —          —         —    

Provision

     —          —          (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

   $ 6,281      $ 6,032      $ 6,281     $ 6,032  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ —        $ 17      $ —       $ 17  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 6,281      $ 6,015      $ 6,281     $ 6,015  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2017, we had no individually impaired commercial mortgage loans. As of September 30, 2016, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $7 million, charge-offs of $2 million and an average recorded investment of $3 million. As of December 31, 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:

 

     September 30, 2017  

(Amounts in millions)

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

Property type:

            

Retail

   $ 933     $ 499     $ 788     $ —       $ —       $ 2,220  

Industrial

     747     356     503     2     —         1,608  

Office

     583     393     473     14     2       1,465  

Apartments

     236     105     143     5     —         489

Mixed use

     101     59     62     —         —         222

Other

     68     29     180     —         —         277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,668     $ 1,441     $ 2,149     $ 21     $ 2     $ 6,281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     43     23     34     —       —       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.65       1.85       1.60       0.63       1.04       2.10  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included a loan with a recorded investment of $2 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 103%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

 

     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  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     34     24     41     1     —       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.20       1.88       1.61       0.80       (0.07 )       1.87  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included a loan with a recorded investment of $7 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 105%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

 

The following tables set forth the debt service coverage ratio for fixed rate commercial mortgage loans by property type as of the dates indicated:

 

     September 30, 2017  

(Amounts in millions)

   Less than 1.00     1.00 - 1.25     1.26 - 1.50     1.51 - 2.00     Greater
than 2.00
    Total  

Property type:

            

Retail

   $ 43     $ 242     $ 298     $ 999     $ 638     $ 2,220  

Industrial

     24     63     180     679     662     1,608  

Office

     72     67     151     521     654     1,465  

Apartments

     —         20     75     193     201     489

Mixed use

     2     4     26     86     104     222

Other