Form 10-Q
Table of Contents

 

 

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, 2012

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 26, 2012, 491,831,925 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  

PART I—FINANCIAL INFORMATION

     3   

Item 1.

 

Financial Statements

     3   
 

Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December  31, 2011

     3   
 

Condensed Consolidated Statements of Income for the three and nine months ended September  30, 2012 and 2011 (Unaudited)

     4   
 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2012 and 2011 (Unaudited)

     5   
 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 and 2011 (Unaudited)

     6   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September  30, 2012 and 2011 (Unaudited)

     7   
 

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   

Item 2.

 

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

     83   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     182   

Item 4.

 

Controls and Procedures

     183   

PART II—OTHER INFORMATION

     184   

Item 1.

 

Legal Proceedings

     184   

Item 1A.

 

Risk Factors

     184   

Item 6.

 

Exhibits

     186   

Signatures

     187   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

     September 30,
2012
    December 31,
2011
 
     (Unaudited)        

Assets

    

Investments:

    

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

   $ 62,214      $ 58,295   

Equity securities available-for-sale, at fair value

     524        361   

Commercial mortgage loans

     5,861        6,092   

Restricted commercial mortgage loans related to securitization entities

     359        411   

Policy loans

     1,626        1,549   

Other invested assets

     3,916        4,819   

Restricted other invested assets related to securitization entities ($393 and $376 at fair value)

     393        377   
  

 

 

   

 

 

 

Total investments

     74,893        71,904   

Cash and cash equivalents

     3,741        4,488   

Accrued investment income

     746        691   

Deferred acquisition costs

     5,020        5,193   

Intangible assets

     488        580   

Goodwill

     1,128        1,253   

Reinsurance recoverable

     17,195        16,998   

Other assets

     1,010        958   

Separate account assets

     10,166        10,122   
  

 

 

   

 

 

 

Total assets

   $ 114,387      $ 112,187   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Liabilities:

    

Future policy benefits

   $ 33,221      $ 32,175   

Policyholder account balances

     26,449        26,345   

Liability for policy and contract claims

     7,545        7,620   

Unearned premiums

     4,291        4,223   

Other liabilities ($167 and $210 other liabilities related to securitization entities)

     6,073        6,308   

Borrowings related to securitization entities ($60 and $48 at fair value)

     353        396   

Non-recourse funding obligations

     2,325        3,256   

Long-term borrowings

     4,880        4,726   

Deferred tax liability

     1,437        838   

Separate account liabilities

     10,166        10,122   
  

 

 

   

 

 

 

Total liabilities

     96,740        96,009   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 580 million and 579 million shares issued as of September 30, 2012 and December 31, 2011, respectively; 492 million and 491 million shares outstanding as of September 30, 2012 and December 31, 2011, respectively

     1        1   

Additional paid-in capital

     12,162        12,136   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

    

Net unrealized investment gains (losses):

    

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

     2,641        1,617   

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

     (88     (132
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     2,553        1,485   
  

 

 

   

 

 

 

Derivatives qualifying as hedges

     2,011        2,009   

Foreign currency translation and other adjustments

     659        553   
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     5,223        4,047   

Retained earnings

     1,741        1,584   

Treasury stock, at cost (88 million shares as of September 30, 2012 and December 31, 2011)

     (2,700     (2,700
  

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     16,427        15,068   

Noncontrolling interests

     1,220        1,110   
  

 

 

   

 

 

 

Total stockholders’ equity

     17,647        16,178   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 114,387      $ 112,187   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

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,
 
         2012             2011             2012             2011      

Revenues:

        

Premiums

   $ 1,311      $ 1,461      $ 3,720      $ 4,353   

Net investment income

     825        842        2,503        2,553   

Net investment gains (losses)

     9        (157     10        (225

Insurance and investment product fees and other

     391        375        1,252        1,063   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,536        2,521        7,485        7,744   
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,363        1,457        3,977        4,549   

Interest credited

     193        194        582        599   

Acquisition and operating expenses, net of deferrals

     504        581        1,536        1,725   

Amortization of deferred acquisition costs and intangibles

     162        152        582        465   

Goodwill impairment

     89        —          89        —     

Interest expense

     126        124        352        385   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     2,437        2,508        7,118        7,723   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     99        13        367        21   

Provision (benefit) for income taxes

     29        (7     108        8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     70        20        259        13   

Less: net income attributable to noncontrolling interests

     36        36        102        106   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 34      $ (16   $ 157      $ (93
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.07      $ (0.03   $ 0.32      $ (0.19
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.07      $ (0.03   $ 0.32      $ (0.19
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     491.7        490.8        491.5        490.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     493.9        490.8        494.5        490.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

        

Total other-than-temporary impairments

   $ (26   $ (39   $ (84   $ (98

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

     (3     (13     (1     (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (29     (52     (85     (114

Other investments gains (losses)

     38        (105     95        (111
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment gains (losses)

   $ 9      $ (157   $ 10      $ (225
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
         2012             2011             2012              2011      

Net income

   $ 70      $ 20      $ 259       $ 13   

Other comprehensive income (loss), net of taxes:

         

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

     517        1,256        1,029         1,600   

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

     28        (10     44         (5

Derivatives qualifying as hedges

     (76     1,017        2         1,036   

Foreign currency translation and other adjustments

     148        (508     145         (259
  

 

 

   

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss)

     617        1,755        1,220         2,372   
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

     687        1,775        1,479         2,385   

Less: comprehensive income attributable to noncontrolling interests

     83        (25     146         86   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 604      $ 1,800      $ 1,333       $ 2,299   
  

 

 

   

 

 

   

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

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, 2011

  $ 1      $ 12,136      $ 4,047      $ 1,584      $ (2,700   $ 15,068      $ 1,110      $ 16,178   
               

 

 

 

Comprehensive income (loss):

               

Net income

    —          —          —          157        —          157        102        259   

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

    —          —          1,024        —          —          1,024        5        1,029   

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

    —          —          44        —          —          44        —          44   

Derivatives qualifying as hedges

    —          —          2        —          —          2        —          2   

Foreign currency translation and other adjustments

    —          —          106        —          —          106        39        145   
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              1,333        146        1,479   

Dividends to noncontrolling interests

    —          —          —          —          —          —          (36     (36

Stock-based compensation expense and exercises and other

    —          26        —          —          —          26        —          26   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2012

  $ 1      $ 12,162      $ 5,223      $ 1,741      $ (2,700   $ 16,427      $ 1,220      $ 17,647   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2010

  $ 1      $ 12,107      $ 1,506      $ 1,535      $ (2,700   $ 12,449      $ 1,096      $ 13,545   
               

 

 

 

Repurchase of subsidiary shares

    —          —          —          —          —          —          (71     (71

Comprehensive income (loss):

               

Net income (loss)

    —          —          —          (93     —          (93     106        13   

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

    —          —          1,566        —          —          1,566        34        1,600   

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

    —          —          (205     —          —          (205     (54     (259
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              2,299        86        2,385   

Dividends to noncontrolling interests

    —          —          —          —          —          —          (35     (35

Stock-based compensation expense and exercises and other

    —          22        —          —          —          22        —          22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2011

  $ 1      $ 12,129      $ 3,898      $ 1,442      $ (2,700   $ 14,770      $ 1,076      $ 15,846   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Nine months ended
September 30,
 
         2012             2011      

Cash flows from operating activities:

    

Net income

   $ 259      $ 13   

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

    

Amortization of fixed maturity discounts and premiums and limited partnerships

     (59     (71

Net investment losses (gains)

     (10     225   

Charges assessed to policyholders

     (590     (507

Acquisition costs deferred

     (456     (485

Amortization of deferred acquisition costs and intangibles

     582        465   

Goodwill impairment

     89        —     

Deferred income taxes

     14        (155

Gain on sale of subsidiary

     (15     —     

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

     66        795   

Stock-based compensation expense

     20        23   

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     (160     (152

Insurance reserves

     1,672        1,953   

Current tax liabilities

     (190     8   

Other liabilities and other policy-related balances

     (795     (80
  

 

 

   

 

 

 

Net cash from operating activities

     427        2,032   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities and repayments of investments:

    

Fixed maturity securities

     3,619        4,075   

Commercial mortgage loans

     559        633   

Restricted commercial mortgage loans related to securitization entities

     48        77   

Proceeds from sales of investments:

    

Fixed maturity and equity securities

     3,956        3,446   

Purchases and originations of investments:

    

Fixed maturity and equity securities

     (8,942     (7,798

Commercial mortgage loans

     (339     (202

Other invested assets, net

     531        (56

Policy loans, net

     (8     (85

Proceeds from sale of a subsidiary, net of cash transferred

     64        —     

Payments for businesses purchased, net of cash acquired

     (18     (4
  

 

 

   

 

 

 

Net cash from investing activities

     (530     86   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Deposits to universal life and investment contracts

     2,248        2,016   

Withdrawals from universal life and investment contracts

     (2,057     (3,034

Redemption and repurchase of non-recourse funding obligations

     (801     (112

Proceeds from the issuance of long-term debt

     361        545   

Repayment and repurchase of long-term debt

     (222     (760

Repayment of borrowings related to securitization entities

     (53     (77

Repurchase of subsidiary shares

     —          (71

Dividends paid to noncontrolling interests

     (36     (35

Other, net

     (103     21   
  

 

 

   

 

 

 

Net cash from financing activities

     (663     (1,507

Effect of exchange rate changes on cash and cash equivalents

     19        (95
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (747     516   

Cash and cash equivalents at beginning of period

     4,488        3,132   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 3,741      $ 3,648   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

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 operating segments:

 

   

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

 

   

International Protection. We are a leading provider of payment protection coverages (referred to as lifestyle protection) in multiple European 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.

 

   

Wealth Management. We offer and manage a variety of wealth management services, including investments, advisor support and practice management services.

 

   

International Mortgage Insurance. We are a leading provider of mortgage insurance products and related services 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. 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.

 

   

Runoff. The Runoff segment includes the results of non-strategic products which are no longer actively sold. Our non-strategic products include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and Medicare supplement 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. Effective October 1, 2011, we completed the sale of our Medicare supplement insurance business.

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 other non-core businesses that are managed outside of our operating segments.

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.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 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 Current Report on Form 8-K filed on June 11, 2012 which reflected retrospective changes in accounting for costs associated with acquiring or renewing insurance contracts and changes in the treatment of future policy benefits for level premium term life insurance products. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

On January 1, 2012, we adopted 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. We chose to present two separate but consecutive statements and adopted this new guidance retrospectively. The Financial Accounting Standards Board (“FASB”) issued an amendment relating to this new guidance for presentation of the reclassification of items out of accumulated other comprehensive income into net income that removed this requirement until further guidance is issued. The adoption of this new accounting guidance did not have any impact on our consolidated financial results.

On January 1, 2012, we adopted new accounting guidance related to fair value measurements. This new accounting guidance clarified existing fair value measurement requirements and changed certain fair value measurement principles and disclosure requirements. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The new guidance removed the requirement to consider a transferor’s ability to fulfill its contractual rights from the criteria used to determine effective control and was effective for us prospectively for any transactions occurring on or after January 1, 2012. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2012, we adopted new accounting guidance related to accounting for costs associated with acquiring or renewing insurance contracts. Acquisition costs include costs that are related directly to the successful acquisition of our insurance policies and investment contracts, which are deferred and amortized over the estimated life of the related insurance policies. These costs include commissions in excess of ultimate renewal commissions and for contracts and policies issued some support costs, such as underwriting, medical inspection and issuance expenses. Deferred acquisition costs (“DAC”) are subsequently amortized to expense over the lives of the underlying contracts, in relation to the anticipated recognition of premiums or gross profits. We adopted this new guidance retrospectively, which reduced retained earnings and stockholders’ equity by $1.3 billion as of January 1, 2011, and reduced net income (loss) by $63 million, $86 million and $12 million for the years ended December 31, 2011, 2010 and 2009, respectively. This new guidance results in lower amortization and fewer deferred costs, specifically related to underwriting, inspection and processing for contracts that are not issued, as well as marketing and customer solicitation.

 

9


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Effective January 1, 2012, we changed our treatment of the liability for future policy benefits for our level premium term life insurance products when the liability for a policy falls below zero. Previously, the total liability for future policy benefits included negative reserves calculated at an individual policy level. Through 2010, we issued level premium term life insurance policies whose premiums are contractually determined to be level through a period of time and then increase thereafter. Our previous accounting policy followed the accounting for traditional, long-duration insurance contracts where the reserves are calculated as the present value of expected benefit payments minus the present value of net premiums based on assumptions determined on the policy issuance date including mortality, interest, and lapse rates. This accounting has the effect of causing profits to emerge as a level percentage of premiums, subject to differences in assumed versus actual experience which flow through income as they occur, and for products with an increasing premium stream, such as the level premium term life insurance product, may result in negative reserves for a given policy.

More recent insurance-specific accounting guidance reflects a different accounting philosophy, emphasizing the balance sheet over the income statement, or matching, focus which was the philosophy in place when the traditional, long-duration insurance contract guidance was issued (the accounting model for traditional, long-duration insurance contracts draws upon the principles of matching and conservatism originating in the 1970’s, and does not specifically address negative reserves). More recent accounting models for long-duration contracts specifically prohibit negative reserves, e.g., non-traditional contracts with annuitization benefits and certain participating contracts. These recent accounting models do not impact the reserving for our level premium term life insurance products.

We believe that industry accounting practices for level premium term life insurance product reserving is mixed with some companies “flooring” reserves at zero and others applying our previous accounting policy described above. In 2010, we stopped issuing new level premium term life insurance policies. Thus, as the level premium term policies reach the end of their level premium term periods, the portion of policies with negative reserves in relation to the reserve for all level premium term life insurance products will continue to increase. Our new method of accounting floors the liability for future policy benefits on each level premium term life insurance policy at zero. We believe that flooring reserves at zero is preferable in our circumstances as this alternative accounting policy will not allow negative reserves to accumulate on the balance sheet for this closed block of insurance policies. In implementing this change in accounting, no changes were made to the assumptions that were locked-in at policy inception. We implemented this accounting change retrospectively, which reduced retained earnings and stockholders’ equity by $110 million as of January 1, 2011, and reduced net income (loss) by $10 million, $4 million and $32 million for the years ended December 31, 2011, 2010 and 2009, respectively.

On October 22, 2012, we announced the launch of a new traditional term life insurance product, along with other changes to our life insurance portfolio designed to update and expand our product offerings and further adjust pricing. We will floor the liability for future policy benefits on these level premium term insurance policies at zero, consistent with our accounting for our existing level premium term insurance business.

 

10


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the balance sheet as of December 31, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

  As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Assets

       

Total investments

  $ 71,904      $ —        $ —        $ 71,904   

Cash and cash equivalents

    4,488        —          —          4,488   

Accrued investment income

    691        —          —          691   

Deferred acquisition costs

    7,327        (2,134     —          5,193   

Intangible assets

    577        3        —          580   

Goodwill

    1,253        —          —          1,253   

Reinsurance recoverable

    16,982        —          16        16,998   

Other assets

    958        —          —          958   

Separate account assets

    10,122        —          —          10,122   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 114,302      $ (2,131   $ 16      $ 112,187   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and stockholders’ equity

       

Liabilities:

       

Future policy benefits

  $ 31,971      $ 3      $ 201      $ 32,175   

Policyholder account balances

    26,345        —          —          26,345   

Liability for policy and contract claims

    7,620        —          —          7,620   

Unearned premiums

    4,257        (34     —          4,223   

Other liabilities

    6,308        —          —          6,308   

Borrowings related to securitization entities

    396        —          —          396   

Non-recourse funding obligations

    3,256        —          —          3,256   

Long-term borrowings

    4,726        —          —          4,726   

Deferred tax liability

    1,636        (733     (65     838   

Separate account liabilities

    10,122        —          —          10,122   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    96,637        (764     136        96,009   
 

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

       

Class A common stock

    1        —          —          1   

Additional paid-in capital

    12,124        12        —          12,136   

Accumulated other comprehensive income (loss):

       

Net unrealized investment gains (losses):

       

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

    1,586        31        —          1,617   

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

    (132     —          —          (132
 

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized investment gains (losses)

    1,454        31        —          1,485   
 

 

 

   

 

 

   

 

 

   

 

 

 

Derivatives qualifying as hedges

    2,009        —          —          2,009   

Foreign currency translation and other adjustments

    558        (5     —          553   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

    4,021        26        —          4,047   

Retained earnings

    3,095        (1,391     (120     1,584   

Treasury stock, at cost

    (2,700     —          —          (2,700
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

    16,541        (1,353     (120     15,068   

Noncontrolling interests

    1,124        (14     —          1,110   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

    17,665        (1,367     (120     16,178   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 114,302      $ (2,131   $ 16      $ 112,187   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

11


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the income statement for the three months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

  As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Revenues:

       

Premiums

  $ 1,461      $ —        $ —        $ 1,461   

Net investment income

    842        —          —          842   

Net investment gains (losses)

    (157     —          —          (157

Insurance and investment product fees and other

    375        —          —          375   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    2,521        —          —          2,521   
 

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

       

Benefits and other changes in policy reserves

    1,457        —          —          1,457   

Interest credited

    194        —          —          194   

Acquisition and operating expenses, net of deferrals

    510        71        —          581   

Amortization of deferred acquisition costs and
intangibles

    190        (38     —          152   

Interest expense

    124        —          —          124   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    2,475        33        —          2,508   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    46        (33     —          13   

Benefit for income taxes

    (19     12        —          (7
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    65        (45     —          20   

Less: net income attributable to noncontrolling interests

    36        —          —          36   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 29      $ (45   $ —        $ (16
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Basic (1)

  $ 0.06      $ (0.09   $ —        $ (0.03
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (1)

  $ 0.06      $ (0.09   $ —        $ (0.03
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

May not total due to whole number calculation.

 

12


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the income statement for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

  As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Revenues:

       

Premiums

  $ 4,353      $ —        $ —        $ 4,353   

Net investment income

    2,553        —          —          2,553   

Net investment gains (losses)

    (225     —          —          (225

Insurance and investment product fees and other

    1,063        —          —          1,063   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    7,744        —          —          7,744   
 

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

       

Benefits and other changes in policy reserves

    4,538        —          11        4,549   

Interest credited

    599        —          —          599   

Acquisition and operating expenses, net of deferrals

    1,524        201        —          1,725   

Amortization of deferred acquisition costs and
intangibles

    572        (107     —          465   

Interest expense

    385        —          —          385   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    7,618        94        11        7,723   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    126        (94     (11     21   

Provision for income taxes

    5        7        (4     8   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    121        (101     (7     13   

Less: net income attributable to noncontrolling interests

    106        —          —          106   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 15      $ (101   $ (7   $ (93
 

 

 

   

 

 

   

 

 

   

 

 

 

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

       

Basic (1)

  $ 0.03      $ (0.21   $ (0.01   $ (0.19
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted (1)

  $ 0.03      $ (0.21   $ (0.01   $ (0.19
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

May not total due to whole number calculation.

 

13


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the cash flows from operating activities for the nine months ended September 30, 2011 reflecting the impact of the accounting changes that were retrospectively adopted on January 1, 2012:

 

(Amounts in millions)

   As Originally
Reported
    Effect of
DAC Change
    Effect of
Reserve Change
    As Currently
Reported
 

Cash flows from operating activities:

        

Net income

   $ 121      $ (101   $ (7   $ 13   

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

        

Amortization of fixed maturity discounts and premiums and limited partnerships

     (71     —          —          (71

Net investment losses

     225        —          —          225   

Charges assessed to policyholders

     (507     —          —          (507

Acquisition costs deferred

     (686     201        —          (485

Amortization of deferred acquisition costs and intangibles

     572        (107     —          465   

Deferred income taxes

     (158     7        (4     (155

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

     795        —          —          795   

Stock-based compensation expense

     23        —          —          23   

Change in certain assets and liabilities:

        

Accrued investment income and other assets

     (152     —          —          (152

Insurance reserves

     1,942        —          11        1,953   

Current tax liabilities

     8        —          —          8   

Other liabilities and policy-related balances

     (80     —          —          (80
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

   $ 2,032      $ —        $ —        $ 2,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

14


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the balance sheet as of September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
    As Computed
Under Previous
Policy
    Effect of
Change
 

Assets

      

Total investments

   $ 74,893      $ 74,893      $ —     

Cash and cash equivalents

     3,741        3,741        —     

Accrued investment income

     746        746        —     

Deferred acquisition costs

     5,020        5,020        —     

Intangible assets

     488        488        —     

Goodwill

     1,128        1,128        —     

Reinsurance recoverable

     17,195        17,172        23   

Other assets

     1,010        1,010        —     

Separate account assets

     10,166        10,166        —     
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 114,387      $ 114,364      $ 23   
  

 

 

   

 

 

   

 

 

 

Liabilities and stockholders’ equity

      

Liabilities:

      

Future policy benefits

   $ 33,221      $ 32,997      $ 224   

Policyholder account balances

     26,449        26,449        —     

Liability for policy and contract claims

     7,545        7,545        —     

Unearned premiums

     4,291        4,291        —     

Other liabilities

     6,073        6,073        —     

Borrowings related to securitization entities

     353        353        —     

Non-recourse funding obligations

     2,325        2,325        —     

Long-term borrowings

     4,880        4,880        —     

Deferred tax liability

     1,437        1,508        (71

Separate account liabilities

     10,166        10,166        —     
  

 

 

   

 

 

   

 

 

 

Total liabilities

     96,740        96,587        153   
  

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

      

Class A common stock

     1        1        —     

Additional paid-in capital

     12,162        12,162        —     

Accumulated other comprehensive income (loss):

      

Net unrealized investment gains (losses):

      

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

     2,641        2,641        —     

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

     (88     (88     —     
  

 

 

   

 

 

   

 

 

 

Net unrealized investment gains (losses)

     2,553        2,553        —     
  

 

 

   

 

 

   

 

 

 

Derivatives qualifying as hedges

     2,011        2,011        —     

Foreign currency translation and other adjustments

     659        659        —     
  

 

 

   

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     5,223        5,223        —     

Retained earnings

     1,741        1,871        (130

Treasury stock, at cost

     (2,700     (2,700     —     
  

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     16,427        16,557        (130

Noncontrolling interests

     1,220        1,220        —     
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     17,647        17,777        (130
  

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 114,387      $ 114,364      $ 23   
  

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the income statement for the three months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
     As Computed
Under Previous
Policy
     Effect of
Change
 

Revenues:

        

Premiums

   $ 1,311       $ 1,311       $ —     

Net investment income

     825         825         —     

Net investment gains (losses)

     9         9         —     

Insurance and investment product fees and other

     391         391         —     
  

 

 

    

 

 

    

 

 

 

Total revenues

     2,536         2,536         —     
  

 

 

    

 

 

    

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,363         1,356         7   

Interest credited

     193         193         —     

Acquisition and operating expenses, net of deferrals

     504         504         —     

Amortization of deferred acquisition costs and intangibles

     162         162         —     

Goodwill impairment

     89         89         —     

Interest expense

     126         126         —     
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     2,437         2,430         7   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     99         106         (7

Provision for income taxes

     29         32         (3
  

 

 

    

 

 

    

 

 

 

Net income

     70         74         (4

Less: net income attributable to noncontrolling interests

     36         36         —     
  

 

 

    

 

 

    

 

 

 

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

   $ 34       $ 38       $ (4
  

 

 

    

 

 

    

 

 

 

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

        

Basic

   $ 0.07       $ 0.08       $ (0.01
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.07       $ 0.08       $ (0.01
  

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the income statement for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
     As Computed
Under Previous
Policy
     Effect of
Change
 

Revenues:

        

Premiums

   $ 3,720       $ 3,720       $ —     

Net investment income

     2,503         2,503         —     

Net investment gains (losses)

     10         10         —     

Insurance and investment product fees and other

     1,252         1,252         —     
  

 

 

    

 

 

    

 

 

 

Total revenues

     7,485         7,485         —     
  

 

 

    

 

 

    

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     3,977         3,961         16   

Interest credited

     582         582         —     

Acquisition and operating expenses, net of deferrals

     1,536         1,536         —     

Amortization of deferred acquisition costs and intangibles

     582         582         —     

Goodwill impairment

     89         89         —     

Interest expense

     352         352         —     
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     7,118         7,102         16   
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     367         383         (16

Provision for income taxes

     108         114         (6
  

 

 

    

 

 

    

 

 

 

Net income

     259         269         (10

Less: net income attributable to noncontrolling interests

     102         102         —     
  

 

 

    

 

 

    

 

 

 

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

   $ 157       $ 167       $ (10
  

 

 

    

 

 

    

 

 

 

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

        

Basic

   $ 0.32       $ 0.34       $ (0.02
  

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.32       $ 0.34       $ (0.02
  

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the net cash flows from operating activities for the nine months ended September 30, 2012 to reflect the impact of the accounting change related to reserves that was adopted on January 1, 2012:

 

(Amounts in millions)

   As Reported
Under New
Policy
    As Computed
Under Previous
Policy
    Effect of
Change
 

Cash flows from operating activities:

      

Net income

   $ 259      $ 269      $ (10

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

      

Amortization of fixed maturity discounts and premiums and limited partnerships

     (59     (59     —     

Net investment gains

     (10     (10     —     

Charges assessed to policyholders

     (590     (590     —     

Acquisition costs deferred

     (456     (456     —     

Amortization of deferred acquisition costs and intangibles

     582        582        —     

Goodwill impairment

     89        89        —     

Deferred income taxes

     14        20        (6

Gain on sale of subsidiary

     (15     (15     —     

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

     66        66        —     

Stock-based compensation expense

     20        20        —     

Change in certain assets and liabilities:

      

Accrued investment income and other assets

     (160     (160     —     

Insurance reserves

     1,672        1,656        16   

Current tax liabilities

     (190     (190     —     

Other liabilities and policy-related balances

     (795     (795     —     
  

 

 

   

 

 

   

 

 

 

Net cash from operating activities

   $ 427      $ 427      $ —     
  

 

 

   

 

 

   

 

 

 

Accounting Pronouncements Not Yet Adopted

In July 2012, the FASB issued new accounting guidance on testing indefinite-lived intangible assets for impairment. The new guidance permits the use of a qualitative assessment prior to, and potentially instead of, the quantitative impairment test for indefinite-lived intangible assets. This new accounting guidance has an effective date of January 1, 2013, with early adoption permitted in certain circumstances. We do not expect the adoption of this accounting guidance to have an impact on our consolidated financial statements.

In December 2011, the FASB issued new accounting guidance for disclosures about offsetting assets and liabilities. The new guidance requires an entity to disclose information about offsetting and related arrangements to enable users to understand the effect of those arrangements on its financial position. These new disclosure requirements will be effective for us on January 1, 2013 and are not expected to have a material impact on our consolidated financial statements.

 

18


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(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)

       2012              2011             2012              2011      

Net income

   $ 70       $ 20      $ 259       $ 13   

Less: net income attributable to noncontrolling interests

     36         36        102         106   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 34       $ (16   $ 157       $ (93
  

 

 

    

 

 

   

 

 

    

 

 

 

Basic per common share:

          

Net income

   $ 0.14       $ 0.04      $ 0.53       $ 0.03   

Less: net income attributable to noncontrolling interests

     0.07         0.07        0.21         0.22   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 0.07       $ (0.03   $ 0.32       $ (0.19
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted per common share:

          

Net income

   $ 0.14       $ 0.04      $ 0.52       $ 0.03   

Less: net income attributable to noncontrolling interests

     0.07         0.07        0.21         0.22   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 0.07       $ (0.03   $ 0.32       $ (0.19
  

 

 

    

 

 

   

 

 

    

 

 

 

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

     491.7         490.8        491.5         490.5   

Potentially dilutive securities:

          

Stock options, restricted stock units and stock appreciation rights

     2.2         —          3.0         —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average shares used in diluted earnings per common share calculations (2)

     493.9         490.8        494.5         490.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

May not total due to whole number calculation.

(2) 

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 net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2011, we were required to use basic weighted-average common shares outstanding in the calculation for the three and nine months ended September 30, 2011 diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 1.7 million and 3.2 million, respectively, would have been antidilutive to the calculation. If we had not incurred a net loss available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2011, dilutive potential common shares would have been 492.5 million and 493.7 million, respectively.

 

19


Table of Contents

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)

       2012             2011             2012             2011      

Fixed maturity securities—taxable

   $ 659      $ 669      $ 1,988      $ 2,032   

Fixed maturity securities—non-taxable

     2        8        9        29   

Commercial mortgage loans

     87        89        256        273   

Restricted commercial mortgage loans related to securitization entities

     8        11        24        30   

Equity securities

     4        3        14        16   

Other invested assets

     48        42        157        131   

Policy loans

     31        30        93        89   

Cash, cash equivalents and short-term investments

     8        12        28        24   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     847        864        2,569        2,624   

Expenses and fees

     (22     (22     (66     (71
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 825      $ 842      $ 2,503      $ 2,553   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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)

       2012             2011             2012             2011      

Available-for-sale securities:

        

Realized gains

   $ 28      $ 59      $ 112      $ 113   

Realized losses

     (14     (23     (79     (88
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     14        36        33        25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (26     (39     (84     (98

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

     (3     (13     (1     (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (29     (52     (85     (114
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     14        11        21        36   

Commercial mortgage loans

     2        3        7        4   

Net gains (losses) related to securitization entities

     18        (57     48        (52

Derivative instruments (1)

     (2     (76     (4     (101

Contingent consideration adjustment

     (8     (22     (10     (23
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 9      $ (157   $ 10      $ (225
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

20


Table of Contents

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, 2012 and 2011 was $228 million and $263 million, respectively, which was approximately 96% and 93%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2012 and 2011 was $911 million and $954 million, respectively, which was approximately 93% of book value for both periods.

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

       2012             2011             2012             2011      

Beginning balance

   $ 588      $ 726      $ 646      $ 784   

Additions:

        

Other-than-temporary impairments not previously recognized

     5        27        13        31   

Increases related to other-than-temporary impairments previously recognized

     10        24        42        72   

Reductions:

        

Securities sold, paid down or disposed

     (66     (58     (164     (168
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 537      $ 719      $ 537      $ 719   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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, 2012     December 31, 2011  

Net unrealized gains (losses) on investment securities:

   

Fixed maturity securities

  $ 5,925      $ 3,742   

Equity securities

    24        5   

Other invested assets

    (23     (30
 

 

 

   

 

 

 

Subtotal

    5,926        3,717   

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

    (1,867     (1,303

Income taxes, net

    (1,412     (840
 

 

 

   

 

 

 

Net unrealized investment gains (losses)

    2,647        1,574   

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

    94        89   
 

 

 

   

 

 

 

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

  $ 2,553      $ 1,485   
 

 

 

   

 

 

 

 

21


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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)

       2012             2011      

Beginning balance

   $ 2,016      $ 264   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     1,040        2,365   

Adjustment to deferred acquisition costs

     (39     (41

Adjustment to present value of future profits

     11        (61

Adjustment to sales inducements

     (17     6   

Adjustment to benefit reserves

     (171     (369

Provision for income taxes

     (288     (665
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     536        1,235   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(6) and $(5)

     9        11   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     545        1,246   

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

     8        29   
  

 

 

   

 

 

 

Ending balance

   $ 2,553      $ 1,481   
  

 

 

   

 

 

 

 

     As of or for the
nine months ended
September 30,
 

(Amounts in millions)

       2012             2011      

Beginning balance

   $ 1,485      $ (80

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     2,157        2,932   

Adjustment to deferred acquisition costs

     (138     (89

Adjustment to present value of future profits

     (11     (77

Adjustment to sales inducements

     (31     (1

Adjustment to benefit reserves

     (384     (400

Provision for income taxes

     (553     (828
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     1,040        1,537   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(19) and $(31)

     33        58   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     1,073        1,595   

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

     5        34   
  

 

 

   

 

 

 

Ending balance

   $ 2,553      $ 1,481   
  

 

 

   

 

 

 

 

22


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2012, 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

  $ 4,448      $ 1,060      $ —        $ (5   $ —        $ 5,503   

Tax-exempt

    328        17        —          (43     —          302   

Government—non-U.S.

    2,315        260        —          (1     —          2,574   

U.S. corporate

    23,062        3,368        20        (144     —          26,306   

Corporate—non-U.S.

    14,256        1,190        —          (78     —          15,368   

Residential mortgage-backed

    5,837        562        12        (150     (142     6,119   

Commercial mortgage-backed

    3,240        185        4        (112     (31     3,286   

Other asset-backed

    2,799        44        —          (86     (1     2,756   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    56,285        6,686        36        (619     (174     62,214   

Equity securities

    499        32        —          (7     —          524   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 56,784      $ 6,718      $ 36      $ (626   $ (174   $ 62,738   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of December 31, 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:

 

          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

  $ 3,946      $ 918      $ —        $ (1   $ —        $ 4,863   

Tax-exempt

    564        15        —          (76     —          503   

Government—non-U.S.

    2,017        196        —          (2     —          2,211   

U.S. corporate

    23,024        2,542        18        (325     (1     25,258   

Corporate—non-U.S.

    13,156        819        —          (218     —          13,757   

Residential mortgage-backed

    5,695        446        9        (252     (203     5,695   

Commercial mortgage-backed

    3,470        157        4        (179     (52     3,400   

Other asset-backed

    2,686        18        —          (95     (1     2,608   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    54,558        5,111        31        (1,148     (257     58,295   

Equity securities

    356        19        —          (14     —          361   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 54,914      $ 5,130      $ 31      $ (1,162   $ (257   $ 58,656   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

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, 2012:

 

     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

  $ 303      $ (5     7      $ —        $ —          —        $ 303      $ (5 )       7   

Tax-exempt

    —          —          —          129        (43 )       15        129        (43 )       15   

Government—non-U.S.

    —          —          —          57        (1 )       10        57        (1 )       10   

U.S. corporate

    382        (11     72        938        (133     91        1,320        (144     163   

Corporate—non-U.S.

    468        (13     90        625        (65 )       61        1,093        (78 )       151   

Residential mortgage-
backed

    120        (2     22        577        (290     304        697        (292     326   

Commercial mortgage-backed

    —          —          —          830        (143     150        830        (143     150   

Other asset-backed

    141        (1     31        185        (86 )       20        326        (87 )       51   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    1,414        (32     222        3,341        (761     651        4,755        (793     873   

Equity securities

    91        (5     40        31        (2 )       20        122        (7 )       60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 1,505      $ (37     262      $ 3,372      $ (763     671      $ 4,877      $ (800     933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 1,405      $ (30     216      $ 2,434      $ (198     371      $ 3,839      $ (228     587   

20%-50% Below cost

    9        (2     6        842        (385     188        851        (387     194   

>50% Below cost

    —          —          —          65        (178     92        65        (178     92   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    1,414        (32     222        3,341        (761     651        4,755        (793     873   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    87        (4     39        28        (1 )       19        115        (5 )       58   

20%-50% Below cost

    4        (1     1        3        (1 )       1        7        (2 )       2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    91        (5     40        31        (2 )       20        122        (7 )       60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 1,505      $ (37     262      $ 3,372      $ (763     671      $ 4,877      $ (800     933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 1,283      $ (22     203      $ 2,173      $ (293     308      $ 3,456      $ (315     511   

Below investment grade (3)

    222        (15     59        1,199        (470     363        1,421        (485     422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 1,505      $ (37     262      $ 3,372      $ (763     671      $ 4,877      $ (800     933   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts included $174 million of unrealized losses on other-than-temporarily impaired securities.

(2) 

Amounts included $174 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 $171 million of unrealized losses on other-than-temporarily impaired securities.

 

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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 lower credit ratings since acquisition for corporate securities across various industry sectors. For securities that have been in a continuous unrealized loss for less than 12 months, the average fair value percentage below cost was approximately 2% as of September 30, 2012.

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

Of the $198 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 62% of the unrealized losses were related to investment grade securities as of September 30, 2012. These unrealized losses were attributable to lower credit ratings 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 7% as of September 30, 2012. 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, 2012:

 

    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

  $ 114      $ (40     5     10      $ —        $ —          —       —     

U.S. corporate

    138        (44     6        7        —          —          —          —     

Corporate—non-U.S.

    29        (17     2        8        2        (2     —          1   

Structured securities:

               

Residential mortgage-backed

    38        (22     3        17        6        (12     2        10   

Commercial mortgage-backed

    18        (7     1        6        —          (1     —          1   

Other asset-backed

    38        (26     3        4        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    94        (55     7        27        6        (13     2        11   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 375      $ (156     20     52      $ 8      $ (15     2     12   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

25


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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:

               

U.S. corporate

  $ 80      $ (32     4     7      $ —        $ —          —       —     

Structured securities:

               

Residential mortgage-backed

    221        (112     14        95        40        (124     16        67   

Commercial mortgage-backed

    117        (49     6        31        7        (23     3        10   

Other asset-backed

    49        (36     5        3        10        (16     2        3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    387        (197     25        129        57        (163     21        80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 467      $ (229     29     136      $ 57      $ (163     21     80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 the following for further discussion of gross unrealized losses by asset class.

Tax-Exempt Securities

As indicated in the table above, $40 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 $4 million which represented an average of 26% below cost. The unrealized losses continue to persist due to a combination of below market spreads, very low coupons, along with economic uncertainty 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, certain of these securities have been negatively impacted as a result of ratings downgrades of 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.

 

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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, 2012:

 

     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
    <