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, 2013

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   80-0873306

(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 23, 2013, 494,259,563 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 

 

 


Table of Contents

NOTE REGARDING THIS QUARTERLY REPORT

As previously announced, on April 1, 2013, we completed a holding company reorganization in connection with a comprehensive capital plan for our U.S. mortgage insurance business, which is discussed in further detail in note 1 of the financial statements in “Item 1—Financial Statements” of this Quarterly Report on Form 10-Q. Pursuant to the reorganization, the public holding company historically known as “Genworth Financial, Inc.” (now renamed Genworth Holdings, Inc. (“Genworth Holdings”)) became a direct, 100% owned subsidiary of a new public holding company that it had formed and that now has been renamed Genworth Financial, Inc. (“New Genworth”). In connection with the reorganization, all the stockholders of Genworth Holdings immediately prior to the completion of the reorganization automatically became stockholders of New Genworth, owning the same number of shares of stock in New Genworth that they owned in Genworth Holdings immediately prior to the reorganization. New Genworth, as the successor issuer to Genworth Holdings (pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), began making filings under the Securities Act of 1933, as amended, and the Exchange Act, from April 1, 2013.

On April 1, 2013, in connection with the reorganization, Genworth Holdings distributed to New Genworth (as its sole stockholder), through a dividend (the “Distribution”), the 84.6% membership interest in one of its subsidiaries (Genworth Mortgage Holdings, LLC (“GMHL”)) that it held directly, and 100% of the shares of another of its subsidiaries (Genworth Mortgage Holdings, Inc. (“GMHI”)), that held the remaining 15.4% of outstanding membership interests of GMHL. At the time of the Distribution, GMHL and GMHI together owned (directly or indirectly) 100% of the shares or other equity interests of all of the subsidiaries that conducted Genworth Holdings’ U.S. mortgage insurance business (these subsidiaries also owned the subsidiaries that conducted Genworth Holdings’ European mortgage insurance business). As part of the comprehensive U.S. mortgage insurance capital plan, on April 1, 2013, immediately prior to the Distribution, Genworth Holdings contributed $100 million to the U.S. mortgage insurance subsidiaries.

On April 1, 2013, in connection with the reorganization (a) New Genworth provided a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding senior notes and the holders of the senior notes, on an unsecured unsubordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, each outstanding series of senior notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the senior notes indenture in respect of such senior notes and (b) New Genworth provided a full and unconditional guarantee to the trustee of Genworth Holdings’ outstanding subordinated notes and the holders of the subordinated notes, on an unsecured subordinated basis, of the full and punctual payment of the principal of, premium, if any and interest on, and all other amounts payable under, the outstanding subordinated notes, and the full and punctual payment of all other amounts payable by Genworth Holdings under the subordinated notes indenture in respect of the subordinated notes.

References to “Genworth,” the “Company,” “we” or “our” in this Quarterly Report on Form 10-Q (including in the condensed consolidated financial statements and notes thereto in this report) have the following meanings, unless the context otherwise requires:

 

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

 

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

 

2


Table of Contents

TABLE OF CONTENTS

 

     Page  

PART I—FINANCIAL INFORMATION

     4   

Item 1. Financial Statements

     4   

Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012

     4   

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2013 and  2012 (Unaudited)

     5   

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September  30, 2013 and 2012 (Unaudited)

     6   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2013 and 2012 (Unaudited)

     7   

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and  2012 (Unaudited)

     8   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     9   

Item 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

     90   

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

     181   

Item 4.    Controls and Procedures

     181   

PART II—OTHER INFORMATION

     181   

Item 1.    Legal Proceedings

     181   

Item 1A. Risk Factors

     182   

Item 6.    Exhibits

     183   

Signatures

     184   

 

3


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,
2013
    December 31,
2012
 
     (Unaudited)        

Assets

    

Investments:

    

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

   $ 59,086      $ 62,161   

Equity securities available-for-sale, at fair value

     379        518   

Commercial mortgage loans

     5,858        5,872   

Restricted commercial mortgage loans related to securitization entities

     290        341   

Policy loans

     1,668        1,601   

Other invested assets

     1,826        3,493   

Restricted other invested assets related to securitization entities, at fair value

     392        393   
  

 

 

   

 

 

 

Total investments

     69,499        74,379   

Cash and cash equivalents

     3,554        3,632   

Accrued investment income

     705        715   

Deferred acquisition costs

     5,256        5,036   

Intangible assets

     404        366   

Goodwill

     867        868   

Reinsurance recoverable

     17,224        17,230   

Other assets

     668        710   

Separate account assets

     9,957        9,937   

Assets associated with discontinued operations

     —          439   
  

 

 

   

 

 

 

Total assets

   $ 108,134      $ 113,312   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Liabilities:

    

Future policy benefits

   $ 33,612      $ 33,505   

Policyholder account balances

     25,266        26,262   

Liability for policy and contract claims

     7,271        7,509   

Unearned premiums

     4,160        4,333   

Other liabilities ($78 and $133 other liabilities related to securitization entities)

     4,607        5,239   

Borrowings related to securitization entities ($73 and $62 at fair value)

     297        336   

Non-recourse funding obligations

     2,046        2,066   

Long-term borrowings

     4,780        4,776   

Deferred tax liability

     293        1,507   

Separate account liabilities

     9,957        9,937   

Liabilities associated with discontinued operations

     —          61   
  

 

 

   

 

 

 

Total liabilities

     92,289        95,531   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 583 million and 580 million shares issued as of September 30, 2013 and December 31, 2012, respectively; 494 million and 492 million shares outstanding as of September 30, 2013 and December 31, 2012, respectively

     1        1   

Additional paid-in capital

     12,149        12,127   
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

    

Net unrealized investment gains (losses):

    

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

     1,106        2,692   

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

     3        (54
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,109        2,638   
  

 

 

   

 

 

 

Derivatives qualifying as hedges

     1,442        1,909   

Foreign currency translation and other adjustments

     388        655   
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     2,939        5,202   

Retained earnings

     2,215        1,863   

Treasury stock, at cost (88 million shares as of September 30, 2013 and December 31, 2012)

     (2,700     (2,700
  

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     14,604        16,493   

Noncontrolling interests

     1,241        1,288   
  

 

 

   

 

 

 

Total stockholders’ equity

     15,845        17,781   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 108,134      $ 113,312   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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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,
 
     2013     2012     2013     2012  

Revenues:

        

Premiums

   $ 1,291      $ 1,313      $ 3,838      $ 3,721   

Net investment income

     801        825        2,436        2,503   

Net investment gains (losses)

     (23     9        (63     13   

Insurance and investment product fees and other

     248        309        780        936   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,317        2,456        6,991        7,173   
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,169        1,363        3,639        3,977   

Interest credited

     184        193        552        582   

Acquisition and operating expenses, net of deferrals

     407        443        1,253        1,322   

Amortization of deferred acquisition costs and intangibles

     182        160        441        578   

Goodwill impairment

     —          89        —          89   

Interest expense

     124        126        371        352   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     2,066        2,374        6,256        6,900   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     251        82        735        273   

Provision for income taxes

     105        23        254        65   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     146        59        481        208   

Income (loss) from discontinued operations, net of taxes

     2        12        (12     51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     148        71        469        259   

Less: net income attributable to noncontrolling interests

     40        36        117        102   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 108      $ 35      $ 352      $ 157   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.21      $ 0.05      $ 0.74      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.21      $ 0.05      $ 0.73      $ 0.22   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.22      $ 0.07      $ 0.71      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.22      $ 0.07      $ 0.71      $ 0.32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     494.0        491.7        493.3        491.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     499.3        493.9        497.9        494.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

        

Total other-than-temporary impairments

   $ (3   $ (26   $ (17   $ (84

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

     (2     (3     (5     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (5     (29     (22     (85

Other investments gains (losses)

     (18     38        (41     98   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment gains (losses)

   $ (23   $ 9      $ (63   $ 13   
  

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
     2013     2012     2013     2012  

Net income

   $ 148      $ 71      $ 469      $ 259   

Other comprehensive income (loss), net of taxes:

        

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

     (191     517        (1,624     1,029   

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

     5        28        57        44   

Derivatives qualifying as hedges

     (139     (76     (467     2   

Foreign currency translation and other adjustments

     144        148        (313     145   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (181     617        (2,347     1,220   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     (33     688        (1,878     1,479   

Less: comprehensive income attributable to noncontrolling interests

     62        83        33        146   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (95   $ 605      $ (1,911   $ 1,333   
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2012

  $ 1      $ 12,127      $ 5,202      $ 1,863      $ (2,700   $ 16,493      $ 1,288      $ 17,781   
               

 

 

 

Repurchase of subsidiary shares

    —          —          —          —          —          —          (43     (43

Comprehensive income (loss):

               

Net income

    —          —          —          352        —          352        117        469   

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

    —          —          (1,586     —          —          (1,586     (38     (1,624

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

    —          —          57        —          —          57        —          57   

Derivatives qualifying as hedges

    —          —          (467     —          —          (467     —          (467

Foreign currency translation and other adjustments

    —          —          (267     —          —          (267     (46     (313
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              (1,911     33        (1,878

Dividends to noncontrolling interests

    —          —          —          —          —          —          (39     (39

Stock-based compensation expense and exercises and other

    —          22        —          —          —          22        2        24   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2013

  $ 1      $ 12,149      $ 2,939      $ 2,215      $ (2,700   $ 14,604      $ 1,241      $ 15,845   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2011

  $ 1      $ 12,136      $ 4,047      $ 1,538      $ (2,700   $ 15,022      $ 1,110      $ 16,132   
               

 

 

 

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      $ 1,695      $ (2,700   $ 16,381      $ 1,220      $ 17,601   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Nine months ended
September 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 469      $ 259   

Less (income) loss from discontinued operations, net of taxes

     12        (51

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

    

Amortization of fixed maturity discounts and premiums and limited partnerships

     (64     (59

Net investment losses (gains)

     63        (13

Charges assessed to policyholders

     (612     (590

Acquisition costs deferred

     (332     (456

Amortization of deferred acquisition costs and intangibles

     441        578   

Goodwill impairment

     —         89   

Deferred income taxes

     (120     12   

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

     (15     66   

Stock-based compensation expense

     27        20   

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     (66     (153

Insurance reserves

     1,679        1,672   

Current tax liabilities

     242        (191

Other liabilities and other policy-related balances

     (699     (808

Cash from operating activities—discontinued operations

     68        52   
  

 

 

   

 

 

 

Net cash from operating activities

     1,093        427   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities and repayments of investments:

    

Fixed maturity securities

     4,046        3,619   

Commercial mortgage loans

     686        559   

Restricted commercial mortgage loans related to securitization entities

     51        48   

Proceeds from sales of investments:

    

Fixed maturity and equity securities

     3,056        3,956   

Purchases and originations of investments:

    

Fixed maturity and equity securities

     (7,872     (8,932

Commercial mortgage loans

     (667     (339

Other invested assets, net

     80        531   

Policy loans, net

     (7     (8

Proceeds from sale of a subsidiary, net of cash transferred

     370        77   

Cash from investing activities—discontinued operations

     (30     (41
  

 

 

   

 

 

 

Net cash from investing activities

     (287     (530
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Deposits to universal life and investment contracts

     1,979        2,248   

Withdrawals from universal life and investment contracts

     (2,613     (2,057

Redemption and repurchase of non-recourse funding obligations

     (20     (801

Proceeds from the issuance of long-term debt

     397        361   

Repayment and repurchase of long-term debt

     (365     (222

Repayment of borrowings related to securitization entities

     (51     (53

Repurchase of subsidiary shares

     (43      

Dividends paid to noncontrolling interests

     (39     (36

Other, net

     (53     (68

Cash from financing activities—discontinued operations

     (3     (35
  

 

 

   

 

 

 

Net cash from financing activities

     (811     (663
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (94     19   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (99     (747

Cash and cash equivalents at beginning of period

     3,653        4,488   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     3,554        3,741   

Less cash and cash equivalents of discontinued operations at end of period

           21   
  

 

 

   

 

 

 

Cash and cash equivalents of continuing operations at end of period

   $ 3,554      $ 3,720   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware on October 23, 2003. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, under the name Sub XLVI, Inc., and was renamed Genworth Financial, Inc. upon the completion of the reorganization.

To implement the reorganization, Genworth Holdings formed New Genworth and New Genworth, in turn, formed Sub XLII, Inc. (“Merger Sub”). The holding company structure was implemented pursuant to Section 251(g) of the General Corporation Law of the State of Delaware (“DGCL”) by the merger of Merger Sub with and into Genworth Holdings (the “Merger”). Genworth Holdings survived the Merger as a direct, wholly-owned subsidiary of New Genworth and each share of Genworth Holdings Class A Common Stock, par value $0.001 per share (“Genworth Holdings Class A Common Stock”), issued and outstanding immediately prior to the Merger and each share of Genworth Holdings Class A Common Stock held in the treasury of Genworth Holdings immediately prior to the Merger converted into one issued and outstanding or treasury, as applicable, share of New Genworth Class A Common Stock, par value $0.001 per share, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the Genworth Holdings Class A Common Stock being converted.

Immediately after the consummation of the Merger, New Genworth had the same authorized, outstanding and treasury capital stock as Genworth Holdings immediately prior to the Merger. Each share of New Genworth common stock outstanding immediately prior to the Merger was cancelled.

Pursuant to Section 251(g) of the DGCL, the Merger did not require a vote of the stockholders of Genworth Holdings. Effective upon the consummation of the Merger, New Genworth adopted an amended and restated certificate of incorporation and amended and restated bylaws that were identical to those of Genworth Holdings immediately prior to the consummation of the Merger (other than provisions regarding certain technical matters, as permitted by Section 251(g) of the DGCL). New Genworth’s directors and executive officers immediately after the consummation of the Merger were the same as the directors and executive officers of Genworth Holdings immediately prior to the consummation of the Merger. Immediately after the consummation of the Merger, New Genworth had, on a consolidated basis, the same assets, businesses and operations as Genworth Holdings had immediately prior to the consummation of the Merger.

On April 1, 2013, in connection with the reorganization, immediately following the consummation of the Merger, Genworth Holdings distributed to New Genworth (as its sole stockholder), through a dividend (the “Distribution”), the 84.6% membership interest in one of its subsidiaries (Genworth Mortgage Holdings, LLC (“GMHL”)) that it held directly, and 100% of the shares of another of its subsidiaries (Genworth Mortgage Holdings, Inc. (“GMHI”)), that held the remaining 15.4% of outstanding membership interests of GMHL. At the time of the Distribution, GMHL and GMHI together owned (directly or indirectly) 100% of the shares or other equity interests of all of the subsidiaries that conducted Genworth Holdings’ U.S. mortgage insurance business (these subsidiaries also owned the subsidiaries that conducted Genworth Holdings’ European mortgage insurance business). As part of the comprehensive U.S. mortgage insurance capital plan, on April 1, 2013, immediately prior to the Distribution, Genworth Holdings contributed $100 million to the U.S. mortgage insurance subsidiaries.

The accompanying condensed financial statements include on a consolidated basis the accounts of: (a) for the periods prior to April 1, 2013, Genworth Holdings and the affiliated companies in which it held a majority

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

equity interest or where it was the primary beneficiary of a variable interest entity and (b) for the periods from and after April 1, 2013, New Genworth and the affiliated companies in which it held a majority voting interest or where it was the primary beneficiary of a variable interest entity. All intercompany accounts and transactions have been eliminated in consolidation.

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

 

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

 

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

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 insurance, long-term care insurance and fixed annuities.

 

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

 

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

 

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

 

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

We also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings holding company level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments.

On March 27, 2013, we announced that we had agreed to sell our wealth management business to AqGen Liberty Acquisition, Inc., a subsidiary of AqGen Liberty Holdings LLC, a partnership of Aquiline Capital

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Partners and Genstar Capital, for approximately $412 million. Historically, this business had been reported as a separate segment. As a result of the sale agreement, the financial statements and other disclosures herein have been revised to reclassify this business as discontinued operations and report its financial position, results of operations and cash flows separately for all periods presented. The sale closed on August 30, 2013 and we received net proceeds of approximately $360 million. Also included in discontinued operations was our tax and advisor unit, Genworth Financial Investment Services, which was part of our wealth management business until the closing of its sale on April 2, 2012. See note 10 for additional information related to discontinued operations.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these 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 May 30, 2013, which reflected the reclassification of our wealth management business as discontinued operations, adjustments to correct an error related to premium refund accrual in our U.S. mortgage insurance business, the addition of a footnote in the notes to the consolidated financial statements that provides required supplemental guarantor financial information related to certain guarantees we gave in connection with the reorganization in which we became the parent company to Genworth Holdings and the addition of certain disclosures about offsetting assets and liabilities required by newly adopted accounting guidance. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On July 17, 2013, we adopted new accounting guidance to provide additional flexibility in the benchmark interest rates used when applying hedge accounting. The new guidance permits the use of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes and removes certain restrictions on being able to apply hedge accounting for similar hedges using different benchmark interest rates. The adoption of this accounting guidance did not have a material impact on our consolidated financial statements.

On January 1, 2013, we adopted new accounting guidance for disclosures about offsetting assets and liabilities. This 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. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

On January 1, 2013, we adopted new accounting guidance related to the presentation of the reclassification of items out of accumulated other comprehensive income into net income. The adoption of this accounting guidance impacted our disclosures only and did not impact our consolidated results.

Accounting Pronouncements Not Yet Adopted

In June 2013, the Financial Accounting Standards Board issued new accounting guidance on the scope, measurement and disclosure requirements for investment companies. The new guidance clarifies the

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

characteristics of an investment company, provides comprehensive guidance for assessing whether an entity is an investment company, requires investment companies to measure noncontrolling ownership interest in other investment companies at fair value rather than using the equity method of accounting and requires additional disclosures. These new requirements will be effective for us on January 1, 2014 and are not expected to have a material impact on our consolidated financial statements.

(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)

   2013      2012      2013     2012  

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

     494.0         491.7         493.3        491.5   

Potentially dilutive securities:

          

Stock options, restricted stock units and stock appreciation rights

     5.3         2.2         4.6        3.0   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

     499.3         493.9         497.9        494.5   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations:

          

Income from continuing operations

   $ 146       $ 59       $ 481      $ 208   

Less: income from continuing operations attributable to noncontrolling interests

     40         36         117        102   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 106       $ 23       $ 364      $ 106   
  

 

 

    

 

 

    

 

 

   

 

 

 

Basic per common share

   $ 0.21       $ 0.05       $ 0.74      $ 0.22   
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted per common share

   $ 0.21       $ 0.05       $ 0.73      $ 0.22   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) from discontinued operations:

          

Income (loss) from discontinued operations, net of taxes

   $ 2       $ 12       $ (12   $ 51   

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

     —          —          —         —    
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 2       $ 12       $ (12   $ 51   
  

 

 

    

 

 

    

 

 

   

 

 

 

Basic per common share

   $      $ 0.02       $ (0.02   $ 0.10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted per common share

   $      $ 0.02       $ (0.02   $ 0.10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income:

          

Income from continuing operations

   $ 146       $ 59       $ 481      $ 208   

Income (loss) from discontinued operations, net of taxes

     2         12         (12     51   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

     148         71         469        259   

Less: net income attributable to noncontrolling interests

     40         36         117        102   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 108       $ 35       $ 352      $ 157   
  

 

 

    

 

 

    

 

 

   

 

 

 

Basic per common share

   $ 0.22       $ 0.07       $ 0.71      $ 0.32   
  

 

 

    

 

 

    

 

 

   

 

 

 

Diluted per common share

   $ 0.22       $ 0.07       $ 0.71      $ 0.32   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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)

     2013         2012       2013     2012  

Fixed maturity securities—taxable

   $ 651      $ 659      $ 1,979      $ 1,988   

Fixed maturity securities—non-taxable

     3        2        7        9   

Commercial mortgage loans

     81        87        244        256   

Restricted commercial mortgage loans related to securitization entities

     8        8        22        24   

Equity securities

     3        4        13        14   

Other invested assets

     41        48        128        157   

Policy loans

     33        31        97        93   

Cash, cash equivalents and short-term investments

     4        8        16        28   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     824        847        2,506        2,569   

Expenses and fees

     (23     (22     (70     (66
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 801      $ 825      $ 2,436      $ 2,503   
  

 

 

   

 

 

   

 

 

   

 

 

 

(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)

     2013         2012         2013         2012    

Available-for-sale securities:

        

Realized gains

   $ 26      $ 28      $ 144      $ 112   

Realized losses

     (38     (14     (151     (79
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     (12     14        (7     33   
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (3     (26     (17     (84

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

     (2     (3     (5     (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (5     (29     (22     (85
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     (6     14        (15     21   

Commercial mortgage loans

     1        2        5        7   

Net gains (losses) related to securitization entities

     21        18        43        48   

Derivative instruments (1)

     (19     (2     (63     (4

Contingent consideration adjustment

     —         (8     —         (7

Other

     (3     —         (4     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ (23   $ 9      $ (63   $ 13   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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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, 2013 and 2012 was $407 million and $228 million, respectively, which was approximately 93% and 96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2013 and 2012 was $1,293 million and $911 million, respectively, which was approximately 90% and 93%, respectively, of book value.

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

 

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

(Amounts in millions)

     2013         2012         2013         2012    

Beginning balance

   $ 179      $ 588      $ 387      $ 646   

Additions:

        

Other-than-temporary impairments not previously recognized

     1        5        3        13   

Increases related to other-than-temporary impairments previously recognized

     2        10        9        42   

Reductions:

        

Securities sold, paid down or disposed

     (76     (66     (293     (164
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 106      $ 537      $ 106      $ 537   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(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, 2013     December 31, 2012  

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 2,786      $ 6,086   

Equity securities

     13        34   

Other invested assets

     (6     (8
  

 

 

   

 

 

 

Subtotal

     2,793        6,112   

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

     (1,008     (1,925

Income taxes, net

     (622     (1,457
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,163        2,730   

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

     54        92   
  

 

 

   

 

 

 

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

   $ 1,109      $ 2,638   
  

 

 

   

 

 

 

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)

   2013     2012  

Beginning balance

   $ 1,294      $ 2,016   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     (411     1,040   

Adjustment to deferred acquisition costs

     23        (39

Adjustment to present value of future profits

     9        11   

Adjustment to sales inducements

     3        (17

Adjustment to benefit reserves

     68        (171

Provision for income taxes

     111        (288
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (197     536   

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

     11        9   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (186     545   

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

     (1     8   
  

 

 

   

 

 

 

Ending balance

   $ 1,109      $ 2,553   
  

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     As of or for the
nine months ended
September 30,
 

(Amounts in millions)

   2013     2012  

Beginning balance

   $ 2,638      $ 1,485   

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     (3,348     2,157   

Adjustment to deferred acquisition costs

     241        (138

Adjustment to present value of future profits

     80        (11

Adjustment to sales inducements

     41        (31

Adjustment to benefit reserves

     555        (384

Provision for income taxes

     845        (553
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (1,586     1,040   

Reclassification adjustments to net investment (gains) losses, net of taxes of $(10) and $(19)

     19        33   
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (1,567     1,073   

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

     (38     5   
  

 

 

   

 

 

 

Ending balance

   $ 1,109      $ 2,553   
  

 

 

   

 

 

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2013, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

(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

   $ 5,007       $ 495       $ —         $ (177   $ —       $ 5,325   

Tax-exempt

     287         7         —          (31     —         263   

Government—non-U.S.

     2,119         124         —          (11     —         2,232   

U.S. corporate

     23,249         1,872         18         (357     —         24,782   

Corporate—non-U.S.

     14,703         751         —          (178     —         15,276   

Residential mortgage-backed

     5,145         321         8         (65     (12     5,397   

Commercial mortgage-backed

     2,762         90         1         (60     (3     2,790   

Other asset-backed

     3,047         33         —          (57     (2     3,021   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

     56,319         3,693         27         (936     (17     59,086   

Equity securities

     366         29         —          (16     —         379   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $ 56,685       $ 3,722       $ 27       $ (952   $ (17   $ 59,465   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of December 31, 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:

 

(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

   $ 4,484       $ 1,025       $ —        $ (18   $ —       $ 5,491   

Tax-exempt

     308         16         —          (30     —         294   

Government—non-U.S.

     2,173         250         —          (1     —         2,422   

U.S. corporate

     22,873         3,317         19         (104     —         26,105   

Corporate—non-U.S.

     14,577         1,262         —          (47     —         15,792   

Residential mortgage-backed

     5,744         549         13         (124     (101     6,081   

Commercial mortgage-backed

     3,253         178         5         (82     (21     3,333   

Other asset-backed

     2,660         50         —          (65     (2     2,643   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

     56,072         6,647         37         (471     (124     62,161   

Equity securities

     483         41         —          (6     —         518   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

   $ 56,555       $ 6,688       $ 37       $ (477   $ (124   $ 62,679   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

17


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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, 2013:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

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

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 769      $ (134     43      $ 134      $ (43     1      $ 903      $ (177     44   

Tax-exempt

    36        (2     19        101        (29 )       9        137        (31 )       28   

Government—non-U.S.

    461        (11     53        —         —          —         461        (11 )       53   

U.S. corporate

    4,655        (280     683        470        (77 )       45        5,125        (357     728   

Corporate—non-U.S.

    3,180        (155     393        248        (23 )       22        3,428        (178     415   

Residential mortgage-backed

    808        (36     128        196        (41 )       119        1,004        (77 )       247   

Commercial mortgage-backed

    656        (38     82        360        (25 )       63        1,016        (63 )       145   

Other asset-backed

    896        (16     126        146        (43 )       16        1,042        (59 )       142   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    11,461        (672     1,527        1,655        (281     275        13,116        (953     1,802   

Equity securities

    133        (16     72        —         —          —         133        (16 )       72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 11,594      $ (688     1,599      $ 1,655      $ (281     275      $ 13,249      $ (969     1,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 11,201      $ (595     1,506      $ 1,294      $ (125     196      $ 12,495      $ (720     1,702   

20%-50% Below cost

    260        (77     21        344        (127     49        604        (204     70   

>50% Below cost

    —         —         —         17        (29 )       30        17        (29 )       30   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    11,461        (672     1,527        1,655        (281     275        13,116        (953     1,802   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    132        (15     69        —         —          —         132        (15 )       69   

20%-50% Below cost

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    133        (16     72        —         —          —         133        (16 )       72   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 11,594      $ (688     1,599      $ 1,655      $ (281     275      $ 13,249      $ (969     1,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 10,978      $ (653     1,435      $ 1,145      $ (203     149      $ 12,123      $ (856     1,584   

Below investment grade (3)

    616        (35     164        510        (78 )       126        1,126        (113     290   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 11,594      $ (688     1,599      $ 1,655      $ (281     275      $ 13,249      $ (969     1,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Amounts included $16 million of unrealized losses on other-than-temporarily impaired securities.
(2)  Amounts included $17 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 $16 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 6% as of September 30, 2013.

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

Of the $125 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 66% of the unrealized losses were related to investment grade securities as of September 30, 2013. These unrealized losses were attributable to the lower credit ratings for these securities since acquisition, primarily associated with corporate and structured securities in the finance and insurance sector. The average fair value percentage below cost for these securities was approximately 9% as of September 30, 2013. 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, 2013:

 

    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. government, agencies and government-sponsored enterprises

  $ 134      $ (43     4     1      $ —       $ —         —       —    

Tax-exempt

    58        (20     2        6        —         —         —         —    

U.S. corporate

    23        (7     1        2        —         —         —         —    

Corporate—non-U.S.

    32        (11     1        7        —         —         —         —    

Structured securities:

               

Residential mortgage-backed

    2        (2     —         3        5        (6     1        7   

Commercial mortgage-backed

    2        (1     —         2        —         (1     —         1   

Other asset-backed

    60        (29     3        4        —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    64        (32     3        9        5        (7     1        8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 311      $ (113     11     25      $ 5      $ (7     1     8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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

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

Structured securities:

               

Residential mortgage-backed

    21        (9     1        19        3        (12     1        19   

Commercial mortgage-backed

    10        (4     —         4        1        (1     —         1   

Other asset-backed

    —         —         —         —         8        (9     1        2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    31        (13     1        23        12        (22     2        22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 33      $ (14     1     24      $ 12      $ (22     2     22   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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.

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

As indicated in the table above, $43 million of gross unrealized losses were related to a U.S. government, agencies and government-sponsored enterprises security that has been in a continuous loss position for more than 12 months and was greater than 20% below cost. The unrealized losses for the U.S. government, agencies and government-sponsored enterprises security represents a long-term, zero coupon Treasury bond. An increase in Treasury yields since the bond was purchased resulted in a decrease in the market value of this security. We expect that this security will accrete up to par value over time.

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, 2013:

 

    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

  $ 55      $ (18         2         9      $ —       $ —         —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 55      $ (18     2     9      $ —       $ —         —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


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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
 

Industry:

               

Finance and insurance

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The total unrealized losses of $19 million for corporate fixed maturity securities presented in the tables above related to issuers in the finance and insurance sector that were 20% 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, 2013. Of the $19 million of unrealized losses related to the finance and insurance industry, $18 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 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 $74 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, $11 million related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to 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 U.S. 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

 

21


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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, 2013.

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.

 

22


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 December 31, 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

  $ 655      $ (18     19      $ —       $ —          —       $ 655      $ (18     19   

Tax-exempt

    —         —         —         137        (30 )       13        137        (30 )       13   

Government—non-U.S.

    103        (1     21        —         —           —         103        (1 )       21   

U.S. corporate

    859        (19     154        646        (85 )       65        1,505        (104     219   

Corporate—non-U.S.

    665        (9     105        436        (38 )       41        1,101        (47 )       146   

Residential mortgage-
backed

    152        (1     32        494        (224     278        646        (225     310   

Commercial mortgage-backed

    183        (1     20        749        (102     130        932        (103     150   

Other asset-backed

    282        (1     42        185        (66 )       18        467        (67 )       60   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    2,899        (50     393        2,647        (545     545        5,546        (595     938   

Equity securities

    52        (4     32        14        (2 )       13        66        (6 )       45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,951      $ (54     425      $ 2,661      $ (547     558      $ 5,612      $ (601     983   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 2,899      $ (50     393      $ 2,151      $ (194     337      $ 5,050      $ (244     730   

20%-50% Below cost

    —         —         —         445        (218     128        445        (218     128   

>50% Below cost

    —         —         —         51        (133     80        51        (133     80   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    2,899        (50     393        2,647        (545     545        5,546        (595     938   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    47        (2     29        12        (1 )       11        59        (3 )       40   

20%-50% Below cost

    5        (2     3        2        (1 )       2        7        (3 )       5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    52        (4     32        14        (2 )       13        66        (6 )       45   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,951      $ (54     425      $ 2,661      $ (547     558      $ 5,612      $ (601     983   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 2,761      $ (43     356      $ 1,616      $ (209     235      $ 4,377      $ (252     591   

Below investment grade (3)

    190        (11     69        1,045        (338     323        1,235        (349     392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,951      $ (54     425      $ 2,661      $ (547     558      $ 5,612      $ (601     983   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Amounts included $123 million of unrealized losses on other-than-temporarily impaired securities.
(2)  Amounts included $124 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 $119 million of unrealized losses on other-than-temporarily impaired securities.

 

23


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2013 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

   $ 2,744       $ 2,772   

Due after one year through five years

     10,019         10,563   

Due after five years through ten years

     12,142         12,570   

Due after ten years

     20,460         21,973   
  

 

 

    

 

 

 

Subtotal

     45,365         47,878   

Residential mortgage-backed

     5,145         5,397   

Commercial mortgage-backed

     2,762         2,790   

Other asset-backed

     3,047         3,021   
  

 

 

    

 

 

 

Total

   $ 56,319       $ 59,086   
  

 

 

    

 

 

 

As of September 30, 2013, $5,529 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2013, securities issued by utilities and energy, finance and insurance, and consumer—non-cyclical industry groups represented approximately 24%, 19% and 12%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio. This portfolio is widely diversified among various geographic regions in the United States and internationally, and is not dependent on the economic stability of one particular region.

As of September 30, 2013, 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.

 

24


Table of Contents

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, 2013     December 31, 2012  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 2,005        34   $ 1,895        32

Office

     1,610        27        1,580        27   

Industrial

     1,571        27        1,603        27   

Apartments

     473        8        552        9   

Mixed use/other

     234        4        282        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     5,893        100     5,912        100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     1          2     

Allowance for losses

     (36       (42  
  

 

 

     

 

 

   

Total

   $ 5,858        $ 5,872     
  

 

 

     

 

 

   

 

     September 30, 2013     December 31, 2012  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic region:

        

Pacific

   $ 1,624        28   $ 1,553        26

South Atlantic

     1,558        26        1,587        27   

Middle Atlantic

     792        13        739        13   

Mountain

     462        8        463        8   

East North Central

     384        7        468        8   

West North Central

     366        6        353        6   

New England

     327        6        343        6   

West South Central

     237        4        265        4   

East South Central

     143        2        141        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     5,893        100     5,912        100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     1          2     

Allowance for losses

     (36       (42  
  

 

 

     

 

 

   

Total

   $ 5,858        $ 5,872     
  

 

 

     

 

 

   

 

25


Table of Contents

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, 2013  

(Amounts in millions)

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

Property type:

            

Retail

   $ —       $ —        $ 10      $ 10      $ 1,995      $ 2,005   

Office

     —         —          9        9        1,601        1,610   

Industrial

     —         16        1        17        1,554        1,571   

Apartments

     —         —          —         —         473        473   

Mixed use/other

     —         —          —         —         234        234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ —       $ 16      $ 20      $ 36      $ 5,857      $ 5,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       1     1     99     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2012  

(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      $ 1,892      $ 1,895   

Office

     2        —          —         2        1,578        1,580   

Industrial

     —         —          —         —         1,603        1,603   

Apartments

     —         —          4        4        548        552   

Mixed use/other

     66        —          —         66        216        282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 68      $ 3      $ 4      $ 75      $ 5,837      $ 5,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     1     —       —       1     99     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2013 and December 31, 2012, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of September 30, 2013 and December 31, 2012.

As of and for the nine months ended September 30, 2013 and the year ended December 31, 2012, we modified or extended 26 and 38 commercial mortgage loans, respectively, with a total carrying value of $146 million and $279 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.

 

26


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

(Amounts in millions)

   2013     2012     2013     2012  

Allowance for credit losses:

        

Beginning balance

   $ 38      $ 46      $ 42      $ 51   

Charge-offs

     (1     (3     (3     (4

Recoveries

     —         —         —         —    

Provision

     (1     1        (3     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 36      $ 44      $ 36      $ 44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance for individually impaired loans

   $ —       $ —       $ —       $ —    
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 36      $ 44      $ 36      $ 44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment:

        

Ending balance

   $ 5,893      $ 5,903      $ 5,893      $ 5,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ 2      $ 8      $ 2      $ 8   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 5,891      $ 5,895      $ 5,891      $ 5,895   
  

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2013, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $1 million, an unpaid principal balance of $3 million, charge-offs of $2 million and an average recorded investment of $1 million. As of September 30, 2013, we also had individually impaired commercial mortgage loans included within the industrial property type with a recorded investment of $1 million, an unpaid principal balance of $2 million, charge-offs of $1 million and an average recorded investment of $1 million. As of December 31, 2012, we had no individually impaired commercial mortgage loans.

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

 

27


Table of Contents

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, 2013  

(Amounts in millions)

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

Property type:

            

Retail

   $ 557      $ 360      $ 957      $ 105      $ 26      $ 2,005   

Office

     385        199        768        190        68        1,610   

Industrial

     444        215        740        151        21        1,571   

Apartments

     190        100        146        36        1        473   

Mixed use/other

     57        56        109        6        6        234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1,633      $ 930      $ 2,720      $ 488      $ 122      $ 5,893   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     28     16     46     8     2     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.19        1.77        1.72        1.11        0.64        1.78   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $2 million of impaired loans, $10 million of loans past due and not individually impaired and $110 million of loans in good standing where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 118%.

 

     December 31, 2012  

(Amounts in millions)

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

Property type:

            

Retail

   $ 548      $ 280      $ 874      $ 162      $ 31      $ 1,895   

Office

     323        237        688        288        44        1,580   

Industrial

     462        242        671        188        40        1,603   

Apartments

     167        140        201        29        15        552   

Mixed use/other

     68        24        103        81        6        282   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1,568      $ 923      $ 2,537      $ 748      $ 136      $ 5,912   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     27     16     42     13     2     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.13        1.73        2.09        1.18        2.48        1.95   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $136 million of loans in good standing where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 144%.

 

28


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     September 30, 2013  

(Amounts in millions)

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

Property type:

            

Retail

   $ 107      $ 297      $ 371      $ 735      $ 393      $ 1,903   

Office

     138        183        211        632        370        1,534   

Industrial

     167        118        267        709        305        1,566   

Apartments

     12        25        105        168        163        473   

Mixed use/other

     22        2        38        122        50        234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 446      $ 625      $ 992      $ 2,366      $ 1,281      $ 5,710   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     8     11     17     42     22     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     80     68     64     60     43     59
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2012  

(Amounts in millions)

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

Property type:

            

Retail

   $ 87      $ 295      $ 391      $ 634      $ 384      $ 1,791   

Office

     148        174        312        559        303        1,496   

Industrial

     164        148        311        629        345        1,597   

Apartments

     9        62        90        279        112        552   

Mixed use/other

     32        21        49        64        50        216   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 440      $ 700      $ 1,153      $ 2,165      $ 1,194      $ 5,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     8     12     20     39     21     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     81     71     66     61     45     61
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     September 30, 2013  

(Amounts in millions)

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

Property type:

            

Retail

   $ —        $ —        $ —       $ —        $ 102      $ 102   

Office

     —          —          8        —          68        76   

Industrial

     —          —          —         —          5        5   

Apartments

     —          —          —         —          —         —    

Mixed use/other

     —          —          —         —          —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ —        $ —        $ 8      $ —        $ 175      $ 183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     —       —       4     —       96     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     —       —       77     —       62     63
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     December 31, 2012  

(Amounts in millions)

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

Property type:

            

Retail

   $ —        $ —        $ 1      $ —        $ 103      $ 104   

Office

     —          —          8        —          76        84   

Industrial

     —          —          —         —          6        6   

Apartments

     —          —          —         —          —         —    

Mixed use/other

     —          —          —         —          66        66   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ —        $ —        $ 9      $ —        $ 251      $ 260   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     —       —       3     —       97     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     —       —       55     —       79     78
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

The following tables set forth additional information regarding our restricted commercial mortgage loans related to securitization entities as of the dates indicated:

 

     September 30, 2013     December 31, 2012  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 118        41   $ 140        42

Industrial

     68        23        81        24   

Office

     52        18        63        18   

Apartments

     50        17        53        15   

Mixed use/other

     3        1        5        1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     291        100     342        100
    

 

 

     

 

 

 

Allowance for losses

     (1       (1  
  

 

 

     

 

 

   

Total

   $ 290        $ 341     
  

 

 

     

 

 

   

 

     September 30, 2013     December 31, 2012  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic region:

        

South Atlantic

   $ 106        36   $ 126        37

Pacific

     54        19        60        18   

Middle Atlantic

     49        17        55        16   

East North Central

     21        7        31        9   

Mountain

     20        7        21        6   

West North Central

     18        6        22        6   

East South Central

     13        5        16        5   

West South Central

     10        3        11        3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     291        100     342        100
    

 

 

     

 

 

 

Allowance for losses

     (1       (1  
  

 

 

     

 

 

   

Total

   $ 290        $ 341     
  

 

 

     

 

 

   

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of September 30, 2013, the total recorded investment of our restricted commercial mortgage loans of $291 million was current. Of our restricted commercial mortgage loans as of December 31, 2012, $337 million were current and $5 million were past due for more than 90 days and still accruing interest.

As of September 30, 2013 and December 31, 2012, the total recorded investment of restricted commercial mortgage loans of $291 million and $342 million, respectively, related to loans not individually impaired that were evaluated collectively for impairment. There was no provision for credit losses recorded during the three or nine months ended September 30, 2013 or 2012 related to restricted commercial mortgage loans.

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

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

 

     September 30, 2013  

(Amounts in millions)

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

Property type:

            

Retail

   $ 116      $ —        $ —       $ —        $ 2      $ 118   

Industrial

     68        —          —         —          —         68   

Office

     50        —          2        —          —         52   

Apartments

     40        —          10        —          —         50   

Mixed use/other

     3        —          —         —          —         3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 277      $ —        $ 12      $ —        $ 2      $ 291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     95     —       4     —       1     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     1.75        —          1.21        —          0.44        1.71   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     December 31, 2012  

(Amounts in millions)

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

Property type:

            

Retail

   $ 126      $ 4      $ 7      $ —       $ 3      $ 140   

Industrial

     77        —         3        1        —         81   

Office

     54        3        —         6        —         63   

Apartments

     28        4        21        —         —         53   

Mixed use/other

     5        —         —         —         —         5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 290      $ 11      $ 31      $ 7      $ 3      $ 342   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     85     3     9     2     1     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     1.78        1.38        1.14        0.86        0.54        1.68   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     September 30, 2013  

(Amounts in millions)

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

Property type:

            

Retail

   $ 6      $ 6      $ 28      $ 32      $ 46      $ 118   

Industrial

     2        5        14        29        18        68   

Office

     9        10        15        13        5        52   

Apartments

     —         5        22        13        10        50   

Mixed use/other

     —         —         —         —         3        3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 17      $ 26      $ 79      $ 87      $ 82      $ 291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     6     9     27     30     28     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     55     31     39     29     25     32
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2012  

(Amounts in millions)

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

Property type:

            

Retail

   $ 5      $ 16      $ 34      $ 36      $ 49      $ 140   

Industrial

     9        4        14        37        17        81   

Office

     4        22        14        12        11        63   

Apartments

     —         20        11        21        1        53   

Mixed use/other

     —         —         —         2        3        5   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 18      $ 62      $ 73      $ 108      $ 81      $ 342   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     5     18     21     32     24     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     51     53     37     31     29     37
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

There were no floating rate restricted commercial mortgage loans as of September 30, 2013 or December 31, 2012.

(g) Restricted Other Invested Assets Related To Securitization Entities

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

(5) Derivative Instruments

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

   

Derivative assets

   

Derivative liabilities

 
   

Balance
sheet classification

  Fair value    

Balance
sheet classification

  Fair value  

(Amounts in millions)

    September 30,
2013
    December 31,
2012
      September 30,
2013
    December 31,
2012
 

Derivatives designated as hedges

           

Cash flow hedges:

           

Interest rate swaps

  Other invested assets   $ 146      $ 414      Other liabilities   $ 410      $ 27   

Inflation indexed swaps

  Other invested assets     —          —        Other liabilities     73        105   

Foreign currency swaps

  Other invested assets     3        3      Other liabilities     1        1   

Forward bond purchase commitments

  Other invested assets     —          53      Other liabilities     5        —     
   

 

 

   

 

 

     

 

 

   

 

 

 

Total cash flow hedges

      149        470          489        133   
   

 

 

   

 

 

     

 

 

   

 

 

 

Fair value hedges:

           

Interest rate swaps

  Other invested assets     1        12      Other liabilities     —          —     

Foreign currency swaps

  Other invested assets     —          31      Other liabilities     —          —     
   

 

 

   

 

 

     

 

 

   

 

 

 

Total fair value hedges

      1        43          —          —     
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedges

      150        513          489        133   
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedges

           

Interest rate swaps

  Other invested assets     357        603      Other liabilities     43        280   

Interest rate swaps related to securitization entities

  Restricted other invested assets     —          —        Other liabilities     18        27   

Credit default swaps

  Other invested assets     9        8      Other liabilities     —          1   

Credit default swaps related to securitization entities

  Restricted other invested assets     —          —        Other liabilities     59        104   

Equity index options

  Other invested assets     6        25      Other liabilities     —          —     

Financial futures

  Other invested assets     —          —        Other liabilities     —          —     

Equity return swaps

  Other invested assets     —          —        Other liabilities     5        8   

Other foreign currency contracts

  Other invested assets     5        —        Other liabilities     4        —     

GMWB embedded derivatives

  Reinsurance recoverable (1)     3        10      Policyholder account balances (2)     177        350   

Fixed index annuity embedded derivatives

  Other assets (3)     —          —        Policyholder account balances (3)     83        27   
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives not designated as hedges

      380        646          389        797   
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives

    $ 530      $ 1,159        $ 878      $ 930   
   

 

 

   

 

 

     

 

 

   

 

 

 

 

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

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

The activity associated with derivative instruments can generally be measured by the change in notional value over the periods presented. However, for GMWB and fixed index annuity embedded derivatives, the

 

34


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

change between periods is best illustrated by the number of policies. The following tables represent activity associated with derivative instruments as of the dates indicated:

 

(Notional in millions)

   Measurement      December 31,
2012
     Additions      Maturities/
terminations
    September 30,
2013
 

Derivatives designated as hedges

             

Cash flow hedges:

             

Interest rate swaps

     Notional       $ 10,146       $ 9,614       $ (5,646   $ 14,114   

Inflation indexed swaps

     Notional         554         9         (2     561   

Foreign currency swaps

     Notional         183         102         (250     35   

Forward bond purchase commitments

     Notional         456         —           (135     321   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total cash flow hedges

        11,339         9,725         (6,033     15,031   
     

 

 

    

 

 

    

 

 

   

 

 

 

Fair value hedges:

             

Interest rate swaps

     Notional         723         —           (717     6   

Foreign currency swaps

     Notional         85         —           (85     —     
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fair value hedges

        808         —           (802     6   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives designated as hedges

        12,147         9,725         (6,835     15,037   
     

 

 

    

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedges

             

Interest rate swaps

     Notional         6,331         961         (2,471     4,821   

Interest rate swaps related to securitization entities

     Notional         104         —           (9     95   

Credit default swaps

     Notional         932         68         (293     707   

Credit default swaps related to securitization entities

     Notional         312         —           —          312   

Equity index options

     Notional         936         912         (1,055     793   

Financial futures

     Notional         1,692         3,851         (4,301     1,242   

Equity return swaps

     Notional         186         128         (214     100   

Other foreign currency contracts

     Notional         —           628         (177     451   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives not designated as hedges

        10,493         6,548         (8,520     8,521   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives

      $ 22,640       $ 16,273       $ (15,355   $ 23,558   
     

 

 

    

 

 

    

 

 

   

 

 

 

(Number of policies)

   Measurement      December 31,
2012
     Additions      Maturities/
terminations
    September 30,
2013
 

Derivatives not designated as hedges

             

GMWB embedded derivatives

     Policies         45,027         —           (2,186     42,841   

Fixed index annuity embedded derivatives

     Policies         2,013         3,077         (55     5,035   

Cash Flow Hedges

Certain derivative instruments are designated as cash flow hedges. The changes in fair value of these instruments are recorded as a component of OCI. We designate and account for the following as cash flow hedges when they have met the effectiveness requirements: (i) various types of interest rate swaps to convert floating rate investments to fixed rate investments; (ii) various types of interest rate swaps to convert floating rate liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate

 

35


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

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

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income
from OCI
   

Classification of gain
(loss) reclassified into
net income

  Gain (loss)
recognized in
net income
(1)
   

Classification of gain
(loss) recognized in
net income

Interest rate swaps hedging assets

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

Interest rate swaps hedging liabilities

    9        —       Interest expense     —        Net investment gains (losses)

Inflation indexed swaps

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

Foreign currency swaps

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

Forward bond purchase commitments

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

 

 

   

 

 

     

 

 

   

Total

  $ (204   $ 12        $ (2 )    
 

 

 

   

 

 

     

 

 

   

 

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

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2012:

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income
from OCI
   

Classification of gain
(loss) reclassified into
net income

  Gain (loss)
recognized in
net income
(1)
   

Classification of gain
(loss) recognized in
net income

Interest rate swaps hedging assets

  $ (83   $ 9      Net investment income   $ (6 )     Net investment gains (losses)

Interest rate swaps hedging assets

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

Inflation indexed swaps

    (23     3      Net investment income     —        Net investment gains (losses)

Foreign currency swaps

    1        —       Interest expense     —        Net investment gains (losses)

Forward bond purchase commitments

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

 

 

   

 

 

     

 

 

   

Total

  $ (103   $ 13        $ (6 )    
 

 

 

   

 

 

     

 

 

   

 

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

 

36


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

(Amounts in millions)

  Gain (loss)
recognized in OCI
    Gain (loss)
reclassified into
net income
from OCI
   

Classification of gain
(loss) reclassified into
net income

  Gain (loss)
recognized in
net income
(1)
   

Classification of gain
(loss) recognized in
net income

Interest rate swaps hedging assets

  $ (702   $ 34      Net investment income   $
 
(12
 

  
  Net investment gains (losses)

Interest rate swaps hedging assets

    —         1