GENWORTH FINANCIAL INC, 10-Q filed on 11/10/2014
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2014
Oct. 28, 2014
Document Information [Line Items]
 
 
Document Type
10-Q 
 
Amendment Flag
false 
 
Document Period End Date
Sep. 30, 2014 
 
Document Fiscal Year Focus
2014 
 
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
 
496,659,914 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Assets
 
 
Fixed maturity securities available-for-sale, at fair value
$ 62,317 
$ 58,629 
Equity securities available-for-sale, at fair value
313 
341 
Commercial mortgage loans
6,077 
5,899 
Restricted commercial mortgage loans related to securitization entities
209 
233 
Policy loans
1,512 
1,434 
Other invested assets
2,281 
1,686 
Restricted other invested assets related to securitization entities, at fair value
404 
391 
Total investments
73,113 
68,613 
Cash and cash equivalents
3,477 
4,214 
Accrued investment income
719 
678 
Deferred acquisition costs
5,085 
5,278 
Intangible assets
300 
399 
Goodwill
316 
867 
Reinsurance recoverable
17,374 
17,219 
Other assets
710 
639 
Separate account assets
9,420 
10,138 
Total assets
110,514 
108,045 
Liabilities and stockholders' equity
 
 
Future policy benefits
34,697 
33,705 
Policyholder account balances
25,827 
25,528 
Liability for policy and contract claims
7,987 
7,204 
Unearned premiums
4,085 
4,107 
Other liabilities ($42 and $50 other liabilities related to securitization entities)
3,605 
4,096 
Borrowings related to securitization entities ($83 and $75 at fair value)
225 
242 
Non-recourse funding obligations
2,010 
2,038 
Long-term borrowings
4,662 
5,161 
Deferred tax liability
875 
206 
Separate account liabilities
9,420 
10,138 
Total liabilities
93,393 
92,425 
Commitments and contingencies
   
   
Stockholders' equity:
 
 
Class A common stock, $0.001 par value; 1.5 billion shares authorized; 585 million and 583 million shares issued as of September 30, 2014 and December 31, 2013, respectively; 497 million and 495 million shares outstanding as of September 30, 2014 and December 31, 2013, respectively
Additional paid-in capital
11,991 
12,127 
Net unrealized investment gains (losses):
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
2,047 
914 
Net unrealized gains (losses) on other-than-temporarily impaired securities
20 
12 
Net unrealized investment gains (losses)
2,067 1
926 1
Derivatives qualifying as hedges
1,753 2
1,319 2
Foreign currency translation and other adjustments
114 
297 
Total accumulated other comprehensive income (loss)
3,934 
2,542 
Retained earnings
1,939 
2,423 
Treasury stock, at cost (88 million shares as of September 30, 2014 and December 31, 2013)
(2,700)
(2,700)
Total Genworth Financial, Inc.'s stockholders' equity
15,165 
14,393 
Noncontrolling interests
1,956 
1,227 
Total stockholders' equity
17,121 
15,620 
Total liabilities and stockholders' equity
$ 110,514 
$ 108,045 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2014
Dec. 31, 2013
Other liabilities, securitization entities
$ 42 
$ 50 
Borrowings related to securitization entities, fair value
$ 83 
$ 75 
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
585,000,000 
583,000,000 
Class A Common Stock, shares outstanding
497,000,000 
495,000,000 
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, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Revenues:
 
 
 
 
Premiums
$ 1,395 
$ 1,291 
$ 4,045 
$ 3,838 
Net investment income
805 
801 
2,423 
2,436 
Net investment gains (losses)
(27)
(23)
(10)
(63)
Insurance and investment product fees and other
231 
248 
683 
780 
Total revenues
2,404 
2,317 
7,141 
6,991 
Benefits and expenses:
 
 
 
 
Benefits and other changes in policy reserves
1,986 
1,169 
4,436 
3,639 
Interest credited
185 
184 
552 
552 
Acquisition and operating expenses, net of deferrals
398 
407 
1,180 
1,253 
Amortization of deferred acquisition costs and intangibles
143 
182 
415 
441 
Goodwill impairment
550 
550 
Interest expense
114 
124 
361 
371 
Total benefits and expenses
3,376 
2,066 
7,494 
6,256 
Income (loss) from continuing operations before income taxes
(972)
251 
(353)
735 
Provision (benefit) for income taxes
(185)
105 
(13)
254 
Income (loss) from continuing operations
(787)
146 
(340)
481 
Income (loss) from discontinued operations, net of taxes
(12)
Net income (loss)
(787)
148 
(340)
469 
Less: net income attributable to noncontrolling interests
57 
40 
144 
117 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders
(844)
108 
(484)
352 
Income (loss) from continuing operations available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ (1.70)
$ 0.21 
$ (0.98)
$ 0.74 
Diluted
$ (1.70)
$ 0.21 
$ (0.98)
$ 0.73 
Net income (loss) available to Genworth Financial, Inc.'s common stockholders per common share:
 
 
 
 
Basic
$ (1.70)
$ 0.22 
$ (0.98)
$ 0.71 
Diluted
$ (1.70)
$ 0.22 
$ (0.98)
$ 0.71 
Weighted-average common shares outstanding:
 
 
 
 
Basic
496.6 
494.0 
496.4 
493.3 
Diluted
496.6 1
499.3 1
496.4 1
497.9 1
Supplemental disclosures:
 
 
 
 
Total other-than-temporary impairments
(13)
(3)
(16)
(17)
Portion of other-than-temporary impairments included in other comprehensive income (loss)
(2)
(5)
Net other-than-temporary impairments
(6)
(5)
(9)
(22)
Other investments gains (losses)
(21)
(18)
(1)
(41)
Net investment gains (losses)
$ (27)
$ (23)
$ (10)
$ (63)
[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 and net loss available to Genworth Financial, Inc.'s common stockholders for the three and nine months ended September 30, 2014, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the three and nine months ended September 30, 2014, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 5.4 million and 6.4 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 and net loss available to Genworth Financial, Inc.'s common stockholders for the three and nine months ended September 30, 2014, dilutive potential weighted-average common shares outstanding would have been 502.0 million and 502.8 million, respectively.
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Sep. 30, 2014
Sep. 30, 2013
Net income (loss)
$ (787)
$ 148 
$ (340)
$ 469 
Other comprehensive income (loss), net of taxes:
 
 
 
 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(68)
(191)
1,171 
(1,624)
Net unrealized gains (losses) on other-than-temporarily impaired securities
57 
Derivatives qualifying as hedges
101 1
(139)1
434 1
(467)1
Foreign currency translation and other adjustments
(379)
144 
(252)
(313)
Total other comprehensive income (loss)
(345)
(181)
1,361 
(2,347)
Total comprehensive income (loss)
(1,132)
(33)
1,021 
(1,878)
Less: comprehensive income (loss) attributable to noncontrolling interests
(61)
62 
56 
33 
Total comprehensive income (loss) available to Genworth Financial, Inc.'s common stockholders
$ (1,071)
$ (95)
$ 965 
$ (1,911)
Condensed Consolidated Statements of Changes in Stockholders' 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, 2012
$ 17,781 
$ 1 
$ 12,127 
$ 5,202 
$ 1,863 
$ (2,700)
$ 16,493 
$ 1,288 
Repurchase of subsidiary shares
(43)
(43)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
469 
352 
352 
117 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
(1,624)
(1,586)
(1,586)
(38)
Net unrealized gains (losses) on other-than-temporarily impaired securities
57 
57 
57 
Derivatives qualifying as hedges
(467)1
(467)
(467)
Foreign currency translation and other adjustments
(313)
(267)
(267)
(46)
Total comprehensive income (loss)
(1,878)
 
 
 
 
 
(1,911)
33 
Dividends to noncontrolling interests
(39)
(39)
Stock-based compensation expense and exercises and other
24 
22 
22 
Balances at Sep. 30, 2013
15,845 
12,149 
2,939 
2,215 
(2,700)
14,604 
1,241 
Balances at Dec. 31, 2013
15,620 
12,127 
2,542 
2,423 
(2,700)
14,393 
1,227 
Initial sale of subsidiary shares to noncontrolling interests
511 
(145)
(57)
(202)
713 
Comprehensive income (loss):
 
 
 
 
 
 
 
 
Net income (loss)
(340)
(484)
(484)
144 
Net unrealized gains (losses) on securities not other-than-temporarily impaired
1,171 
1,155 
1,155 
16 
Net unrealized gains (losses) on other-than-temporarily impaired securities
Derivatives qualifying as hedges
434 1
434 
434 
Foreign currency translation and other adjustments
(252)
(148)
(148)
(104)
Total comprehensive income (loss)
1,021 
 
 
 
 
 
965 
56 
Dividends to noncontrolling interests
(46)
(46)
Stock-based compensation expense and exercises and other
15 
Balances at Sep. 30, 2014
$ 17,121 
$ 1 
$ 11,991 
$ 3,934 
$ 1,939 
$ (2,700)
$ 15,165 
$ 1,956 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2014
Sep. 30, 2013
Cash flows from operating activities:
 
 
Net income (loss)
$ (340)
$ 469 
Less loss from discontinued operations, net of taxes
12 
Adjustments to reconcile net income (loss) to net cash from operating activities:
 
 
Amortization of fixed maturity securities discounts and premiums and limited partnerships
(87)
(64)
Net investment losses (gains)
10 
63 
Charges assessed to policyholders
(580)
(612)
Acquisition costs deferred
(356)
(332)
Amortization of deferred acquisition costs and intangibles
415 
441 
Goodwill impairment
550 
Deferred income taxes
(194)
(120)
Net increase (decrease) in trading securities, held-for-sale investments and derivative instruments
110 
(15)
Stock-based compensation expense
21 
27 
Change in certain assets and liabilities:
 
 
Accrued investment income and other assets
(172)
(66)
Insurance reserves
1,769 
1,679 
Current tax liabilities
(187)
242 
Other liabilities and other policy-related balances
181 
(699)
Cash from operating activities-discontinued operations
68 
Net cash from operating activities
1,140 
1,093 
Cash flows from investing activities:
 
 
Fixed maturity securities
3,775 
4,046 
Commercial mortgage loans
528 
686 
Restricted commercial mortgage loans related to securitization entities
24 
51 
Proceeds from sales of investments:
 
 
Fixed maturity and equity securities
1,745 
3,056 
Purchases and originations of investments:
 
 
Fixed maturity and equity securities
(7,464)
(7,872)
Commercial mortgage loans
(709)
(667)
Other invested assets, net
87 
80 
Policy loans, net
11 
(7)
Proceeds from sale of a subsidiary, net of cash transferred
370 
Cash from investing activities-discontinued operations
(30)
Net cash from investing activities
(2,003)
(287)
Cash flows from financing activities:
 
 
Deposits to universal life and investment contracts
2,201 
1,979 
Withdrawals from universal life and investment contracts
(1,950)
(2,613)
Redemption of non-recourse funding obligations
(28)
(20)
Proceeds from issuance of long-term debt
144 
397 
Repayment and repurchase of long-term debt
(621)
(365)
Repayment of borrowings related to securitization entities
(24)
(51)
Proceeds from sale of subsidiary shares to noncontrolling interests
517 
Repurchase of subsidiary shares
(43)
Dividends paid to noncontrolling interests
(46)
(39)
Other, net
(44)
(53)
Cash from financing activities-discontinued operations
(3)
Net cash from financing activities
149 
(811)
Effect of exchange rate changes on cash and cash equivalents
(23)
(94)
Net change in cash and cash equivalents
(737)
(99)
Cash and cash equivalents at beginning of period
4,214 
3,653 
Cash and cash equivalents at end of period
3,477 
3,554 
Less cash and cash equivalents of discontinued operations at end of period
Cash and cash equivalents of continuing operations at end of period
$ 3,477 
$ 3,554 
Formation of Genworth and Basis of Presentation
Formation of Genworth and Basis of Presentation

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering of Genworth 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, under the name Sub XLVI, Inc., and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

References to “Genworth,” the “Company,” “we” or “our” in the accompanying unaudited condensed consolidated financial statements and these notes thereto have the following meanings, unless the context otherwise requires:

 

    For periods prior to April 1, 2013: Genworth Holdings and its subsidiaries

 

    For periods from and after April 1, 2013: Genworth Financial and its subsidiaries

The accompanying unaudited condensed financial statements include on a consolidated basis the accounts of Genworth and our affiliate companies in which we hold a majority voting interest or where we are the primary beneficiary of a variable interest entity (“VIE”). All intercompany accounts and transactions have been eliminated in consolidation.

We have the following operating segments:

 

    U.S. Life Insurance. We offer and manage a variety of insurance and fixed annuity products in the United States. Our primary products include life insurance, long-term care insurance and fixed annuities.

 

    International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services in Canada and Australia and also participate in select European and other countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We also selectively provide mortgage insurance on a structured, or bulk, basis that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

 

    U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. We selectively provide mortgage insurance on a bulk basis with essentially all of our bulk writings prime-based. Additionally, we offer services, analytical tools and technology that enable lenders to operate efficiently and manage risk.

 

    International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European countries and have operations in select other countries. Our lifestyle protection insurance products primarily help consumers meet specified payment obligations should they become unable to pay due to accident, illness, involuntary unemployment, disability or death.

 

   

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”). In January 2011, we discontinued new sales of retail and group variable annuities while continuing to service our existing blocks of business.

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 non-core businesses that are managed outside of our operating segments, including 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 2013 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

a) Accounting Pronouncement Recently Adopted

On January 1, 2014, we adopted new accounting guidance on the scope, measurement and disclosure requirements for investment companies. The new guidance clarified the characteristics of an investment company, provided comprehensive guidance for assessing whether an entity is an investment company, required investment companies to measure noncontrolling ownership interest in other investment companies at fair value rather than using the equity method of accounting and required additional disclosures. The adoption of this accounting guidance did not have any impact on our consolidated financial statements.

b) Accounting Pronouncements Not Yet Adopted

In August 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance related to measuring the financial assets and financial liabilities of a consolidated collateralized financing entity. The guidance is intended to address diversity in practice that has developed in the accounting for the measurement difference between the fair value of financial assets and the fair value of financial liabilities of a collateralized financing entity. The new guidance provides a measurement alternative whereby a reporting entity could measure the financial assets and financial liabilities of the collateralized financing entity in its consolidated financial statements using the more observable of the fair values. This guidance is effective for us on January 1, 2016, with early adoption permitted as of the beginning of an annual reporting period. While we have consolidated variable interest entities that are subject to this guidance, our current practice uses an approach that was acceptable under the old guidance and is consistent with the new measurement alternatives. As a result, we plan to early adopt this new guidance during the first quarter of 2015 and do not expect any impact on our consolidated financial statements.

In June 2014, the FASB issued new accounting guidance related to the accounting for repurchase-to-maturity transactions and repurchase financings, and added disclosure requirements for all repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. The new guidance changes the accounting for repurchase-to-maturity transactions and repurchase financing such that they will be consistent with secured borrowing accounting. In addition, the guidance requires new disclosures for all repurchase agreements and securities lending transactions. We do not have repurchase-to-maturity transactions, but have repurchase agreements and securities lending transactions that will be subject to additional disclosures. These new requirements will be effective for us on January 1, 2015 and early adoption is not permitted. This new guidance will only impact our disclosures.

In May 2014, the FASB issued new accounting guidance related to revenue from contracts with customers. The key principle of the new guidance is that entities should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. The guidance also includes disclosure requirements that provide information about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for us on January 1, 2017 and early adoption is not permitted. Although insurance contracts are specifically scoped out of this new guidance, we have minor services that may be subject to the new revenue recognition guidance and are still in the process of evaluating the impact, if any, 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 shares outstanding for the periods indicated:

 

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

(Amounts in millions, except per share amounts)

      2014             2013             2014             2013      

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

    496.6        494.0        496.4        493.3   

Potentially dilutive securities:

       

Stock options, restricted stock units and stock appreciation rights

    —         5.3        —          4.6   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    496.6        499.3        496.4        497.9   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations:

       

Income (loss) from continuing operations

  $ (787   $ 146      $ (340   $ 481   

Less: income from continuing operations attributable to noncontrolling interests

    57        40        144        117   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (844   $ 106      $ (484   $ 364   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

  $ (1.70   $ 0.21      $ (0.98   $ 0.74   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

  $ (1.70   $ 0.21      $ (0.98   $ 0.73   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations:

       

Income (loss) from discontinued operations, net of taxes

  $ —        $ 2      $ —        $ (12

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

  $ —        $ 2      $ —        $ (12
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

  $ —        $ —        $ —        $ (0.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

  $ —        $ —        $ —        $ (0.02
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss):

       

Income (loss) from continuing operations

  $ (787   $ 146      $ (340   $ 481   

Income (loss) from discontinued operations, net of taxes

    —          2        —          (12
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (787     148        (340     469   

Less: net income attributable to noncontrolling interests

    57        40        144        117   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ (844   $ 108      $ (484   $ 352   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

  $ (1.70   $ 0.22      $ (0.98   $ 0.71   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

  $ (1.70   $ 0.22      $ (0.98   $ 0.71   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 and net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2014, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share for the three and nine months ended September 30, 2014, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 5.4 million and 6.4 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 and net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2014, dilutive potential weighted-average common shares outstanding would have been 502.0 million and 502.8 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)

     2014         2013         2014         2013    

Fixed maturity securities—taxable

   $ 651      $ 651      $ 1,965      $ 1,979   

Fixed maturity securities—non-taxable

     3        3        9        7   

Commercial mortgage loans

     82        81        246        244   

Restricted commercial mortgage loans related to securitization entities

     3        8        11        22   

Equity securities

     3        3        11        13   

Other invested assets

     46        41        135        128   

Restricted other invested assets related to securitization entities

     1        —         3        —    

Policy loans

     32        33        95        97   

Cash, cash equivalents and short-term investments

     7        4        19        16   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     828        824        2,494        2,506   

Expenses and fees

     (23     (23     (71     (70
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 805      $ 801      $ 2,423      $ 2,436   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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)

     2014         2013         2014         2013    

Available-for-sale securities:

        

Realized gains

   $ 17      $ 26      $ 62      $ 144   

Realized losses

     (5     (38     (42     (151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     12        (12     20        (7
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (13     (3     (16     (17

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

     7        (2     7        (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (6     (5     (9     (22
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     4        (6     24        (15

Commercial mortgage loans

     3        1        9        5   

Net gains (losses) related to securitization entities

     (1     21        14        43   

Derivative instruments (1)

     (38     (19     (66     (63

Contingent consideration adjustment

     (1     —         (1     —    

Other

     —         (3     (1     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ (27   $ (23   $ (10   $ (63
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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, 2014 and 2013 was $225 million and $407 million, respectively, which was approximately 98% and 93%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2014 and 2013 was $732 million and $1,293 million, respectively, which was approximately 95% and 90%, 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)

     2014         2013         2014         2013    

Beginning balance

   $ 95      $ 179      $ 101      $ 387   

Additions:

        

Other-than-temporary impairments not previously recognized

     1        1        2        3   

Increases related to other-than-temporary impairments previously recognized

     —         2        —         9   

Reductions:

        

Securities sold, paid down or disposed

     (7     (76     (14     (293
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 89      $ 106      $ 89      $ 106   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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,
2014
    December 31,
2013
 

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 4,721      $ 2,346   

Equity securities

     34        23   

Other invested assets

     (2     (4
  

 

 

   

 

 

 

Subtotal

     4,753        2,365   

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

     (1,442     (869

Income taxes, net

     (1,153     (517
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     2,158        979   

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

     91        53   
  

 

 

   

 

 

 

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

   $ 2,067      $ 926   
  

 

 

   

 

 

 

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)

   2014     2013  

Beginning balance

   $ 2,128      $ 1,294   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     (225     (411

Adjustment to deferred acquisition costs

     35        23   

Adjustment to present value of future profits

     36        9   

Adjustment to sales inducements

     9        3   

Adjustment to benefit reserves

     49        68   

Provision for income taxes

     33        111   
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (63     (197

Reclassification adjustments to net investment (gains) losses, net of taxes of $2 and $(6)

     (4     11   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (67     (186

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

     (6     (1
  

 

 

   

 

 

 

Ending balance

   $ 2,067      $ 1,109   
  

 

 

   

 

 

 

 

     As of or for the
nine months ended
September 30,
 

(Amounts in millions)

   2014     2013  

Beginning balance

   $ 926      $ 2,638   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     2,399        (3,348

Adjustment to deferred acquisition costs

     (160     241   

Adjustment to present value of future profits

     (55     80   

Adjustment to sales inducements

     (19     41   

Adjustment to benefit reserves

     (339     555   

Provision for income taxes

     (640     845   
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     1,186        (1,586

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

     (7     19   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     1,179        (1,567

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

     38        (38
  

 

 

   

 

 

 

Ending balance

   $ 2,067      $ 1,109   
  

 

 

   

 

 

 

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2014, 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

  $ 4,991      $ 710      $ —        $ (59   $ —        $ 5,642   

Tax-exempt

    346        25        —          (15     —          356   

Government—non-U.S.

    1,902        136        —          (3     —          2,035   

U.S. corporate

    24,398        2,653        19        (114     —          26,956   

Corporate—non-U.S.

    14,691        995        —          (48     (1     15,637   

Residential mortgage-backed

    4,864        308        14        (30     (1     5,155   

Commercial mortgage-backed

    2,623        117        4        (16     —          2,728   

Other asset-backed

    3,825        29        1        (47     —          3,808   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,640        4,973        38        (332     (2     62,317   

Equity securities

    281        38        —          (6     —          313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 57,921      $ 5,011      $ 38      $ (338   $ (2   $ 62,630   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2013, 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

   $ 4,710       $ 331       $ —         $ (231   $ —        $ 4,810   

Tax-exempt

     324         7         —           (36     —          295   

Government—non-U.S.

     2,057         104         —           (15     —          2,146   

U.S. corporate

     23,614         1,761         19         (359     —          25,035   

Corporate—non-U.S.

     14,489         738         —           (156     —          15,071   

Residential mortgage-backed

     5,058         232         9         (70     (4     5,225   

Commercial mortgage-backed

     2,886         75         2         (62     (3     2,898   

Other asset-backed

     3,171         35         —           (57     —          3,149   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

     56,309         3,283         30         (986     (7     58,629   

Equity securities

     318         36         —           (13     —          341   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $ 56,627       $ 3,319       $ 30       $ (999   $ (7   $ 58,970   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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, 2014:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
(1)
    Number of
securities
    Fair
value
    Gross
unrealized
losses
(1)
    Number of
securities
    Fair
value
    Gross
unrealized
losses
(2)
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 416      $ (5     17      $ 746      $ (54     27      $ 1,162      $ (59     44   

Tax-exempt

    —          —          —          110        (15     10        110        (15     10   

Government—non-U.S.

    133        (1     25        100        (2     8        233        (3     33   

U.S. corporate

    2,032        (27     295        1,565        (87     251        3,597        (114     546   

Corporate—non-U.S.

    1,331        (17     213        615        (32     80        1,946        (49     293   

Residential mortgage-backed

    369        (3     45        318        (28     106        687        (31     151   

Commercial mortgage-backed

    181        (1     23        454        (15     59        635        (16     82   

Other asset-backed

    1,153        (6     162        440        (41     46        1,593        (47     208   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    5,615        (60     780        4,348        (274     587        9,963        (334     1,367   

Equity securities

    23        (1     48        50        (5     6        73        (6     54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 5,638      $ (61     828      $ 4,398      $ (279     593      $ 10,036      $ (340     1,421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 5,615      $ (60     780      $ 4,247      $ (231     564      $ 9,862      $ (291     1,344   

20%-50% Below cost

    —          —          —          101        (42     15        101        (42     15   

>50% Below cost

    —          —          —          —          (1     8        —          (1     8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    5,615        (60     780        4,348        (274     587        9,963        (334     1,367   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    23        (1     48        50        (5     6        73        (6     54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    23        (1     48        50        (5     6        73        (6     54   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 5,638      $ (61     828      $ 4,398      $ (279     593      $ 10,036      $ (340     1,421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 5,109      $ (48     708      $ 4,089      $ (252     513      $ 9,198      $ (300     1,221   

Below investment grade (3)

    529        (13     120        309        (27     80        838        (40     200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 5,638      $ (61     828      $ 4,398      $ (279     593      $ 10,036      $ (340     1,421   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Amounts included $1 million of unrealized losses on other-than-temporarily impaired securities.
(2)  Amounts included $2 million of unrealized losses on other-than-temporarily impaired securities.
(3)  Amounts that have been in a continuous unrealized loss position for 12 months or more included $1 million of unrealized losses on other-than-temporarily impaired securities.

As indicated in the table 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 lower credit ratings since acquisition for corporate securities across various industry sectors since these securities were purchased. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 1% as of September 30, 2014.

 

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

Of the $231 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, 2014. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with corporate securities in the utilities and energy and finance and insurance sectors, in addition to U.S. government, agencies and government-sponsored enterprises securities resulting from an increase in U.S. Treasury yields since these securities were purchased. The average fair value percentage below cost for these securities was approximately 5% as of September 30, 2014. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of September 30, 2014:

 

    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:

               

Tax-exempt

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

Corporate—non-U.S.

    1        (1     —         1        —         —         —         —    

Structured securities:

               

Residential mortgage-backed

    10        (5     1        4        —         —         —         —    

Other asset-backed

    72        (26     8        4        —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    82        (31     9        8        —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 92      $ (35     10     10      $ —       $ —         —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    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:

               

Structured securities:

               

Residential mortgage-backed

  $ 1      $ (1     —       4      $ —       $ (1     —       8   

Other asset-backed

    8        (6     2        1        —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    9        (7     2        5        —         (1     —         8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 9      $ (7     2     5      $ —       $ (1     —       8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate 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.

 

Structured Securities

Of the $39 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, $1 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

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

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

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of September 30, 2014.

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

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of December 31, 2013:

 

    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
(1)
    Number of
securities
    Fair
value
    Gross
unrealized
losses
(1)
    Number
of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 796      $ (109     32      $ 335      $ (122     13      $ 1,131      $ (231     45   

Tax-exempt

    82        (3     26        97        (33     9        179        (36     35   

Government—non-U.S.

    479        (15     60        —         —         —         479        (15     60   

U.S. corporate

    4,774        (260     707        663        (99     82        5,437        (359     789   

Corporate—non-U.S.

    3,005        (127     379        287        (29     34        3,292        (156     413   

Residential mortgage-backed

    1,052        (55     139        157        (19     92        1,209        (74     231   

Commercial mortgage-backed

    967        (42     107        370        (23     62        1,337        (65     169   

Other asset-backed

    1,089        (17     133        145        (40     17        1,234        (57     150   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    12,244        (628     1,583        2,054        (365     309        14,298        (993     1,892   

Equity securities

    95        (13     41        —         —         —         95        (13     41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,339      $ (641     1,624      $ 2,054      $ (365     309      $ 14,393      $ (1,006     1,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 12,009      $ (547     1,571      $ 1,575      $ (163     238      $ 13,584      $ (710     1,809   

20%-50% Below cost

    235        (81     12        466        (187     51        701        (268     63   

>50% Below cost

    —         —         —         13        (15     20        13        (15     20   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    12,244        (628     1,583        2,054        (365     309        14,298        (993     1,892   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    87        (11     40        —         —         —         87        (11     40   

20%-50% Below cost

    8        (2     1        —         —         —         8        (2     1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    95        (13     41        —         —         —         95        (13     41   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,339      $ (641     1,624      $ 2,054      $ (365     309      $ 14,393      $ (1,006     1,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 11,896      $ (616     1,515      $ 1,631      $ (315     208      $ 13,527      $ (931     1,723   

Below investment grade (2)

    443        (25     109        423        (50     101        866        (75     210   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,339      $ (641     1,624      $ 2,054      $ (365     309      $ 14,393      $ (1,006     1,933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Amounts included $7 million of unrealized losses on other-than-temporarily impaired securities.
(2)  Amounts that have been in a continuous unrealized loss position for 12 months or more included $7 million of unrealized losses on other-than-temporarily impaired securities.

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2014 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

   $ 2,618       $ 2,640   

Due after one year through five years

     10,458         11,009   

Due after five years through ten years

     12,474         13,113   

Due after ten years

     20,778         23,864   
  

 

 

    

 

 

 

Subtotal

     46,328         50,626   

Residential mortgage-backed

     4,864         5,155   

Commercial mortgage-backed

     2,623         2,728   

Other asset-backed

     3,825         3,808   
  

 

 

    

 

 

 

Total

   $ 57,640       $ 62,317   
  

 

 

    

 

 

 

As of September 30, 2014, $6,618 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2014, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 24%, 19% and 12%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.

As of September 30, 2014, 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 prepayments, 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, 2014     December 31, 2013  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 2,147        35   $ 2,073        35

Office

     1,642        27        1,558        26   

Industrial

     1,606        26        1,581        27   

Apartments

     499        8        491        8   

Mixed use/other

     207        4        229        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,101        100     5,932        100
    

 

 

     

 

 

 

Allowance for losses

     (24       (33  
  

 

 

     

 

 

   

Total

   $ 6,077        $ 5,899     
  

 

 

     

 

 

   

 

     September 30, 2014     December 31, 2013  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic region:

        

South Atlantic

   $ 1,651        27   $ 1,535        26

Pacific

     1,646        27        1,590        27   

Middle Atlantic

     835        14        828        14   

Mountain

     531        9        478        8   

East North Central

     392        6        404        7   

West North Central

     374        6        377        6   

West South Central

     267        5        241        4   

New England

     265        4        337        6   

East South Central

     140        2        142        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,101        100     5,932        100
    

 

 

     

 

 

 

Allowance for losses

     (24       (33  
  

 

 

     

 

 

   

Total

   $ 6,077        $ 5,899     
  

 

 

     

 

 

   

 

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

 

     September 30, 2014  

(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

   $ —       $ —        $ 4      $ 4      $ 2,143      $ 2,147   

Office

     —         —         6        6        1,636        1,642   

Industrial

     —         —         18        18        1,588        1,606   

Apartments

     —         —         —         —         499        499   

Mixed use/other

     —         —         —         —         207        207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ —       $ —       $ 28      $ 28      $ 6,073      $ 6,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2013  

(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

   $ —       $ —       $ 10      $ 10      $ 2,063      $ 2,073   

Office

     —         —         6        6        1,552        1,558   

Industrial

     2        2        16        20        1,561        1,581   

Apartments

     —         —         —         —         491        491   

Mixed use/other

     1        —         —         1        228        229   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 3      $ 2      $ 32      $ 37      $ 5,895      $ 5,932   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       1     1     99     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2014 and December 31, 2013, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of September 30, 2014 and December 31, 2013.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of September 30, 2014, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of these loans was expected to be recoverable.

During the nine months ended September 30, 2014 and the year ended December 31, 2013, we modified or extended 19 and 33 commercial mortgage loans, respectively, with a total carrying value of $220 million and $165 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 and were not considered troubled debt restructurings.

 

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)

       2014             2013             2014             2013      

Allowance for credit losses:

        

Beginning balance

   $ 27      $ 38      $ 33      $ 42   

Charge-offs

     —         (1     (1     (3

Recoveries

     —         —         —         —    

Provision

     (3     (1     (8     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 24      $ 36      $ 24      $ 36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance for individually impaired loans

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 24      $ 36      $ 24      $ 36   
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment:

        

Ending balance

   $ 6,101      $ 5,893      $ 6,101      $ 5,893   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ 17      $ 2      $ 17      $ 2   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 6,084      $ 5,891      $ 6,084      $ 5,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2014, we had individually impaired commercial mortgage loans included within the industrial property type with a recorded investment of $15 million, an unpaid principal balance of $16 million, charge-offs of $1 million and an average recorded investment of $15 million. As of September 30, 2014 and December 31, 2013, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $2 million, an unpaid principal balance of $3 million, charge-offs of $1 million, which were recorded in the second quarter of 2013, and an average recorded investment of $2 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 net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

 

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

 

     September 30, 2014  

(Amounts in millions)

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

Property type:

            

Retail

   $ 669      $ 382      $ 996      $ 88      $ 12      $ 2,147   

Office

     400        266        787        131        58        1,642   

Industrial

     447        333        709        86        31        1,606   

Apartments

     216        77        183        8        15        499   

Mixed use/other

     51        43        107        6        —         207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1,783      $ 1,101      $ 2,782      $ 319      $ 116      $ 6,101   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     29     18     46     5     2     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.08        1.74        1.58        1.00        0.73        1.71   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $17 million of impaired loans, $6 million of loans past due and not individually impaired and $93 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 130%.

 

     December 31, 2013  

(Amounts in millions)

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

Property type:

            

Retail

   $ 596      $ 336      $ 1,024      $ 95      $ 22      $ 2,073   

Office

     397        191        716        191        63        1,558   

Industrial

     430        237        748        146        20        1,581   

Apartments

     201        86        176        27        1        491   

Mixed use/other

     71        36        110        12        —         229   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1,695      $ 886      $ 2,774      $ 471      $ 106      $ 5,932   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     28     15     47     8     2     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.14        1.79        1.66        1.03        0.63        1.75   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $2 million of impaired loans, $5 million of loans past due and not individually impaired and $99 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 119%.

 

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, 2014  

(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

   $ 96      $ 300      $ 469      $ 897      $ 385      $ 2,147   

Office

     116        173        212        754        380        1,635   

Industrial

     170        102        271        783        280        1,606   

Apartments

     2        30        114        209        144        499   

Mixed use/other

     6        2        34        119        46        207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 390      $ 607      $ 1,100      $ 2,762      $ 1,235      $ 6,094   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     6     10     18     46     20     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     79     65     63     60     44     59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2013  

(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

   $ 106      $ 314      $ 374      $ 779      $ 399      $ 1,972   

Office

     131        181        225        637        376        1,550   

Industrial

     195        100        270        721        295        1,581   

Apartments

     3        31        107        187        163        491   

Mixed use/other

     16        9        32        106        66        229   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 451      $ 635      $ 1,008      $ 2,430      $ 1,299      $ 5,823   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     8     11     17     42     22     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     80     68     63     60     43     59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2014 and December 31, 2013, we had floating rate commercial mortgage loans of $7 million and $109 million, respectively.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

We have a consolidated securitization entity that holds commercial mortgage loans that are recorded as restricted commercial mortgage loans related to securitization entities.

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities and the changes in fair value for these securities are recorded in current period income (loss). The trading securities comprise asset-backed securities, including residual interest in certain policy loan securitization entities and highly rated bonds that are primarily backed by credit card receivables.

Derivative Instruments
Derivative Instruments

(5) Derivative Instruments

Our business activities routinely deal with fluctuations in interest rates, equity prices, currency exchange rates and other asset and liability prices. We use derivative instruments to mitigate or reduce certain of these risks. We have established policies for managing each of these risks, including prohibitions on derivatives market-making and other speculative derivatives activities. These policies require the use of derivative instruments in concert with other techniques to reduce or mitigate these risks. While we use derivatives to mitigate or reduce risks, certain derivatives do not meet the accounting requirements to be designated as hedging instruments and are denoted as “derivatives not designated as hedges” in the following disclosures. For derivatives that meet the accounting requirements to be designated as hedges, the following disclosures for these derivatives are denoted as “derivatives designated as hedges,” which include both cash flow and fair value hedges.

 

The following table sets forth our positions in derivative instruments as of the dates indicated:

 

   

Derivative assets

   

Derivative liabilities

 
        Fair value         Fair value  

(Amounts in millions)

 

Balance
sheet classification

  September 30,
2014
    December 31,
2013
   

Balance
sheet classification

  September 30,
2014
    December 31,
2013
 

Derivatives designated as hedges

           

Cash flow hedges:

           

Interest rate swaps

  Other invested assets   $ 253      $ 121      Other liabilities   $ 33      $ 569   

Inflation indexed swaps

  Other invested assets     —         —       Other liabilities     70        60   

Foreign currency swaps

  Other invested assets     4        4      Other liabilities     —         2   

Forward bond purchase commitments

  Other invested assets     5        —       Other liabilities     —         13   
   

 

 

   

 

 

     

 

 

   

 

 

 

Total cash flow hedges

      262        125          103        644   
   

 

 

   

 

 

     

 

 

   

 

 

 

Fair value hedges:

           

Interest rate swaps

  Other invested assets     —         1      Other liabilities     —         —    
   

 

 

   

 

 

     

 

 

   

 

 

 

Total fair value hedges

      —         1          —         —    
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedges

      262        126          103        644   
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedges

           

Interest rate swaps

  Other invested assets     373        314      Other liabilities     96        6   

Interest rate swaps related to securitization entities

  Restricted other invested assets     —         —       Other liabilities     22        16   

Foreign currency swaps

  Other invested assets     —         —       Other liabilities     3        —    

Credit default swaps

  Other invested assets     5        11      Other liabilities     —         —    

Credit default swaps related to securitization entities

  Restricted other invested assets     —         —       Other liabilities     19        32   

Equity index options

  Other invested assets     11        12      Other liabilities     —         —    

Financial futures

  Other invested assets     —         —       Other liabilities     —         —    

Equity return swaps

  Other invested assets     5        —       Other liabilities     —         1   

Other foreign currency contracts

  Other invested assets     8        8      Other liabilities     8        4   

GMWB embedded derivatives

  Reinsurance recoverable (1)     8        (1   Policyholder account balances (2)     218        96   

Fixed index annuity embedded derivatives

  Other assets     —         —       Policyholder account balances (3)     246        143   

Indexed universal life embedded derivatives

  Reinsurance recoverable     —         —       Policyholder account balances (4)     3        —    
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives not designated as hedges

      410        344          615        298   
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives

    $ 672      $ 470        $ 718      $ 942   
   

 

 

   

 

 

     

 

 

   

 

 

 

 

(1)  Represents embedded derivatives associated with the reinsured portion of our guaranteed minimum withdrawal benefits (“GMWB”) liabilities.
(2)  Represents the embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.
(3) Represents the embedded derivatives associated with our fixed index annuity liabilities.
(4) Represents the embedded derivatives associated with our indexed universal life liabilities.

 

The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements. The amounts recognized for derivative counterparty collateral retained by us was recorded in other invested assets with a corresponding amount recorded in other liabilities to represent our obligation to return the collateral retained by us.

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB, fixed index annuity embedded derivatives and indexed universal life embedded derivatives, the change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:

 

(Notional in millions)

  Measurement   December 31,
2013
    Additions     Maturities/
terminations
    September 30,
2014
 

Derivatives designated as hedges

         

Cash flow hedges:

         

Interest rate swaps

  Notional   $ 13,926      $ —        $ (597   $ 13,329   

Inflation indexed swaps

  Notional     561        15        (3     573   

Foreign currency swaps

  Notional     35        —          —          35   

Forward bond purchase commitments

  Notional     237        —          (189     48   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total cash flow hedges

      14,759        15        (789     13,985   
   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value hedges:

         

Interest rate swaps

  Notional     6        —          (1     5   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total fair value hedges

      6        —          (1     5   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives designated as hedges

      14,765        15        (790     13,990   
   

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives not designated as hedges

         

Interest rate swaps

  Notional     4,822        253        (6     5,069   

Interest rate swaps related to securitization entities

  Notional     91        —          (10     81   

Credit default swaps

  Notional     639        5        —          644   

Credit default swaps related to securitization entities

  Notional     312        —          —          312   

Equity index options

  Notional     777        439        (394     822   

Financial futures

  Notional     1,260        4,299        (4,226     1,333   

Equity return swaps

  Notional     110        223        (223     110   

Foreign currency swaps

  Notional     —          104        —          104   

Other foreign currency contracts

  Notional     487        677        (786     378   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives not designated as hedges

      8,498        6,000        (5,645     8,853   
   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivatives

    $ 23,263      $ 6,015      $ (6,435   $ 22,843   
   

 

 

   

 

 

   

 

 

   

 

 

 

(Number of policies)

  Measurement   December 31,
2013
    Additions     Maturities/
terminations
    September 30,
2014
 

Derivatives not designated as hedges

         

GMWB embedded derivatives

  Policies     42,045        —          (1,541     40,504   

Fixed index annuity embedded derivatives

  Policies     7,705        3,767        (110     11,362   

Indexed universal life embedded derivatives

  Policies     29        228        —          257   

 

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2014:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income (loss)
from OCI
    Classification of gain
(loss) reclassified into
net income (loss)
  Gain (loss)
recognized in
net income (loss) 
(1)
    Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

  $ 151      $ 17      Net investment
income
  $ 2      Net investment
gains (losses)

Interest rate swaps hedging liabilities

    (8     —       Interest expense     —       Net investment
gains (losses)

Inflation indexed swaps

    20        (3   Net investment
income
    —       Net investment
gains (losses)

Foreign currency swaps

    2        —       Net investment
income
    —       Net investment
gains (losses)

Forward bond purchase commitments

    4        —       Net investment
income
    —       Net investment
gains (losses)
 

 

 

   

 

 

     

 

 

   

Total

  $ 169      $ 14        $ 2     
 

 

 

   

 

 

     

 

 

   

 

(1)  Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

 

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2013:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income (loss)
from OCI
    Classification of gain
(loss) reclassified into
net income (loss)
  Gain (loss)
recognized in
net income (loss) 
(1)
    Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

  $ (199   $ 15      Net investment
income
  $ (2   Net investment
gains (losses)

Interest rate swaps hedging liabilities

    9        —       Interest expense     —       Net investment
gains (losses)

Inflation indexed swaps

    (2     (3   Net investment
income
    —       Net investment
gains (losses)

Foreign currency swaps

    (1     —       Interest expense     —       Net investment
gains (losses)

Forward bond purchase commitments

    (11     —       Net investment
income
    —       Net investment
gains (losses)
 

 

 

   

 

 

     

 

 

   

Total

  $ (204   $ 12        $ (2  
 

 

 

   

 

 

     

 

 

   

 

(1)  Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2014:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income (loss)
from OCI
    Classification of gain
(loss) reclassified into
net income (loss)
  Gain (loss)
recognized in
net income (loss) 
(1)
    Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

  $ 723      $ 45      Net investment
income
  $ 9      Net investment
gains (losses)

Interest rate swaps hedging liabilities

    (42     1      Interest expense     —       Net investment
gains (losses)

Inflation indexed swaps

    (10     (11   Net investment
income
    —       Net investment
gains (losses)

Foreign currency swaps

    2        —       Net investment
income
    —       Net investment
gains (losses)

Forward bond purchase commitments

    32        —       Net investment
income
    —       Net investment
gains (losses)
 

 

 

   

 

 

     

 

 

   

Total

  $ 705      $ 35        $ 9     
 

 

 

   

 

 

     

 

 

   

 

(1)  Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

 

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2013:

 

(Amounts in millions)

   Gain (loss)
recognized in
OCI
    Gain (loss)
reclassified into
net income (loss)
from OCI
    Classification of gain
(loss) reclassified into
net income (loss)
   Gain (loss)
recognized in
net income (loss) 
(1)
    Classification of gain
(loss) recognized in
net income (loss)

Interest rate swaps hedging assets

   $ (702   $ 34      Net investment
income
   $ (12   Net investment
gains (losses)

Interest rate swaps hedging assets

     —         1      Net investment
gains (losses)
     —       Net investment
gains (losses)

Interest rate swaps hedging liabilities

     31        1      Interest expense      —       Net investment
gains (losses)

Inflation indexed swaps

     32        (5   Net investment
income
     —       Net investment
gains (losses)

Foreign currency swaps

     (1     —       Interest expense      —       Net investment
gains (losses)

Forward bond purchase commitments

     (50     —       Net investment
income
     —       Net investment
gains (losses)
  

 

 

   

 

 

      

 

 

   

Total

   $ (690   $ 31         $ (12  
  

 

 

   

 

 

      

 

 

   

 

(1)  Represents ineffective portion of cash flow hedges as there were no amounts excluded from the measurement of effectiveness.

The following tables provide a reconciliation of current period changes, net of applicable income taxes, for these designated derivatives presented in the separate component of stockholders’ equity labeled “derivatives qualifying as hedges,” for the periods indicated:

 

     Three months
ended
September 30,
 

(Amounts in millions)

   2014     2013  

Derivatives qualifying as effective accounting hedges as of July 1

   $ 1,652      $ 1,581   

Current period increases (decreases) in fair value, net of deferred taxes of $(59) and $73

     110        (131

Reclassification to net (income) loss, net of deferred taxes of $5 and $4

     (9     (8
  

 

 

   

 

 

 

Derivatives qualifying as effective accounting hedges as of September 30

   $ 1,753      $ 1,442   
  

 

 

   

 

 

 

 

     Nine months
ended
September 30,
 

(Amounts in millions)

   2014     2013  

Derivatives qualifying as effective accounting hedges as of January 1

   $ 1,319      $ 1,909   

Current period increases (decreases) in fair value, net of deferred taxes of $(248) and $244

     457        (446

Reclassification to net (income) loss, net of deferred taxes of $12 and $10

     (23     (21
  

 

 

   

 

 

 

Derivatives qualifying as effective accounting hedges as of September 30

   $ 1,753      $ 1,442   
  

 

 

   

 

 

 

The total of derivatives designated as cash flow hedges of $1,753 million, net of taxes, recorded in stockholders’ equity as of September 30, 2014 is expected to be reclassified to net income (loss) in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $51 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2047. No amounts were reclassified to net income (loss) during the three or nine months ended September 30, 2014 in connection with forecasted transactions that were no longer considered probable of occurring.

Fair Value Hedges

Certain derivative instruments are designated as fair value hedges. The changes in fair value of these instruments are recorded in net income (loss). In addition, changes in the fair value attributable to the hedged portion of the underlying instrument are reported in net income (loss). We designate and account for the following as fair value hedges when they have met the effectiveness requirements: (i) interest rate swaps to convert fixed rate liabilities into floating rate liabilities; (ii) cross currency swaps to convert non-U.S. dollar fixed rate liabilities to floating rate U.S. dollar liabilities; and (iii) other instruments to hedge various fair value exposures of investments.

There were no pre-tax income (loss) effects of fair value hedges and related hedged items for the three months ended September 30, 2014 and 2013.

There were no pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2014. The following table provides information about the pre-tax income (loss) effects of fair value hedges and related hedged items for the nine months ended September 30, 2013:

 

     Derivative instrument      Hedged item

(Amounts in millions)

   Gain (loss)
recognized
in net
income
(loss)
    Classification of
gain (losses)
recognized in net
income (loss)
   Other
impacts
to net
income
(loss)
     Classification
of other
impacts to
net income
(loss)
     Gain (loss)
recognized
in net
income
(loss)
     Classification of
gain (losses)
recognized in net
income (loss)

Interest rate swaps hedging liabilities

   $ (11   Net investment
gains (losses)
   $ 12        
 
Interest
credited
  
  
   $ 11       Net investment
gains (losses)

Foreign currency swaps

     (31   Net investment
gains (losses)
     —         
 
Interest
credited
  
  
     31       Net investment
gains (losses)
  

 

 

      

 

 

       

 

 

    

Total

   $ (42      $ 12          $ 42      
  

 

 

      

 

 

       

 

 

    

The difference between the gain (loss) recognized for the derivative instrument and the hedged item presented above represents the net ineffectiveness of the fair value hedging relationships. The other impacts presented above represent the net income (loss) effects of the derivative instruments that are presented in the same location as the income (loss) activity from the hedged item. There were no amounts excluded from the measurement of effectiveness.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated with non-functional currency investments held by certain foreign subsidiaries and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

We also have derivatives related to securitization entities where we were required to consolidate the related securitization entity as a result of our involvement in the structure. The counterparties for these derivatives typically only have recourse to the securitization entity. The interest rate swaps used for these entities are typically used to effectively convert the interest payments on the assets of the securitization entity to the same basis as the interest rate on the borrowings issued by the securitization entity. Credit default swaps are utilized in certain securitization entities to enhance the yield payable on the borrowings issued by the securitization entity and also include a settlement feature that allows the securitization entity to provide the par value of assets in the securitization entity for the amount of any losses incurred under the credit default swap.

The following table provides the pre-tax gain (loss) recognized in net income (loss) for the effects of derivatives not designated as hedges for the periods indicated:

 

     Three months ended
September 30,
    Classification of gain (loss)
recognized

in net income (loss)

(Amounts in millions)

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