Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 001-32195

 

 

LOGO

GENWORTH FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   33-1073076

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

6620 West Broad Street

Richmond, Virginia

  23230
(Address of Principal Executive Offices)   (Zip Code)

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 31, 2011, 490,931,207 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 

 

 


TABLE OF CONTENTS

 

         Page  

PART I—FINANCIAL INFORMATION

     3   
Item 1.  

Financial Statements

     3   
 

Condensed Consolidated Statements of Income for the three and nine months ended September  30, 2011 and 2010 (Unaudited)

     3   
 

Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010

     4   
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 and 2010 (Unaudited)

     5   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and  2010 (Unaudited)

     6   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     7   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     67   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     144   
Item 4.  

Controls and Procedures

     145   

PART II—OTHER INFORMATION

  

Item 1.  

Legal Proceedings

     145   
Item 1A.  

Risk Factors

     146   
Item 6.  

Exhibits

     150   
Signatures      151   

 

2


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
         2011             2010             2011             2010      

Revenues:

        

Premiums

   $ 1,461      $ 1,447      $ 4,353      $ 4,387   

Net investment income

     842        815        2,553        2,403   

Net investment gains (losses)

     (157     105        (225     (104

Insurance and investment product fees and other

     375        300        1,063        812   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,521        2,667        7,744        7,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,457        1,502        4,538        4,157   

Interest credited

     194        212        599        636   

Acquisition and operating expenses, net of deferrals

     510        472        1,524        1,446   

Amortization of deferred acquisition costs and intangibles

     190        227        572        590   

Interest expense

     124        114        385        338   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     2,475        2,527        7,618        7,167   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     46        140        126        331   

Provision (benefit) for income taxes

     (19     18        5        (80
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     65        122        121        411   

Less: net income attributable to noncontrolling interests

     36        39        106        108   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 29      $ 83      $ 15      $ 303   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.06      $ 0.17      $ 0.03      $ 0.62   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.06      $ 0.17      $ 0.03      $ 0.61   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     490.8        489.5        490.5        489.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     492.5        493.9        493.7        493.9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

        

Total other-than-temporary impairments

   $ (39   $ (7   $ (98   $ (108

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

     (13     (30     (16     (60
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (52     (37     (114     (168

Other investments gains (losses)

     (105     142        (111     64   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment gains (losses)

   $ (157   $ 105      $ (225   $ (104
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

3


GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

    September 30,
2011
    December 31,
2010
 
    (Unaudited)        

Assets

   

Investments:

   

Fixed maturity securities available-for-sale, at fair value

  $ 57,816      $ 55,183   

Equity securities available-for-sale, at fair value

    354        332   

Commercial mortgage loans

    6,271        6,718   

Restricted commercial mortgage loans related to securitization entities

    430        507   

Policy loans

    1,556        1,471   

Other invested assets

    5,626        3,854   

Restricted other invested assets related to securitization entities ($376 and $370 at fair value)

    377        372   
 

 

 

   

 

 

 

Total investments

    72,430        68,437   

Cash and cash equivalents

    3,648        3,132   

Accrued investment income

    725        733   

Deferred acquisition costs

    7,359        7,256   

Intangible assets

    626        741   

Goodwill

    1,326        1,329   

Reinsurance recoverable

    16,976        17,191   

Other assets

    1,002        810   

Deferred tax asset

    —          1,100   

Separate account assets

    9,794        11,666   
 

 

 

   

 

 

 

Total assets

  $ 113,886      $ 112,395   
 

 

 

   

 

 

 

Liabilities and stockholders’ equity

   

Liabilities:

   

Future policy benefits

  $ 31,745      $ 30,717   

Policyholder account balances

    26,480        26,978   

Liability for policy and contract claims

    7,379        6,933   

Unearned premiums

    4,210        4,541   

Other liabilities ($212 and $150 other liabilities related to securitization entities)

    6,755        6,085   

Borrowings related to securitization entities ($48 and $51 at fair value)

    414        494   

Non-recourse funding obligations

    3,280        3,437   

Long-term borrowings

    4,708        4,952   

Deferred tax liability

    1,753        1,621   

Separate account liabilities

    9,794        11,666   
 

 

 

   

 

 

 

Total liabilities

    96,518        97,424   
 

 

 

   

 

 

 

Commitments and contingencies

   

Stockholders’ equity:

   

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 579 million and 578 million shares issued as of September 30, 2011 and December 31, 2010, respectively; 491 million and 490 million shares outstanding as of September 30, 2011 and December 31, 2010, respectively

    1        1   

Additional paid-in capital

    12,117        12,095   
 

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

   

Net unrealized investment gains (losses):

   

Net unrealized gains (losses) on securities not other-than-temporarily impaired

    1,579        21   

Net unrealized gains (losses) on other-than-temporarily impaired securities

    (126     (121
 

 

 

   

 

 

 

Net unrealized investment gains (losses)

    1,453        (100
 

 

 

   

 

 

 

Derivatives qualifying as hedges

    1,960        924   

Foreign currency translation and other adjustments

    459        668   
 

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

    3,872        1,492   

Retained earnings

    2,988        2,973   

Treasury stock, at cost (88 million shares as of September 30, 2011 and December 31, 2010)

    (2,700     (2,700
 

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

    16,278        13,861   

Noncontrolling interests

    1,090        1,110   
 

 

 

   

 

 

 

Total stockholders’ equity

    17,368        14,971   
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 113,886      $ 112,395   
 

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

4


GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in millions)

(Unaudited)

 

    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
    Total
stockholders’
equity
 

Balances as of December 31, 2010

  $ 1      $ 12,095      $ 1,492      $ 2,973      $ (2,700   $ 13,861      $ 1,110      $ 14,971   
               

 

 

 

Repurchase of subsidiary shares

    —          —          —          —          —          —          (71     (71

Comprehensive income (loss):

               

Net income

    —          —          —          15        —          15        106        121   

Net unrealized gains (losses) on securities not other- than-temporarily impaired

    —          —          1,558        —          —          1,558        34        1,592   

Net unrealized gains (losses) on other-than-temporarily impaired securities

    —          —          (5     —          —          (5     —          (5

Derivatives qualifying as hedges

    —          —          1,036        —          —          1,036        —          1,036   

Foreign currency translation and other adjustments

    —          —          (209     —          —          (209     (54     (263
               

 

 

 

Total comprehensive income (loss)

                  2,481   

Dividends to noncontrolling interests

    —          —          —          —          —          —          (35     (35

Stock-based compensation expense and exercises and other

    —          22        —          —          —          22        —          22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2011

  $ 1      $ 12,117      $ 3,872      $ 2,988      $ (2,700   $ 16,278      $ 1,090      $ 17,368   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2009

  $ 1      $ 12,034      $ (164   $ 3,105      $ (2,700   $ 12,276      $ 1,074      $ 13,350   
               

 

 

 

Cumulative effect of change in accounting, net of taxes and other adjustments

    —          —          260        (275     —          (15     —          (15

Repurchase of subsidiary shares

    —          —          —          —          —          —          (131     (131

Comprehensive income (loss):

               

Net income

    —          —          —          303        —          303        108        411   

Net unrealized gains (losses) on securities not other- than-temporarily impaired

    —          —          1,621        —          —          1,621        28        1,649   

Net unrealized gains (losses) on other-than-temporarily impaired securities

    —          —          104        —          —          104        —          104   

Derivatives qualifying as hedges

    —          —          552        —          —          552        —          552   

Foreign currency translation and other adjustments

    —          —          111        —          —          111        22        133   
               

 

 

 

Total comprehensive income (loss)

                  2,849   

Dividends to noncontrolling interests

    —          —          —          —          —          —          (32     (32

Stock-based compensation expense and exercises and other

    —          30        —          —          —          30        —          30   

Other capital transactions

    —          20        —          —          —          20        —          20   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2010

  $ 1      $ 12,084      $ 2,484      $ 3,133      $ (2,700   $ 15,002      $ 1,069      $ 16,071   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5


GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Nine months ended
September 30,
 
     2011     2010  

Cash flows from operating activities:

    

Net income

   $ 121      $ 411   

Adjustments to reconcile net income to net cash from operating activities:

    

Amortization of fixed maturity discounts and premiums and limited partnerships

     (71     (11

Net investment losses (gains)

     225        104   

Charges assessed to policyholders

     (507     (367

Acquisition costs deferred

     (686     (610

Amortization of deferred acquisition costs and intangibles

     572        590   

Deferred income taxes

     (158     (111

Net increase in trading securities, held-for-sale investments and derivative instruments

     795        113   

Stock-based compensation expense

     23        31   

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     (152     (31

Insurance reserves

     1,942        1,767   

Current tax liabilities

     8        (313

Other liabilities and other policy-related balances

     (80     (597
  

 

 

   

 

 

 

Net cash from operating activities

     2,032        976   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities and repayments of investments:

    

Fixed maturity securities

     4,075        3,302   

Commercial mortgage loans

     633        493   

Restricted commercial mortgage loans related to securitization entities

     77        40   

Proceeds from sales of investments:

    

Fixed maturity and equity securities

     3,446        3,329   

Purchases and originations of investments:

    

Fixed maturity and equity securities

     (7,798     (10,223

Commercial mortgage loans

     (202     (35

Other invested assets, net

     (56     1,483   

Policy loans, net

     (85     (77

Payments for businesses purchased, net of cash acquired

     (4     —     
  

 

 

   

 

 

 

Net cash from investing activities

     86        (1,688
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Deposits to universal life and investment contracts

     2,016        1,832   

Withdrawals from universal life and investment contracts

     (3,034     (2,950

Short-term borrowings and other, net

     21        (86

Redemption and repurchase of non-recourse funding obligations

     (112     (6

Proceeds from the issuance of long-term debt

     545        660   

Repayment and repurchase of long-term debt

     (760     (6

Repayment of borrowings related to securitization entities

     (77     (46

Repurchase of subsidiary shares

     (71     (131

Dividends paid to noncontrolling interests

     (35     (32
  

 

 

   

 

 

 

Net cash from financing activities

     (1,507     (765

Effect of exchange rate changes on cash and cash equivalents

     (95     73   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     516        (1,404

Cash and cash equivalents at beginning of period

     3,132        5,002   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,648      $ 3,598   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

6


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Financial, Inc. (“Genworth”) was incorporated in Delaware on October 23, 2003. The accompanying 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, which we refer to as the “Company,” “we,” “us” or “our” unless the context otherwise requires. All intercompany accounts and transactions have been eliminated in consolidation.

We have the following three operating segments:

 

   

Retirement and Protection. We offer and/or manage a variety of protection, wealth management and retirement income products. Our primary insurance products include life and long-term care insurance. Additionally, we offer other Medicare supplement insurance products, as well as care coordination services for our long-term care policyholders. Our wealth management and retirement income products include: a variety of managed account programs and advisor services, financial planning services and fixed deferred and immediate individual annuities. We previously offered variable deferred annuities and group variable annuities offered through retirement plans.

 

   

International. We offer mortgage and lifestyle protection insurance products and related services in multiple markets. We are a leading provider of mortgage insurance products in Canada, Australia, Mexico and multiple European countries. Our products predominantly insure prime-based, individually underwritten residential mortgage loans, also known as flow mortgage insurance. On a limited basis, we also 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. We are a leading provider of protection coverages primarily associated with certain financial obligations (referred to as lifestyle protection) in multiple European countries. These 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.

 

   

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 structured, or 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 capital and risk.

We also have Corporate and Other activities which include debt financing expenses that are incurred at our holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of non-strategic products that are managed outside of our operating segments. Our non-strategic products include our institutional and corporate-owned life 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 continue to offer fixed annuities.

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 condensed consolidated financial statements include all adjustments considered necessary by management to present a fair statement of the financial position, results of

 

7


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

operations and cash flows for the periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2010 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Pronouncements

Recently Adopted

In September 2011, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance related to goodwill impairment testing. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the two step quantitative goodwill impairment test. The new guidance has a mandatory effective date of January 1, 2012, with early adoption permitted in some cases. We elected to early adopt this new guidance effective on July 1, 2011 in order to apply the new guidance in our annual goodwill impairment testing performed during the third quarter. The adoption of this new accounting guidance did not have an impact on our consolidated financial statements.

On July 1, 2011, we adopted new accounting guidance related to additional disclosures for troubled debt restructurings. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2011, we adopted new accounting guidance related to goodwill impairment testing when a reporting unit’s carrying value is zero or negative. This guidance did not impact our consolidated financial statements upon adoption, as all of our reporting units with goodwill balances have positive carrying values.

On January 1, 2011, we adopted new accounting guidance related to how investments held through separate accounts affect an insurer’s consolidation analysis of those investments. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2011, we adopted new accounting guidance related to additional disclosures about purchases, sales, issuances and settlements in the rollforward of Level 3 fair value measurements. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements.

Not Yet Adopted

In June 2011, the FASB issued new accounting guidance requiring presentation of the components of net income (loss), the components of other comprehensive income (loss) (“OCI”) and total comprehensive income either in a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. This new accounting guidance is effective for us on January 1, 2012. We do not expect the adoption of this accounting guidance to have a material impact on our consolidated financial results.

In May 2011, the FASB issued new accounting guidance for fair value measurements. This new accounting guidance clarifies existing fair value measurement requirements and changes certain fair value measurement principles and disclosure requirements that will be effective for us on January 1, 2012. We have not yet determined the impact this accounting guidance will have on our consolidated financial statements.

In April 2011, the FASB issued new accounting guidance for repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new

 

8


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

guidance removes the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria when determining effective control and is effective, for us, prospectively to any transactions occurring on or after January 1, 2012. We do not expect the adoption of this accounting guidance to have a material impact on our consolidated financial statements.

In October 2010, the FASB issued new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. This new accounting guidance will be effective for us on January 1, 2012. The new guidance is effective prospectively with retrospective adoption allowed. We intend to adopt this new guidance retrospectively. We expect that this new guidance, when adopted, will reduce retained earnings and stockholders’ equity by approximately $1.3 billion to $1.6 billion, subject to other adjustments. When adopted in 2012, we expect to defer fewer costs and record lower amortization resulting in decreased earnings.

(3) Earnings Per Share

Basic and diluted earnings per share are calculated by dividing each income 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)

       2011              2010              2011              2010      

Net income

   $ 65       $ 122       $ 121       $ 411   

Less: net income attributable to noncontrolling interests

     36         39         106         108   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

   $ 29       $ 83       $ 15       $ 303   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic per common share:

           

Net income

   $ 0.13       $ 0.25       $ 0.25       $ 0.84   

Less: net income attributable to noncontrolling interests

     0.07         0.08         0.22         0.22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders (1)

   $ 0.06       $ 0.17       $ 0.03       $ 0.62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted per common share:

           

Net income

   $ 0.13       $ 0.25       $ 0.24       $ 0.83   

Less: net income attributable to noncontrolling interests

     0.07         0.08         0.21         0.22   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income available to Genworth Financial, Inc.’s common stockholders (1)

   $ 0.06       $ 0.17       $ 0.03       $ 0.61   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     490.8         489.5         490.5         489.1   

Potentially dilutive securities:

           

Stock options, restricted stock units and stock appreciation rights

     1.7         4.4         3.2         4.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average shares used in diluted earnings per common share calculations

     492.5         493.9         493.7         493.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

May not total due to whole number calculation.

 

9


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(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)

      2011             2010             2011             2010      

Fixed maturity securities—taxable

  $ 669      $ 658      $ 2,032      $ 1,930   

Fixed maturity securities—non-taxable

    8        14        29        46   

Commercial mortgage loans

    89        95        273        298   

Restricted commercial mortgage loans related to securitization entities

    11        10        30        30   

Equity securities

    3        4        16        11   

Other invested assets

    42        24        131        61   

Restricted other invested assets related to securitization entities

    —          1        —          2   

Policy loans

    30        28        89        83   

Cash, cash equivalents and short-term investments

    12        6        24        15   
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

    864        840        2,624        2,476   

Expenses and fees

    (22     (25     (71     (73
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

  $ 842      $ 815      $ 2,553      $ 2,403   
 

 

 

   

 

 

   

 

 

   

 

 

 

(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)

      2011             2010             2011             2010      

Available-for-sale securities:

       

Realized gains

  $ 59      $ 38      $ 113      $ 114   

Realized losses

    (23     (35     (88     (109
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    36        3        25        5   
 

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

       

Total other-than-temporary impairments

    (39     (7     (98     (108

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

    (13     (30     (16     (60
 

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

    (52     (37     (114     (168
 

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

    11        23        36        25   

Commercial mortgage loans

    3        (9     4        (31

Net gains (losses) related to securitization entities

    (57     30        (52     (6

Derivative instruments (1)

    (76     94        (101     48   

Contingent purchase price valuation change

    (22     —          (23     —     

Other

    —          1        —          23   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

  $ (157   $ 105      $ (225   $ (104
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

10


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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, 2011 and 2010 was $263 million and $275 million, respectively, which was approximately 93% and 89%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2011 and 2010 was $954 million and $1,691 million, respectively, which was approximately 93% and 94%, respectively, of book value.

The following represents the activity for credit losses recognized in net income on debt securities where an other-than-temporary impairment was identified and a portion of other-than-temporary impairments was included in OCI as of or 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)

      2011             2010             2011             2010      

Beginning balance

  $ 726      $ 978      $ 784      $ 1,059   

Additions:

       

Other-than-temporary impairments not previously recognized

    27        13        31        44   

Increases related to other-than-temporary impairments previously recognized

    24        22        72        100   

Reductions:

       

Securities sold, paid down or disposed

    (58     (126     (168     (316
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 719      $ 887      $ 719      $ 887   
 

 

 

   

 

 

   

 

 

   

 

 

 

(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, 2011         December 31, 2010    

Net unrealized gains (losses) on investment securities:

   

Fixed maturity securities

  $ 3,553      $ 511   

Equity securities

    (4     9   

Other invested assets

    (30     (22
 

 

 

   

 

 

 

Subtotal

    3,519        498   

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

    (1,162     (583

Income taxes, net

    (820     35   
 

 

 

   

 

 

 

Net unrealized investment gains (losses)

    1,537        (50

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

    84        50   
 

 

 

   

 

 

 

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

  $ 1,453      $ (100
 

 

 

   

 

 

 

 

11


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     As of or for the
three months ended
September 30,
 

(Amounts in millions)

       2011             2010      

Beginning balance

   $ 236      $ 29   

Cumulative effect of changes in accounting

     —          169   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     2,365        1,486   

Adjustment to deferred acquisition costs

     (44     (187

Adjustment to present value of future profits

     (61     (101

Adjustment to sales inducements

     6        (21

Adjustment to benefit reserves

     (369     (581

Provision for income taxes

     (662     (210
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     1,235        386   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(5) and $(12)

     11        22   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     1,246        577   

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

     29        19   
  

 

 

   

 

 

 

Ending balance

   $ 1,453      $ 587   
  

 

 

   

 

 

 

 

     As of or for the
nine months ended
September 30,
 

(Amounts in millions)

       2011             2010      

Beginning balance

   $ (100   $ (1,398

Cumulative effect of changes in accounting

     —          260   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     2,932        3,747   

Adjustment to deferred acquisition costs

     (101     (381

Adjustment to present value of future profits

     (77     (182

Adjustment to sales inducements

     (1     (46

Adjustment to benefit reserves

     (400     (581

Provision for income taxes

     (824     (910
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     1,529        1,647   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(31) and $(57)

     58        106   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     1,587        2,013   

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

     34        28   
  

 

 

   

 

 

 

Ending balance

   $ 1,453      $ 587   
  

 

 

   

 

 

 

 

12


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2011, 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:

 

(Amounts in millions)

  Amortized
cost or
cost
    Gross unrealized gains     Gross unrealized losses     Fair
value
 
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
   

Fixed maturity securities:

           

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

  $ 3,973      $ 853      $ —        $ (1   $ —        $ 4,825   

Tax-exempt

    753        24        —          (84     —          693   

Government—non-U.S.

    1,990        178        —          (3     —          2,165   

U.S. corporate

    23,218        2,461        15        (324     (2     25,368   

Corporate—non-U.S.

    13,138        768        —          (201     —          13,705   

Residential mortgage-backed

    5,392        446        10        (267     (201     5,380   

Commercial mortgage-backed

    3,613        161        6        (199     (38     3,543   

Other asset-backed

    2,202        23        —          (87     (1     2,137   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    54,279        4,914        31        (1,166     (242     57,816   

Equity securities

    357        15        —          (18     —          354   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for- sale securities

  $ 54,636      $ 4,929      $ 31      $ (1,184   $ (242   $ 58,170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 2010, 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:

 

(Amounts in millions)

  Amortized
cost or
cost
    Gross unrealized gains     Gross unrealized losses     Fair
value
 
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
   

Fixed maturity securities:

           

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

  $ 3,568      $ 145      $ —        $ (8   $ —        $ 3,705   

Tax-exempt

    1,124        19        —          (113     —          1,030   

Government—non-U.S.

    2,257        118        —          (6     —          2,369   

U.S. corporate

    23,282        1,123        10        (448     —          23,967   

Corporate—non-U.S.

    13,180        485        —          (167     —          13,498   

Residential mortgage-backed

    4,821        116        18        (304     (196     4,455   

Commercial mortgage-backed

    3,936        132        6        (286     (45     3,743   

Other asset-backed

    2,494        18        —          (94     (2     2,416   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    54,662        2,156        34        (1,426     (243     55,183   

Equity securities

    323        13        —          (4     —          332   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 54,985      $ 2,169      $ 34      $ (1,430   $ (243   $ 55,515   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

13


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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, 2011:

 

     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
(2)
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 263      $ (1     3      $ —        $ —          —        $ 263      $ (1 )       3   

Tax-exempt

    —          —          —          254        (84 )       79        254        (84 )       79   

Government—non-U.S.

    149        (3     31        —          —          —          149        (3 )       31   

U.S. corporate

    1,700        (65     204        1,526        (261 )       137        3,226        (326 )       341   

Corporate—non-U.S.

    1,774        (78     271        736        (123 )       73        2,510        (201 )       344   

Residential mortgage-backed

    155        (4     71        815        (464 )       365        970        (468 )       436   

Commercial mortgage-backed

    321        (29     52        940        (208 )       167        1,261        (237 )       219   

Other asset-backed

    182        (1     35        319        (87 )       36        501        (88 )       71   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    4,544        (181     667        4,590        (1,227     857        9,134        (1,408     1,524   

Equity securities

    115        (15     50        20        (3 )       13        135        (18 )       63   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 4,659      $ (196     717      $ 4,610      $ (1,230     870      $ 9,269      $ (1,426     1,587   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 4,477      $ (152     622      $ 3,230      $ (322 )       456      $ 7,707      $ (474 )       1,078   

20%-50% Below cost

    62        (24     34        1,207        (585 )       272        1,269        (609 )       306   

>50% Below cost

    5        (5     11        153        (320 )       129        158        (325 )       140   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    4,544        (181     667        4,590        (1,227     857        9,134        (1,408     1,524   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    99        (8     41        16        (1 )       9        115        (9 )       50   

20%-50% Below cost

    16        (7     9        4        (2 )       4        20        (9 )       13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    115        (15     50        20        (3 )       13        135        (18 )       63   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 4,659      $ (196     717      $ 4,610      $ (1,230     870      $ 9,269      $ (1,426     1,587   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 4,047      $ (151     536      $ 3,237      $ (567 )       486      $ 7,284      $ (718 )       1,022   

Below investment grade (3)

    612        (45     181        1,373        (663 )       384        1,985        (708 )       565   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 4,659      $ (196     717      $ 4,610      $ (1,230     870      $ 9,269      $ (1,426     1,587   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included $236 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts included $242 million of unrealized losses on other-than-temporarily impaired securities.

(3) 

Amounts that have been in a continuous loss position for 12 months or more included $220 million of unrealized losses on other-than-temporarily impaired securities.

 

14


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 credit spreads that have widened since acquisition for corporate securities across various industry sectors, including finance and insurance as well as consumer–non-cyclical. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 4% as of September 30, 2011.

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

Of the $322 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB” and approximately 75% of the unrealized losses were related to investment grade securities as of September 30, 2011. These unrealized losses were attributable to the widening of credit spreads for these securities since acquisition, primarily associated with corporate securities in the finance and insurance sector as well as mortgage-backed and asset-backed securities. The average fair value percentage below cost for these securities was approximately 9% as of September 30, 2011. See below for additional discussion related to fixed maturity securities that have been in a continuous 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 loss position for 12 months or more by asset class as of September 30, 2011:

 

    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

  $ 160      $ (73     5     39      $ —        $ —          —       —     

U.S. corporate

    179        (74     5        12        —          —          —          —     

Corporate—non-U.S.

    158        (76     5        14        —          —          —          —     

Structured securities:

               

Residential mortgage- backed

    73        (30     2        28        11        (27     2        14   

Commercial mortgage-backed

    68        (29     2        15        5        (6     —          7   

Other asset-backed

    27        (9     1        3        1        (1     —          1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    168        (68     5        46        17        (34     2        22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 665      $ (291     20     111      $ 17      $ (34     2     22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

    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:

               

Tax-exempt

  $ —        $ —          —       —        $ —        $ —          —       —     

U.S. corporate

    59        (37     3        9        9        (11     1        3   

Structured securities:

               

Residential mortgage-backed

    310        (170     12        118        86        (204     14        86   

Commercial mortgage-backed

    87        (38     3        30        29        (59     4        16   

Other asset-backed

    86        (49     3        4        12        (12     1        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    483        (257     18        152        127        (275     19        104   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 542      $ (294     21     161      $ 136      $ (286     20     107   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 and it is not more likely than not 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.

Tax-Exempt Securities

As indicated in the table above, $73 million of gross unrealized losses were related to tax-exempt securities that have been in a continuous unrealized loss position for more than 12 months and were more than 20% below cost. The unrealized losses for tax-exempt securities represent municipal bonds that were diversified by state as well as municipality or political subdivision within those states. Of these tax-exempt securities, the average unrealized loss was approximately $2 million which represented an average of 31% below cost. The unrealized losses primarily related to widening of credit spreads on these securities since acquisition as a result of higher risk premiums being attributed to these securities from uncertainty in many political subdivisions related to special revenues supporting these obligations as well as certain securities having longer duration that may be viewed as less desirable in the current market place. Additionally, the fair value of certain of these securities has been negatively impacted as a result of having certain bond insurers associated with the security. In our analysis of impairment for these securities, we expect to recover our amortized cost from the cash flows of the underlying securities before any guarantee support. However, the existence of these guarantees may negatively impact the value of the debt security in certain instances. We performed an analysis of these securities and the underlying activities that are expected to support the cash flows and determined we expect to recover our amortized cost.

 

16


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Corporate Debt Securities

The following tables present the concentration of gross unrealized losses and fair values related to corporate debt fixed maturity securities that were more than 20% below cost and in a continuous loss position for 12 months or more by industry as of September 30, 2011:

 

     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
 

Industry:

                    

Finance and insurance

   $ 290       $ (133     9     24       $ —         $ —           —       —     

Utilities and energy

     17         (6     —          1         —           —           —          —     

Consumer—non-cyclical

     30         (11     1        1         —           —           —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 337       $ (150     10     26       $ —         $ —           —       —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     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
 

Industry:

                   

Finance and insurance

   $ 57       $ (36     3       7        $ 9       $ (11     1     3   

Technology and communications

     2         (1     —            2          —           —          —          —     
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 59       $ (37     3       9        $ 9       $ (11     1     3   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Of the total unrealized losses of $198 million for corporate fixed maturity securities presented in the preceding tables, $180 million, or 91%, of the unrealized losses related to issuers in the finance and insurance sector that were 34% below cost on average. Given the current market conditions, including current financial industry events and uncertainty around global economic conditions, the fair value of these debt securities has declined due to credit spreads that have widened since acquisition. In our examination of these securities, we considered all available evidence, including the issuers’ financial condition and current industry events to develop our conclusion on the amount and timing of the cash flows expected to be collected. Based on this evaluation, we determined that the unrealized losses on these debt securities represented temporary impairments as of September 30, 2011. Of the $180 million of unrealized losses related to the finance and insurance industry, $141 million related to financial hybrid securities on which a debt impairment model was employed. Most of our hybrid securities retained a credit rating of investment grade. The fair value of these hybrid securities has been impacted by credit spreads that have widened since acquisition and reflect uncertainty surrounding the extent and duration of government involvement, potential capital restructuring of these institutions, and continued but diminishing risk that income payments may be deferred. We continue to receive our contractual payments and expect to fully recover our amortized cost.

We expect that our investments in corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it

 

17


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

is at least reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of corporate securities in the future.

Structured Securities

Of the $634 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, $202 million related to other-than-temporarily-impaired securities where the unrealized losses represented the non-credit portion of the impairment. The extent and duration of the unrealized loss position on our structured securities is due to the ongoing concern and uncertainty about the residential and commercial real estate market and unemployment, resulting in credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been significantly 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 housing market.

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, 2011.

 

18


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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, 2010:

 

     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
(2)
    Number of
securities
 

Description of Securities

                 

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

  $ 545      $ (8     36      $ —        $ —          —        $ 545      $ (8 )       36   

Tax-exempt

    285        (12     101        244        (101 )       90        529        (113 )       191   

Government—non-U.S.

    431        (5     69        21        (1 )       7        452        (6 )       76   

U.S. corporate

    3,615        (125     443        2,338        (323 )       191        5,953        (448 )       634   

Corporate—non-U.S.

    2,466        (53     296        1,141        (114 )       102        3,607        (167 )       398   

Residential mortgage-backed

    461        (23     92        1,031        (477 )       416        1,492        (500 )       508   

Commercial mortgage-backed

    177        (8     26        1,167        (323 )       225        1,344        (331 )       251   

Other asset-backed

    401        (2     37        512        (94 )       53        913        (96 )       90   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    8,381        (236     1,100        6,454        (1,433     1,084        14,835        (1,669     2,184   

Equity securities

    77        (3     48        5        (1 )       4        82        (4 )       52   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 8,458      $ (239     1,148      $ 6,459      $ (1,434     1,088      $ 14,917      $ (1,673     2,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 8,359      $ (226     1,076      $ 4,852      $ (418 )       588      $ 13,211      $ (644 )       1,664   

20%-50% Below cost

    22        (8     18        1,428        (652 )       328        1,450        (660 )       346   

>50% Below cost

    —          (2     6        174        (363 )       168        174        (365 )       174   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    8,381        (236     1,100        6,454        (1,433     1,084        14,835        (1,669     2,184   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    72        (2     47        5        (1 )       4        77        (3 )       51   

20%-50% Below cost

    5        (1     1        —          —          —          5        (1 )       1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    77        (3     48        5        (1 )       4        82        (4 )       52   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 8,458      $ (239     1,148      $ 6,459      $ (1,434     1,088      $ 14,917      $ (1,673     2,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 8,249      $ (231     1,060      $ 4,850      $ (764 )       683      $ 13,099      $ (995 )       1,743   

Below investment grade (3)

    209        (8     88        1,609        (670 )       405        1,818        (678 )       493   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 8,458      $ (239     1,148      $ 6,459      $ (1,434     1,088      $ 14,917      $ (1,673     2,236   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included $240 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts included $243 million of unrealized losses on other-than-temporarily impaired securities.

(3) 

Amounts that have been in a continuous loss position for 12 months or more included $213 million of unrealized losses on other-than-temporarily impaired securities.

 

19


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2011 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

   $ 2,696       $ 2,720   

Due after one year through five years

     10,842         11,172   

Due after five years through ten years

     9,964         10,612   

Due after ten years

     19,570         22,252   
  

 

 

    

 

 

 

Subtotal

     43,072         46,756   

Residential mortgage-backed

     5,392         5,380   

Commercial mortgage-backed

     3,613         3,543   

Other asset-backed

     2,202         2,137   
  

 

 

    

 

 

 

Total

   $ 54,279       $ 57,816   
  

 

 

    

 

 

 

As of September 30, 2011, $4,347 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2011, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 23%, 22% and 12% of our domestic and foreign corporate fixed maturity securities portfolio, respectively. 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, 2011, 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.

 

20


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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, 2011     December 31, 2010  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 1,889        30   $ 1,974        29

Industrial

     1,736        28        1,788        26   

Office

     1,647        26        1,850        27   

Apartments

     708        11        725        11   

Mixed use/other

     341        5        435        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,321        100     6,772        100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     4          5     

Allowance for losses

     (54       (59  
  

 

 

     

 

 

   

Total

   $ 6,271        $ 6,718     
  

 

 

     

 

 

   

 

     September 30, 2011     December 31, 2010  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic region:

        

South Atlantic

   $ 1,624        27   $ 1,583        23

Pacific

     1,598        25        1,769        26   

Middle Atlantic

     810        13        937        14   

East North Central

     568        9        612        9   

Mountain

     500        8        540        8   

New England

     390        6        482        7   

West North Central

     344        5        369        6   

West South Central

     329        5        297        4   

East South Central

     158        2        183        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,321        100     6,772        100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     4          5     

Allowance for losses

     (54       (59  
  

 

 

     

 

 

   

Total

   $ 6,271        $ 6,718     
  

 

 

     

 

 

   

 

21


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     September 30, 2011  

(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

   $ —        $ —        $ 3      $ 3      $ 1,886      $ 1,889   

Industrial

     —          16        4        20        1,716        1,736   

Office

     10        4        8        22        1,625        1,647   

Apartments

     1        —          —          1        707        708   

Mixed use/other

     1        —          —          1        340        341   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 12      $ 20      $ 15      $ 47      $ 6,274      $ 6,321   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       1     —       1     99     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2010  

(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

   $ —        $ —        $ —        $ —        $ 1,974      $ 1,974   

Industrial

     —          6        27        33        1,755        1,788   

Office

     —          —          12        12        1,838        1,850   

Apartments

     —          —          —          —          725        725   

Mixed use/other

     —          —          —          —          435        435   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ —        $ 6      $ 39      $ 45      $ 6,727      $ 6,772   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       1     1     99     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2011 and December 31, 2010, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest.

During the nine months ended September 30, 2011 and the year ended December 31, 2010, we modified or extended 23 and 13 commercial mortgage loans, respectively, with a total carrying value of $104 million and $98 million, respectively, as of September 30, 2011 and December 31, 2010. 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.

 

22


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table sets forth the commercial mortgage loans on nonaccrual status by property type as of the dates indicated:

 

(Amounts in millions)

   September 30,
2011
     December 31,
2010
 

Property type:

     

Retail

   $ 3       $ —     

Industrial

     4         27   

Office

     8         12   

Apartments

     —           —     

Mixed use/other

     —           —     
  

 

 

    

 

 

 

Total recorded investment

   $ 15       $ 39   
  

 

 

    

 

 

 

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

 

(Amounts in millions)

   Three months ended
September 30, 2011
    Nine months ended
September 30, 2011
 

Allowance for credit losses:

    

Beginning balance

   $ 57      $ 59   

Charge-offs

     —          (5

Recoveries

     —          —     

Provision

     (3     —     
  

 

 

   

 

 

 

Ending balance

   $ 54      $ 54   
  

 

 

   

 

 

 

Ending allowance for individually impaired loans

   $ —        $ —     
  

 

 

   

 

 

 

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

   $ 54      $ 54   
  

 

 

   

 

 

 

Recorded investment:

    

Ending balance

   $ 6,321      $ 6,321   
  

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ 13      $ 13   
  

 

 

   

 

 

 

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

   $ 6,308      $ 6,308   
  

 

 

   

 

 

 

The following table presents the activity in the allowance for losses as of or for the periods indicated:

 

(Amounts in millions)

   Three months ended
September 30, 2010
    Nine months ended
September 30, 2010
 

Beginning balance

   $ 70      $ 48   

Provision

     5        27   

Release (1)

     (13     (13
  

 

 

   

 

 

 

Ending balance

   $ 62      $ 62   
  

 

 

   

 

 

 

 

(1) 

Included $13 million related to held-for-sale commercial mortgage loans that were sold in the third quarter of 2010.

 

23


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables set forth our individually impaired commercial mortgage loans by property type as of the dates indicated:

 

     September 30, 2011  

(Amounts in millions)

   Recorded
investment
     Unpaid
principal
balance
     Charge-
offs
     Related
allowance
     Average
recorded
investment
     Interest
income
recognized
 

Property type:

                 

Retail

   $ 3       $ 4       $ 1       $ —         $ 2       $ —     

Industrial

     —           —           —           —         $ —           —     

Office

     10         13         3         —         $ 10         —     

Apartments

     —           —           —           —         $ —           —     

Mixed use/other

     —           —           —           —         $ —           —     
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total

   $ 13       $ 17       $ 4       $ —         $ 6       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

     December 31, 2010  

(Amounts in millions)

   Recorded
investment
     Unpaid
principal
balance
     Charge-
offs
     Related
allowance
     Average
recorded
investment
     Interest
income
recognized
 

Property type:

                 

Retail

   $ 5       $ 8       $ 3       $ —         $ 2       $ —     

Industrial

     19         24         5         —         $ 3         —     

Office

     6         8         2         —         $ 2         —     

Apartments

     —           —           —           —         $ —           —     

Mixed use/other

     —           —           —           —         $ —           —     
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total

   $ 30       $ 40       $ 10       $ —         $ 3       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

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 mortgages 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.

 

24


GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

    September 30, 2011  

(Amounts in millions)

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

Property type:

           

Retail

  $ 426      $ 275      $ 874      $ 282      $ 32      $ 1,889   

Industrial

    481        286        665        281        23        1,736   

Office

    427        282        591        226        121        1,647   

Apartments

    222        162        269        40        15        708   

Mixed use/other

    80        58        60        137        6        341   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 1,636      $ 1,063      $ 2,459      $ 966      $ 197      $ 6,321   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

    26     17     39     15     3     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

    2.54        1.89        2.13        1.78        0.89        2.11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Included $10 million of impaired loans and $187 million of loans in good standing, with a total weighted-average loan-to-value of 121%, where borrowers continued to make timely payments and have no history of delinquencies or distress.

 

  &nb