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 March 31, 2016

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 April 21, 2016, 498,470,047 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  
PART I—FINANCIAL INFORMATION   

Item 1. Financial Statements

     3   

Condensed Consolidated Balance Sheets as of March  31, 2016 (Unaudited) and December 31, 2015

     3   

Condensed Consolidated Statements of Income for the three months ended March 31, 2016 and 2015 (Unaudited)

     4   

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015 (Unaudited)

     5   

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2016 and 2015 (Unaudited)

     6   

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (Unaudited)

     7   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   

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

     84   

Item  3. Quantitative and Qualitative Disclosures About Market Risk

     143   

Item 4. Controls and Procedures

     144   
PART II—OTHER INFORMATION   

Item 1. Legal Proceedings

     145   

Item 1A. Risk Factors

     145   

Item 6. Exhibits

     145   

Signatures

     146   

 

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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)

 

     March 31,
2016
    December 31,
2015
 
     (Unaudited)        

Assets

    

Investments:

    

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

   $ 60,290     $ 58,197  

Equity securities available-for-sale, at fair value

     431       310  

Commercial mortgage loans

     6,179       6,170  

Restricted commercial mortgage loans related to securitization entities

     155       161  

Policy loans

     1,565       1,568  

Other invested assets

     2,923       2,309  

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

     422       413  
  

 

 

   

 

 

 

Total investments

     71,965       69,128  

Cash and cash equivalents

     4,043       5,965  

Accrued investment income

     720       653  

Deferred acquisition costs

     4,235       4,398  

Intangible assets and goodwill

     291       357  

Reinsurance recoverable

     17,587       17,245  

Other assets

     577       520  

Deferred tax asset

     —         155  

Separate account assets

     7,624       7,883  

Assets held for sale

     131       127  
  

 

 

   

 

 

 

Total assets

   $ 107,173     $ 106,431  
  

 

 

   

 

 

 

Liabilities and equity

    

Liabilities:

    

Future policy benefits

   $ 36,776     $ 36,475  

Policyholder account balances

     26,354       26,209  

Liability for policy and contract claims

     8,177       8,095  

Unearned premiums

     3,378       3,308  

Other liabilities ($42 and $46 of other liabilities are related to securitization entities)

     3,596       3,004  

Borrowings related to securitization entities ($85 and $81 are at fair value)

     173       179  

Non-recourse funding obligations

     310       1,920  

Long-term borrowings

     4,232       4,570  

Deferred tax liability

     449       24  

Separate account liabilities

     7,624       7,883  

Liabilities held for sale

     131       127  
  

 

 

   

 

 

 

Total liabilities

     91,200       91,794  
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 587 million and 586 million shares issued as of March 31, 2016 and December 31, 2015, respectively; 498 million shares outstanding as of March 31, 2016 and December 31, 2015

     1       1  

Additional paid-in capital

     11,952       11,949  
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

    

Net unrealized investment gains (losses):

    

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

     2,043       1,236  

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

     14       18  
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     2,057       1,254  
  

 

 

   

 

 

 

Derivatives qualifying as hedges

     2,302       2,045  

Foreign currency translation and other adjustments

     (174     (289
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     4,185       3,010  

Retained earnings

     617       564  

Treasury stock, at cost (88 million shares as of March 31, 2016 and December 31, 2015)

     (2,700     (2,700
  

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     14,055       12,824  

Noncontrolling interests

     1,918       1,813  
  

 

 

   

 

 

 

Total equity

     15,973       14,637  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 107,173     $ 106,431  
  

 

 

   

 

 

 

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
March 31,
 
     2016     2015  

Revenues:

    

Premiums

   $ 794     $ 1,143  

Net investment income

     789       781  

Net investment gains (losses)

     (19     (16

Policy fees and other income

     221       227  
  

 

 

   

 

 

 

Total revenues

     1,785       2,135  
  

 

 

   

 

 

 

Benefits and expenses:

    

Benefits and other changes in policy reserves

     860       1,192  

Interest credited

     177       180  

Acquisition and operating expenses, net of deferrals

     394       267  

Amortization of deferred acquisition costs and intangibles

     99       95  

Interest expense

     105       107  
  

 

 

   

 

 

 

Total benefits and expenses

     1,635       1,841  
  

 

 

   

 

 

 

Income before income taxes

     150       294  

Provision for income taxes

     23       91  
  

 

 

   

 

 

 

Income from continuing operations

     127       203  

Income (loss) from discontinued operations, net of taxes

     (19     1  
  

 

 

   

 

 

 

Net income

     108       204  

Less: net income attributable to noncontrolling interests

     55       50  
  

 

 

   

 

 

 

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

   $ 53     $ 154  
  

 

 

   

 

 

 

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

    

Basic

   $ 0.14     $ 0.31  
  

 

 

   

 

 

 

Diluted

   $ 0.14     $ 0.31  
  

 

 

   

 

 

 

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

    

Basic

   $ 0.11     $ 0.31  
  

 

 

   

 

 

 

Diluted

   $ 0.11     $ 0.31  
  

 

 

   

 

 

 

Weighted-average common shares outstanding:

    

Basic

     498.0       497.0  
  

 

 

   

 

 

 

Diluted

     499.4       498.9  
  

 

 

   

 

 

 

Supplemental disclosures:

    

Total other-than-temporary impairments

   $ (11   $ (3

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

     —         —    
  

 

 

   

 

 

 

Net other-than-temporary impairments

     (11     (3

Other investments gains (losses)

     (8     (13
  

 

 

   

 

 

 

Total net investment gains (losses)

   $ (19   $ (16
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

     Three months ended
March 31,
 
         2016             2015      

Net income

   $ 108     $ 204  

Other comprehensive income (loss), net of taxes:

    

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

     807       323  

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

     (4     2  

Derivatives qualifying as hedges

     257       177  

Foreign currency translation and other adjustments

     216       (370
  

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,276       132  
  

 

 

   

 

 

 

Total comprehensive income (loss)

     1,384       336  

Less: comprehensive income attributable to noncontrolling interests

     156       (64
  

 

 

   

 

 

 

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

   $ 1,228     $ 400  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN 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
equity
 

Balances as of December 31, 2015

  $ 1     $ 11,949     $ 3,010     $ 564     $ (2,700   $ 12,824     $ 1,813     $ 14,637  
               

 

 

 

Comprehensive income (loss):

               

Net income

    —          —          —          53       —          53       55       108  

Other comprehensive income (loss), net of taxes

    —          —          1,175       —          —          1,175       101       1,276  
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              1,228       156       1,384  

Dividends to noncontrolling interests

    —          —          —          —          —          —          (52     (52

Stock-based compensation expense and exercises and other

    —          3       —          —          —          3       1       4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2016

  $ 1     $ 11,952     $ 4,185     $ 617     $ (2,700   $ 14,055     $ 1,918     $ 15,973  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2014

  $ 1     $ 11,997     $ 4,446     $ 1,179     $ (2,700   $ 14,923     $ 1,874     $ 16,797  
               

 

 

 

Comprehensive income (loss):

               

Net income

    —          —          —          154       —          154       50       204  

Other comprehensive income (loss), net of taxes

    —          —          246       —          —          246       (114     132  
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              400       (64     336  

Dividends to noncontrolling interests

    —          —          —          —          —          —          (54     (54

Stock-based compensation expense and exercises and other

    —          1       —          —          —          1       1       2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2015

  $ 1     $ 11,998     $ 4,692     $ 1,333     $ (2,700   $ 15,324     $ 1,757     $ 17,081  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Three months ended
March 31,
 
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 108     $ 204  

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

     19       (1

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

    

Gain on sale of subsidiary

     (20     —    

Amortization of fixed maturity securities discounts and premiums and limited partnerships

     (38     (21

Net investment losses (gains)

     19       16  

Charges assessed to policyholders

     (191     (196

Acquisition costs deferred

     (50     (86

Amortization of deferred acquisition costs and intangibles

     99       95  

Deferred income taxes

     7       25  

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

     21       18  

Stock-based compensation expense

     7       (3

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     (159     (25

Insurance reserves

     36       443  

Current tax liabilities

     (8     (9

Other liabilities, policy and contract claims and other policy-related balances

     406       202  

Cash from operating activities—held for sale

     —         (38
  

 

 

   

 

 

 

Net cash from operating activities

     256       624  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities and repayments of investments:

    

Fixed maturity securities

     840       1,089  

Commercial mortgage loans

     192       198  

Restricted commercial mortgage loans related to securitization entities

     6       13  

Proceeds from sales of investments:

    

Fixed maturity and equity securities

     905       418  

Purchases and originations of investments:

    

Fixed maturity and equity securities

     (2,042     (1,802

Commercial mortgage loans

     (200     (247

Other invested assets, net

     34       (89

Policy loans, net

     10       —    

Cash from investing activities—held for sale

     —         54  
  

 

 

   

 

 

 

Net cash from investing activities

     (255     (366
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Deposits to universal life and investment contracts

     571       630  

Withdrawals from universal life and investment contracts

     (517     (527

Redemption of non-recourse funding obligations

     (1,620     (13

Repayment and repurchase of long-term debt

     (326     —    

Repayment of borrowings related to securitization entities

     (10     (11

Dividends paid to noncontrolling interests

     (52     (54

Other, net

     13       37  

Cash from financing activities—held for sale

     —         (27
  

 

 

   

 

 

 

Net cash from financing activities

     (1,941     35  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents (includes $— and $(4) related to businesses held for sale)

     31       (53
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (1,909     240  

Cash and cash equivalents at beginning of period

     5,993       4,918  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     4,084       5,158  

Less cash and cash equivalents held for sale at end of period

     41       221  
  

 

 

   

 

 

 

Cash and cash equivalents of continuing operations at end of period

   $ 4,043     $ 4,937  
  

 

 

   

 

 

 

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 in 2003 in preparation for an initial public offering of Genworth common stock, which was completed on May 28, 2004. On April 1, 2013, Genworth Holdings completed a holding company reorganization pursuant to which Genworth Holdings became a direct, 100% owned subsidiary of a new public holding company that it had formed. The new public holding company was incorporated in Delaware on December 5, 2012, in connection with the reorganization, and was renamed Genworth Financial, Inc. (“Genworth Financial”) upon the completion of the reorganization.

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

References to “Genworth,” the “Company,” “we” or “our” in the accompanying condensed consolidated financial statements and these notes thereto are, unless the context otherwise requires, to Genworth Financial on a consolidated basis.

We operate our business through the following five operating segments:

 

    U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.

 

    Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

 

    Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

 

    U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.

 

    Runoff. The Runoff segment includes the results of non-strategic products which 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 and guaranteed investment contracts. We no longer offer retail and group variable annuities but continue to service our existing blocks of business.

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On December 1, 2015, we completed the sale of our lifestyle protection insurance business, which had previously been designated as a non-core business. Prior to its sale, our lifestyle protection insurance business was reported as discontinued operations and its financial position, results of operations and cash flows were separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 12 for additional information.

On October 27, 2015, we announced that Genworth Mortgage Insurance Company (“GMICO”), our wholly-owned indirect subsidiary, entered into an agreement to sell our European mortgage insurance business. As the held-for-sale criteria were satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 12 for additional information.

The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Preparing financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from those estimates. These unaudited condensed consolidated financial statements include all adjustments (including normal recurring adjustments) considered necessary by management to present a fair statement of the financial position, results of operations and cash flows for the periods presented. The results reported in these unaudited condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and related notes contained in our 2015 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

We have revised our condensed consolidated statement of cash flows previously reported in our Quarterly Report on Form 10-Q for the three months ended March 31, 2015 to reflect a correction related to the calculation of the change in reinsurance recoverable that impacted the lines “insurance reserves” and “other liabilities, policy and contract claims and other policy-related balances.” As a result, the change in insurance reserves decreased by $171 million and the change in other liabilities, policy and contract claims and other policy-related balances increased by $171 million. The revisions had no impact on net cash flows from operating activities or the total change in cash and cash equivalents within our condensed consolidated statement of cash flows. Additionally, there was no impact on our unaudited condensed consolidated balance sheet or unaudited condensed consolidated statement of income.

(2) Accounting Changes

Accounting Pronouncement Recently Adopted

On January 1, 2016, we adopted new accounting guidance related to consolidation. The new guidance primarily impacts limited partnerships and similar legal entities, evaluation of fees paid to a decision maker as a variable interest, the effect of fee arrangements and related parties on the primary beneficiary determination and certain investment funds. The adoption of this new guidance did not have a material impact on our consolidated financial statements.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Accounting Pronouncements Not Yet Adopted

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance related to the accounting for stock compensation. The guidance primarily simplifies the accounting for employee share-based payment transactions, including a new requirement to record all of the income tax effects at settlement or expiration through the income statement, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to transition to the equity method of accounting. The guidance eliminates the retrospective application of the equity method of accounting when obtaining significant influence over a previously held investment. The guidance requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The guidance is effective for us on January 1, 2017, with early adoption permitted. We do not expect any significant impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to the assessment of contingent put and call options in debt instruments. The guidance clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The guidance is effective for us on January 1, 2017, with early adoption permitted. We are in the process of determining the impact from this guidance on our consolidated financial statements.

In March 2016, the FASB issued new accounting guidance related to the effect of derivative contract novations on existing hedge accounting relationships. The guidance clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The guidance is effective for us on January 1, 2017, with early adoption permitted. This guidance is consistent with our accounting for derivative contract novations and, accordingly, we do not expect any impact on our consolidated financial statements.

In February 2016, the FASB issued new accounting guidance related to the accounting for leases. The new guidance generally requires lessees to recognize both a right-to-use asset and a corresponding liability on the balance sheet. The guidance is effective for us on January 1, 2019, with early adoption permitted. We are still in the process of evaluating the impact this guidance will have on our consolidated financial statements.

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(3) Earnings (Loss) Per Share

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

 

     Three months ended
March 31,
 

(Amounts in millions, except per share amounts)

   2016      2015  

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

     498.0        497.0  

Potentially dilutive securities:

     

Stock options, restricted stock units and stock appreciation rights

     1.4        1.9  
  

 

 

    

 

 

 

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

     499.4        498.9  
  

 

 

    

 

 

 

Income from continuing operations:

     

Income from continuing operations

   $ 127      $ 203  

Less: income from continuing operations attributable to noncontrolling interests

     55        50  
  

 

 

    

 

 

 

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

   $ 72      $ 153  
  

 

 

    

 

 

 

Basic per common share

   $ 0.14      $ 0.31  
  

 

 

    

 

 

 

Diluted per common share

   $ 0.14      $ 0.31  
  

 

 

    

 

 

 

Income (loss) from discontinued operations:

     

Income (loss) from discontinued operations, net of taxes

   $ (19    $ 1  

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

   $ (19    $ 1  
  

 

 

    

 

 

 

Basic per common share

   $ (0.04    $ —    
  

 

 

    

 

 

 

Diluted per common share

   $ (0.04    $ —    
  

 

 

    

 

 

 

Net income:

     

Income from continuing operations

   $ 127      $ 203  

Income (loss) from discontinued operations, net of taxes

     (19      1  
  

 

 

    

 

 

 

Net income

     108        204  

Less: net income attributable to noncontrolling interests

     55        50  
  

 

 

    

 

 

 

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

   $ 53      $ 154  
  

 

 

    

 

 

 

Basic per common share

   $ 0.11      $ 0.31  
  

 

 

    

 

 

 

Diluted per common share

   $ 0.11      $ 0.31  
  

 

 

    

 

 

 

 

11


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4) Investments

(a) Net Investment Income

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

 

     Three months ended
March 31,
 

(Amounts in millions)

   2016      2015  

Fixed maturity securities—taxable

   $ 641      $ 632  

Fixed maturity securities—non-taxable

     3        3  

Commercial mortgage loans

     81        85  

Restricted commercial mortgage loans related to securitization entities

     2        4  

Equity securities

     5        4  

Other invested assets

     38        40  

Restricted other invested assets related to securitization entities

     2        1  

Policy loans

     35        33  

Cash, cash equivalents and short-term investments

     5        3  
  

 

 

    

 

 

 

Gross investment income before expenses and fees

     812        805  

Expenses and fees

     (23      (24
  

 

 

    

 

 

 

Net investment income

   $ 789      $ 781  
  

 

 

    

 

 

 

(b) Net Investment Gains (Losses)

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

 

     Three months ended
March 31,
 

(Amounts in millions)

   2016      2015  

Available-for-sale securities:

     

Realized gains

   $ 16      $ 15  

Realized losses

     (23      (12
  

 

 

    

 

 

 

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

     (7      3  
  

 

 

    

 

 

 

Impairments:

     

Total other-than-temporary impairments

     (11      (3

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

     —          —    
  

 

 

    

 

 

 

Net other-than-temporary impairments

     (11      (3
  

 

 

    

 

 

 

Trading securities

     28        6  

Commercial mortgage loans

     1        2  

Net gains (losses) related to securitization entities

     8        8  

Derivative instruments (1)

     (38      (32
  

 

 

    

 

 

 

Net investment gains (losses)

   $ (19    $ (16
  

 

 

    

 

 

 

 

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

 

12


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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 March 31, 2016 and 2015 was $240 million and $139 million, respectively, which was approximately 91% 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 three months ended March 31:

 

(Amounts in millions)

   2016      2015  

Beginning balance

   $ 64      $ 83  

Reductions:

     

Securities sold, paid down or disposed

     (1      (5
  

 

 

    

 

 

 

Ending balance

   $ 63      $ 78  
  

 

 

    

 

 

 

(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)

   March 31, 2016      December 31, 2015  

Net unrealized gains (losses) on investment securities:

     

Fixed maturity securities

   $ 4,767      $ 3,140  

Equity securities

     (23      (10
  

 

 

    

 

 

 

Subtotal

     4,744        3,130  

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

     (1,439      (1,070

Income taxes, net

     (1,153      (711
  

 

 

    

 

 

 

Net unrealized investment gains (losses)

     2,152        1,349  

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

     95        95  
  

 

 

    

 

 

 

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

   $ 2,057      $ 1,254  
  

 

 

    

 

 

 

 

13


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The change in net unrealized gains (losses) on available-for-sale investment securities reported in accumulated other comprehensive income (loss) was as follows as of and for the three months ended March 31:

 

(Amounts in millions)

   2016      2015  

Beginning balance

   $ 1,254      $ 2,453  

Unrealized gains (losses) arising during the period:

     

Unrealized gains (losses) on investment securities

     1,596        943  

Adjustment to deferred acquisition costs

     (142      (98

Adjustment to present value of future profits

     (34      (20

Adjustment to sales inducements

     (19      (15

Adjustment to benefit reserves

     (174      (323

Provision for income taxes

     (436      (162
  

 

 

    

 

 

 

Change in unrealized gains (losses) on investment securities

     791        325  

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

     12        —    
  

 

 

    

 

 

 

Change in net unrealized investment gains (losses)

     803        325  

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

     —          30  
  

 

 

    

 

 

 

Ending balance

   $ 2,057      $ 2,748  
  

 

 

    

 

 

 

 

14


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of March 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

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

  $ 5,389     $ 1,135     $ —       $     $ —       $ 6,524  

State and political subdivisions

    2,272       262       —         (17     —         2,517  

Non-U.S. government

    1,944       138       —         (2     —         2,080  

U.S. corporate:

           

Utilities

    3,752       530       —         (13     —         4,269  

Energy

    2,193       85       —         (114     —         2,164  

Finance and insurance

    5,357       476       10       (28     —         5,815  

Consumer—non-cyclical

    3,838       522       —         (6     —         4,354  

Technology and communications

    2,147       175       —         (22     —         2,300  

Industrial

    1,165       82       —         (22     —         1,225  

Capital goods

    1,801       254       —         (5     —         2,050  

Consumer—cyclical

    1,568       135       —         (11     —         1,692  

Transportation

    1,035       105       —         (8     —         1,132  

Other

    362       29       —         (3     —         388  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    23,218       2,393       10       (232     —         25,389  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    1,038       56       —         (10     —         1,084  

Energy

    1,459       48       —         (70     —         1,437  

Finance and insurance

    2,471       154       —         (6     —         2,619  

Consumer—non-cyclical

    735       36       —         (5     —         766  

Technology and communications

    994       59       —         (14     —         1,039  

Industrial

    1,047       32       —         (45     —         1,034  

Capital goods

    594       31       —         (15     —         610  

Consumer—cyclical

    538       10       —         (4     —         544  

Transportation

    561       62       —         (3     —         620  

Other

    2,669       224       —         (17     —         2,876  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    12,106       712       —         (189     —         12,629  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,716       403       9       (6     —         5,122  

Commercial mortgage-backed

    2,588       133       3       (10     (1     2,713  

Other asset-backed

    3,381       12       1       (78     —         3,316  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    55,614       5,188       23       (534     (1     60,290  

Equity securities

    461       12       —         (42     —         431  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 56,075     $ 5,200     $ 23     $ (576   $ (1   $ 60,721  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of December 31, 2015, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

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

  $ 5,487     $ 732     $ —       $ (16   $ —       $ 6,203  

State and political subdivisions

    2,287       181       —         (30     —         2,438  

Non-U.S. government

    1,910       110       —         (5     —         2,015  

U.S. corporate:

           

Utilities

    3,355       364       —         (26     —         3,693  

Energy

    2,560       103       —         (162     —         2,501  

Finance and insurance

    5,268       392       15       (43     —         5,632  

Consumer—non-cyclical

    3,755       371       —         (30     —         4,096  

Technology and communications

    2,108       123       —         (38     —         2,193  

Industrial

    1,164       53       —         (44     —         1,173  

Capital goods

    1,774       188       —         (12     —         1,950  

Consumer—cyclical

    1,602       95       —         (22     —         1,675  

Transportation

    1,023       75       —         (12     —         1,086  

Other

    385       22       —         (5     —         402  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    22,994       1,786       15       (394     —         24,401  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    815       37       —         (9     —         843  

Energy

    1,700       64       —         (78     —         1,686  

Finance and insurance

    2,327       152       2       (8     —         2,473  

Consumer—non-cyclical

    746       24       —         (18     —         752  

Technology and communications

    978       36       —         (26     —         988  

Industrial

    1,063       19       —         (96     —         986  

Capital goods

    602       19       —         (17     —         604  

Consumer—cyclical

    522       8       —         (4     —         526  

Transportation

    559       52       —         (6     —         605  

Other

    2,574       187       —         (25     —         2,736  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,886       598       2       (287     —         12,199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,777       330       11       (17     —         5,101  

Commercial mortgage-backed

    2,492       84       3       (20     —         2,559  

Other asset-backed

    3,328       11       1       (59     —         3,281  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    55,161       3,832       32       (828     —         58,197  

Equity securities

    325       8       —         (23     —         310  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 55,486     $ 3,840     $ 32     $ (851   $ —       $ 58,507  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


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 March 31, 2016:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

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

Description of Securities

                 

Fixed maturity securities:

                 

State and political subdivisions

  $ —       $ —         —       $ 202     $ (17     19     $ 202     $ (17     19  

Non-U.S. government

    93       (2     17       —         —          —         93       (2     17  

U.S. corporate

    2,610       (141     344       1,203       (91     167       3,813       (232     511  

Non-U.S. corporate

    1,665       (87     209       700       (102     102       2,365       (189     311  

Residential mortgage-backed

    349       (2     48       104       (4     35       453       (6     83  

Commercial mortgage-backed

    331       (8     58       113       (3     23       444       (11     81  

Other asset-backed

    1,741       (36     320       368       (42     63       2,109       (78     383  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    6,789       (276     996       2,690       (259     409       9,479       (535     1,405  

Equity securities

    136       (25     170       59       (17     29       195       (42     199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 6,925     $ (301     1,166     $ 2,749     $ (276     438     $ 9,674     $ (577     1,604  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 6,677     $ (229     974     $ 2,410     $ (127     362     $ 9,087     $ (356     1,336  

20%-50% Below cost

    110       (44     19       272       (120     43       382       (164     62  

>50% Below cost

    2       (3     3       8       (12     4       10       (15     7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    6,789       (276     996       2,690       (259     409       9,479       (535     1,405  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    83       (7     152       12       —          6       95       (7     158  

20%-50% Below cost

    53       (18     18       47       (17     23       100       (35     41  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    136       (25     170       59       (17     29       195       (42     199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 6,925     $ (301     1,166     $ 2,749     $ (276     438     $ 9,674     $ (577     1,604  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 5,974     $ (207     892     $ 2,362     $ (172     357     $ 8,336     $ (379     1,249  

Below investment grade (2)

    951       (94     274       387       (104     81       1,338       (198     355  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 6,925     $ (301     1,166     $ 2,749     $ (276     438     $ 9,674     $ (577     1,604  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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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 corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of March 31, 2016:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

U.S. corporate:

                 

Utilities

  $ 214     $ (9     31     $ 101     $ (4     16     $ 315     $ (13     47  

Energy

    961       (83     131       171       (31     27       1,132       (114     158  

Finance and insurance

    489       (9     55       322       (19     41       811       (28     96  

Consumer—non-cyclical

    128       (2     16       124       (4     20       252       (6     36  

Technology and communications

    268       (13     36       133       (9     18       401       (22     54  

Industrial

    195       (12     24       102       (10     17       297       (22     41  

Capital goods

    52       (2     11       61       (3     8       113       (5     19  

Consumer—cyclical

    173       (7     22       102       (4     12       275       (11     34  

Transportation

    83       (2     15       78       (6     7       161       (8     22  

Other

    47       (2     3       9       (1     1       56       (3     4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    2,610       (141     344       1,203       (91     167       3,813       (232     511  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    122       (7     18       31       (3     4       153       (10     22  

Energy

    420       (38     43       129       (32     23       549       (70     66  

Finance and insurance

    244       (2     37       81       (4     11       325       (6     48  

Consumer—non-cyclical

    88       (2     8       95       (3     9       183       (5     17  

Technology and communications

    160       (5     14       45       (9     8       205       (14     22  

Industrial

    282       (19     42       163       (26     23       445       (45     65  

Capital goods

    68       (5     10       41       (10     7       109       (15     17  

Consumer—cyclical

    94       (4     10       —         —         —         94       (4     10  

Transportation

    77       (2     11       21       (1     3       98       (3     14  

Other

    110       (3     16       94       (14     14       204       (17     30  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    1,665       (87     209       700       (102     102       2,365       (189     311  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 4,275     $ (228     553     $ 1,903     $ (193     269     $ 6,178     $ (421     822  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 4% as of March 31, 2016.

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

Of the $127 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 81% of the unrealized losses were related to investment grade securities as of March 31, 2016. These unrealized losses were predominantly attributable to corporate securities including fixed rate securities purchased in a lower rate environment and variable rate securities purchased in a higher rate and lower spread environment. The average fair value percentage below cost for these securities was approximately 5% as of March 31, 2016. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

 

19


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of March 31, 2016:

 

    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:

               

State and political subdivisions

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

U.S. corporate:

               

Energy

    15       (7     1       2       —         —         —         —    

Finance and insurance

    10       (5     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    25       (12     2       3       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

               

Energy

    19       (7     1       2       —         —         —         —    

Industrial

    17       (6     1       2       —         —         —         —    

Other

    6       (1     —         1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    42       (14     2       5       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Structured securities:

               

Other asset-backed

    64       (27     5       4       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    64       (27     5       4       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 140     $ (56     10     13     $ —       $ —         —       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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:

               

Energy

  $ 18     $ (7     1     5     $ —       $ —         —       —    

Finance and insurance

    7       (3     1        1       —         —         —          —    

Technology and communications

    6       (2     —          2       —         —         —          —    

Industrial

    6       (3     1        1       —         —         —          —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    37       (15     3       9       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

               

Utilities

    3       (2     —         1       —         —         —         —    

Energy

    45       (22     4       9       —         —         —         —    

Technology and communications

    —         —         —         —         3       (6     1       2  

Industrial

    21       (11     2       6       —         —         —         —    

Capital goods

    3       (2     —         1       5       (6     1       2  

Other

    15       (5     1       3       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    87       (42     7       20       8       (12     2       4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Structured securities:

               

Other asset-backed

    8       (7     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    8       (7     1       1       —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 132     $ (64     11      30     $ 8     $ (12         4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

For all securities in an unrealized loss position, we expect to recover the amortized cost based on our estimate of the amount and timing of cash flows to be collected. We do not intend to sell nor do we expect that we will be required to sell these securities prior to recovering our amortized cost. See below for further discussion of gross unrealized losses by asset class.

Non-U.S. corporate

As indicated above, $68 million of gross unrealized losses were related to non-U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for non-U.S. corporate fixed maturity securities, $29 million, or 43%, related to the energy sector and $17 million, or 25%, related to the industrial sector. Reduced overseas demand for oil and metals has led to a decline in commodities pricing, adversely impacting the fair value of these securities.

We expect that our investments in non-U.S. 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 reasonably possible that issuers of our investments in non-U.S. corporate securities may perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of non-U.S. corporate securities in the future.

Structured Securities

Of the $34 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, none related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

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

We use 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

 

21


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 March 31, 2016.

Despite the considerable analysis and rigor employed on our structured securities, it is reasonably possible that the underlying collateral of these investments may 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, 2015:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

Fixed maturity securities:

                 

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

  $ 883     $ (16     32     $ —       $ —          —       $ 883     $ (16     32  

State and political subdivisions

    464       (15     81       163       (15     17       627       (30     98  

Non-U.S. government

    366       (5     49       —         —          —         366       (5     49  

U.S. corporate

    5,836       (332     817       466       (62     83       6,302       (394     900  

Non-U.S. corporate

    3,016       (170     400       486       (117     87       3,502       (287     487  

Residential mortgage-backed

    756       (10     88       103       (7     38       859       (17     126  

Commercial mortgage-backed

    780       (19     116       39       (1     13       819       (20     129  

Other asset-backed

    1,944       (22     349       336       (37     55       2,280       (59     404  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    14,045       (589     1,932       1,593       (239     293       15,638       (828     2,225  

Equity securities

    153       (23     64       —         —          —         153       (23     64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 14,198     $ (612     1,996     $ 1,593     $ (239     293     $ 15,791     $ (851     2,289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 13,726     $ (472     1,877     $ 1,259     $ (78     238     $ 14,985     $ (550     2,115  

20%-50% Below cost

    319       (116     54       316       (139     50       635       (255     104  

>50% Below cost

    —         (1     1       18       (22     5       18       (23     6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    14,045       (589     1,932       1,593       (239     293       15,638       (828     2,225  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    133       (18     56       —         —          —         133       (18     56  

20%-50% Below cost

    20       (5     8       —         —          —         20       (5     8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    153       (23     64       —         —          —         153       (23     64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 14,198     $ (612     1,996     $ 1,593     $ (239     293     $ 15,791     $ (851     2,289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 13,342     $ (524     1,834     $ 1,245     $ (135     225     $ 14,587     $ (659     2,059  

Below investment grade

    856       (88     162       348       (104     68       1,204       (192     230  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 14,198     $ (612     1,996     $ 1,593     $ (239     293     $ 15,791     $ (851     2,289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the gross unrealized losses and fair values of our corporate securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, based on industry, as of December 31, 2015:

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    Number of
securities
 

Description of Securities

                 

U.S. corporate:

                 

Utilities

  $ 485     $ (25     74     $ 14     $ (1     7     $ 499     $ (26     81  

Energy

    1,162       (134     163       131       (28     22       1,293       (162     185  

Finance and insurance

    1,142       (35     160       94       (8     15       1,236       (43     175  

Consumer—non-cyclical

    836       (26     107       51       (4     10       887       (30     117  

Technology and communications

    658       (36     95       23       (2     5       681       (38     100  

Industrial

    476       (33     64       44       (11     9       520       (44     73  

Capital goods

    293       (10     48       26       (2     4       319       (12     52  

Consumer—cyclical

    427       (18     60       63       (4     10       490       (22     70  

Transportation

    273       (10     38       20       (2     1       293       (12     39  

Other

    84       (5     8       —         —         —         84       (5     8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    5,836       (332     817       466       (62     83       6,302       (394     900  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    130       (6     20       32       (3     6       162       (9     26  

Energy

    589       (48     71       127       (30     20       716       (78     91  

Finance and insurance

    478       (7     77       30       (1     8       508       (8     85  

Consumer—non-cyclical

    261       (14     27       37       (4     4       298       (18     31  

Technology and communications

    324       (15     37       33       (11     9       357       (26     46  

Industrial

    495       (54     67       110       (42     18       605       (96     85  

Capital goods

    154       (8     22       41       (9     9       195       (17     31  

Consumer—cyclical

    155       (4     20       —         —         —         155       (4     20  

Transportation

    147       (6     17       —         —         —         147       (6     17  

Other

    283       (8     42       76       (17     13       359       (25     55  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    3,016       (170     400       486       (117     87       3,502       (287     487  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 8,852     $ (502     1,217     $ 952     $ (179     170     $ 9,804     $ (681     1,387  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

24


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of March 31, 2016 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

   Amortized
cost or cost
     Fair
value
 

Due one year or less

   $ 1,861      $ 1,879  

Due after one year through five years

     10,268        10,730  

Due after five years through ten years

     11,505        11,964  

Due after ten years

     21,295        24,566  
  

 

 

    

 

 

 

Subtotal

     44,929        49,139  

Residential mortgage-backed

     4,716        5,122  

Commercial mortgage-backed

     2,588        2,713  

Other asset-backed

     3,381        3,316  
  

 

 

    

 

 

 

Total

   $ 55,614      $ 60,290  
  

 

 

    

 

 

 

As of March 31, 2016, $8,405 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of March 31, 2016, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 22%, 14% and 13%, respectively, of our domestic and foreign corporate fixed maturity securities portfolio. No other industry group comprised more than 10% of our investment portfolio.

As of March 31, 2016, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

Our mortgage loans are collateralized by commercial properties, including multi-family residential buildings. The carrying value of commercial mortgage loans is stated at original cost net of principal payments, amortization and allowance for loan losses.

We diversify our commercial mortgage loans by both property type and geographic region. The following tables set forth the distribution across property type and geographic region for commercial mortgage loans as of the dates indicated:

 

     March 31, 2016     December 31, 2015  

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Property type:

          

Retail

   $ 2,118        34   $ 2,116        34

Industrial

     1,582        25       1,562        25  

Office

     1,527        25       1,516        24  

Apartments

     445        7       465        8  

Mixed use

     233        4       234        4  

Other

     291        5       294        5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,196        100     6,187        100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (2        (2   

Allowance for losses

     (15        (15   
  

 

 

      

 

 

    

Total

   $ 6,179        $ 6,170     
  

 

 

      

 

 

    

 

25


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     March 31, 2016     December 31, 2015  
     Carrying      % of     Carrying      % of  

(Amounts in millions)

   value      total     value      total  

Geographic region:

          

Pacific

   $ 1,589        26   $ 1,581        26

South Atlantic

     1,557        25       1,574        25  

Middle Atlantic

     874        14       890        14  

Mountain

     571        9       585        10  

West North Central

     455        8       416        7  

East North Central

     382        6       386        6  

West South Central

     304        5       294        5  

New England

     269        4       268        4  

East South Central

     195        3       193        3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,196        100     6,187        100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (2        (2   

Allowance for losses

     (15        (15   
  

 

 

      

 

 

    

Total

   $ 6,179        $ 6,170     
  

 

 

      

 

 

    

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

 

    March 31, 2016  

(Amounts in millions)

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

Property type:

           

Retail

  $ —       $ —       $ —       $ —       $ 2,118     $ 2,118  

Industrial

    14       —         —         14       1,568       1,582  

Office

    —         —         5       5       1,522       1,527  

Apartments

    —         —         —         —         445       445  

Mixed use

    —         —         —         —         233       233  

Other

    —         —         —         —         291       291  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

  $ 14     $ —       $ 5     $ 19     $ 6,177     $ 6,196  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

    —       —       —       —       100     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    December 31, 2015  

(Amounts in millions)

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

Property type:

           

Retail

  $ —       $ —       $ —       $ —       $ 2,116     $ 2,116  

Industrial

    —         —         —         —         1,562       1,562  

Office

    6       —         5       11       1,505       1,516  

Apartments

    —         —         —         —         465       465  

Mixed use

    —         —         —         —         234       234  

Other

    —         —         —         —         294       294  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

  $ 6     $ —       $ 5     $ 11     $ 6,176     $ 6,187  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

    —       —       —       —       100     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of March 31, 2016 and December 31, 2015, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of March 31, 2016 and December 31, 2015.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of March 31, 2016, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of these loans was expected to be recoverable.

During the three months ended March 31, 2016 and the year ended December 31, 2015, we modified or extended 5 and 21 commercial mortgage loans, respectively, with a total carrying value of $43 million and $110 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower and were not considered troubled debt restructurings.

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

 

     Three months ended  
     March 31,  

(Amounts in millions)

   2016      2015  

Allowance for credit losses:

     

Beginning balance

   $ 15      $ 22  

Charge-offs

     —          (3

Recoveries

     —          —    

Provision

     —          1  
  

 

 

    

 

 

 

Ending balance

   $ 15      $ 20  
  

 

 

    

 

 

 

Ending allowance for individually impaired loans

   $ —        $ —    
  

 

 

    

 

 

 

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

   $ 15      $ 20  
  

 

 

    

 

 

 

Recorded investment:

     

Ending balance

   $ 6,196      $ 6,170  
  

 

 

    

 

 

 

Ending balance of individually impaired loans

   $ 19      $ 18  
  

 

 

    

 

 

 

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

   $ 6,177      $ 6,152  
  

 

 

    

 

 

 

As of March 31, 2016 and December 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the third quarter of 2015. As of March 31, 2016 and December 31, 2015, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million, which were recorded in the first quarter of 2014. As of December 31, 2015, this loan had interest income of $1 million.

 

27


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

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

 

     March 31, 2016  

(Amounts in millions)

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

Property type:

            

Retail

   $ 765     $ 395     $ 866     $ 83     $ 9      $ 2,118  

Industrial

     565       446       502       65       4        1,582  

Office

     499       301       645       68       14        1,527  

Apartments

     178       64       193       10       —          445  

Mixed use

     57       47       125       4       —          233  

Other

     61       62       168       —          —          291  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,125     $ 1,315     $ 2,499     $ 230     $ 27      $ 6,196  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     34     21     40     4     1     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.16       1.83       1.56       1.08       0.45        1.80  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $27 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 119%.

 

28


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     December 31, 2015  

(Amounts in millions)

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

Property type:

            

Retail

   $ 785     $ 417     $ 800     $ 103     $ 11      $ 2,116  

Industrial

     515       478       499       65       5        1,562  

Office

     493       341       580       83       19        1,516  

Apartments

     196       66       182       21       —          465  

Mixed use

     56       48       124       3       3        234  

Other

     54       55       185       —         —          294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,099     $ 1,405     $ 2,370     $ 275     $ 38      $ 6,187  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     34     23     38     4     1     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.13       1.82       1.57       1.12       0.55        1.79  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $38 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 123%.

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

 

     March 31, 2016  

(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

   $ 66     $ 226     $ 435     $ 880     $ 511     $ 2,118  

Industrial

     85       180       214       697       406       1,582  

Office

     72       105       195       804       351       1,527  

Apartments

     4       38       70       201       132       445  

Mixed use

     3       12       28       134       56       233  

Other

     —         58       145       59       29       291  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 230     $ 619     $ 1,087     $ 2,775     $ 1,485     $ 6,196  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     4     10     17     45     24     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     74     64     60     57     43     56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

29


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     December 31, 2015  

(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

   $ 67     $ 221     $ 433     $ 882     $ 513     $ 2,116  

Industrial

     94       181       208       672       407       1,562  

Office

     85       114       265       699       346       1,509  

Apartments

     6       41       74       199       145       465  

Mixed use

     3       11       28       135       57       234  

Other

     —         58       146       60       30       294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 255     $ 626     $ 1,154     $ 2,647     $ 1,498     $ 6,180  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     4     10     19     43     24     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     74     64     58     58     43     56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of March 31, 2016, we did not have any floating rate commercial mortgage loans. As of December 31, 2015, we had floating rate commercial mortgage loans of $7 million.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

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

(g) Restricted Other Invested Assets Related To Securitization Entities

We have consolidated securitization entities that hold certain investments that are recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities hold certain investments as trading securities and 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.

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs due to the equity group’s lack of sufficient financial control. Generally, these investments are limited partner or non-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of March 31, 2016 and December 31, 2015, the total carrying value of these investments was $155 million and $165 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

(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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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  
        Fair value         Fair value  
           

(Amounts in millions)

  Balance
sheet classification
  March 31,
2016
    December 31,
2015
    Balance
sheet classification
  March 31,
2016
    December 31,
2015
 

Derivatives designated as hedges

           

Cash flow hedges:

           

Interest rate swaps

  Other invested assets   $ 1,087     $ 629     Other liabilities   $ 68     $ 37  

Inflation indexed swaps

  Other invested assets     —         —       Other liabilities     36       33  

Foreign currency swaps

  Other invested assets     7       8     Other liabilities     —         —    
   

 

 

   

 

 

     

 

 

   

 

 

 

Total cash flow hedges

      1,094       637         104       70  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedges

      1,094       637         104       70  
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedges

           

Interest rate swaps

  Other invested assets     526       425     Other liabilities     292       183  

Interest rate swaps related to securitization entities

  Restricted other
invested assets
    —         —       Other liabilities     35       30  

Foreign currency swaps

  Other invested assets     —         —       Other liabilities     18       27  

Credit default swaps

  Other invested assets     1       1     Other liabilities     1       —    

Credit default swaps related to securitization entities

  Restricted other
invested assets
    —         —       Other liabilities     6       14  

Equity index options

  Other invested assets     36       30     Other liabilities     —         —    

Financial futures

  Other invested assets     —         —       Other liabilities     —         —    

Equity return swaps

  Other invested assets     2       2     Other liabilities     14       1  

Other foreign currency contracts

  Other invested assets     7       17     Other liabilities     31       34  

GMWB embedded derivatives

  Reinsurance
recoverable (1)
    23       17     Policyholder
account balances (2)
    443       352  

Fixed index annuity embedded derivatives

  Other assets     —         —       Policyholder
account balances (3)
    345       342  

Indexed universal life embedded derivatives

  Reinsurance
recoverable
    —         —       Policyholder
account balances (4)
    12       10  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives not designated as hedges

      595       492         1,197       993  
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives

    $ 1,689     $ 1,129       $ 1,301     $ 1,063  
   

 

 

   

 

 

     

 

 

   

 

 

 

 

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The fair value of derivative positions presented above was not offset by the respective collateral amounts retained or provided under these agreements.

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

 

(Notional in millions)

   Measurement    December 31,
2015
     Additions      Maturities/
terminations
    March 31,
2016
 

Derivatives designated as hedges

          

Cash flow hedges:

             

Interest rate swaps

   Notional    $ 11,214      $ —        $ (18   $ 11,196  

Inflation indexed swaps

   Notional      571        1        (2     570  

Foreign currency swaps

   Notional      35        —          —         35  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total cash flow hedges

        11,820        1        (20     11,801  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives designated as hedges

        11,820        1        (20     11,801  
     

 

 

    

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedges

             

Interest rate swaps

   Notional      4,932        —          (250     4,682  

Interest rate swaps related to securitization entities

   Notional      67        —          (2     65  

Foreign currency swaps

   Notional      162        17        —         179  

Credit default swaps

   Notional      144        —          —         144  

Credit default swaps related to securitization entities

   Notional      312        —          —         312  

Equity index options

   Notional      1,080        722        (270     1,532  

Financial futures

   Notional      1,331        2,361        (2,187     1,505  

Equity return swaps

   Notional      134        50        (38     146  

Other foreign currency contracts

   Notional      1,656        567        (128     2,095  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives not designated as hedges

        9,818        3,717        (2,875     10,660  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives

      $ 21,638      $ 3,718      $ (2,895   $ 22,461  
     

 

 

    

 

 

    

 

 

   

 

 

 

(Number of policies)

   Measurement    December 31,
2015
     Additions      Maturities/
terminations
    March 31,
2016
 

Derivatives not designated as hedges

             

GMWB embedded derivatives

   Policies      36,146        —          (717     35,429  

Fixed index annuity embedded derivatives

   Policies      17,482        623        (132     17,973  

Indexed universal life embedded derivatives

   Policies      982        131        (12     1,101  

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

liabilities into fixed rate liabilities; (iii) receive U.S. dollar fixed on foreign currency swaps to hedge the foreign currency cash flow exposure of foreign currency denominated investments; (iv) forward starting interest rate swaps to hedge against changes in interest rates associated with future fixed rate bond purchases and/or interest income; (v) forward bond purchase commitments to hedge against the variability in the anticipated cash flows required to purchase future fixed rate bonds; and (vi) other instruments to hedge the cash flows of various forecasted transactions.

The following table provides information about the pre-tax income effects of cash flow hedges for the three months ended March 31, 2016:

 

(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

   $ 457      $ 25      Net investment
income
   $ 6       Net investment
gains (losses)

Interest rate swaps hedging assets

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

Interest rate swaps hedging liabilities

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

Inflation indexed swaps

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

Foreign currency swaps

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

 

 

    

 

 

       

 

 

    

Total

   $ 422      $ 28         $ 6      
  

 

 

    

 

 

       

 

 

    

 

(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 effects of cash flow hedges for the three months ended March 31, 2015:

 

(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

   $ 306      $ 19      Net investment
income
   $ 4       Net investment
gains (losses)

Interest rate swaps hedging liabilities

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

Inflation indexed swaps

     11        9      Net investment
income
     —         Net investment
gains (losses)

Foreign currency swaps

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

 

 

    

 

 

       

 

 

    

Total

   $ 302      $ 28          $ 4      
  

 

 

    

 

 

       

 

 

    

 

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     Three months ended
March 31,
 

(Amounts in millions)

   2016      2015  

Derivatives qualifying as effective accounting hedges as of January 1

   $ 2,045      $ 2,070  

Current period increases (decreases) in fair value, net of deferred taxes of $(147) and $(107)

     275        195  

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

     (18      (18
  

 

 

    

 

 

 

Derivatives qualifying as effective accounting hedges as of March 31

   $ 2,302      $ 2,247  
  

 

 

    

 

 

 

The total of derivatives designated as cash flow hedges of $2,302 million, net of taxes, recorded in stockholders’ equity as of March 31, 2016 is expected to be reclassified to net income in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $72 million, net of taxes, is expected to be reclassified to net income in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2047. There were immaterial amounts reclassified to net income during the three months ended March 31, 2016 in connection with forecasted transactions that were no longer considered probable of occurring.

Fair Value Hedges

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

There were no pre-tax income effects of fair value hedges and related hedged items for the three months ended March 31, 2016 and 2015.

Derivatives Not Designated As Hedges

We also enter into certain non-qualifying derivative instruments such as: (i) interest rate swaps and financial futures to mitigate interest rate risk as part of managing regulatory capital positions; (ii) credit default swaps to enhance yield and reproduce characteristics of investments with similar terms and credit risk; (iii) equity index options, equity return swaps, interest rate swaps and financial futures to mitigate the risks associated with liabilities that have guaranteed minimum benefits, fixed index annuities and indexed universal life; (iv) interest rate swaps where the hedging relationship does not qualify for hedge accounting; (v) credit default swaps to mitigate loss exposure to certain credit risk; (vi) foreign currency swaps, options and forward contracts to mitigate currency risk associated with non-functional currency investments held by certain foreign subsidiaries

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

and future dividends or other cash flows from certain foreign subsidiaries to our holding company; and (vii) equity index options to mitigate certain macroeconomic risks associated with certain foreign subsidiaries. Additionally, we provide GMWBs on certain variable annuities that are required to be bifurcated as embedded derivatives. We also offer fixed index annuity and indexed universal life products and have reinsurance agreements with certain features that are required to be bifurcated as embedded derivatives.

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

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

 

     Three months ended March 31,      Classification of gain (loss) recognized

(Amounts in millions)

   2016      2015      in net income

Interest rate swaps

   $ 15      $ 8      Net investment gains (losses)

Interest rate swaps related to securitization entities

     (5)         (3)       Net investment gains (losses)

Credit default swaps

     (1)         1      Net investment gains (losses)

Credit default swaps related to securitization entities

     9        8      Net investment gains (losses)

Equity index options

     (3)         (10)       Net investment gains (losses)

Financial futures

     7        7      Net investment gains (losses)

Equity return swaps

     2        (9)       Net investment gains (losses)

Other foreign currency contracts

     (2)         (1)       Net investment gains (losses)

Foreign currency swaps

     10        (10)       Net investment gains (losses)

GMWB embedded derivatives

     (78)         (16)       Net investment gains (losses)

Fixed index annuity embedded derivatives

     3        (7)       Net investment gains (losses)

Indexed universal life embedded derivatives

     2        1      Net investment gains (losses)
  

 

 

    

 

 

    

Total derivatives not designated as hedges

   $ (41)       $ (31)      
  

 

 

    

 

 

    

Derivative Counterparty Credit Risk

Most of our derivative arrangements with counterparties require the posting of collateral upon meeting certain net exposure thresholds. For derivatives related to securitization entities, there are no arrangements that

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

require either party to provide collateral and the recourse of the derivative counterparty is typically limited to the assets held by the securitization entity and there is no recourse to any entity other than the securitization entity.

The following table presents additional information about derivative assets and liabilities subject to an enforceable master netting arrangement as of the dates indicated:

 

     March 31, 2016     December 31, 2015  

(Amounts in millions)

   Derivatives
assets
(1)
    Derivatives
liabilities
(2)
    Net
derivatives
    Derivatives
assets
(1)
    Derivatives
liabilities
(2)
    Net
derivatives
 

Amounts presented in the balance sheet:

            

Gross amounts recognized

   $ 1,707      $ 484      $ 1,223     $ 1,135      $ 320      $ 815  

Gross amounts offset in the balance sheet

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts presented in the balance sheet

     1,707        484        1,223       1,135        320        815  

Gross amounts not offset in the balance sheet:

            

Financial instruments (3)

     (367     (367     —          (231     (231     —     

Collateral received

     (1,128     —          (1,128     (642     —          (642

Collateral pledged

     —          (182     182       —          (263     263  

Over collateralization

     3        68        (65     3        174        (171
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amount

   $ 215      $ 3      $ 212     $ 265      $ —        $ 265  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $41 million and $24 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of March 31, 2016 and December 31, 2015, respectively.
(2)  Included $24 million and $6 million of accruals on derivatives classified as other liabilities and does not include amounts related to embedded derivatives and derivatives related to securitization entities as of March 31, 2016 and December 31, 2015, respectively.
(3)  Amounts represent derivative assets and/or liabilities that are presented gross within the balance sheet but are held with the same counterparty where we have a master netting arrangement. This adjustment results in presenting the net asset and net liability position for each counterparty.

Except for derivatives related to securitization entities, almost all of our master swap agreements contain credit downgrade provisions that allow either party to assign or terminate derivative transactions if the other party’s long-term unsecured debt rating or financial strength rating is below the limit defined in the applicable agreement. As a result of the credit rating downgrades of Genworth Holdings and our life insurance subsidiaries in February 2016, we could have claimed up to $215 million, or could have been required to disburse up to $3 million as of March 31, 2016. If the downgrade provisions had been triggered as of December 31, 2015, we could have claimed up to $265 million. The chart above excludes embedded derivatives and derivatives related to securitization entities as those derivatives are not subject to master netting arrangements.

Credit Derivatives

We sell protection under single name credit default swaps and credit default swap index tranches in combination with purchasing securities to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for both indexed reference entities and single

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

name reference entities follow the Credit Derivatives Physical Settlement Matrix published by the International Swaps and Derivatives Association. Under these terms, credit default triggers are defined as bankruptcy, failure to pay or restructuring, if applicable. Our maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, we are typically required to pay the protection holder the full notional value less a recovery rate determined at auction.

In addition to the credit derivatives discussed above, we also have credit derivative instruments related to securitization entities that we consolidate. These derivatives represent a customized index of reference entities with specified attachment points for certain derivatives. The credit default triggers are similar to those described above. In the event of default, the securitization entity will provide the counterparty with the par value of assets held in the securitization entity for the amount of incurred loss on the credit default swap. The maximum exposure to loss for the securitization entity is the notional value of the derivatives. Certain losses on these credit default swaps would be absorbed by the third-party noteholders of the securitization entity and the remaining losses on the credit default swaps would be absorbed by our portion of the notes issued by the securitization entity.

The following table sets forth our credit default swaps where we sell protection on single name reference entities and the fair values as of the dates indicated:

 

     March 31, 2016      December 31, 2015  

(Amounts in millions)

   Notional
value
     Assets      Liabilities      Notional
value
     Assets      Liabilities  

Investment grade

                 

Matures in less than one year

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

Matures after one year through five years

     39        —           1        39        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps on single name reference entities

   $ 39      $ —        $ 1      $ 39      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth our credit default swaps where we sell protection on credit default swap index tranches and the fair values as of the dates indicated:

 

     March 31, 2016      December 31, 2015  

(Amounts in millions)

   Notional
value
     Assets      Liabilities      Notional
value
     Assets      Liabilities  

Original index tranche attachment/detachment point and maturity:

                 

7% - 15% matures in less than one year (1)

   $ 100      $ 1      $ —        $ 100      $ 1      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swap index tranches

     100        1        —          100        1        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Customized credit default swap index tranches related to securitization entities:

                 

Portion backing third-party borrowings maturing 2017 (2)

     12        —          2        12        —          2  

Portion backing our interest maturing 2017 (3)

     300        —          4        300        —          12  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total customized credit default swap index tranches related to securitization entities

     312        —          6        312        —          14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps on index tranches

   $ 412      $ 1      $ 6      $ 412      $ 1      $ 14  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  The current attachment/detachment as of March 31, 2016 and December 31, 2015 was 7% – 15%.
(2)  Original notional value was $39 million.
(3)  Original notional value was $300 million.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(6) Fair Value of Financial Instruments

Assets and liabilities that are reflected in the accompanying condensed consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and cash equivalents, investment securities, separate accounts, securities held as collateral and derivative instruments. Other financial assets and liabilities—those not carried at fair value—are discussed below. Apart from certain of our borrowings and certain marketable securities, few of the instruments discussed below are actively traded and their fair values must often be determined using models. The fair value estimates are made at a specific point in time, based upon available market information and judgments about the financial instruments, including estimates of the timing and amount of expected future cash flows and the credit standing of counterparties. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider the tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets.

The basis on which we estimate fair value is as follows:

Commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

Restricted commercial mortgage loans. Based on recent transactions and/or discounted future cash flows, using current market rates. Given the limited availability of data related to transactions for similar instruments, we typically classify these loans as Level 3.

Other invested assets. Primarily represents short-term investments and limited partnerships accounted for under the cost method. The fair value of short-term investments typically does not include significant unobservable inputs and approximate our amortized cost basis. As a result, short-term investments are classified as Level 2. Limited partnerships are valued based on comparable market transactions, discounted future cash flows, quoted market prices and/or estimates using the most recent data available for the underlying instrument. Cost method limited partnerships typically include significant unobservable inputs as a result of being relatively illiquid with limited market activity for similar instruments and are classified as Level 3.

Long-term borrowings. We utilize available market data when determining fair value of long-term borrowings issued in the United States and Canada, which includes data on recent trades for the same or similar financial instruments. Accordingly, these instruments are classified as Level 2 measurements. In cases where market data is not available such as our long-term borrowings in Australia, we use broker quotes for which we consider the valuation methodology utilized by the third party, but the valuation typically includes significant unobservable inputs. Accordingly, we classify these borrowings where fair value is based on our consideration of broker quotes as Level 3 measurements.

Non-recourse funding obligations. We use an internal model to determine fair value using the current floating rate coupon and expected life/final maturity of the instrument discounted using the floating rate index and current market spread assumption, which is estimated based on recent transactions for these instruments or similar instruments as well as other market information or broker provided data. Given these instruments are private and very little market activity exists, our current market spread assumption is considered to have significant unobservable inputs in calculating fair value and, therefore, results in the fair value of these instruments being classified as Level 3.

 

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Borrowings related to securitization entities. Based on market quotes or comparable market transactions. Some of these borrowings are publicly traded debt securities and are classified as Level 2. Certain borrowings are not publicly traded and are classified as Level 3.

Investment contracts. Based on expected future cash flows, discounted at current market rates for annuity contracts or institutional products. Given the significant unobservable inputs associated with policyholder behavior and current market rate assumptions used to discount the expected future cash flows, we classify these instruments as Level 3 except for certain funding agreement-backed notes that are traded in the marketplace as a security and are classified as Level 2.

The following represents our estimated fair value of financial assets and liabilities that are not required to be carried at fair value as of the dates indicated:

 

     March 31, 2016  
     Notional
amount
    Carrying
amount
     Fair value  

(Amounts in millions)

        Total      Level 1      Level 2      Level 3  

Assets:

                

Commercial mortgage loans

   $   (1)    $ 6,179      $ 6,542      $ —        $ —        $ 6,542  

Restricted commercial mortgage loans

       (1)      155        174        —          —          174  

Other invested assets

       (1)      247        253        —          174        79  

Liabilities:

                

Long-term borrowings (2)

       (1)      4,232        3,260        —          3,079        181  

Non-recourse funding obligations (2)

       (1)      310        178        —          —          178  

Borrowings related to securitization entities

       (1)      88        93        —          93        —    

Investment contracts

       (1)      17,365        18,456        —          5        18,451  

Other firm commitments:

                

Commitments to fund limited partnerships

     143        —          —          —          —          —    

Ordinary course of business lending commitments

     91        —          —          —          —          —    

 

     December 31, 2015  
     Notional
amount
    Carrying
amount
     Fair value  

(Amounts in millions)

        Total      Level 1      Level 2      Level 3  

Assets:

                

Commercial mortgage loans

   $   (1)    $ 6,170      $ 6,476      $ —        $ —        $ 6,476  

Restricted commercial mortgage loans

       (1)      161        179        —          —          179  

Other invested assets

       (1)      273        279        —          197        82  

Liabilities:

                

Long-term borrowings (2)

       (1)      4,570        3,518        —          3,343        175  

Non-recourse funding obligations (2)

       (1)      1,920        1,401        —          —          1,401  

Borrowings related to securitization entities

       (1)      98        104        —          104        —    

Investment contracts

       (1)      17,258        17,910        —          5        17,905  

Other firm commitments:

                

Commitments to fund limited partnerships

     131        —          —          —          —          —    

Ordinary course of business lending commitments

     40        —          —          —          —          —    

 

(1)  These financial instruments do not have notional amounts.
(2)  See note 7 for additional information related to borrowings.

 

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Recurring Fair Value Measurements

We have fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are carried at fair value. Below is a description of the valuation techniques and inputs used to determine fair value by class of instrument.

Fixed maturity, equity and trading securities

The fair value of fixed maturity, equity and trading securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or third-party broker provided prices (“broker quotes”), which use a market approach, income approach or a combination of the market and income approach depending on the type of instrument and availability of information. In general, a market approach is utilized if there is readily available and relevant market activity for an individual security. In certain cases where market information is not available for a specific security but is available for similar securities, a security is valued using that market information for similar securities, which is also a market approach. When market information is not available for a specific security or is available but such information is less relevant or reliable, an income approach or a combination of a market and income approach is utilized. For securities with optionality, such as call or prepayment features (including mortgage-backed or asset-backed securities), an income approach may be used. In addition, a combination of the results from market and income approaches may be used to estimate fair value. These valuation techniques may change from period to period, based on the relevance and availability of market data.

We utilize certain third-party data providers when determining fair value. We consider information obtained from pricing services as well as broker quotes in our determination of fair value. Additionally, we utilize internal models to determine the valuation of securities using an income approach where the inputs are based on third-party provided market inputs. While we consider the valuations provided by pricing services and broker quotes to be of high quality, management determines the fair value of our investment securities after considering all relevant and available information. We also use various methods to obtain an understanding of the valuation methodologies and procedures used by third-party data providers to ensure sufficient understanding to evaluate the valuation data received, including an understanding of the assumptions and inputs utilized to determine the appropriate fair value. For pricing services, we analyze the prices provided by our primary pricing services to other readily available pricing services and perform a detailed review of the assumptions and inputs from each pricing service to determine the appropriate fair value when pricing differences exceed certain thresholds. We evaluate changes in fair value that are greater than certain pre-defined thresholds each month to further aid in our review of the accuracy of fair value measurements and our understanding of changes in fair value, with more detailed reviews performed by the asset managers responsible for the related asset class associated with the security being reviewed. A pricing committee provides additional oversight and guidance in the evaluation and review of the pricing methodologies used to value our investment portfolio.

In general, we first obtain valuations from pricing services. If a price is not supplied by a pricing service, we will typically seek a broker quote for public or private fixed maturity securities. In certain instances, we utilize price caps for broker quoted securities where the estimated market yield results in a valuation that may exceed the amount that we believe would be received in a market transaction. For certain private fixed maturity securities where we do not obtain valuations from pricing services, we utilize an internal model to determine fair value since transactions for identical securities are not readily observable and these securities are not typically valued by pricing services. For all securities, excluding certain private fixed maturity securities, if neither a pricing service nor broker quotes valuation is available, we determine fair value using internal models.

 

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For pricing services, we obtain an understanding of the pricing methodologies and procedures for each type of instrument. Additionally, on a monthly basis we review a sample of securities, examining the pricing service’s assumptions to determine if we agree with the service’s derived price. When available, we also evaluate the prices sampled as compared to other public prices. If a variance greater than a pre-defined threshold is noted, additional review of the price is executed to ensure accuracy. In general, a pricing service does not provide a price for a security if sufficient information is not readily available to determine fair value or if such security is not in the specific sector or class covered by a particular pricing service. Given our understanding of the pricing methodologies and procedures of pricing services, the securities valued by pricing services are typically classified as Level 2 unless we determine the valuation process for a security or group of securities utilizes significant unobservable inputs, which would result in the valuation being classified as Level 3.

For private fixed maturity securities, we utilize an income approach where we obtain public bond spreads and utilize those in an internal model to determine fair value. Other inputs to the model include rating and weighted-average life, as well as sector which is used to assign the spread. We then add an additional premium, which represents an unobservable input, to the public bond spread to adjust for the liquidity and other features of our private placements. We utilize the estimated market yield to discount the expected cash flows of the security to determine fair value. We utilize price caps for securities where the estimated market yield results in a valuation that may exceed the amount that would be received in a market transaction and value all private fixed maturity securities at par that have less than 12 months to maturity. When a security does not have an external rating, we assign the security an internal rating to determine the appropriate public bond spread that should be utilized in the valuation. To evaluate the reasonableness of the internal model, we review a sample of private fixed maturity securities each month. In that review we compare the modeled prices to the prices of similar public securities in conjunction with analysis on current market indicators. If a pricing variance greater than a pre-defined threshold is noted, additional review of the price is executed to ensure accuracy. At the end of each month, all internally modeled prices are compared to the prior month prices with an evaluation of all securities with a month-over-month change greater than a pre-defined threshold. While we generally consider the public bond spreads by sector and maturity to be observable inputs, we evaluate the similarities of our private placement with the public bonds, any price caps utilized, liquidity premiums applied, and whether external ratings are available for our private placements to determine whether the spreads utilized would be considered observable inputs. We classify private securities without an external rating and public bond spread as Level 3. In general, increases (decreases) in credit spreads will decrease (increase) the fair value for our fixed maturity securities.

For broker quotes, we consider the valuation methodology utilized by the third party and analyze a sample each month to assess reasonableness given then-current market conditions. Additionally, for broker quotes on certain structured securities, we validate prices received against other publicly available pricing sources. Broker quotes are typically based on an income approach given the lack of available market data. As the valuation typically includes significant unobservable inputs, we classify the securities where fair value is based on our consideration of broker quotes as Level 3 measurements.

For remaining securities priced using internal models, we determine fair value using an income approach. We analyze a sample each month to assess reasonableness given then-current market conditions. We maximize the use of observable inputs but typically utilize significant unobservable inputs to determine fair value. Accordingly, the valuations are typically classified as Level 3.

A summary of the inputs used for our fixed maturity, equity and trading securities based on the level in which instruments are classified is included below. We have combined certain classes of instruments together as the nature of the inputs is similar.

 

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Level 1 measurements

Equity securities. The primary inputs to the valuation of exchange-traded equity securities include quoted prices for the identical instrument.

Level 2 measurements

Fixed maturity securities

 

    Third-party pricing services: In estimating the fair value of fixed maturity securities, approximately 90% of our portfolio is priced using third-party pricing sources. These pricing services utilize industry-standard valuation techniques that include market-based approaches, income-based approaches, a combination of market-based and income-based approaches or other proprietary, internally generated models as part of the valuation processes. These third-party pricing vendors maximize the use of publicly available data inputs to generate valuations for each asset class. Priority and type of inputs used may change frequently as certain inputs may be more direct drivers of valuation at the time of pricing. Examples of significant inputs incorporated by third-party pricing services may include sector and issuer spreads, seasoning, capital structure, security optionality, collateral data, prepayment assumptions, default assumptions, delinquencies, debt covenants, benchmark yields, trade data, dealer quotes, credit ratings, maturity and weighted-average life. We conduct regular meetings with our third-party pricing services for the purpose of understanding the methodologies, techniques and inputs used by the third-party pricing providers.

 

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The following table presents a summary of the significant inputs used by our third-party pricing services for certain fair value measurements of fixed maturity securities that are classified as Level 2 as of March 31, 2016:

 

(Amounts in millions)

   Fair value   

Primary methodologies

  

Significant inputs

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

  

 

 

$6,522

   Price quotes from trading desk, broker feeds    Bid side prices, trade prices, Option Adjusted Spread (“OAS”) to swap curve, Bond Market Association OAS, Treasury Curve, Agency Bullet Curve, maturity to issuer spread

State and political subdivisions

  

 

$2,475

   Multi-dimensional attribute-based modeling systems, third-party pricing vendors    Trade prices, material event notices, Municipal Market Data benchmark yields, broker quotes

Non-U.S. government

   $2,062    Matrix pricing, spread priced to benchmark curves, price quotes from market makers    Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources

U.S. corporate

   $22,482    Multi-dimensional attribute-based modeling systems, broker quotes, price quotes from market makers, internal models, OAS-based models    Bid side prices to Treasury Curve, Issuer Curve, which includes sector, quality, duration, OAS percentage and change for spread matrix, trade prices, comparative transactions, Trade Reporting and Compliance Engine (“TRACE”) reports

Non-U.S. corporate

   $10,796    Multi-dimensional attribute-based modeling systems, OAS-based models, price quotes from market makers    Benchmark yields, trade prices, broker quotes, comparative transactions, issuer spreads, bid-offer spread, market research publications, third-party pricing sources

Residential mortgage-backed

  

 

$5,001

   OAS-based models, To Be Announced pricing models, single factor binomial models, internally priced    Prepayment and default assumptions, aggregation of bonds with similar characteristics, including collateral type, vintage, tranche type, weighted-average life, weighted-average loan age, issuer program and delinquency ratio, pay up and pay down factors, TRACE reports

Commercial mortgage-backed

  

 

$2,705

   Multi-dimensional attribute-based modeling systems, pricing matrix, spread matrix priced to swap curves, Trepp commercial mortgage-backed securities analytics model    Credit risk, interest rate risk, prepayment speeds, new issue data, collateral performance, origination year, tranche type, original credit ratings, weighted-average life, cash flows, spreads derived from broker quotes, bid side prices, spreads to daily updated swaps curves, TRACE reports

Other asset-backed

   $2,148    Multi-dimensional attribute-based modeling systems, spread matrix priced to swap curves, price quotes from market makers, internal models    Spreads to daily updated swaps curves, spreads derived from trade prices and broker quotes, bid side prices, new issue data, collateral performance, analysis of prepayment speeds, cash flows, collateral loss analytics, historical issue analysis, trade data from market makers, TRACE reports

 

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    Internal models: A portion of our non-U.S. government, U.S. corporate and non-U.S. corporate securities are valued using internal models. The fair value of these fixed maturity securities were $18 million, $618 million and $282 million, respectively, as of March 31, 2016. Internally modeled securities are primarily private fixed maturity securities where we use market observable inputs such as an interest rate yield curve, published credit spreads for similar securities based on the external ratings of the instrument and related industry sector of the issuer. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps and liquidity premiums are established using inputs from market participants.

Equity securities. The primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active.

Level 3 measurements

Fixed maturity securities

 

    Internal models: A portion of our U.S. government, agencies and government-sponsored enterprises, non-U.S. government, U.S. corporate, non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using internal models. The primary inputs to the valuation of the bond population include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, duration, call provisions, issuer rating, benchmark yields and credit spreads. Certain private fixed maturity securities are valued using an internal model using market observable inputs such as interest rate yield curve, as well as published credit spreads for similar securities where there are no external ratings of the instrument and include a significant unobservable input. Additionally, we may apply certain price caps and liquidity premiums in the valuation of private fixed maturity securities. Price caps are established using inputs from market participants. For structured securities, the primary inputs to the valuation include quoted prices for identical assets, or similar assets in markets that are not active, contractual cash flows, weighted-average coupon, weighted-average maturity, issuer rating, structure of the security, expected prepayment speeds and volumes, collateral type, current and forecasted loss severity, average delinquency rates, vintage of the loans, geographic region, debt service coverage ratios, payment priority with the tranche, benchmark yields and credit spreads. The fair value of our Level 3 fixed maturity securities priced using internal models was $3,512 million as of March 31, 2016.

 

    Broker quotes: A portion of our state and political subdivisions, U.S. corporate, non-U.S. corporate, residential mortgage-backed, commercial mortgage-backed and other asset-backed securities are valued using broker quotes. Broker quotes are obtained from third-party providers that have current market knowledge to provide a reasonable price for securities not routinely priced by third-party pricing services. Brokers utilized for valuation of assets are reviewed annually. The fair value of our Level 3 fixed maturity securities priced by broker quotes was $1,669 million as of March 31, 2016.

Equity securities. The primary inputs to the valuation include broker quotes where the underlying inputs are unobservable and for internal models, structure of the security and issuer rating.

Restricted other invested assets related to securitization entities

We have trading securities related to securitization entities that are classified as restricted other invested assets and are carried at fair value. The trading securities represent asset-backed securities. The valuation for

 

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trading securities is determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there is observable market information for transactions of the same or similar instruments, which is provided to us by a third-party pricing service and is classified as Level 2. For certain securities that are not actively traded, we determine fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classify these valuations as Level 3.

Securities lending collateral

The fair value of securities held as collateral is primarily based on Level 2 inputs from market information for the collateral that is held on our behalf by the custodian. We determine fair value after considering prices obtained by third-party pricing services.

Separate account assets

The fair value of separate account assets is based on the quoted prices of the underlying fund investments and, therefore, represents Level 1 pricing.

Derivatives

We consider counterparty collateral arrangements and rights of set-off when evaluating our net credit risk exposure to our derivative counterparties. Accordingly, we are permitted to include consideration of these arrangements when determining whether any incremental adjustment should be made for both the counterparty’s and our non-performance risk in measuring fair value for our derivative instruments. As a result of these counterparty arrangements, we determined that any adjustment for credit risk would not be material and we have not recorded any incremental adjustment for our non-performance risk or the non-performance risk of the derivative counterparty for our derivative assets or liabilities. We determine fair value for our derivatives using an income approach with internal models based on relevant market inputs for each derivative instrument. We also compare the fair value determined using our internal model to the valuations provided by our derivative counterparties with any significant differences or changes in valuation being evaluated further by our derivatives professionals that are familiar with the instrument and market inputs used in the valuation.

Interest rate swaps. The valuation of interest rate swaps is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2. For certain interest rate swaps, the inputs into the valuation also include the total returns of certain bonds that would primarily be considered an observable input and result in the derivative being classified as Level 2. For certain other swaps, there are features that provide an option to the counterparty to terminate the swap at specified dates. The interest rate volatility input used to value these options would be considered a significant unobservable input and results in the fair value measurement of the derivative being classified as Level 3. These options to terminate the swap by the counterparty are based on forward interest rate swap curves and volatility. As interest rate volatility increases, our valuation of the derivative changes unfavorably.

Interest rate swaps related to securitization entities. The valuation of interest rate swaps related to securitization entities is determined using an income approach. The primary input into the valuation represents the forward interest rate swap curve, which is generally considered an observable input, and results in the derivative being classified as Level 2.

 

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Inflation indexed swaps. The valuation of inflation indexed swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, the current consumer price index and the forward consumer price index curve, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Foreign currency swaps. The valuation of foreign currency swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and foreign currency exchange rates, both of which are considered an observable input, and results in the derivative being classified as Level 2.

Credit default swaps. We have both single name credit default swaps and index tranche credit default swaps. For single name credit default swaps, we utilize an income approach to determine fair value based on using current market information for the credit spreads of the reference entity, which is considered observable inputs based on the reference entities of our derivatives and results in these derivatives being classified as Level 2. For index tranche credit default swaps, we utilize an income approach that utilizes current market information related to credit spreads and expected defaults and losses associated with the reference entities that comprise the respective index associated with each derivative. There are significant unobservable inputs associated with the timing and amount of losses from the reference entities as well as the timing or amount of losses, if any, that will be absorbed by our tranche. Accordingly, the index tranche credit default swaps are classified as Level 3. As credit spreads widen for the underlying issuers comprising the index, the change in our valuation of these credit default swaps will be unfavorable.

Credit default swaps related to securitization entities. Credit default swaps related to securitization entities represent customized index tranche credit default swaps and are valued using a similar methodology as described above for index tranche credit default swaps. We determine fair value of these credit default swaps after considering both the valuation methodology described above as well as the valuation provided by the derivative counterparty. In addition to the valuation methodology and inputs described for index tranche credit default swaps, these customized credit default swaps contain a feature that permits the securitization entity to provide the par value of underlying assets in the securitization entity to settle any losses under the credit default swap. The valuation of this settlement feature is dependent upon the valuation of the underlying assets and the timing and amount of any expected loss on the credit default swap, which is considered a significant unobservable input. Accordingly, these customized index tranche credit default swaps related to securitization entities are classified as Level 3. As credit spreads widen for the underlying issuers comprising the customized index, the change in our valuation of these credit default swaps will be unfavorable.

Equity index options. We have equity index options associated with various equity indices. The valuation of equity index options is determined using an income approach. The primary inputs into the valuation represent forward interest rate volatility and time value component associated with the optionality in the derivative, which are considered significant unobservable inputs in most instances. The equity index volatility surface is determined based on market information that is not readily observable and is developed based upon inputs received from several third-party sources. Accordingly, these options are classified as Level 3. As equity index volatility increases, our valuation of these options changes favorably.

Financial futures. The fair value of financial futures is based on the closing exchange prices. Accordingly, these financial futures are classified as Level 1. The period end valuation is zero as a result of settling the margins on these contracts on a daily basis.

 

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Equity return swaps. The valuation of equity return swaps is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve and underlying equity index values, which are generally considered observable inputs, and results in the derivative being classified as Level 2.

Forward bond purchase commitments. The valuation of forward bond purchase commitments is determined using an income approach. The primary input into the valuation represents the current bond prices and interest rates, which are generally considered an observable input, and results in the derivative being classified as Level 2.

Other foreign currency contracts. We have certain foreign currency options classified as other foreign currency contracts. The valuation of foreign currency options is determined using an income approach. The primary inputs into the valuation represent the forward interest rate swap curve, foreign currency exchange rates, forward interest rate, foreign currency exchange rate volatility, foreign equity index volatility and time value component associated with the optionality in the derivative. As a result of the significant unobservable inputs associated with the forward interest rate, foreign currency exchange rate volatility and foreign equity index volatility inputs, the derivative is classified as Level 3. As foreign currency exchange rate volatility and foreign equity index volatility increases, the change in our valuation of these options will be favorable for purchase options and unfavorable for options sold. We also have foreign currency forward contracts where the valuation is determined using an income approach. The primary inputs into the valuation represent the forward foreign currency exchange rates, which are generally considered observable inputs and results in the derivative being classified as Level 2.

GMWB embedded derivatives

We are required to bifurcate an embedded derivative for certain features associated with annuity products and related reinsurance agreements where we provide a GMWB to the policyholder and are required to record the GMWB embedded derivative at fair value. The valuation of our GMWB embedded derivative is based on an income approach that incorporates inputs such as forward interest rates, equity index volatility, equity index and fund correlation, and policyholder assumptions such as utilization, lapse and mortality. In addition to these inputs, we also consider risk and expense margins when determining the projected cash flows that would be determined by another market participant. While the risk and expense margins are considered in determining fair value, these inputs do not have a significant impact on the valuation. We determine fair value using an internal model based on the various inputs noted above. The resulting fair value measurement from the model is reviewed by the product actuarial, risk and finance professionals each reporting period with changes in fair value also being compared to changes in derivatives and other instruments used to mitigate changes in fair value from certain market risks, such as equity index volatility and interest rates.

For GMWB liabilities, non-performance risk is integrated into the discount rate. Our discount rate used to determine fair value of our GMWB liabilities includes market credit spreads above U.S. Treasury rates to reflect an adjustment for the non-performance risk of the GMWB liabilities. As of March 31, 2016 and December 31, 2015, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $91 million and $79 million, respectively.

To determine the appropriate discount rate to reflect the non-performance risk of the GMWB liabilities, we evaluate the non-performance risk in our liabilities based on a hypothetical exit market transaction as there is no exit market for these types of liabilities. A hypothetical exit market can be viewed as a hypothetical transfer of the liability to another similarly rated insurance company which would closely resemble a reinsurance

 

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transaction. Another hypothetical exit market transaction can be viewed as a hypothetical transaction from the perspective of the GMWB policyholder. In determining the appropriate discount rate to incorporate non-performance risk of the GMWB liabilities, we also considered the impacts of state guarantees embedded in the related insurance product as a form of inseparable third-party guarantee. We believe that a hypothetical exit market participant would use a similar discount rate as described above to value the liabilities.

For equity index volatility, we determine the projected equity market volatility using both historical volatility and projected equity market volatility with more significance being placed on projected near-term volatility and recent historical data. Given the different attributes and market characteristics of GMWB liabilities compared to equity index options in the derivative market, the equity index volatility assumption for GMWB liabilities may be different from the volatility assumption for equity index options, especially for the longer dated points on the curve.

Equity index and fund correlations are determined based on historical price observations for the fund and equity index.

For policyholder assumptions, we use our expected lapse, mortality and utilization assumptions and update these assumptions for our actual experience, as necessary. For our lapse assumption, we adjust our base lapse assumption by policy based on a combination of the policyholder’s current account value and GMWB benefit.

We classify the GMWB valuation as Level 3 based on having significant unobservable inputs, with equity index volatility and non-performance risk being considered the more significant unobservable inputs. As equity index volatility increases, the fair value of the GMWB liabilities will increase. Any increase in non-performance risk would increase the discount rate and would decrease the fair value of the GMWB liability. Additionally, we consider lapse and utilization assumptions to be significant unobservable inputs. An increase in our lapse assumption would decrease the fair value of the GMWB liability, whereas an increase in our utilization rate would increase the fair value.

Fixed index annuity embedded derivatives

We have fixed indexed annuity products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Indexed universal life embedded derivatives

We have indexed universal life products where interest is credited to the policyholder’s account balance based on equity index changes. This feature is required to be bifurcated as an embedded derivative and recorded at fair value. Fair value is determined using an income approach where the present value of the excess cash flows above the guaranteed cash flows is used to determine the value attributed to the equity index feature. The inputs

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

used in determining the fair value include policyholder behavior (lapses and withdrawals), near-term equity index volatility, expected future interest credited, forward interest rates and an adjustment to the discount rate to incorporate non-performance risk and risk margins. As a result of our assumptions for policyholder behavior and expected future interest credited being considered significant unobservable inputs, we classify these instruments as Level 3. As lapses and withdrawals increase, the value of our embedded derivative liability will decrease. As expected future interest credited decreases, the value of our embedded derivative liability will decrease.

Borrowings related to securitization entities

We record certain borrowings related to securitization entities at fair value. The fair value of these borrowings is determined using either a market approach or income approach, depending on the instrument and availability of market information. Given the unique characteristics of the securitization entities that issued these borrowings as well as the lack of comparable instruments, we determine fair value considering the valuation of the underlying assets held by the securitization entities and any derivatives, as well as any unique characteristics of the borrowings that may impact the valuation. After considering all relevant inputs, we determine fair value of the borrowings using the net valuation of the underlying assets and derivatives that are backing the borrowings. Accordingly, these instruments are classified as Level 3. Increases in the valuation of the underlying assets or decreases in the derivative liabilities will result in an increase in the fair value of these borrowings.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables set forth our assets by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:

 

     March 31, 2016  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Assets

           

Investments:

           

Fixed maturity securities:

           

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

   $ 6,524      $ —         $ 6,522      $ 2  

State and political subdivisions

     2,517        —           2,475        42  

Non-U.S. government

     2,080        —           2,080        —     

U.S. corporate:

           

Utilities

     4,269        —           3,787        482  

Energy

     2,164        —           1,934        230  

Finance and insurance

     5,815        —           5,118        697  

Consumer—non-cyclical

     4,354        —           4,242        112  

Technology and communications

     2,300        —           2,263        37  

Industrial

     1,225        —           1,161        64  

Capital goods

     2,050        —           1,896        154  

Consumer—cyclical

     1,692        —           1,482        210  

Transportation

     1,132        —           1,009        123  

Other

     388        —           208        180  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. corporate

     25,389        —           23,100        2,289  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-U.S. corporate:

           

Utilities

     1,084        —           768        316  

Energy

     1,437        —           1,211        226  

Finance and insurance

     2,619        —           2,428        191  

Consumer—non-cyclical

     766        —           603        163  

Technology and communications

     1,039        —           975        64  

Industrial

     1,034        —           938        96  

Capital goods

     610        —           396        214  

Consumer—cyclical

     544        —           474        70  

Transportation

     620        —           476        144  

Other

     2,876        —           2,809        67  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-U.S. corporate

     12,629        —           11,078        1,551  
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential mortgage-backed

     5,122        —           5,001        121  

Commercial mortgage-backed

     2,713        —           2,705        8  

Other asset-backed

     3,316        —           2,148        1,168  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     60,290        —           55,109        5,181  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

     431        386        1        44  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other invested assets:

           

Trading securities

     471        —           471        —     

Derivative assets:

           

Interest rate swaps

     1,613        —           1,613        —     

Foreign currency swaps

     7        —           7        —     

Credit default swaps

     1        —           —           1  

Equity index options

     36        —           —           36  

Equity return swaps

     2        —           2        —     

Other foreign currency contracts

     7        —           6        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     1,666        —           1,628        38  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities lending collateral

     415        —           415         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other invested assets

     2,552        —           2,514        38  
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted other invested assets related to securitization entities

     422        —           181        241  

Reinsurance recoverable (1)

     23        —           —           23  

Separate account assets

     7,624        7,624        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 71,342      $ 8,010      $ 57,805      $ 5,527  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     December 31, 2015  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Assets

           

Investments:

           

Fixed maturity securities:

           

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

   $ 6,203      $ —         $ 6,200      $ 3  

State and political subdivisions

     2,438        —           2,403        35  

Non-U.S. government

     2,015        —           2,015        —     

U.S. corporate:

           

Utilities

     3,693        —           3,244        449  

Energy

     2,501        —           2,248        253  

Finance and insurance

     5,632        —           4,917        715  

Consumer—non-cyclical

     4,096        —           3,987        109  

Technology and communications

     2,193        —           2,158        35  

Industrial

     1,173        —           1,112        61  

Capital goods

     1,950        —           1,770        180  

Consumer—cyclical

     1,675        —           1,436        239  

Transportation

     1,086        —           980        106  

Other

     402        —           220        182  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. corporate

     24,401        —           22,072        2,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-U.S. corporate:

           

Utilities

     843        —           556        287  

Energy

     1,686        —           1,434        252  

Finance and insurance

     2,473        —           2,282        191  

Consumer—non-cyclical

     752        —           583        169  

Technology and communications

     988        —           926        62  

Industrial

     986        —           902        84  

Capital goods

     604        —           391        213  

Consumer—cyclical

     526        —           455        71  

Transportation

     605        —           461        144  

Other

     2,736        —           2,664        72  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-U.S. corporate

     12,199        —           10,654        1,545  
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential mortgage-backed

     5,101        —           4,985        116  

Commercial mortgage-backed

     2,559        —           2,549        10  

Other asset-backed

     3,281        —           2,139        1,142  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     58,197        —           53,017        5,180  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

     310        270        2        38  
  

 

 

    

 

 

    

 

 

    

 

 

 

Other invested assets:

           

Trading securities

     447        —           447        —     

Derivative assets:

           

Interest rate swaps

     1,054        —           1,054        —     

Foreign currency swaps

     8        —           8        —     

Credit default swaps

     1        —           —           1  

Equity index options

     30        —           —           30  

Equity return swaps

     2        —           2        —     

Other foreign currency contracts

     17        —           14        3  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     1,112        —           1,078        34  
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities lending collateral

     347        —           347        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other invested assets

     1,906        —           1,872        34  
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted other invested assets related to securitization entities

     413        —           181        232  

Reinsurance recoverable (1)

     17        —           —           17   

Separate account assets

     7,883        7,883        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 68,726      $ 8,153      $ 55,072      $ 5,501  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

We review the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers between levels at the beginning fair value for the reporting period in which the changes occur. Given the types of assets classified as Level 1, which primarily represents mutual fund investments, we typically do not have any transfers between Level 1 and Level 2 measurement categories and did not have any such transfers during any period presented.

Our assessment of whether or not there were significant unobservable inputs related to fixed maturity securities was based on our observations obtained through the course of managing our investment portfolio, including interaction with other market participants, observations related to the availability and consistency of pricing and/or rating, and understanding of general market activity such as new issuance and the level of secondary market trading for a class of securities. Additionally, we considered data obtained from third-party pricing sources to determine whether our estimated values incorporate significant unobservable inputs that would result in the valuation being classified as Level 3.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following tables present additional information about assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:

 

    Beginning
balance

as of
January 1,
2016
    Total realized and
unrealized gains
(losses)
                                        Ending
balance
as of
March 31,
2016
    Total gains
(losses)
included in
net income
attributable
to assets
still held
 

(Amounts in millions)

    Included in
net
income
    Included
in OCI
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3  (1)
    Transfer
out of
Level 3  (1)
     

Fixed maturity securities:

                     

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

  $ 3     $ —       $ —        $ —        $ —       $ —       $ (1   $ —        $ —        $ 2     $ —    

State and political subdivisions

    35       1       (1     7       —          —          —          —          —          42       1  

U.S. corporate:

                     

Utilities

    449       1       5       13       —          —          (8     49        (27     482       —     

Energy

    253       —          (1     —          —          —          (1     7        (28     230       —     

Finance and insurance

    715       10       7       —          —          —          (17     —          (18     697       10  

Consumer—non-cyclical

    109       —          3       —          —          —          —          —          —          112       —     

Technology and communications

    35       1       1       —          —          —          —          —          —          37       1  

Industrial

    61       —          3       —          —          —          —          —          —          64       —     

Capital goods

    180       —          3       —          —          —          —          —          (29     154       —     

Consumer—cyclical

    239       4       4       3       —          —          (40     —          —          210       —     

Transportation

    106       —          4       17       —          —          (4     —          —          123       —     

Other

    182       —          1       —          —          —          (1     —          (2     180       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    2,329       16       30       33       —          —          (71     56        (104     2,289       11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                     

Utilities

    287       —          3       —          —          —          —          26        —          316       —     

Energy

    252       —          13       —          —          —          (13     —          (26     226       —     

Finance and insurance

    191       1       (1     —          —          —          —          —          —          191       1  

Consumer—non-cyclical

    169       —          5       —          —          —          (11     —          —          163       —     

Technology and communications

    62       —          2       —          —          —          —          —          —          64       —     

Industrial

    84       —          3       —          —          —          —          9        —          96       —     

Capital goods

    213       —          7       —          —          —          (6     —          —          214       —     

Consumer—cyclical

    71       —          1       —          —          —          (2     —          —          70       —     

Transportation

    144       —          —          —          —          —          —          —          —          144       —     

Other

    72       —          2       —          —          —          (7     —          —          67       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    1,545       1       35       —          —          —          (39     35        (26     1,551       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    116       —          2       38       —          —          (2     —          (33     121       —     

Commercial mortgage-backed

    10       —          —          —          —          —          (2     —          —          8       —     

Other asset-backed

    1,142       1       (16     12       —          —          (6     35        —          1,168       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    5,180       19       50       90       —          —          (121     126        (163     5,181       14  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    38       —          —          6       —          —          —          —          —          44       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

                     

Derivative assets:

                     

Credit default swaps

    1       —          —          —          —          —          —          —          —          1       —     

Equity index options

    30       (3     —          13       —          —          (4     —          —          36       3  

Other foreign currency contracts

    3       (2     —          —          —          —          —          —          —          1       (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

    34       (5     —          13       —          —          (4     —          —          38       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

    34       (5     —          13       —          —          (4     —          —          38       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted other invested assets related to securitization entities

    232       9       —          —          —          —          —          —          —          241       9  

Reinsurance recoverable (2)

    17       5       —          —          —          1       —          —          —          23       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 5,501     $ 28     $ 50     $ 109     $  —        $ 1     $ (125   $ 126      $ (163   $ 5,527     $ 29  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads, as well as changes in the industry sectors assigned to specific securities.
(2)  Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

    Beginning
balance

as of
January 1,
2015
    Total realized and
unrealized
gains (losses)
                                        Ending
balance

as of
March 31,
2015
    Total gains
(losses)
included in
net income

attributable
to assets
still held
 

(Amounts in millions)

    Included in
net

income
    Included
in OCI
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
 (1)
    Transfer
out of
Level 3
 (1)
     

Fixed maturity securities:

                     

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

  $ 4     $  —        $  —        $ —        $  —        $  —        $ (1   $ —        $ —        $  3     $ —     

State and political subdivisions

    30       1       (1     5       —          —          —          —          (5     30       1  

Non-U.S. government

    7       —          —          —          —          —          (1     —          —          6       —     

U.S. corporate:

                     

Utilities

    444       —          6       15       —          —          (2     —          (1     462       —     

Energy

    285       —          3       —          —          —          —          —          (8     280       —     

Finance and insurance

    616       5       15       20       —          —          (18     —          (1     637       4  

Consumer—non-cyclical

    140       1       4       —          —          —          (28     —          —          117       —     

Technology and communications

    45       —          2       —          —          —          —          —          —          47       —     

Industrial

    36       —          1       —          —          —          —          —          —          37       —     

Capital goods

    166       —          1       —          —          —          —          —          —          167       —     

Consumer—cyclical

    363       —          5       —          —          —          (1     —          —          367       —     

Transportation

    153       1       2       7       —          —          (2     —          —          161       1  

Other

    171       1       2       —          —          —          (1     —          —          173       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    2,419       8       41       42       —          —          (52     —          (10     2,448       6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                     

Utilities

    328       —          4       —          —          —          —          —          —          332       —     

Energy

    324       (1     (7     —          (9     —          —          —          —          307       (1

Finance and insurance

    221       1       6       —          —          —          (2     —          —          226       1  

Consumer—non-cyclical

    197       —          5       —          —          —          (30     —          —          172       —     

Technology and communications

    42       —          —          —          —          —          —          1        —          43       —     

Industrial

    131       —          2       7       —          —          (14     1        —          127       —     

Capital goods

    237       —          5       —          —          —          —          —          —          242       —     

Consumer—cyclical

    89       —          2       —          —          —          —          —          (1     90       —     

Transportation

    154       —          3       —          —          —          —          —          —          157       —     

Other

    81       —          1       —          —          —          —          1        —          83       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    1,804       —          21       7       (9     —          (46     3        (1     1,779       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    65       —          (2     —          —          —          (2     —          —          61       —     

Commercial mortgage-backed

    5       —          —          —          —          —          —          —          (1     4       —     

Other asset-backed

    1,420       —          14       38       —          —          (11     33        (38     1,456       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    5,754       9       73       92       (9     —          (113     36        (55     5,787       7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    34       —          —          1       (1     —          —          —          —          34       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

                     

Derivative assets:

                     

Credit default swaps

    3       —          —          —          —          —          (1     —          —          2       —     

Equity index options

    17       (10     —          8       —          —          —          —          —          15       (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

    20       (10     —          8       —          —          (1     —          —          17       (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

    20       (10     —          8       —          —          (1     —          —          17       (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted other invested assets related to securitization entities

    230       —          —          —          —          —          —          —          —          230       —     

Reinsurance recoverable (2)

    13       1       —          —          —          —          —          —          —          14       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 6,051     $  —        $ 73     $ 101     $ (10   $  —        $ (114   $ 36      $ (55   $ 6,082     $ —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  The transfers into and out of Level 3 for fixed maturity securities were related to changes in the primary pricing source and changes in the observability of external information used in determining the fair value, such as external ratings or credit spreads.
(2)  Represents embedded derivatives associated with the reinsured portion of our GMWB liabilities.

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the gains and losses included in net income from assets measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the three months ended March 31:

 

(Amounts in millions)

   2016      2015  

Total realized and unrealized gains (losses) included in net income:

     

Net investment income

   $ 20      $ 11  

Net investment gains (losses)

     8        (11
  

 

 

    

 

 

 

Total

   $ 28      $ —     
  

 

 

    

 

 

 

Net gains (losses) included in net income attributable to assets still held:

     

Net investment income

   $ 15      $ 9  

Net investment gains (losses)

     14        (9
  

 

 

    

 

 

 

Total

   $ 29      $ —     
  

 

 

    

 

 

 

The amount presented for unrealized gains (losses) included in net income for available-for-sale securities represents impairments and accretion on certain fixed maturity securities.

The following tables set forth our liabilities by class of instrument that are measured at fair value on a recurring basis as of the dates indicated:

 

     March 31, 2016  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Liabilities

           

Policyholder account balances:

           

GMWB embedded derivatives (1)

   $ 443      $  —         $ —         $ 443  

Fixed index annuity embedded derivatives

     345        —           —           345  

Indexed universal life embedded derivatives

     12        —           —           12  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total policyholder account balances

     800        —           —           800  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate swaps

     360        —           360        —     

Interest rate swaps related to securitization entities

     35        —           35        —     

Inflation indexed swaps

     36        —           36        —     

Foreign currency swaps

     18        —           18        —     

Credit default swaps

     1        —           1        —     

Credit default swaps related to securitization entities

     6        —           —           6  

Equity return swaps

     14        —           14        —     

Other foreign currency contracts

     31        —           31        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     501        —           495        6  
  

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings related to securitization entities

     85        —           —           85  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1,386      $  —         $ 495      $ 891  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

     December 31, 2015  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Liabilities

           

Policyholder account balances:

           

GMWB embedded derivatives (1)

   $ 352      $  —         $ —         $ 352  

Fixed index annuity embedded derivatives

     342        —           —           342  

Indexed universal life embedded derivatives

     10        —           —           10  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total policyholder account balances

     704        —           —           704  
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate swaps

     220        —           220        —     

Interest rate swaps related to securitization entities

     30        —           30        —     

Inflation indexed swaps

     33        —           33        —     

Foreign currency swaps

     27        —           27        —     

Credit default swaps related to securitization entities

     14        —           —           14  

Equity return swaps

     1        —           1        —     

Other foreign currency contracts

     34        —           34        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     359        —           345        14  
  

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings related to securitization entities

     81        —           —           81  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1,144      $  —         $ 345      $ 799  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

The following tables present additional information about liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value as of or for the dates indicated:

 

    Beginning
balance

as of
January 1,
2016
    Total realized and
unrealized (gains)
losses
                                        Ending
balance

as of
March 31,
2016
    Total (gains)
losses
included in
net (income)

attributable
to liabilities
still held
 

(Amounts in millions)

    Included
in net
(income)
    Included
in OCI
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
     

Policyholder account balances:

                     

GMWB embedded derivatives (1)

  $ 352     $ 83     $  —        $  —        $  —        $ 8     $ —        $  —        $  —        $ 443     $ 87  

Fixed index annuity embedded derivatives

    342       (3     —          —          —          10       (4     —          —          345       (3

Indexed universal life embedded derivatives

    10       (2     —          —          —          4       —          —          —          12       (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

    704       78       —          —          —          22       (4     —          —          800       82  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities:

                     

Credit default swaps related to securitization entities

    14       (9     —          —          —          1       —          —          —          6       (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities

    14       (9     —          —          —          1       —          —          —          6       (9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings related to securitization entities

    81       4       —          —          —          —          —          —          —          85       4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 liabilities

  $ 799     $ 73     $  —        $  —        $  —        $ 23     $ (4   $  —        $  —        $ 891     $ 77  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

    Beginning
balance

as of
January 1,
2015
    Total realized and
unrealized (gains)
losses
                                        Ending
balance

as of
March 31,
2015
    Total (gains)
losses
included in
net (income)

attributable
to liabilities
still held
 

(Amounts in millions)

    Included
in net

(income)
    Included
in OCI
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
     

Policyholder account balances:

                     

GMWB embedded derivatives (1)

  $ 291     $ 17     $  —        $ —        $  —        $ 8     $ —        $  —        $  —        $ 316     $ 20  

Fixed index annuity embedded derivatives

    276       7       —          —          —          19       (2     —          —          300       7  

Indexed universal life embedded derivatives

    7        (1     —          —          —          1       —          —          —          7       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

    574       23       —          —          —          28       (2     —          —          623       27  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities:

                     

Credit default swaps related to securitization entities

    17        (8     —          1       —          —          —          —          —          10        (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities

    17        (8     —          1       —          —          —          —          —          10       (8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings related to securitization entities

    85        (4     —          —          —          —          —          —          —          81        (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 liabilities

  $ 676     $ 11     $  —        $ 1     $  —        $ 28     $ (2   $  —       $  —        $ 714     $ 15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

The following table presents the gains and losses included in net (income) from liabilities measured at fair value on a recurring basis and for which we have utilized significant unobservable (Level 3) inputs to determine fair value and the related income statement line item in which these gains and losses were presented for the three months ended March 31:

 

(Amounts in millions)

   2016      2015  

Total realized and unrealized (gains) losses included in net (income):

     

Net investment income

   $  —         $  —     

Net investment (gains) losses

     73        11  
  

 

 

    

 

 

 

Total

   $ 73      $ 11  
  

 

 

    

 

 

 

Total (gains) losses included in net (income) attributable to liabilities still held:

     

Net investment income

   $  —         $ —     

Net investment (gains) losses

     77        15  
  

 

 

    

 

 

 

Total

   $ 77      $ 15  
  

 

 

    

 

 

 

Purchases, sales, issuances and settlements represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily consists of purchases, sales and settlements of fixed maturity, equity and trading securities and purchases, issuances and settlements of derivative instruments.

Issuances presented for GMWB embedded derivative liabilities are characterized as the change in fair value associated with the product fees recognized that are attributed to the embedded derivative to equal the expected future benefit costs upon issuance. Issuances for fixed index annuity and indexed universal life embedded derivative liabilities represent the amount of the premium received that is attributed to the value of the embedded

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

derivative. Settlements of embedded derivatives are characterized as the change in fair value upon exercising the embedded derivative instrument, effectively representing a settlement of the embedded derivative instrument. We have shown these changes in fair value separately based on the classification of this activity as effectively issuing and settling the embedded derivative instrument with all remaining changes in the fair value of these embedded derivative instruments being shown separately in the category labeled “included in net (income)” in the tables presented above.

The following table presents a summary of the significant unobservable inputs used for certain fair value measurements that are based on internal models and classified as Level 3 as of March 31, 2016:

 

(Amounts in millions)

 

Valuation technique

  Fair value     Unobservable input  

Range

  Weighted-average

Fixed maturity securities:

         

U.S. corporate:

         

Utilities

  Internal models   $ 459     Credit spreads   113bps - 447bps   186bps

Energy

  Internal models     95     Credit spreads   137bps - 454bps   282bps

Finance and insurance

  Internal models     587     Credit spreads   114bps - 677bps   272bps

Consumer—non-cyclical

  Internal models     112     Credit spreads   143bps - 419bps   257bps

Technology and communications

  Internal models     37     Credit spreads   425bps   Not applicable

Industrial

  Internal models     64     Credit spreads   222bps - 321bps   275bps

Capital goods

  Internal models     154     Credit spreads   85bps - 436bps   220bps

Consumer—cyclical

  Internal models     210     Credit spreads   85bps - 355bps   222bps

Transportation

  Internal models     113     Credit spreads   59bps - 323bps   202bps

Other

  Internal models     166     Credit spreads   97bps - 310bps   163bps
   

 

 

       

Total U.S. corporate

  Internal models   $ 1,997     Credit spreads   59bps - 677bps   233bps

Non-U.S. corporate:

         

Utilities

  Internal models   $ 316     Credit spreads   114bps - 210bps   170bps

Energy

  Internal models     174     Credit spreads   159bps - 398bps   249bps

Finance and insurance

  Internal models     181     Credit spreads   127bps - 268bps   179bps

Consumer—non-cyclical

  Internal models     158     Credit spreads   85bps - 305bps   196bps

Technology and communications

  Internal models     64     Credit spreads   187bps - 398bps   287bps

Industrial

  Internal models     88     Credit spreads   143bps - 310bps   248bps

Capital goods

  Internal models     179     Credit spreads   143bps - 321bps   229bps

Consumer—cyclical

  Internal models     70     Credit spreads   133bps - 317bps   222bps

Transportation

  Internal models     144     Credit spreads   122bps - 317bps   205bps

Other

  Internal models     37     Credit spreads   291bps - 786bps   516bps
   

 

 

       

Total non-U.S. corporate

  Internal models   $ 1,411     Credit spreads   85bps - 786bps   217bps

Derivative assets:

         

Credit default swaps

  Discounted cash flows   $ 1     Credit spreads   9bps   Not applicable

Equity index options

  Discounted cash flows   $ 36     Equity index
volatility
  — % - 22%   16%

Other foreign currency contracts

  Discounted cash flows   $ 1     Foreign exchange
rate volatility
  10% - 14%   13%

Policyholder account balances:

         
      Withdrawal    
      utilization rate   — % - 99%   66%
      Lapse rate   — % - 15%   6%
      Non-performance risk    
      (credit spreads)   40bps - 85bps   72bps

GMWB embedded derivatives (1)

 

Stochastic cash

flow model

  $ 443     Equity index
volatility
  16% - 24%   21%

Fixed index annuity embedded derivatives

  Option budget method   $ 345     Expected future
interest credited
  — % - 3%   2%

Indexed universal life embedded derivatives

  Option budget method   $ 12     Expected future
interest credited
  3% - 9%   6%

 

(1)  Represents embedded derivatives associated with our GMWB liabilities, excluding the impact of reinsurance.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Certain classes of instruments classified as Level 3 are excluded above as a result of not being material or due to limitations in being able to obtain the underlying inputs used by certain third-party sources, such as broker quotes, used as an input in determining fair value.

(7) Borrowings and Other Financings

(a) Short-Term Borrowings

Revolving Credit Facility

In April 2016, Genworth Holdings terminated its $300 million multicurrency revolving credit facility, prior to its September 26, 2016 maturity date. There were no amounts outstanding under the credit facility at the time of termination.

(b) Long-Term Borrowings

The following table sets forth total long-term borrowings as of the dates indicated:

 

(Amounts in millions)

   March 31,
2016
     December 31,
2015
 

Genworth Holdings (1)

     

8.625% Senior Notes, due 2016

   $      $ 298  

6.52% Senior Notes, due 2018

     597        598  

7.70% Senior Notes, due 2020

     397        397  

7.20% Senior Notes, due 2021

     381        389  

7.625% Senior Notes, due 2021

     705        724  

4.90% Senior Notes, due 2023

     399        399  

4.80% Senior Notes, due 2024

     400        400  

6.50% Senior Notes, due 2034

     297        297  

6.15% Fixed-to-Floating Rate Junior Subordinated Notes, due 2066

     598        598  
  

 

 

    

 

 

 

Subtotal

     3,774        4,100  

Bond consent fees

     (43      —    

Deferred borrowing charges

     (20      (21
  

 

 

    

 

 

 

Total Genworth Holdings

     3,711        4,079  
  

 

 

    

 

 

 

Canada (2)

     

5.68% Senior Notes, due 2020

     212        199  

4.24% Senior Notes, due 2024

     123        116  
  

 

 

    

 

 

 

Subtotal

     335        315  

Deferred borrowing charges

     (2      (2
  

 

 

    

 

 

 

Total Canada

     333        313  
  

 

 

    

 

 

 

Australia (3)

     

Floating Rate Junior Notes, due 2021

     38        36  

Floating Rate Junior Notes, due 2025

     154        146  
  

 

 

    

 

 

 

Subtotal

     192        182  

Deferred borrowing charges

     (4      (4
  

 

 

    

 

 

 

Total Australia

     188        178  
  

 

 

    

 

 

 

Total

   $   4,232      $   4,570  
  

 

 

    

 

 

 

 

(1)  We have the option to redeem all or a portion of the senior notes at any time with notice to the noteholders at a price equal to the greater of 100% of principal or the sum of the present value of the remaining scheduled payments of principal and interest discounted at the then-current treasury rate plus an applicable spread.
(2)  Senior notes issued by our majority-owned subsidiary, Genworth MI Canada Inc.
(3)  Subordinated floating rate notes issued by our indirect wholly-owned subsidiary, Genworth Financial Mortgage Insurance Pty Limited.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In January 2016, Genworth Holdings redeemed $298 million of its 8.625% senior notes due 2016 issued in December 2009 (the “2016 Notes”) and paid a make-whole premium of approximately $20 million pre-tax in addition to accrued and unpaid interest.

During the three months ended March 31, 2016, we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a pre-tax gain of $4 million and paid accrued and unpaid interest thereon.

On March 18, 2016, Genworth Holdings received the requisite consents, pursuant to a solicitation of consents (the “Consent Solicitation”), to amend the indenture dated as of June 15, 2004, by and between Genworth Holdings and The Bank of New York Mellon Trust Company, N.A. (the “Trustee”), as successor to JP Morgan Chase Bank, N.A., as amended and supplemented from time to time (as so amended and supplemented, the “Senior Notes Indenture”) and the indenture dated as of November 14, 2006, by and between Genworth Holdings and the Trustee, as amended and supplemented from time to time (as so amended and supplemented, the “Subordinated Notes Indenture” and together with the Senior Notes Indenture, the “Indentures”).

On March 18, 2016, Genworth Holdings, Genworth Financial, as guarantor, and the Trustee entered into Supplemental Indenture No. 12 to the Senior Notes Indenture and the Third Supplemental Indenture to the Subordinated Notes Indenture (the “Supplemental Indentures”) that amended the Senior Notes Indenture and the Subordinated Notes Indenture, respectively, to (i) exclude Genworth Life Insurance Company, Genworth Life Insurance Company of New York and Brookfield Life and Annuity Insurance Company Limited, which operate our long-term care insurance business, from the event of default provisions of the Indentures and (ii) clarify that one or more transactions disposing of any or all of the Genworth Holdings’ long-term care and other life insurance businesses and assets (a “Life Sale”) would not constitute a disposition of “all or substantially all” of Genworth Holdings’ assets under the Indentures, provided that in order to rely on that clarification, the assets of our U.S. Mortgage Insurance segment would be contributed to Genworth Holdings and 80% of any Net Cash Proceeds, as defined in the Supplemental Indentures, to us from any Life Sale would be used to reduce outstanding indebtedness.

The Supplemental Indentures became operative on March 22, 2016 upon the payment of the applicable consent fees payable under the terms of the Consent Solicitation. We paid total fees related to the Consent Solicitation of approximately $61 million, including bond consent fees of $43 million, which were deferred, as well as broker, advisor and investment banking fees of $18 million, which were expensed, in the first quarter of 2016.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(c) Non-Recourse Funding Obligations

The following table sets forth the non-recourse funding obligations (surplus notes) of our wholly-owned, special purpose consolidated captive insurance subsidiaries as of the dates indicated:

 

(Amounts in millions)

   March 31,      December 31,  

Issuance

   2016      2015  

River Lake Insurance Company (a), due 2033

   $ —         $ 570  

River Lake Insurance Company (b), due 2033

     —           405  

River Lake Insurance Company II (a), due 2035

     —           192  

River Lake Insurance Company II (b), due 2035

     —           453  

Rivermont Life Insurance Company I (a), due 2050

     315        315  
  

 

 

    

 

 

 
  

 

 

    

 

 

 

Subtotal

     315        1,935  

Deferred borrowing charges

     (5      (15
  

 

 

    

 

 

 
  

 

 

    

 

 

 

Total

   $ 310      $ 1,920  
  

 

 

    

 

 

 

 

(1)  Accrual of interest based on one-month London Interbank Offered Rate (“LIBOR”) that resets every 28 days plus a fixed margin.
(b)  Accrual of interest based on one-month LIBOR that resets on a specified date each month plus a contractual margin.

During the three months ended March 31, 2016, in connection with a life block transaction, River Lake Insurance Company, our indirect wholly-owned subsidiary, redeemed $975 million of its total outstanding floating rate subordinated notes due in 2033 and River Lake Insurance Company II, our indirect wholly-owned subsidiary, redeemed $645 million of its total outstanding floating rate subordinated notes due in 2035 for a pre-tax loss of $9 million from the write-off of deferred borrowing costs.

(d) Repurchase agreements and securities lending activity

Repurchase agreements

We have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. Repurchase agreements are treated as collateralized financing transactions and are carried at the amounts at which the securities will be subsequently reacquired, including accrued interest, as specified in the respective agreement. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the parties against credit exposure. Cash received is invested in fixed maturity securities. As of March 31, 2016 and December 31, 2015, the fair value of securities pledged under the repurchase program was $32 million and $231 million, respectively, and the repurchase obligation of $29 million and $229 million, respectively, was included in other liabilities in the consolidated balance sheets.

Securities lending activity

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Under the securities lending program in the United States, the borrower is required to provide collateral, which can consist of cash or government securities, on a daily basis in amounts equal to or exceeding 102% of the value of the loaned securities. Currently, we only accept cash collateral from borrowers under the program. Cash collateral received by us on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral. Any cash collateral received is reinvested by our custodian based upon the investment guidelines provided within our agreement. In the United States, the reinvested cash collateral is primarily invested in a money market fund approved by the National Association of Insurance Commissioners, U.S. and foreign government securities, U.S. government agency securities, asset-backed securities and corporate debt securities. As of March 31, 2016 and December 31, 2015, the fair value of securities loaned under our securities lending program in the United States was $401 million and $334 million, respectively. As of March 31, 2016 and December 31, 2015, the fair value of collateral held under our securities lending program in the United States was $415 million and $347 million, respectively, and the offsetting obligation to return collateral of $415 million and $347 million, respectively, was included in other liabilities in the consolidated balance sheets. We did not have any non-cash collateral provided by the borrowers in our securities lending program in the United States as of March 31, 2016 and December 31, 2015.

Under our securities lending program in Canada, the borrower is required to provide collateral consisting of government securities on a daily basis in amounts equal to or exceeding 105% of the fair value of the applicable securities loaned. Securities received from counterparties as collateral are not recorded on our consolidated balance sheet given that the risk and rewards of ownership is not transferred from the counterparties to us in the course of such transactions. Additionally, there was no cash collateral because it is not permitted as an acceptable form of collateral under the program. In Canada, the lending institution must be included on the approved Securities Lending Borrowers List with the Canadian regulator and the intermediary must be rated at least “AA-” by Standard & Poor’s Financial Services LLC. As of March 31, 2016 and December 31, 2015, the fair value of securities loaned under our securities lending program in Canada was $324 million and $340 million, respectively.

Risks associated with repurchase agreements and securities lending programs

Our repurchase agreement and securities lending programs expose us to liquidity risk if we did not have enough cash or collateral readily available to return to the counterparty when required to do so under the agreements. We manage this risk by regularly monitoring our available sources of cash and collateral to ensure we can meet short-term liquidity demands under normal and stressed scenarios.

We are also exposed to credit risk in the event of default of our counterparties or changes in collateral values. This risk is significantly reduced because our programs require over collateralization and collateral exposures are trued up on a daily basis. We manage this risk by using multiple counterparties and ensuring that changes in required collateral are monitored and adjusted daily. We also monitor the creditworthiness, including credit ratings, of our counterparties on a regular basis.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Contractual maturity

The following tables present the remaining contractual maturity of the agreements as of the dates indicated:

 

    March 31, 2016  

(Amounts in millions)

  Overnight and
continuous
    Up to 30 days     31 - 90 days     Greater than
90 days
    Total  

Repurchase agreements:

         

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

  $ —       $ 29     $ —        $ —       $ 29  

Securities lending:

         

Fixed maturity securities:

         

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

    9       —          —          —          9  

Non-U.S. government

    60       —          —          —          60  

U.S. corporate

    120       —          —          —          120  

Non-U.S. corporate

    219       —          —          —          219  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    408       —          —          —          408  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    7       —          —          —          7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities lending

    415       —          —          —          415  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total repurchase agreements and securities lending

  $ 415     $ 29     $     $      $ 444  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2015  

(Amounts in millions)

  Overnight and
continuous
    Up to 30 days     31 - 90 days     Greater than
90 days
    Total  

Repurchase agreements:

         

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

  $      $ 58     $ 25     $ 146     $ 229  

Securities lending:

         

Fixed maturity securities:

         

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

    18       —          —          —          18  

Non-U.S. government

    39       —          —          —          39  

U.S. corporate

    95       —          —          —          95  

Non-U.S. corporate

    190       —          —          —          190  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    342       —          —          —          342  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    5       —          —          —          5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities lending

    347       —          —          —          347  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total repurchase agreements and securities lending

  $ 347     $ 58     $ 25     $ 146     $ 576  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(8) Income Taxes

The reconciliation of the federal statutory tax rate to the effective income tax rate was as follows for the periods indicated:

 

     Three months ended March 31,  

(Amounts in millions)

   2016     2015  

Pre-tax income

   $ 150        $ 294     
  

 

 

      

 

 

    

Statutory U.S. federal income tax rate

   $ 53        35.0   $ 103        35.0

Increase (reduction) in rate resulting from:

          

State income tax, net of federal income tax effect

     1        0.8        5        1.5   

Benefit on tax favored investments

     (1      (0.6     (3      (0.9

Effect of foreign operations

     (6      (4.0     (16      (5.5

Reversal of valuation allowance

     (25      (16.5     —          —     

Non-deductible expenses

     —          —          1        0.3   

Stock-based compensation

     3        1.7        1        0.5   

Loss on sale of business

     (2      (1.2     —          —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Effective rate

   $ 23        15.2   $ 91        30.9
  

 

 

    

 

 

   

 

 

    

 

 

 

The effective tax rate for the three months ended March 31, 2016 was impacted by the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe due to newly expected taxable gains supporting the recognition of these deferred tax assets in the current year.

(9) Segment Information

Beginning in the fourth quarter of 2015, we changed how we review our operating businesses and no longer have separate reporting divisions. Under our new structure, we have the following five operating business segments: U.S. Mortgage Insurance; Canada Mortgage Insurance; Australia Mortgage Insurance; U.S Life Insurance (which includes our long-term care insurance, life insurance and fixed annuities businesses); and Runoff (which includes the results of non-strategic products which are no longer actively sold). In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations. Financial information has been updated for all periods to reflect the reorganized segment reporting structure.

We allocate our consolidated provision for income taxes to our operating segments. Our allocation methodology applies a specific tax rate to the pre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign income. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities. The annually-determined tax rates and adjustments to each segment’s provision for income taxes are estimates which are subject to review and could change from year to year.

We use the same accounting policies and procedures to measure segment income (loss) and assets as our consolidated net income and assets. Our chief operating decision maker evaluates segment performance and

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

allocates resources on the basis of “net operating income (loss).” We define net operating income (loss) as income (loss) from continuing operations excluding the after-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and infrequent or unusual non-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from net operating income (loss) because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusual non-operating items are also excluded from net operating income (loss) if, in our opinion, they are not indicative of overall operating trends.

While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income (loss), and measures that are derived from or incorporate net operating income (loss), are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the business. Management also uses net operating income (loss) as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from net operating income (loss) have occurred in the past and could, and in some cases will, recur in the future. Net operating income (loss) is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) may differ from the definitions used by other companies.

In the first quarter of 2016, we recorded an estimated gain of $20 million, net of taxes, related to the planned sale of our mortgage insurance business in Europe.

In January 2016, we paid a make-whole expense of $13 million, net of taxes, related to the early redemption of Genworth Holdings’ 2016 Notes. We also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a gain of $2 million, net of taxes, in the first quarter of 2016. These transactions were excluded for net operating income for the periods presented as they related to a gain (loss) on the early extinguishment of debt.

In the first quarter of 2016, we completed a life block transaction resulting in an after-tax loss of $6 million in connection the early extinguishment of non-recourse funding obligations.

In the first quarter of 2016, we recorded an after-tax expense of $9 million related to restructuring costs as part of an expense reduction plan as we evaluate and appropriately size our organizational needs and expenses.

There were no infrequent or unusual items excluded from net operating income during the periods presented other than fees incurred during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $12 million, net of taxes, for broker, advisor and investment banking fees.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Adjustments to reconcile net income (loss) attributable to Genworth Financial, Inc.’s common stockholders and net operating income (loss) assume a 35% tax rate and are net of the portion attributable to noncontrolling interests. Net investment gains (losses) are also adjusted for deferred acquisition costs and other intangible amortization and certain benefit reserves.

The following is a summary of revenues for our segments and Corporate and Other activities for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions)

   2016      2015  

Revenues:

     

U.S. Mortgage Insurance segment’s revenues

   $ 175      $ 170  
  

 

 

    

 

 

 

Canada Mortgage Insurance segment’s revenues

     160        136  
  

 

 

    

 

 

 

Australia Mortgage Insurance segment’s revenues

     105        118  
  

 

 

    

 

 

 

U.S. Life Insurance segment:

     

Long-term care insurance

     952        905  

Life insurance

     123        487  

Fixed annuities

     206        233  
  

 

 

    

 

 

 

U.S. Life Insurance segment’s revenues

     1,281        1,625  
  

 

 

    

 

 

 

Runoff segment’s revenues

     69        74  
  

 

 

    

 

 

 

Corporate and Other’s revenues

     (5      12  
  

 

 

    

 

 

 

Total revenues

   $ 1,785      $ 2,135  
  

 

 

    

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a summary of net operating income for our segments and Corporate and Other activities and a reconciliation of net operating income for our segments and Corporate and Other activities to net income available to Genworth Financial, Inc.’s common stockholders for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions)

   2016      2015  

U.S. Mortgage Insurance segment’s net operating income

   $ 61      $ 52  
     

 

 

    

 

 

 

Canada Mortgage Insurance segment’s net operating income

     33        40  
     

 

 

    

 

 

 

Australia Mortgage Insurance segment’s net operating income

     19        30  
     

 

 

    

 

 

 

U.S. Life Insurance segment:

        

Long-term care insurance

     34        10  

Life insurance

     31        40  

Fixed annuities

     26        31  
     

 

 

    

 

 

 

U.S. Life Insurance segment’s net operating income

     91        81  
     

 

 

    

 

 

 

Runoff segment’s net operating income

     4        11  
     

 

 

    

 

 

 

Corporate and Other’s net operating loss

     (105      (60
     

 

 

    

 

 

 

Net operating income

     103        154  

Net investment gains (losses), net

     (13      (1

Gains (losses) on sale of businesses, net

     20        —     

Gains (losses) on early extinguishment of debt, net

     (11      —     

Gains (losses) from life block transactions, net

     (6      —     

Expenses related to restructuring, net

     (9      —     

Fees associated with bond consent solicitation, net

     (12      —     
     

 

 

    

 

 

 

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

     72        153  

Net income attributable to noncontrolling interests

     55        50  
     

 

 

    

 

 

 

Income from continuing operations

     127        203  

Income (loss) from discontinued operations, net of taxes

     (19      1  
     

 

 

    

 

 

 

Net income

     108        204  

Less: net income attributable to noncontrolling interests

     55        50  
     

 

 

    

 

 

 

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

   $ 53      $ 154  
     

 

 

    

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following is a summary of total assets for our segments and Corporate and Other activities as of the dates indicated:

 

     March 31,      December 31,  

(Amounts in millions)

   2016      2015  

Assets:

        

U.S. Mortgage Insurance

   $ 2,367      $ 2,899  

Canada Mortgage Insurance

     4,727        4,520  

Australia Mortgage Insurance

     3,053        2,987  

U.S. Life Insurance

     82,410        79,530  

Runoff

     11,729        12,115  

Corporate and Other

     2,756        4,253  
     

 

 

    

 

 

 

Segment assets from continuing operations

     107,042        106,304  

Assets held for sale

     131        127  
     

 

 

    

 

 

 

Total assets

   $ 107,173      $ 106,431  
     

 

 

    

 

 

 

(10) Commitments and Contingencies

(a) Litigation and Regulatory Matters

We face the risk of litigation and regulatory investigations and actions in the ordinary course of operating our businesses, including the risk of class action lawsuits. Our pending legal and regulatory actions include proceedings specific to us and others generally applicable to business practices in the industries in which we operate. In our insurance operations, we are, have been, or may become subject to class actions and individual suits alleging, among other things, issues relating to sales or underwriting practices, increases to in-force long-term care insurance premiums, payment of contingent or other sales commissions, claims payments and procedures, product design, product disclosure, administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on products, recommending unsuitable products to customers, our pricing structures and business practices in our mortgage insurance businesses, such as captive reinsurance arrangements with lenders and contract underwriting services, violations of the Real Estate Settlement and Procedures Act of 1974 or related state anti-inducement laws, and mortgage insurance policy rescissions and curtailments, and breaching fiduciary or other duties to customers, including but not limited to breach of customer information. Plaintiffs in class action and other lawsuits against us may seek very large or indeterminate amounts which may remain unknown for substantial periods of time. In our investment-related operations, we are subject to litigation involving commercial disputes with counterparties. We are also subject to litigation arising out of our general business activities such as our contractual and employment relationships and securities lawsuits. In addition, we are also subject to various regulatory inquiries, such as information requests, subpoenas, books and record examinations and market conduct and financial examinations from state, federal and international regulators and other authorities. A substantial legal liability or a significant regulatory action against us could have an adverse effect on our business, financial condition and results of operations. Moreover, even if we ultimately prevail in the litigation, regulatory action or investigation, we could suffer significant reputational harm, which could have an adverse effect on our business, financial condition or results of operations.

In August 2014, Genworth Financial, Inc., its current chief executive officer and its then current chief financial officer were named in a putative class action lawsuit captioned Manuel Esguerra v. Genworth Financial, Inc., et al, in the United States District Court for the Southern District of New York. Plaintiff alleged

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

securities law violations involving certain disclosures in 2013 and 2014 concerning Genworth’s long-term care insurance reserves. The lawsuit sought unspecified compensatory damages, costs and expenses, including counsel fees and expert fees. In October 2014, a putative class action lawsuit captioned City of Pontiac General Employees’ Retirement System v. Genworth Financial, Inc., et al., was filed in the United States District Court for the Eastern District of Virginia. This lawsuit names the same defendants, alleges the same securities law violations, seeks the same damages and covers the same class as the Esguerra lawsuit. Following the filing of the City of Pontiac lawsuit, the Esguerra lawsuit was voluntarily dismissed without prejudice allowing the City of Pontiac lawsuit to proceed. In the City of Pontiac lawsuit, the United States District Court for the Eastern District of Virginia appointed Her Majesty the Queen in Right of Alberta and Fresno County Employees’ Retirement Association as lead plaintiffs and designated the caption of the action as In re Genworth Financial, Inc. Securities Litigation. On December 22, 2014, the lead plaintiffs filed an amended complaint. On February 5, 2015, we filed a motion to dismiss plaintiffs’ amended complaint. On May 1, 2015, the court denied the motion to dismiss. We engaged in mediation in the fourth quarter of 2015, continuing into the first quarter of 2016, and previously accrued $25 million in connection with this matter, which was the amount of our self-insured retention on our executive and organizational liability insurance program. On March 11, 2016, in connection with the mediation, we reached an agreement in principle to settle the action. On April 1, 2016, the parties entered into a stipulation and agreement of settlement. The settlement provides for a full release of all defendants in connection with the allegations made in the lawsuit. We believe that the plaintiffs’ claims are without merit, but we are settling the lawsuit to avoid the burden, risk and expense of further litigation. The agreement provides for a settlement payment to the class of $219 million, inclusive of all plaintiffs’ attorneys fees and expenses and settlement costs, of which $150 million will be paid by our insurance carriers, and $69 million pre-tax will be paid by Genworth. Our payment was made into an escrow account during the first quarter of 2016. We also incurred additional legal fees and expenses of approximately $10 million pre-tax, for a total additional pre-tax incurred amount of $79 million in the first quarter of 2016. On April 13, 2016, the Court granted plaintiffs’ motion for preliminary approval of the settlement, provisional certification of the class for settlement purposes only, and issuance of notice to settlement class members. The settlement remains subject to final court approval. The Court has scheduled a hearing on July 20, 2016 to consider final approval of the settlement. In the event the settlement is approved by the court, it will exhaust all coverage available to Genworth under our 2014 executive and organizational liability insurance program. Therefore, Genworth does not have coverage under the program to pay any future settlements or judgments in relation to litigation brought during the 2014 policy year, including the City of Hialeah Employees’ Retirement System v. Genworth Financial, Inc., et al., case discussed below.

In April 2014, Genworth Financial, Inc., its former chief executive officer and its then current chief financial officer were named in a putative class action lawsuit captioned City of Hialeah Employees’ Retirement System v. Genworth Financial, Inc., et al., in the United States District Court for the Southern District of New York. Plaintiff alleges securities law violations involving certain disclosures in 2012 concerning Genworth’s Australian mortgage insurance business, including our plans for an initial public offering of the business. The lawsuit seeks unspecified damages, costs and attorneys’ fees and such equitable/injunctive relief as the court may deem proper. The United States District Court for the Southern District of New York appointed City of Hialeah Employees’ Retirement System and New Bedford Contributory Retirement System as lead plaintiffs and designated the caption of the action as In re Genworth Financial, Inc. Securities Litigation. On October 3, 2014, the lead plaintiffs filed an amended complaint. On December 2, 2014, we filed a motion to dismiss plaintiffs’ amended complaint. On March 25, 2015, the United States District Court for the Southern District of New York denied the motion but entered an order dismissing the amended complaint with leave to replead. On April 17, 2015, plaintiffs filed a second amended complaint. We filed a motion to dismiss the second amended complaint and on June 16, 2015, the court denied the motion to dismiss. On January 22, 2016, we filed a motion for reconsideration of the court’s June 16, 2015 order denying our motion to dismiss which the court denied on

 

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(Unaudited)

 

March 3, 2016. On January 29, 2016, plaintiffs filed a motion for class certification which we opposed. On March 7, 2016, the court granted plaintiffs’ motion for class certification. We intend to vigorously defend this action. As discussed above, we have exhausted all coverage under our 2014 executive and organizational liability insurance program applicable to this case; therefore, there is no insurance coverage for Genworth with respect to any settlement or judgment amount related to this litigation.

In January 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its former chief financial officer and the current members of its board of directors were named in a shareholder derivative suit filed by International Union of Operating Engineers Local No. 478 Pension Fund, Richard L. Salberg and David Pinkoski in the Court of Chancery of the State of Delaware. The case is captioned Int’l Union of Operating Engineers Local No. 478 Pension Fund, et al v. McInerney, et al. In February 2016, Genworth Financial, Inc., its current Chief Executive Officer, its former Chief Executive Officer, its former Chief Financial Officer and the current members of its board of directors were named in a second shareholder derivative suit filed by Martin Cohen in the Court of Chancery of the State of Delaware. The case is captioned Cohen v. McInerney, et al. On February 23, 2016, the Court of Chancery of the State of Delaware consolidated these derivative suits under the caption Genworth Financial, Inc. Consolidated Derivative Litigation. On March 28, 2016, plaintiffs in the consolidated action filed an amended complaint. The amended complaint alleges breaches of fiduciary duties concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an initial public offering of the business and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the court may deem proper. The amended consolidated complaint also adds Genworth’s current Chief Financial Officer as a defendant, based on the current Chief Financial Officer’s alleged conduct in her former capacity as Genworth’s Controller and principal accounting officer. We intend to move to dismiss the consolidated action.

At this time, other than as noted above, we cannot determine or predict the ultimate outcome of any of the pending legal and regulatory matters specifically identified above or the likelihood of potential future legal and regulatory matters against us. Except as disclosed above, we also are not able to provide an estimate or range of reasonably possible losses related to these matters. Therefore, we cannot ensure that the current investigations and proceedings will not have a material adverse effect on our business, financial condition or results of operations. In addition, it is possible that related investigations and proceedings may be commenced in the future, and we could become subject to additional unrelated investigations and lawsuits. Increased regulatory scrutiny and any resulting investigations or proceedings could result in new legal precedents and industry-wide regulations or practices that could adversely affect our business, financial condition and results of operations.

(b) Commitments

As of March 31, 2016, we were committed to fund $143 million in limited partnership investments, $45 million in U.S. commercial mortgage loan investments and $46 million in private placement investments.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(11) Changes in Accumulated Other Comprehensive Income (Loss)

The following tables show the changes in accumulated other comprehensive income (loss), net of taxes, by component as of and for the periods indicated:

 

(Amounts in millions)

  Net
unrealized
investment
gains
(losses)
(1)
    Derivatives
qualifying as
hedges 
(2)
    Foreign
currency
translation
and other
adjustments
    Total  

Balances as of January 1, 2016

  $ 1,254      $ 2,045      $ (289   $ 3,010  

OCI before reclassifications

    791        275        216       1,282  

Amounts reclassified from (to) OCI

    12        (18     —          (6
 

 

 

   

 

 

   

 

 

   

 

 

 

Current period OCI

    803        257        216       1,276  
 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2016 before noncontrolling interests

    2,057        2,302        (73     4,286  
 

 

 

   

 

 

   

 

 

   

 

 

 

Less: change in OCI attributable to noncontrolling interests

    —          —          101       101  
 

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2016

  $ 2,057      $ 2,302      $ (174   $ 4,185  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Net of adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
(2)  See note 5 for additional information.

 

(Amounts in millions)

   Net
unrealized
investment
gains
(losses)
(1)
     Derivatives
qualifying as
hedges 
(2)
    Foreign
currency
translation
and other
adjustments
    Total  

Balances as of January 1, 2015

   $ 2,453       $ 2,070      $ (77   $ 4,446  

OCI before reclassifications

     325         195        (370     150  

Amounts reclassified from (to) OCI

     —           (18     —          (18
  

 

 

    

 

 

   

 

 

   

 

 

 

Current period OCI

     325         177        (370     132  
  

 

 

    

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2015 before noncontrolling interests

     2,778         2,247        (447     4,578  
  

 

 

    

 

 

   

 

 

   

 

 

 

Less: change in OCI attributable to noncontrolling interests

     30         —          (144     (114
  

 

 

    

 

 

   

 

 

   

 

 

 

Balances as of March 31, 2015

   $ 2,748       $ 2,247      $ (303   $ 4,692  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1)  Net of adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves. See note 4 for additional information.
(2)  See note 5 for additional information.

The foreign currency translation and other adjustments balance included $5 million and $32 million, respectively, net of taxes of $3 million and $14 million, respectively, related to a net unrecognized postretirement benefit obligation as of March 31, 2016 and 2015. Amount also included taxes of $(45) million and $(91) million, respectively, related to foreign currency translation adjustments as of March 31, 2016 and 2015.

 

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The following table shows reclassifications in (out) of accumulated other comprehensive income (loss), net of taxes, for the periods presented:

 

    Amount reclassified from accumulated
other comprehensive income (loss)
   

Affected line item in the

consolidated statements

of income

    Three months ended March 31,    
     

(Amounts in millions)

  2016     2015    
     

Net unrealized investment (gains) losses:

     

Unrealized (gains) losses on investments (1)

  $ 18     $  —        Net investment (gains) losses

Provision for income taxes

    (6     —        Provision for income taxes
 

 

 

   

 

 

   
 

 

 

   

 

 

   

Total

  $ 12     $  —       
 

 

 

   

 

 

   
     

Derivatives qualifying as hedges:

     

Interest rate swaps hedging assets

  $ (25   $ (19   Net investment income

Interest rate swaps hedging assets

    (1     —        Net investment (gains) losses

Inflation indexed swaps

    (2     (9   Net investment income

Provision for income taxes

    10       10     Provision for income taxes
 

 

 

   

 

 

   

Total

  $ (18   $ (18  
 

 

 

   

 

 

   

 

(1)  Amounts exclude adjustments to deferred acquisition costs, present value of future profits, sales inducements and benefit reserves.

(12) Sale of Businesses

European mortgage insurance business

On October 27, 2015, we announced that Genworth Mortgage Insurance Corporation, our wholly-owned indirect subsidiary, has entered into an agreement to sell our European mortgage insurance business to AmTrust Financial Services, Inc., which is currently expected to result in net proceeds of approximately $50 million. In the first quarter of 2016, we recorded an estimated pre-tax loss of $7 million and a tax benefit of $27 million primarily related to the reversal of a deferred tax valuation allowance, for a net after-tax gain of $20 million. The transaction is expected to close in the second quarter of 2016 and is subject to customary conditions, including requisite regulatory approvals.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The major assets and liability categories of our European mortgage insurance business were as follows as of the dates indicated:

 

(Amounts in millions)

   March 31,
2016
     December 31,
2015
 

Assets

     

Investments:

     

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

   $ 198       $ 195  

Other invested assets

     2         6  
  

 

 

    

 

 

 

Total investments

     200        201  

Cash and cash equivalents

     41        28  

Accrued investment income

     3        3  

Reinsurance recoverable

     22        21  

Other assets

     12        14  
  

 

 

    

 

 

 

Assets held for sale

     278        267  

Fair value less closing costs impairment

     (147      (140
  

 

 

    

 

 

 

Total assets held for sale

   $ 131      $ 127  
  

 

 

    

 

 

 

Liabilities

     

Liability for policy and contract claims

   $ 59      $ 56  

Unearned premiums

     61        58  

Other liabilities

     11        12  

Deferred tax liability

     —          1  
  

 

 

    

 

 

 

Liabilities held for sale

   $ 131      $ 127  
  

 

 

    

 

 

 

Deferred tax liabilities that result in future taxable or deductible amounts to the remaining consolidated group have been reflected in liabilities of continuing operations and not reflected in liabilities held for sale.

Lifestyle protection insurance

On December 1, 2015, we completed the sale of our lifestyle protection insurance business and received approximately $493 million with net proceeds of approximately $400 million, subject to the finalization of closing balance sheet purchase price adjustments expected in the second quarter of 2016. During the first quarter of 2016, we recorded an additional after-tax loss of approximately $19 million primarily related to claim liabilities and taxes we retain.

We retained liabilities for the U.K. pension plan as well as taxes and certain claims and sales practices that occurred while we owned the lifestyle protection insurance business. We have established our current best estimates for these liabilities, where appropriate; however, there may be future adjustments to these estimates.

(13) Condensed Consolidating Financial Information

Genworth Financial provides 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

 

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(Unaudited)

 

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. Genworth Financial also provides 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. Genworth Holdings is a direct, 100% owned subsidiary of Genworth Financial.

The following condensed consolidating financial information of Genworth Financial and its direct and indirect subsidiaries have been prepared pursuant to rules regarding the preparation of consolidating financial information of Regulation S-X. The condensed consolidating financial information has been prepared as if the guarantee had been in place during the periods presented herein.

The condensed consolidating financial information presents the condensed consolidating balance sheet information as of March 31, 2016 and December 31, 2015, the condensed consolidating income statement information and the condensed consolidating comprehensive income statement information for the three months ended March 31, 2016 and 2015 and the condensed consolidating cash flow statement information for the three months ended March 31, 2016 and 2015.

The condensed consolidating financial information reflects Genworth Financial (“Parent Guarantor”), Genworth Holdings (“Issuer”) and each of Genworth Financial’s other direct and indirect subsidiaries (the “All Other Subsidiaries”) on a combined basis, none of which guarantee the senior notes or subordinated notes, as well as the eliminations necessary to present Genworth Financial’s financial information on a consolidated basis and total consolidated amounts.

The accompanying condensed consolidating financial information is presented based on the equity method of accounting for all periods presented. Under this method, investments in subsidiaries are recorded at cost and adjusted for the subsidiaries’ cumulative results of operations, capital contributions and distributions, and other changes in equity. Elimination entries include consolidating and eliminating entries for investments in subsidiaries and intercompany activity.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating balance sheet information as of March 31, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Assets

          

Investments:

          

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

   $ —       $ —       $ 60,490     $ (200   $ 60,290  

Equity securities available-for-sale, at fair value

     —         —         431       —         431  

Commercial mortgage loans

     —         —         6,179       —         6,179  

Restricted commercial mortgage loans related to securitization entities

     —         —         155       —         155  

Policy loans

     —         —         1,565       —         1,565  

Other invested assets

     —         5       2,927       (9     2,923  

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

     —         —         422       —         422  

Investments in subsidiaries

     14,108       14,197       —         (28,305     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     14,108       14,202       72,169       (28,514     71,965  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     —         760       3,283       —         4,043  

Accrued investment income

     —         —         720       —         720  

Deferred acquisition costs

     —         —         4,235       —         4,235  

Intangible assets and goodwill

     —         —         291       —         291  

Reinsurance recoverable

     —         —         17,587       —         17,587  

Other assets

     (4     265       317       (1     577  

Intercompany notes receivable

     —         68       392       (460     —    

Separate account assets

     —         —         7,624       —         7,624  

Assets held for sale

     —         —         131       —         131  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 14,104     $ 15,295     $ 106,749     $ (28,975   $ 107,173  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

          

Liabilities:

          

Future policy benefits

   $ —       $ —       $ 36,776     $ —       $ 36,776  

Policyholder account balances

     —         —         26,354       —         26,354  

Liability for policy and contract claims

     —         —         8,177       —         8,177  

Unearned premiums

     —         —         3,378       —         3,378  

Other liabilities

     11       340       3,256       (11     3,596  

Intercompany notes payable

     68       592       —         (660     —    

Borrowings related to securitization entities

     —         —         173       —         173  

Non-recourse funding obligations

     —         —         310       —         310  

Long-term borrowings

     —         3,711       521       —         4,232  

Deferred tax liability

     (30     (1,099     1,578       —         449  

Separate account liabilities

     —         —         7,624       —         7,624  

Liabilities held for sale

     —         —         131       —         131  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     49       3,544       88,278       (671     91,200  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity:

          

Common stock

     1       —         —         —         1  

Additional paid-in capital

     11,952       9,098       17,034       (26,132     11,952  

Accumulated other comprehensive income (loss)

     4,185       4,242       4,224       (8,466     4,185  

Retained earnings

     617       (1,589     (5,005     6,594       617  

Treasury stock, at cost

     (2,700     —         —         —         (2,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Total Genworth Financial, Inc.’s
stockholders’ equity
   14,055     11,751     16,253     (28,004)     14,055  

Noncontrolling interests

     —          —          2,218       (300     1,918  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     14,055       11,751       18,471       (28,304     15,973  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 14,104     $ 15,295     $ 106,749     $ (28,975   $ 107,173  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

76


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating balance sheet information as of December 31, 2015:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Assets

          

Investments:

          

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

   $ —       $ 150     $ 58,247     $ (200   $ 58,197  

Equity securities available-for-sale, at fair value

     —         —         310       —         310  

Commercial mortgage loans

     —         —         6,170       —         6,170  

Restricted commercial mortgage loans related to securitization entities

     —         —         161       —         161  

Policy loans

     —         —         1,568       —         1,568  

Other invested assets

     —         114       2,198       (3     2,309  

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

     —         —         413       —         413  

Investments in subsidiaries

     12,814       12,989       —         (25,803     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

     12,814       13,253       69,067       (26,006     69,128  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     —         1,124       4,841       —         5,965  

Accrued investment income

     —         —         657       (4     653  

Deferred acquisition costs

     —         —         4,398       —         4,398  

Intangible assets and goodwill

     —         —         357       —         357  

Reinsurance recoverable

     —         —         17,245       —         17,245  

Other assets

     —         199       323       (2     520  

Intercompany notes receivable

     —         2       458       (460     —    

Deferred tax assets

     25       1,038       (908     —         155  

Separate account assets

     —         —         7,883       —         7,883  

Assets held for sale

     —         —         127       —         127  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 12,839     $ 15,616     $ 104,448     $ (26,472   $ 106,431  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

          

Liabilities:

          

Future policy benefits

   $ —       $ —       $ 36,475     $ —       $ 36,475  

Policyholder account balances

     —         —         26,209       —         26,209  

Liability for policy and contract claims

     —         —         8,095       —         8,095  

Unearned premiums

     —         —         3,308       —         3,308  

Other liabilities

     13       279       2,722       (10     3,004  

Intercompany notes payable

     2       658       —         (660     —    

Borrowings related to securitization entities

     —         —         179       —         179  

Non-recourse funding obligations

     —         —         1,920       —         1,920  

Long-term borrowings

     —         4,078       492       —         4,570  

Deferred tax liability

     —         —         24       —         24  

Separate account liabilities

     —         —         7,883       —         7,883  

Liabilities held for sale

     —         —         127       —         127  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     15       5,015       87,434       (670     91,794  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity:

          

Common stock

     1       —         —         —         1  

Additional paid-in capital

     11,949       9,097       17,007       (26,104     11,949  

Accumulated other comprehensive income (loss)

     3,010       3,116       3,028       (6,144     3,010  

Retained earnings

     564       (1,612 )     (5,134 )     6,746       564  

Treasury stock, at cost

     (2,700                       (2,700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     12,824       10,601       14,901       (25,502     12,824  

Noncontrolling interests

                 2,113       (300     1,813  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     12,824       10,601       17,014       (25,802     14,637  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

   $ 12,839     $ 15,616     $ 104,448     $ (26,472   $ 106,431  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

77


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating income statement information for the three months ended March 31, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Premiums

   $ —       $ —       $ 794     $ —       $ 794  

Net investment income

     (1     (1     795       (4     789  

Net investment gains (losses)

     —         (15     (4     —         (19

Policy fees and other income

     —         (4     225       —         221  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     (1     (20     1,810       (4     1,785  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

          

Benefits and other changes in policy reserves

     —         —         860       —         860  

Interest credited

     —         —         177       —         177  

Acquisition and operating expenses, net of deferrals

     88       35       271       —         394  

Amortization of deferred acquisition costs and intangibles

     —         —         99       —         99  

Interest expense

     1       71       37       (4     105  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     89       106       1,444       (4     1,635  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries

     (90     (126     366       —         150  

Provision (benefit) for income taxes

     (24     (43     90       —         23  

Equity in income of subsidiaries

     119       106       —         (225     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     53       23       276       (225     127  

Loss from discontinued operations, net of taxes

     —         —         (19     —         (19
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     53       23       257       (225     108  

Less: net income attributable to noncontrolling interests

     —         —         55       —         55  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 53     $ 23     $ 202     $ (225   $ 53  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

78


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating income statement information for the three months ended March 31, 2015:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Premiums

   $ —       $ —       $ 1,143     $ —       $ 1,143  

Net investment income

     —         —         785       (4     781  

Net investment gains (losses)

     —         3       (19     —         (16

Policy fees and other income

     —         (9     236       —         227  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     —         (6     2,145       (4     2,135  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

          

Benefits and other changes in policy reserves

     —         —         1,192       —         1,192  

Interest credited

     —         —         180       —         180  

Acquisition and operating expenses, net of deferrals

     5       1       261       —         267  

Amortization of deferred acquisition costs and intangibles

     —         —         95       —         95  

Interest expense

     —         77       34       (4     107  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     5       78       1,762       (4     1,841  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes and equity in income of subsidiaries

     (5     (84     383       —         294  

Provision (benefit) for income taxes

     (9     (29     129       —         91  

Equity in income of subsidiaries

     150       143       —         (293     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     154       88       254       (293     203  

Income from discontinued operations, net of taxes

     —         —         1       —         1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     154       88       255       (293     204  

Less: net income attributable to noncontrolling interests

     —         —         50       —         50  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 154     $ 88     $ 205     $ (293   $ 154  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

79


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating comprehensive income statement information for the three months ended March 31, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 53     $ 23     $ 257     $ (225   $ 108  

Other comprehensive income (loss), net of taxes:

          

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

     807       789       809       (1,598     807  

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

     (4     (5     (4     9       (4

Derivatives qualifying as hedges

     257       256       275       (531     257  

Foreign currency translation and other adjustments

     115       86       217       (202     216  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     1,175       1,126       1,297       (2,322     1,276  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     1,228       1,149       1,554       (2,547     1,384  

Less: comprehensive income attributable to noncontrolling interests

     —         —         156       —         156  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 1,228     $ 1,149     $ 1,398     $ (2,547   $ 1,228  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the condensed consolidating comprehensive income statement information for the three months ended March 31, 2015:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 154     $ 88     $ 255     $ (293   $ 204  

Other comprehensive income (loss), net of taxes:

          

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

     293       275       323       (568     323  

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

     2       2       2       (4     2  

Derivatives qualifying as hedges

     177       177       189       (366     177  

Foreign currency translation and other adjustments

     (226     (170     (370     396       (370
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     246       284       144       (542     132  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     400       372       399       (835     336  

Less: comprehensive income (loss) attributable to noncontrolling interests

     —         —         (64     —         (64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 400     $ 372     $ 463     $ (835   $ 400  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

80


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating cash flow statement information for the three months ended March 31, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income

   $ 53     $ 23     $ 257     $ (225   $ 108  

Less loss from discontinued operations, net of taxes

     —         —         19       —         19  

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

          

Equity in income from subsidiaries

     (119     (106     —         225       —    

Dividends from subsidiaries

     —         73       (73     —         —    

Gain on sale of subsidiary

     —         —         (20     —         (20

Amortization of fixed maturity securities discounts and premiums and limited partnerships

     —         —         (38     —         (38

Net investment losses (gains)

     —         15       4       —         19  

Charges assessed to policyholders

     —         —         (191     —         (191

Acquisition costs deferred

     —         —         (50     —         (50

Amortization of deferred acquisition costs and intangibles

     —         —         99       —         99  

Deferred income taxes

     (5     (48     60       —         7  

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

     —         3       18       —         21  

Stock-based compensation expense

     5       —         2       —         7  

Change in certain assets and liabilities:

          

Accrued investment income and other assets

     4       (45     (113     (5     (159

Insurance reserves

     —         —         36       —         36  

Current tax liabilities

     (7     (6     5       —         (8

Other liabilities, policy and contract claims and other policy-related balances

     3       (65     469       (1     406  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

     (66     (156     484       (6     256  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Proceeds from maturities and repayments of investments:

          

Fixed maturity securities

     —         150       690       —         840  

Commercial mortgage loans

     —         —         192       —         192  

Restricted commercial mortgage loans related to securitization entities

     —         —         6       —         6  

Proceeds from sales of investments:

          

Fixed maturity and equity securities

     —         —         905       —         905  

Purchases and originations of investments:

          

Fixed maturity and equity securities

     —         —         (2,042     —         (2,042

Commercial mortgage loans

     —         —         (200     —         (200

Other invested assets, net

     —         100       (72     6       34  

Policy loans, net

     —         —         10       —         10  

Intercompany notes receivable

     —         (66     66       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from investing activities

     —         184       (445     6       (255
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Deposits to universal life and investment contracts

     —         —         571       —         571  

Withdrawals from universal life and investment contracts

     —         —         (517     —         (517

Redemption of non-recourse funding obligations

     —         —         (1,620     —         (1,620

Repayment and repurchase of long-term debt

     —         (326     —         —         (326

Repayment of borrowings related to securitization entities

     —         —         (10     —         (10

Dividends paid to noncontrolling interests

     —         —         (52     —         (52

Proceeds from intercompany notes payable

     66       (66     —         —         —    

Other, net

     —         —         13       —         13  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from financing activities

     66       (392     (1,615     —         (1,941
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —         —         31       —         31  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     —         (364     (1,545     —         (1,909

Cash and cash equivalents at beginning of period

     —         1,124       4,869       —         5,993  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     —         760       3,324       —         4,084  

Less cash and cash equivalents held for sale at end of period

     —         —         41       —         41  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents of continuing operations at end of period

   $ —       $ 760     $ 3,283     $ —       $ 4,043  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

81


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating cash flow statement information for the three months ended March 31, 2015:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

          

Net income

   $ 154     $ 88     $ 255     $ (293   $ 204  

Less income from discontinued operations, net of taxes

     —         —         (1     —         (1

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

          

Equity in income from subsidiaries

     (150     (143     —         293       —    

Dividends from subsidiaries

     —         132       (132     —         —    

Amortization of fixed maturity securities discounts and premiums and limited partnerships

     —         —         (21     —         (21

Net investment losses (gains)

     —         (3     19       —         16  

Charges assessed to policyholders

     —         —         (196     —         (196

Acquisition costs deferred

     —         —         (86     —         (86

Amortization of deferred acquisition costs and intangibles

     —         —         95       —         95  

Deferred income taxes

     (5     (40     70       —         25  

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

     —         9       9       —         18  

Stock-based compensation expense

     2       —         (5     —         (3

Change in certain assets and liabilities:

          

Accrued investment income and other assets

     2       (7     (23     3       (25

Insurance reserves

     —         —         443       —         443  

Current tax liabilities

     (4     66       (71     —         (9

Other liabilities, policy and contract claims and other policy-related balances

     —         (60     275       (13     202  

Cash from operating activities—held for sale

     —         —         (38     —         (38
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

     (1     42       593       (10     624  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

          

Proceeds from maturities and repayments of investments:

          

Fixed maturity securities

     —         —         1,089       —         1,089  

Commercial mortgage loans

     —         —         198       —         198  

Restricted commercial mortgage loans related to securitization entities

     —         —         13       —         13  

Proceeds from sales of investments:

          

Fixed maturity and equity securities

     —         —         418       —         418  

Purchases and originations of investments:

          

Fixed maturity and equity securities

     —         —         (1,802     —         (1,802

Commercial mortgage loans

     —         —         (247     —         (247

Other invested assets, net

     —         (100     1       10       (89

Intercompany notes receivable

     2       (10     38       (30     —    

Capital contributions to subsidiaries

     —         (25     25       —         —    

Cash from investing activities—held for sale

     —         —         54       —         54  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from investing activities

     2       (135     (213     (20     (366
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

          

Deposits to universal life and investment contracts

     —         —         630       —         630  

Withdrawals from universal life and investment contracts

     —         —         (527     —         (527

Redemption of non-recourse funding obligations

     —         —         (13     —         (13

Repayment of borrowings related to securitization entities

     —         —         (11     —         (11

Dividends paid to noncontrolling interests

     —         —         (54     —         (54

Proceeds from intercompany notes payable

     —         (40     10       30       —    

Other, net

     (1     —         38       —         37  

Cash from financing activities—held for sale

     —         —         (27     —         (27
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from financing activities

     (1     (40     46       30       35  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —         —         (53     —         (53
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     —         (133     373       —         240  

Cash and cash equivalents at beginning of period

     —         953       3,965       —         4,918  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

     —         820       4,338       —         5,158  

Less cash and cash equivalents held for sale at end of period

     —         —         221       —         221  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents from continuing operations at end of period

   $ —       $ 820     $ 4,117     $ —       $ 4,937  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Our insurance company subsidiaries are restricted by state and foreign laws and regulations as to the amount of dividends they may pay to their parent without regulatory approval in any year, the purpose of which is to protect affected insurance policyholders and contractholders, not stockholders. Any dividends in excess of limits are deemed “extraordinary” and require approval. Based on estimated statutory results as of December 31, 2015, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $140 million to us in 2016 without obtaining regulatory approval, and the remaining net assets are considered restricted. While the $140 million is unrestricted, we do not expect our insurance subsidiaries to pay dividends to us in 2016 at this level if they need to retain capital for growth and to meet capital requirements and desired thresholds. As of March 31, 2016, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $14.0 billion and $14.1 billion, respectively.

 

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included herein and with our 2015 Annual Report on Form 10-K.

Cautionary note regarding forward-looking statements

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Actual outcomes and results may differ materially due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following:

 

    strategic risks including: our inability to successfully execute strategic plans to effectively address our current business challenges (including with respect to the restructuring of our U.S. life insurance businesses, cost savings, ratings and capital), our inability to complete the planned sale of our European mortgage insurance business at all or on the terms anticipated, and failure to attract buyers for any other businesses or other assets we may seek to sell, or securities we may seek to issue, in each case, in a timely manner on anticipated terms; failure to obtain any required regulatory, stockholder and/or noteholder approvals or consents, or our challenges changing or being more costly or difficult to successfully address than currently anticipated or the benefits achieved being less than anticipated; inability to achieve anticipated cost-savings in a timely manner; or adverse tax or accounting charges; and inability to increase the capital needed in our businesses in a timely manner and on anticipated terms, including through improved business performance, reinsurance or similar transactions, asset sales, securities offerings or otherwise, in each case as and when required;

 

    risks relating to estimates, assumptions and valuations including: inadequate reserves and the need to increase reserves (including as a result of any changes we may make to our assumptions, methodologies or otherwise in connection with periodic or other reviews); inaccurate models; deviations from our estimates and actuarial assumptions or other reasons in our long-term care insurance, life insurance and/or annuity businesses; accelerated amortization of deferred acquisition costs (“DAC”) and present value of future profits (“PVFP”) (including as a result of any changes we may make to our assumptions, methodologies or otherwise in connection with periodic or other reviews); adverse impact on our financial results as a result of projected profits followed by projected losses (as is currently the case with our long-term care insurance business); and changes in valuation of fixed maturity, equity and trading securities;

 

    risks relating to economic, market and political conditions including: downturns and volatility in global economies and equity and credit markets; interest rates and changes in rates; deterioration in economic conditions or a decline in home prices that adversely affect our loss experience in mortgage insurance; political and economic instability or changes in government policies; and fluctuations in foreign currency exchange rates and international securities markets;

 

   

regulatory and legal risks including: extensive regulation of our businesses and changes in applicable laws and regulations; litigation and regulatory investigations or other actions, including not receiving court approval of the planned settlement of In re Genworth Financial, Inc. Securities Litigation; dependence on dividends and other distributions from our subsidiaries (particularly our international subsidiaries) and the inability of any subsidiaries to pay dividends or make other distributions to us, including as a result of the performance of our subsidiaries and insurance, regulatory or corporate law restrictions (including the unwillingness or inability of the subsidiary that indirectly owns most of the interests in our Australian and Canadian mortgage insurance businesses to pay the dividends that it

 

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receives from those businesses as a result of the impact on its financial condition of its capital support for certain long-term care insurance related reinsurance arrangements); adverse change in regulatory requirements, including risk-based capital; changes in regulations adversely affecting our international operations; inability to meet or maintain the private mortgage insurer eligibility requirements (“PMIERs”); inability of our U.S. mortgage insurance subsidiaries to meet minimum statutory capital requirements and hazardous financial condition standards; the influence of Federal National Mortgage Association (“Fannie Mae”), Federal Home Loan Mortgage Corporation (“Freddie Mac”) and a small number of large mortgage lenders on the U.S. mortgage insurance market and adverse changes to the role or structure of Fannie Mae and Freddie Mac; adverse changes in regulations affecting our mortgage insurance businesses; inability to continue to implement actions to mitigate the impact of statutory reserve requirements; impact of additional regulations pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); and changes in accounting and reporting standards;

 

    liquidity, financial strength ratings, credit and counterparty risks including: insufficient internal sources to meet liquidity needs and limited or no access to capital (including our inability to replace our credit facility); recent or future adverse rating agency actions, including with respect to rating downgrades or potential downgrades, or being put on review for potential downgrade, all of which could have adverse implications for us, including with respect to key business relationships, product offerings, business results of operations, financial condition and capital needs, strategic plans, collateral obligations and availability and terms of hedging, reinsurance and borrowings; defaults by counterparties to reinsurance arrangements or derivative instruments; defaults or other events impacting the value of our fixed maturity securities portfolio; and defaults on our commercial mortgage loans or the mortgage loans underlying our investments in commercial mortgage-backed securities and volatility in performance;

 

    operational risks including: inability to retain, attract and motivate qualified employees or senior management; ineffective or inadequate risk management in identifying, controlling or mitigating risks; reliance on, and loss of, key customer or distribution relationships; availability, affordability and adequacy of reinsurance to protect us against losses; competition; competition in our mortgage insurance businesses from government and government-owned and government-sponsored enterprises (“GSEs”) offering mortgage insurance; material weakness in, or ineffective, internal control over financial reporting; and failure or any compromise of the security of our computer systems, disaster recovery systems and business continuity plans and failures to safeguard, or breaches of, our confidential information;

 

    insurance and product-related risks including: our inability to increase sufficiently, and in a timely manner, premiums on in-force long-term care insurance policies and/or reduce in-force benefits, and charge higher premiums on new policies, in each case, as currently anticipated and as may be required from time to time in the future (including as a result of our failure to obtain any necessary regulatory approvals or unwillingness or inability of policyholders to pay increased premiums); our inability to reflect future premium increases and other management actions in our margin calculation as anticipated; failure to sufficiently increase new sales for our long-term care insurance products; inability to realize anticipated benefits of our rescissions, curtailments, loan modifications or other similar programs in our mortgage insurance businesses; premiums for the significant portion of our mortgage insurance risk in-force with high loan-to-value ratios may not be sufficient to compensate us for the greater risks associated with those policies; decreases in the volume of high loan-to-value mortgage originations or increases in mortgage insurance cancellations; increases in the use of alternatives to private mortgage insurance and reductions in the level of coverage selected; potential liabilities in connection with our U.S. contract underwriting services; and medical advances, such as genetic research and diagnostic imaging, and related legislation that impact policyholder behavior in ways adverse to us;

 

   

other risks including: occurrence of natural or man-made disasters or a pandemic; impairments of or valuation allowances against our deferred tax assets; the possibility that in certain circumstances we

 

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will be obligated to make payments to General Electric Company (“GE”) under the tax matters agreement with GE even if our corresponding tax savings are never realized and payments could be accelerated in the event of certain changes in control; and provisions of our certificate of incorporation and bylaws and the tax matters agreement with GE may discourage takeover attempts and business combinations that stockholders might consider in their best interests; and

 

    risks relating to our common stock including: the continued suspension of payment of dividends; and stock price fluctuations.

We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise.

Overview

Our business

We are dedicated to helping meet the homeownership and long-term care needs of our customers. We have the following five operating business segments:

 

    U.S. Mortgage Insurance. In the United States, we offer mortgage insurance products predominantly insuring prime-based, individually underwritten residential mortgage loans (“flow mortgage insurance”). We selectively provide mortgage insurance on a bulk basis (“bulk mortgage insurance”) with essentially all of our bulk writings being prime-based.

 

    Canada Mortgage Insurance. We offer flow mortgage insurance and also provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk in Canada.

 

    Australia Mortgage Insurance. In Australia, we offer flow mortgage insurance and selectively provide bulk mortgage insurance that aids in the sale of mortgages to the capital markets and helps lenders manage capital and risk.

 

    U.S. Life Insurance. We offer long-term care insurance products as well as service traditional life insurance and fixed annuity products in the United States.

 

    Runoff. The Runoff segment includes the results of non-strategic products which 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”). We no longer offer retail and group variable annuities but continue to service our existing blocks of business.

In addition to our five operating business segments, we also have Corporate and Other activities which include debt financing expenses that are incurred at the Genworth Holdings, Inc. (“Genworth Holdings”) level, unallocated corporate income and expenses, eliminations of inter-segment transactions and the results of other businesses that are managed outside of our operating segments, including certain smaller international mortgage insurance businesses and discontinued operations.

On December 1, 2015, we completed the sale of our lifestyle protection insurance business, which had previously been designated as a non-core business. Prior to its sale, our lifestyle protection insurance business was reported as discontinued operations and its financial position, results of operations and cash flows were separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 12 in our consolidated financial statements under “Item 1—Financial Statements” for additional information.

On October 27, 2015, we announced that Genworth Mortgage Insurance Company (“GMICO”), our wholly-owned indirect subsidiary, entered into an agreement to sell our European mortgage insurance business. As the

 

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held-for-sale criteria were satisfied during the fourth quarter of 2015, our European mortgage insurance business, included in Corporate and Other activities, has been reported as held for sale and its financial position is separately reported for all periods presented. All prior periods reflected herein have been re-presented on this basis. See note 12 in our consolidated financial statements under “Item 1—Financial Statements” for additional information.

Strategic Update

Our focus remains on improving business performance and increasing financial and strategic flexibility across the organization. Our strategy includes maximizing our opportunities in our mortgage insurance businesses and restructuring our U.S. life insurance businesses.

On February 4, 2016, as part of restructuring our U.S. life insurance businesses, we announced an initiative to: (i) suspend sales of our traditional life insurance and fixed annuity products; (ii) further reduce expense levels in 2016; (iii) repatriate existing business from Brookfield Life and Annuity Insurance Company Limited (“BLAIC”), our primary Bermuda domiciled reinsurance subsidiary, to our U.S. life insurance subsidiaries in 2016; and (iv) separate and potentially isolate our long-term care insurance business.

In the first quarter of 2016, we made progress on this plan. All sales of traditional life insurance and fixed annuity products were suspended on March 7, 2016. Expense actions taken to date are expected to reduce cash expenses by approximately $135 million pre-tax on an annualized basis. Effective April 1, 2016, we recaptured a block of universal life insurance from BLAIC to the U.S. life insurance companies. In March 2016, we successfully completed a bond consent solicitation, demonstrating progress toward the isolation of our long-term care insurance business. The bond consents permitted us to amend our bond indentures to: (i) eliminate concerns that any bankruptcy or insolvency-related events involving the subsidiary companies that operate our long-term care insurance business would result in a default of our bonds; and (ii) provide clarity on how Genworth Holdings’ debt would be treated in a sale or disposition of our life insurance, annuity and long-term care insurance businesses, eliminating uncertainty related to certain potential transactions.

In conjunction with this U.S. life insurance restructuring plan, we continue to remain open to strategic alternatives and are actively pursuing options that would accomplish the goal of separating and isolating the long-term care business from our other businesses and ultimately separating the mortgage insurance businesses from the U.S. life insurance businesses. The successful completion of the bond consent process, our efforts to reduce our holding company debt and our continuing progress in executing the U.S. life insurance restructuring plan to simplify our organization and reduce interdependencies are expected to provide additional strategic and financial flexibility. In assessing strategic options, we are considering many factors, including, the level of debt capacity, tax considerations, the views of regulators and rating agencies, and resulting impacts to book value, liquidity and other financial metrics.

Executive Summary of Financial Results

Below is an executive summary of our consolidated financial results for the periods indicated. Amounts below are net of taxes, unless otherwise indicated.

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

 

    We had net income available to Genworth Financial, Inc.’s common stockholders of $53 million and $154 million during the three months ended March 31, 2016 and 2015, respectively.

 

    During the three months ended March 31, 2016, we recorded a $45 million expense related to the planned settlement of In re Genworth Financial, Inc. Securities Litigation and an additional $6 million of legal fees and expenses related to this litigation. We also recorded $3 million of additional legal fees in the current year related to other pending litigation.

 

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    We paid a make-whole expense of approximately $13 million in January 2016 related to the early redemption of Genworth Holdings’ senior notes due in 2016. We repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a gain of $2 million in the first quarter of 2016.

 

    In the first quarter of 2016, we incurred expenses related to Genworth Holdings’ bond consent solicitation of $12 million for broker, advisor and investment banking fees.

 

    During the three months ended March 31, 2016, we recorded $9 million related to restructuring costs as part of an expense reduction plan as we evaluate and appropriately size our organizational needs and expenses. In addition, we recorded a loss of $6 million from the write-off of deferred borrowing costs in connection with the early extinguishment of non-recourse funding obligations as part of a life block transaction completed in the first quarter of 2016.

 

    Our financial results in our Australia mortgage insurance business were also lower as a result of the additional sale of shares of this business in May 2015, which reduced our ownership percentage to 52.0%.

 

    We had an increase of $52 million in our long-term care insurance business in the current year driven by increased premiums and reduced benefits from in-force rate actions, partially offset by a $4 million unfavorable correction related to the calculation on our in-force rate actions.

 

    During the three months ended March 31, 2016, we recorded an additional loss of $19 million related to the sale of our lifestyle protection insurance business and an estimated gain of $20 million related to the planned sale of our mortgage insurance business in Europe.

Significant Developments

The periods under review include, among others, the following significant developments.

Dispositions

 

    Completed sale of a life insurance block. In January 2016, Genworth Life and Annuity Insurance Company (“GLAIC”), our indirect wholly-owned subsidiary, entered into a reinsurance agreement to coinsure certain term life insurance business with Protective Life Insurance Company (“Protective Life”) as part of a life block transaction. This transaction is expected to generate capital in excess of $150 million in aggregate to Genworth, including anticipated tax benefits of approximately $175 million to the holding company that are scheduled to be settled in July 2016, which are committed to be used in executing the restructuring plan for our U.S. life insurance businesses.

U.S. Life Insurance

 

    Rate actions in our long-term care insurance business. As part of our strategy for our long-term care insurance business, we have been implementing, and expect to continue to pursue, significant premium rate increases on the older generation blocks of business that were written before 2002. We are also requesting premium rate increases on newer blocks of business, as needed. For all of these rate action filings, we received 21 filing approvals from six states in the first quarter of 2016, representing a weighted-average increase of 30% on approximately $144 million in annualized in-force premiums. We also submitted 19 new filings in 10 states in the first quarter of 2016 on approximately $206 million in annualized in-force premiums.

Liquidity and Capital Resources

 

   

Redemption of Genworth Holdings’ 2016 notes. In January 2016, Genworth Holdings redeemed $298 million of its 8.625% senior notes due 2016 issued in December 2009 (the “2016 Notes”) and

 

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paid a make-whole premium of approximately $20 million pre-tax in addition to accrued and unpaid interest using cash proceeds received from the sale of our lifestyle protection insurance business.

 

    Repurchase of Genworth Holdings senior notes. During the three months ended March 31, 2016, we repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a pre-tax gain of $4 million and paid accrued and unpaid interest thereon.

 

    Completion of Genworth Holdings’ bond consent solicitation. Genworth Holdings paid total fees related to the bond consent solicitation of approximately $61 million, including bond consent fees of $43 million, which were deferred, as well as broker, advisor and investment banking fees of $18 million, which were expensed, in the first quarter of 2016.

 

    Redemption of Non-Recourse Funding Obligations. During the three months ended March 31, 2016, in connection with a life block transaction, River Lake Insurance Company (“River Lake”), our indirect wholly-owned subsidiary, redeemed $975 million of its total outstanding floating rate subordinated notes due in 2033 and River Lake Insurance Company II (“River Lake II”), our indirect wholly-owned subsidiary, redeemed $645 million of its total outstanding floating rate subordinated notes due in 2035 for a pre-tax loss of $9 million from the write-off of deferred borrowing costs.

Financial Strength Ratings

There were no changes of the financial strength ratings of our insurance subsidiaries during the three months ended March 31, 2016 other than the downgrades previously disclosed in our Annual Report on Form 10-K filed on February 26, 2016.

Critical Accounting Estimates

As of March 31, 2016, other than as set forth below, there have been no material changes to critical accounting estimates set forth in our Annual Report on Form 10-K filed on February 26, 2016.

Deferred acquisition costs

Historically low interest rates spreads have impacted the margins on our fixed immediate annuity products. As of March 31, 2016 and December 31, 2015, we had margin of approximately $11 million and $19 million, respectively, on $5,758 million and $5,849 million, respectively, of net U.S. generally accepted accounting principles (“U.S. GAAP”) liability related to our fixed immediate annuity products. As of March 31, 2016 and December 31, 2015, we had DAC of $16 million and $17 million, respectively, related to our immediate annuity products. The risks we face include adverse variations in interest rates, credit spreads and/or mortality. Adverse experience in one or both of these risks could result in the DAC associated with our fixed immediate annuity products being no longer fully recoverable as well as the establishment of additional benefit reserves. As of March 31, 2016, for our fixed immediate annuity products, a combined 50 basis point reduction in interest rates or credit spreads, or 2% lower mortality, scenarios that we consider to be reasonably possible given historical changes in market conditions and experience on these products, would result in margin reduction of approximately $27 million or $23 million, respectively. In addition, if interest rates and credit spreads remain at current levels for an extended period of time, margins could decline further or become negative. Margin reduction below zero results in a premium deficiency and would result in a charge to current period earnings. Any favorable variation would result in additional margin in our DAC loss recognition analysis and would result in higher income recognition over the remaining duration of the in-force block. As of March 31, 2016, we believe all of our businesses have sufficient projected future income where the related DAC would be recoverable under selected adverse variations in our assumptions.

 

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Consolidated

General Trends and Conditions

The stability of both the financial markets and global economies in which we operate impacts the sales, revenue growth and profitability trends of our businesses as well as value of assets and liabilities. During 2015 and into 2016, the U.S. and several international financial markets have been impacted by concerns regarding global economies and the rate and strength of recovery, particularly given recent political and geographical events in Europe and the Middle East and slow growth in China, which has kept interest rates low and resulted in decreases in oil and commodity prices.

Slow or varied levels of economic growth, coupled with uncertain financial markets and economic outlooks, changes in government policy, regulatory reforms and other changes in market conditions, influenced, and we believe will continue to influence, investment and spending decisions by consumers and businesses as they adjust their consumption, debt, capital and risk profiles in response to these conditions. These trends change as investor confidence in the markets and the outlook for some consumers and businesses shift. As a result, our sales, revenues and profitability trends of certain insurance and investment products as well as the value of assets and liabilities have been and could be further impacted going forward. In particular, factors such as government spending, monetary policies, the volatility and strength of the capital markets, anticipated tax policy changes and the impact of global financial regulation reform will continue to affect economic and business outlooks, level of interest rates and consumer behaviors moving forward.

The U.S. and international governments, the Federal Reserve, other central banks and other legislative and regulatory bodies have taken certain actions to support the economy and capital markets, influence interest rates, influence housing markets and mortgage servicing and provide liquidity to promote economic growth. These include various mortgage restructuring programs implemented or under consideration by the GSEs, lenders, servicers and the U.S. government. Outside of the United States, various governments and central banks have taken actions to stimulate economies, stabilize financial systems and improve market liquidity. In aggregate, these actions had a positive effect in the short term on the economies of these countries and their markets; however, there can be no assurance as to the future impact these types of actions may have on the economic and financial markets, including levels of interest rates and volatility. A delayed economic recovery period, a U.S. or global recession or regional or global financial crisis could materially and adversely affect our business, financial condition and results of operations.

 

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Consolidated Results of Operations

The following is a discussion of our consolidated results of operations. For a discussion of our segment results, see “—Results of Operations and Selected Financial and Operating Performance Measures by Segment.”

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth the consolidated results of operations for the periods indicated:

 

     Three months ended
March 31,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016      2015      2016 vs. 2015  

Revenues:

           

Premiums

   $ 794       $ 1,143       $ (349      (31 )% 

Net investment income

     789         781         8         1

Net investment gains (losses)

     (19      (16      (3      (19 )% 

Policy fees and other income

     221         227         (6      (3 )% 
  

 

 

    

 

 

    

 

 

    

Total revenues

     1,785         2,135         (350      (16 )% 
  

 

 

    

 

 

    

 

 

    

Benefits and expenses:

           

Benefits and other changes in policy reserves

     860         1,192         (332      (28 )% 

Interest credited

     177         180         (3      (2 )% 

Acquisition and operating expenses, net of deferrals

     394         267         127         48

Amortization of deferred acquisition costs and intangibles

     99         95         4         4

Interest expense

     105         107         (2      (2 )% 
  

 

 

    

 

 

    

 

 

    

Total benefits and expenses

     1,635         1,841         (206      (11 )% 
  

 

 

    

 

 

    

 

 

    

Income from continuing operations before income taxes

     150         294         (144      (49 )% 

Provision for income taxes

     23         91         (68      (75 )% 
  

 

 

    

 

 

    

 

 

    

Income from continuing operations

     127         203         (76      (37 )% 

Income (loss) from discontinued operations, net of taxes

     (19      1         (20      NM  (1) 
  

 

 

    

 

 

    

 

 

    

Net income

     108         204         (96      (47 )% 

Less: net income attributable to noncontrolling interests

     55         50         5         10
  

 

 

    

 

 

    

 

 

    

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

   $ 53       $ 154       $ (101      (66 )% 
  

 

 

    

 

 

    

 

 

    

 

(1)  We define “NM” as not meaningful for increases or decreases greater than 200%.

Premiums. Premiums consist primarily of premiums earned on insurance products for mortgage, long-term care, life and accident and health insurance, single premium immediate annuities and structured settlements with life contingencies.

 

    Our U.S. Life Insurance segment decreased $342 million. Our life insurance business decreased $364 million principally related to higher ceded reinsurance in the current year. We initially ceded $326 million of certain term life insurance premiums under a new reinsurance treaty as part of a life block transaction. Our fixed annuities business decreased $7 million principally from lower sales of our life-contingent products resulting from the suspension of product offerings in the current year. Our long-term care insurance business increased $29 million largely from $31 million of increased premiums in the current year from in-force rate actions approved and implemented.

 

    Our Canada Mortgage Insurance segment decreased $8 million driven by a $17 million decrease attributable to changes in foreign exchange rates during the three months ended March 31, 2016. Excluding the effects of foreign exchange, our Canada Mortgage Insurance segment increased primarily from the seasoning of our larger in-force blocks of business in the current year.

 

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    Our Australia Mortgage Insurance segment decreased $8 million driven by a $10 million decrease attributable to changes in foreign exchange rates during the three months ended March 31, 2016. Excluding the effects of foreign exchange, our Australia Mortgage Insurance segment increased primarily as a result of the refinements to premium recognition factors made in the third quarter of 2015, partially offset by the seasoning of our prior year in-force blocks of business and a decrease in premiums from a lower loan-to-value mix and flow volume in the current year.

 

    Our U.S. Mortgage Insurance segment increased $10 million mainly attributable to higher average flow mortgage insurance in-force and the reversal of the accrual for premium refunds related to policy cancellations that was recorded in the third quarter of 2015, partially offset by higher ceded reinsurance premiums in the current year.

Net investment income. Net investment income represents the income earned on our investments. For discussion of the change in net investment income, see the comparison for this line item under “—Investments and Derivative Instruments.”

Net investment gains (losses). Net investment gains (losses) consist primarily of realized gains and losses from the sale or impairment of our investments, unrealized and realized gains and losses from our trading securities and derivative instruments. For discussion of the change in net investment gains (losses), see the comparison for this line item under “—Investments and Derivative Instruments.”

Policy fees and other income. Policy fees and other income consists primarily of fees assessed against policyholder and contractholder account values, surrender charges, cost of insurance assessed on universal and term universal life insurance policies, advisory and administration service fees assessed on investment contractholder account values, broker/dealer commission revenues and other fees.

 

    Our Runoff segment decreased $7 million mainly attributable to lower account values in our variable annuity products in the current year.

 

    Our U.S. Life Insurance segment decreased $3 million primarily from our life insurance business largely related to lower production and a decrease in our term universal and universal life insurance in-force blocks in the current year.

 

    Our Australia Mortgage Insurance segment increased $4 million primarily due to non-functional currency transactions attributable to remeasurement and repayment of intercompany loans in the prior year that did not recur.

Benefits and other changes in policy reserves. Benefits and other changes in policy reserves consist primarily of claim costs incurred related to mortgage insurance products and benefits paid and reserve activity related to current claims and future policy benefits on insurance and investment products for long-term care, life and accident and health insurance, structured settlements and single premium immediate annuities with life contingencies.

 

    Our U.S. Life Insurance segment decreased $333 million. Our life insurance business decreased $337 million principally related to higher ceded reinsurance in the current year. We initially ceded $331 million of certain term life insurance reserves under a new reinsurance treaty as part of a life block transaction. Our fixed annuities business decreased $6 million largely attributable to lower sales of our life-contingent products and lower interest credited, partially offset by less favorable mortality in the current year. Our long-term care insurance business increased $10 million principally from aging and growth of the in-force block, lower terminations, higher severity on new claims, a $7 million unfavorable correction related to a calculation on our in-force rate actions and incremental reserves of $4 million recorded in connection with an accrual for profits followed by losses in the current year. These increases were partially offset by reduced benefits of $52 million in the current year related to in-force rate actions approved and implemented. The prior year also included net unfavorable adjustments of $11 million reflecting a refinement to a reserve calculation on our acquired block of business, partially offset primarily by a favorable correction related to reinsurance.

 

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    Our U.S. Mortgage Insurance segment decreased $12 million primarily driven by a continued decline in new delinquencies primarily in our 2005 through 2008 book years, partially offset by a lower net benefit from cures and aging of existing delinquencies in the current year.

 

    Our Runoff segment increased $8 million primarily related to our variable annuity products from an increase in our guaranteed minimum death benefit (“GMDB”) reserves due to less favorable equity market performance and unfavorable mortality in our corporate-owned life insurance products in the current year.

 

    Our Australia Mortgage Insurance segment increased $7 million primarily driven by a favorable adjustment of $7 million in the first quarter of 2015 related to the expected recovery of claims paid in prior periods that did not recur. The increase was also attributable to a higher average reserve per delinquency from aging of existing delinquencies primarily in commodity-dependent regions, partially offset by favorable cures in the current year. The three months ended March 31, 2016 included a decrease of $3 million attributable to changes in foreign exchange rates.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances.

 

    Our U.S. Life Insurance segment decreased $6 million primarily related to our fixed annuities business driven by a decrease in average account values and lower crediting rates in the current year.

 

    Our Runoff segment increased $3 million largely related to higher loan cash values in our corporate-owned life insurance products in the current year.

Acquisition and operating expenses, net of deferrals. Acquisition and operating expenses, net of deferrals, represent costs and expenses related to the acquisition and ongoing maintenance of insurance and investment contracts, including commissions, policy issuance expenses and other underwriting and general operating costs. These costs and expenses are net of amounts that are capitalized and deferred, which are costs and expenses that are related directly to the successful acquisition of new or renewal insurance policies and investment contracts, such as first-year commissions in excess of ultimate renewal commissions and other policy issuance expenses.

 

    Corporate and Other activities increased $123 million mainly driven by $69 million for the planned settlement of In re Genworth Financial, Inc. Securities Litigation and an additional $10 million of legal fees and expenses related to this litigation. In addition, we paid a make-whole expense of $20 million on the early redemption of Genworth Holdings’ 2016 senior notes in January 2016, and paid broker, advisor and investment banking fees of $18 million associated with Genworth Holdings’ bond consent solicitation in March 2016. The increase was also attributable to an additional estimated loss of $7 million recorded in the first quarter of 2016 related to the planned sale of our mortgage insurance business in Europe and $4 million of additional legal fees in the current year related to other pending litigation. We also had higher net expenses after allocations to our operating segments in the current year.

 

    Our Canada Mortgage Insurance segment increased $6 million mainly from higher stock-based compensation expense driven by an increase in Genworth MI Canada Inc.’s (“Genworth Canada”) share price in the current year. The three months ended March 31, 2016 also included a decrease of $2 million attributable to changes in foreign exchange rates.

Amortization of deferred acquisition costs and intangibles. Amortization of deferred acquisition costs and intangibles consists primarily of the amortization of acquisition costs that are capitalized, PVFP and capitalized software. Our U.S. Life Insurance segment increased $5 million. Our life insurance business increased $3 million largely related to the write-off of computer software in connection with a restructuring charge in the current year. Our fixed annuities business increased $2 million largely attributable to a less favorable unlocking primarily related to lapses in the current year.

 

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Interest expense. Interest expense represents interest related to our borrowings that are incurred at Genworth Holdings or subsidiaries and our non-recourse funding obligations and interest expense related to the Tax Matters Agreement and certain reinsurance arrangements being accounted for as deposits.

 

    Corporate and Other activities decreased $5 million largely driven by the redemption of $298 million of Genworth Holdings’ senior notes in January 2016.

 

    Our U.S. Life Insurance segment increased $3 million driven by our life insurance business principally from the write-off of $9 million of deferred borrowing costs associated with our non-recourse funding obligations as part of a life block transaction and from the impact of credit rating downgrades which increased the cost of financing term life insurance reserves, partially offset by lower letter of credit fees in the current year.

Provision for income taxes. The effective tax rate decreased to 15.2% for the three months ended March 31, 2016 from 30.9% for the three months ended March 31, 2015. The decrease in the effective tax rate was primarily attributable to the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe in the current year. The decrease was also related to tax benefits related to the planned sale of our mortgage insurance business in Europe in the current year as well as higher state income tax true ups in the prior year. These decreases were partially offset by international tax true ups in the prior year and higher stock-based compensation in the current year. The three months ended March 31, 2016 included a decrease of $6 million attributable to changes in foreign exchange rates.

Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of income in a subsidiary attributable to third parties. The increase was primarily related to the additional sale of shares of our Australian mortgage insurance business in May 2015, which reduced our ownership percentage to 52.0%. The three months ended March 31, 2016 included a decrease of $8 million attributable to changes in foreign exchange rates.

Reconciliation of net income to net operating income

Net operating income for the three months ended March 31, 2016 and 2015 was $103 million and $154 million, respectively. We define net operating income (loss) as income (loss) from continuing operations excluding the after-tax effects of income attributable to noncontrolling interests, net investment gains (losses), goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions, restructuring costs and infrequent or unusual non-operating items. Gains (losses) on insurance block transactions are defined as gains (losses) on the early extinguishment of non-recourse funding obligations, early termination fees for other financing restructuring and/or resulting gains (losses) on reinsurance restructuring for certain blocks of business. We exclude net investment gains (losses) and infrequent or unusual non-operating items because we do not consider them to be related to the operating performance of our segments and Corporate and Other activities. A component of our net investment gains (losses) is the result of impairments, the size and timing of which can vary significantly depending on market credit cycles. In addition, the size and timing of other investment gains (losses) can be subject to our discretion and are influenced by market opportunities, as well as asset-liability matching considerations. Goodwill impairments, gains (losses) on the sale of businesses, gains (losses) on the early extinguishment of debt, gains (losses) on insurance block transactions and restructuring costs are also excluded from net operating income (loss) because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusual non-operating items are also excluded from net operating income (loss) if, in our opinion, they are not indicative of overall operating trends.

While some of these items may be significant components of net income (loss) available to Genworth Financial, Inc.’s common stockholders in accordance with U.S. GAAP, we believe that net operating income (loss), and measures that are derived from or incorporate net operating income (loss), are appropriate measures that are useful to investors because they identify the income (loss) attributable to the ongoing operations of the

 

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business. Management also uses net operating income (loss) as a basis for determining awards and compensation for senior management and to evaluate performance on a basis comparable to that used by analysts. However, the items excluded from net operating income (loss) have occurred in the past and could, and in some cases will, recur in the future. Net operating income (loss) is not a substitute for net income (loss) available to Genworth Financial, Inc.’s common stockholders determined in accordance with U.S. GAAP. In addition, our definition of net operating income (loss) may differ from the definitions used by other companies.

The following table includes a reconciliation of net income available to Genworth Financial, Inc.’s common stockholders to net operating income for the periods indicated:

 

    Three months ended
March 31,
 

(Amounts in millions)

  2016      2015  

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

  $ 53       $ 154   

Net income attributable to noncontrolling interests

    55         50   
 

 

 

    

 

 

 

Net income

    108         204   

Income (loss) from discontinued operations, net of taxes

    (19      1   
 

 

 

    

 

 

 

Income from continuing operations

    127         203   

Less: net income attributable to noncontrolling interests

    55         50   
 

 

 

    

 

 

 

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

    72         153   

Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

    

Net investment (gains) losses, net

    13         1   

(Gains) losses on sale of businesses, net

    (20      —    

(Gains) losses on early extinguishment of debt, net

    11         —    

(Gains) losses from life block transactions, net

    6         —    

Expenses related to restructuring, net

    9         —    

Fees associated with bond consent solicitation, net

    12         —    
 

 

 

    

 

 

 

Net operating income

  $ 103       $ 154   
 

 

 

    

 

 

 

In the first quarter of 2016, we recorded an estimated gain of $20 million, net of taxes, related to the planned sale of our mortgage insurance business in Europe.

In January 2016, we paid a make-whole expense of $13 million, net of taxes, related to the early redemption of Genworth Holdings’ 2016 Notes. We also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a gain of $2 million, net of taxes, in the first quarter of 2016. These transactions were excluded for net operating income for the periods presented as they related to a gain (loss) on the early extinguishment of debt.

In the first quarter of 2016, we completed a life block transaction resulting in an after-tax loss of $6 million in connection the early extinguishment of non-recourse funding obligations.

In the first quarter of 2016, we recorded an after-tax expense of $9 million related to restructuring costs as part of an expense reduction plan as we evaluate and appropriately size our organizational needs and expenses.

There were no infrequent or unusual items excluded from net operating income during the periods presented other than fees incurred during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $12 million, net of taxes, for broker, advisor and investment banking fees.

 

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Earnings per share

The following table provides basic and diluted net income available to Genworth Financial, Inc.’s common stockholders and net operating income per common share for the periods indicated:

 

     Three months ended
March 31,
 

(Amounts in millions, except per share amounts)

   2016      2015  

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

     

Basic

   $ 0.14       $ 0.31   
  

 

 

    

 

 

 

Diluted

   $ 0.14       $ 0.31   
  

 

 

    

 

 

 

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

     

Basic

   $ 0.11       $ 0.31   
  

 

 

    

 

 

 

Diluted

   $ 0.11       $ 0.31   
  

 

 

    

 

 

 

Net operating income per common share:

     

Basic

   $ 0.21       $ 0.31   
  

 

 

    

 

 

 

Diluted

   $ 0.21       $ 0.31   
  

 

 

    

 

 

 

Weighted-average common shares outstanding:

     

Basic

     498.0         497.0   
  

 

 

    

 

 

 

Diluted

     499.4         498.9   
  

 

 

    

 

 

 

Diluted weighted-average common shares outstanding reflect the effects of potentially dilutive securities including stock options, restricted stock units and other equity-based compensation.

Results of Operations and Selected Financial and Operating Performance Measures by Segment

Our chief operating decision maker evaluates segment performance and allocates resources on the basis of net operating income (loss). See note 9 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for a reconciliation of net operating income of our segments and Corporate and Other activities to net income available to Genworth Financial, Inc.’s common stockholders.

We allocate our consolidated provision for income taxes to our operating segments. Our allocation methodology applies a specific tax rate to the pre-tax income (loss) of each segment, which is then adjusted in each segment to reflect the tax attributes of items unique to that segment such as foreign income. The difference between the consolidated provision for income taxes and the sum of the provision for income taxes in each segment is reflected in Corporate and Other activities. The annually-determined tax rates and adjustments to each segment’s provision for income taxes are estimates which are subject to review and could change from year to year. The effective tax rates disclosed herein are calculated using whole dollars. As a result, the percentages shown may differ from an effective tax rate calculated using rounded numbers.

Management’s discussion and analysis by segment contains selected operating performance measures including “sales” and “insurance in-force” or “risk in-force” which are commonly used in the insurance industry as measures of operating performance.

Management regularly monitors and reports sales metrics as a measure of volume of new and renewal business generated in a period. Sales refer to: (1) new insurance written for mortgage insurance; (2) annualized first-year premiums for long-term care and term life insurance products; (3) annualized first-year deposits plus

 

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5% of excess deposits for universal and term universal life insurance products; (4) 10% of premium deposits for linked-benefits products; and (5) new and additional premiums/deposits for fixed annuities. Sales do not include renewal premiums on policies or contracts written during prior periods. We consider new insurance written, annualized first-year premiums/deposits, premium equivalents and new premiums/deposits to be a measure of our operating performance because they represent a measure of new sales of insurance policies or contracts during a specified period, rather than a measure of our revenues or profitability during that period.

Management regularly monitors and reports insurance in-force and risk in-force. Insurance in-force for our mortgage and life insurance businesses is a measure of the aggregate face value of outstanding insurance policies as of the respective reporting date. For risk in-force in our mortgage insurance businesses, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Risk in-force for our U.S. mortgage insurance business is our obligation that is limited under contractual terms to the amounts less than 100% of the mortgage loan value. Effective risk in-force has been calculated by applying to insurance in-force a factor of 35% that represents our highest expected average per-claim payment for any one underwriting year over the life of our businesses in Canada and Australia. In Australia, we have certain risk share arrangements where we provide pro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicable pro-rata coverage amount provided is used when applying the factor. We consider insurance in-force and risk in-force to be measures of our operating performance because they represent measures of the size of our business at a specific date which will generate revenues and profits in a future period, rather than measures of our revenues or profitability during that period.

Management also regularly monitors and reports a loss ratio for our businesses. For our mortgage insurance businesses, the loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. For our long-term care insurance business, the loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums. We consider the loss ratio to be a measure of underwriting performance in these businesses and helps to enhance the understanding of the operating performance of our businesses.

An assumed tax rate of 35% is utilized in certain adjustments to net operating income (loss) and in the explanation of specific variances of operating performance.

These operating performance measures enable us to compare our operating performance across periods without regard to revenues or profitability related to policies or contracts sold in prior periods or from investments or other sources.

U.S. Mortgage Insurance segment

Trends and conditions

Results of our U.S. mortgage insurance business are affected primarily by the following factors: competitor actions; unemployment or underemployment levels; other economic and housing market trends, including interest rates, home prices, and mortgage origination volume mix and practices; the levels and aging of mortgage delinquencies, which may be affected by seasonal variations; the inventory of unsold homes; lender modification and other servicing efforts; and resolution of pending or any future litigation, among other items. The impact of prior years’ weakness and uncertainty in the domestic economy, related levels of unemployment and underemployment and resulting increase in foreclosures, the number of borrowers seeking loan modifications and the level of housing inventories with the related impact on home values, all contributed adversely to the performance of our insured portfolio relating to our 2005 through 2008 book years. Our results are subject to the continued recovery of the U.S. housing market and the extent of the adverse impact of seasonality that we experience historically in the second half of the year.

The level of private mortgage insurance industry market penetration and eventual market size is affected in part by actions taken by the GSEs, the Federal Housing Administration (“FHA”), the Federal Housing Finance

 

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Agency (“FHFA”), the U.S. Congress or the U.S. government which impact housing or housing finance policy. In the past, these actions have included announced changes, or potential changes, to underwriting standards, FHA pricing, GSE guaranty fees and loan limits as well as low-down-payment programs available through the FHA or GSEs.

Mortgage origination volume increased modestly from the fourth quarter of 2015, as higher refinance mortgage loan origination volume offset seasonally-lower purchase mortgage loan origination volume. Mortgage interest rates moved slightly lower during the first quarter of 2016, as higher volatility in the U.S. and international financial markets and a weaker outlook for global economic growth reduced U.S. Treasury yields and residential mortgage-backed securities. The relative increase in refinance mortgages compared to purchase mortgages resulted in a mix of originations with fewer purchase mortgages in the first quarter of 2016 compared to the fourth quarter of 2015. Because purchase mortgages typically are insured with private mortgage insurance more often than refinance mortgages, a mix of overall originations containing fewer purchase money mortgages results in a smaller private mortgage insurance market. Our U.S. mortgage insurance estimated market share remained stable during the first quarter of 2016.

New insurance written in the first quarter of 2016 increased 17% compared to the first quarter of 2015 but decreased 5% compared to the fourth quarter of 2015 consistent with normal seasonal declines in purchase originations. We continue to manage the quality of new business through our underwriting guidelines, which we modify from time to time when circumstances warrant. The percentage of single premium new insurance written increased modestly in the first quarter of 2016 reflecting our selective participation in this market. Future volumes of these products will vary depending in part on our evaluation of their risk return profile of these transactions. We have observed changes in competitor pricing protocols as well as continued highly competitive pricing with monthly premium borrower paid mortgage insurance during the first quarter of 2016. In March 2016, we introduced a new monthly premium borrower paid rate card which aligned our pricing with the factors promulgated by the GSEs in the revised industry-wide risk-based capital requirements under PMIERs. Our updated rate card features reduced rates across all loan-to-value ratios for borrowers with credit scores above 740, is broadly competitive with the industry, including the FHA, and results in a weighted-average rate consistent with our prior rate card given our current mix of business.

Our loss ratio decreased to 24% for the three months ended March 31, 2016 reflecting lower new delinquencies. New delinquencies during the first quarter of 2016 decreased compared to the first quarter of 2015 and the fourth quarter of 2015 due to macroeconomic improvements including improvements in unemployment rates and in housing values. The majority of new delinquencies in the first quarter of 2016 continued to come from our 2005 through 2008 book years. We have observed improvement in the ultimate claim expectations from early stage delinquencies through the first quarter of 2016. Foreclosure starts and the number of paid claims decreased during the first quarter of 2016 as compared to the first quarter of 2015. In addition, the older delinquencies that remain in our portfolio, particularly those from our 2005 through 2008 book years, continued to age through the first quarter of 2016 from the lengthening of the foreclosure process. This aging has resulted in increased claims expenses relative to claims paid during the period prior to the 2008 financial crisis when the industry was experiencing a shorter foreclosure process than at present. Overall, we have seen a reduction in loans that have been subject to a modification or workout in the first quarter of 2016 compared to the first quarter of 2015. We expect our level of loan modifications to continue to decline going forward in line with the expected reduction in delinquent loans and the continuing aging of delinquencies. Depending on our experience going forward, we may need to adjust our reserve frequency or severity assumptions as experience from these programs continues to emerge.

As of March 31, 2016, GMICO’s risk-to-capital ratio under the current regulatory framework as established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), GMICO’s domestic insurance regulator, was approximately 15.5:1, compared with a risk-to-capital ratio of approximately 16.4:1 as of December 31, 2015. This risk-to-capital ratio remains below the NCDOI’s maximum risk-to-capital ratio of 25:1. GMICO’s ongoing risk-to-capital ratio will depend principally on the magnitude of future losses

 

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incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses, the amount of additional capital that is generated within the business or capital support (if any) that we provide and changes in the value of affiliate assets.

Effective December 31, 2015, each GSE adopted revised PMIERs which set forth operational and financial requirements that mortgage insurers must meet in order to remain eligible. Each approved mortgage insurer is required to provide the GSEs with an annual certification and a quarterly report as to its compliance with PMIERs. We have met all PMIERs reporting requirements as required by the GSEs to date. As of March 31, 2016, we estimate our U.S. mortgage insurance business had available assets of approximately 113% of the required assets under PMIERs compared to 109% as of December 31, 2015. This increase was driven primarily by a higher valuation of our U.S mortgage insurance business’ holdings in Genworth Canada, the impact of foreign exchange and the reduction in delinquent loans.

In 2015, our U.S. mortgage insurance business entered into three separate reinsurance transactions for the primary purpose of obtaining capital credit under PMIERs in order to meet the PMIERs financial requirements. Beginning January 1, 2016, the reinsurance treaty covering our 2015 book year includes all eligible mortgage insurance certificates issued through the fourth quarter of 2015. The three reinsurance transactions provided an aggregate of approximately $525 million of PMIERs capital credit as of March 31, 2016.

As of March 31, 2016, loans modified through the Home Affordable Refinance Program (“HARP”) accounted for approximately $16.9 billion of insurance in-force, with $15.8 billion of those loans from our 2005 through 2008 book years. The volume of new HARP modifications continues to decrease as the number of loans that would benefit from a HARP modification decreases. Loans modified through HARP have extended amortization periods and reduced interest rates, which reduce borrower’s monthly payments. Over time, we expect these modified loans to result in extended premium streams and a lower incidence of default. The U.S. government has extended HARP through the year ending December 31, 2016. For financial reporting purposes, we report HARP modified loans as a modification of the coverage on existing insurance in-force rather than new insurance written.

On April 14, 2016, FHFA announced the Principal Reduction Modification program for borrowers whose loans are owned or guaranteed by Fannie Mae or Freddie Mac and who meet specific eligibility criteria. FHFA expects that approximately 33,000 borrowers will be eligible for the program but because actual participation will be dependent upon the effectiveness of loan servicer solicitations and loan modification processes, we are not anticipating a material impact on our results of operations.

 

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Segment results of operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth the results of operations relating to our U.S. Mortgage Insurance segment for the periods indicated:

 

     Three months ended
March 31,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016      2015      2016 vs. 2015  

Revenues:

           

Premiums

   $ 160       $ 150       $ 10         7

Net investment income

     15         19         (4      (21 )% 

Net investment gains (losses)

     (1      —          (1      NM  (1) 

Policy fees and other income

     1         1         —          —   % 
  

 

 

    

 

 

    

 

 

    

Total revenues

     175         170         5         3
  

 

 

    

 

 

    

 

 

    

Benefits and expenses:

           

Benefits and other changes in policy reserves

     38         50         (12      (24 )% 

Acquisition and operating expenses, net of deferrals

     39         37         2         5

Amortization of deferred acquisition costs and intangibles

     3         2         1         50
  

 

 

    

 

 

    

 

 

    

Total benefits and expenses

     80         89         (9      (10 )% 
  

 

 

    

 

 

    

 

 

    

Income from continuing operations before income taxes

     95         81         14         17

Provision for income taxes

     34         29         5         17
  

 

 

    

 

 

    

 

 

    

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

     61         52         9         17

Adjustment to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

           

Net investment (gains) losses, net

     —          —          —          —   % 
  

 

 

    

 

 

    

 

 

    

Net operating income

   $ 61       $ 52       $ 9         17
  

 

 

    

 

 

    

 

 

    

 

(1)  We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating income

Net operating income increased in the current year mainly attributable to a continued decline in new delinquencies and higher premiums, partially offset by a lower benefit from net cures and aging of existing delinquencies.

Revenues

Premiums increased mainly attributable to higher average flow mortgage insurance in-force and the reversal of the accrual for premium refunds related to policy cancellations that was recorded in the third quarter of 2015, partially offset by higher ceded reinsurance premiums in the current year.

Net investment income decreased primarily from lower intercompany dividends received of approximately $8 million as a result of the intercompany sale of U.S. mortgage insurance’s ownership interest in affiliate preferred securities in July 2015. This decrease was partially offset by higher average invested assets in the current year.

 

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Benefits and expenses

Benefits and other changes in policy reserves decreased due to a continued decline in new delinquencies primarily in our 2005 through 2008 book years, partially offset by a lower net benefit from cures and aging of existing delinquencies in the current year.

Acquisition and operating expenses, net of deferrals, increased primarily from higher employee compensation expense that resulted from growth in sales in the current year. This increase was partially offset by a write-off of software in the prior year that did not recur.

Provision for income taxes. The effective tax rate increased slightly to 35.8% for the three months ended March 31, 2016 from 35.7% for the three months ended March 31, 2015. The increase in the effective tax rate was primarily attributable to changes in state taxes.

U.S. Mortgage Insurance selected operating performance measures

The following table sets forth selected operating performance measures regarding our U.S. Mortgage Insurance segment as of or for the dates indicated:

 

     As of or for the three
months ended

March 31,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016      2015      2016 vs. 2015  

Primary insurance in-force

   $ 124,100       $ 115,200       $ 8,900         8

Risk in-force

     31,600         28,900         2,700         9

New insurance written

     7,400         6,300         1,100         17

Net premiums written

     176         170         6         4

Primary insurance in-force and risk in-force

Primary insurance in-force increased primarily as a result of the increase of $9.8 billion in flow insurance in-force, which increased from $111.9 billion as of March 31, 2015 to $121.7 billion as of March 31, 2016 as a result of new insurance written during the current year. The increase in flow insurance in-force was partially offset by a decline of $0.9 billion in bulk insurance in-force, which decreased from $3.3 billion as of March 31, 2015 to $2.4 billion as of March 31, 2016 from cancellations and lapses. In addition, risk in-force increased primarily as a result of higher flow new insurance written. Flow persistency was 82% and 81% for the three months ended March 31, 2016 and 2015, respectively.

New insurance written

New insurance written increased in the current year primarily driven by a larger purchase originations market and an increase in our market share. We also had a lower concentration of single premium lender paid business reflecting our decision to selectively participate in the market.

Net premiums written

Net premiums written increased due to higher flow insurance in-force and the reversal of the accrual for premium refunds related to policy cancellations that was recorded in the third quarter of 2015, partially offset by higher ceded reinsurance premiums in the current year.

 

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Loss and expense ratios

The following table sets forth the loss and expense ratios for our U.S. Mortgage Insurance segment for the dates indicated:

 

     Three months ended
March 31,
    Increase (decrease)  
     2016     2015     2016 vs. 2015  

Loss ratio

     24     33     (9)

Expense ratio (net earned premiums)

     26     26     —  

Expense ratio (net premiums written)

     24     23     1

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our business, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.

The loss ratio decreased primarily from a continued decline in new delinquencies primarily in our 2005 through 2008 book years, in addition to higher net earned premiums attributable to higher average flow mortgage insurance in-force and the reversal of the accrual for premium refunds related to policy cancellations that was recorded in the third quarter of 2015, partially offset by higher ceded reinsurance premiums in the current year. These decreases were partially offset by a lower net benefit from cures and aging of existing delinquencies in the current year.

The expense ratio (net premiums written) increased slightly from higher employee compensation expense that resulted from growth in sales, mostly offset by higher net premiums in the current year. The prior year also included a write-off of software that did not recur.

Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our U.S. mortgage insurance portfolio as of the dates indicated:

 

    March 31,
2016
    December 31,
2015
    March 31,
2015
 

Primary insurance:

     

Insured loans in-force

    655,300        651,668        631,591   

Delinquent loans

    27,602        31,663        35,665   

Percentage of delinquent loans (delinquency rate)

    4.21     4.86     5.65

Flow loan in-force

    632,010        627,349        601,472   

Flow delinquent loans

    26,491        30,416        34,220   

Percentage of flow delinquent loans (delinquency rate)

    4.19     4.85     5.69

Bulk loans in-force

    23,290        24,319        30,119   

Bulk delinquent loans (1)

    1,111        1,247        1,445   

Percentage of bulk delinquent loans (delinquency rate)

    4.77     5.13     4.80

A minus and sub-prime loans in-force

    26,995        28,332        33,805   

A minus and sub-prime loans delinquent loans

    5,546        6,448        7,019   

Percentage of A minus and sub-prime delinquent loans (delinquency rate)

    20.54     22.76     20.76

Pool insurance:

     

Insured loans in-force

    6,406        6,620        7,979   

Delinquent loans

    369        386        468   

Percentage of delinquent loans (delinquency rate)

    5.76     5.83     5.87

 

(1)  Included loans where we were in a secondary loss position for which no reserve was established due to an existing deductible. Excluding these loans, bulk delinquent loans were 776 as of March 31, 2016, 889 as of December 31, 2015 and 984 as of March 31, 2015.

 

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Total delinquencies related to our 2005 through 2008 book years have declined as the United States has continued to experience improvement in its residential real estate market.

The following tables set forth flow delinquencies, direct case reserves and risk in-force by aged missed payment status in our U.S. mortgage insurance portfolio as of the dates indicated:

 

     March 31, 2016  

(Dollar amounts in millions)

   Delinquencies      Direct case
reserves
(1)
     Risk
in-force
     Reserves as %
of risk in-force
 

Payments in default:

           

3 payments or less

     8,082       $ 45       $ 337         13

4 - 11 payments

     7,065         176         294         60

12 payments or more

     11,344         477         559         85
  

 

 

    

 

 

    

 

 

    

Total

     26,491       $ 698       $ 1,190         59
  

 

 

    

 

 

    

 

 

    

 

(1)  Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

 

     December 31, 2015  

(Dollar amounts in millions)

   Delinquencies      Direct case
reserves
(1)
     Risk
in-force
     Reserves as %
of risk in-force
 

Payments in default:

           

3 payments or less

     10,103       $ 52       $ 405         13

4 - 11 payments

     7,366         180         307         59

12 payments or more

     12,947         543         638         85
  

 

 

    

 

 

    

 

 

    

Total

     30,416       $ 775       $ 1,350         57
  

 

 

    

 

 

    

 

 

    

 

(1)  Direct flow case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves.

Primary insurance delinquency rates differ from region to region in the United States at any one time depending upon economic conditions and cyclical growth patterns. The tables below set forth our primary delinquency rates for the various regions of the United States and the 10 largest states by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.

 

     Percent of primary
risk in-force as of
March 31, 2016
    Percent of total
reserves as of
March 31, 2016 
(1)
    Delinquency rate  
       March 31,
2016
    December 31,
2015
    March 31,
2015
 

By Region:

          

Southeast (2)

     19     23 %      5.00     5.78     6.92

South Central (3)

     16        7        3.35     3.81     4.03

Northeast (4)

     14        34        7.92     8.91     10.04

Pacific (5)

     13        8        2.54     3.01     4.03

North Central (6)

     12        9        3.30     3.89     4.72

Great Lakes (7)

     10        6        2.95     3.50     3.96

New England (8)

     6        6        4.20     4.71     5.75

Mid-Atlantic (9)

     6        5        4.38     5.05     5.71

Plains (10)

     4        2        3.20     3.70     3.88
  

 

 

   

 

 

       

Total

     100     100 %      4.21     4.86     5.65
  

 

 

   

 

 

       

 

(1)  Total reserves were $768 million as of March 31, 2016.
(2)  Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.
(3)  Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.
(4)  New Jersey, New York and Pennsylvania.
(5)  Alaska, California, Hawaii, Nevada, Oregon and Washington.
(6)  Illinois, Minnesota, Missouri and Wisconsin.
(7)  Indiana, Kentucky, Michigan and Ohio.
(8)  Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont.
(9)  Delaware, Maryland, Virginia, Washington D.C. and West Virginia.
(10)  Idaho, Iowa, Kansas, Montana, Nebraska, North Dakota, South Dakota and Wyoming.

 

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     Percent of primary
risk in-force as of
March 31, 2016
    Percent of total
reserves as of
March 31, 2016 
(1)
    Delinquency rate  
       March 31,
2016
    December 31,
2015
    March 31,
2015
 

By State:

          

California

     7     3     1.91     2.26     2.75

Texas

     7     3     3.30     3.90     3.97

New York

     6     16     8.21     9.07     10.11

Florida

     6     14     6.54     7.71     10.87

Illinois

     6     6     3.98     4.70     5.98

Pennsylvania

     4     4     5.30     6.20     6.94

New Jersey

     4     13     11.38     12.71     14.40

Ohio

     4     3     3.52     4.14     4.61

Michigan

     4     1     2.08     2.56     2.97

North Carolina

     3     2     4.24     4.75     5.20

 

(1)  Total reserves were $768 million as of March 31, 2016.

The following table sets forth the dispersion of our total reserves and primary insurance in-force and risk in-force by year of policy origination and average annual mortgage interest rate as of March 31, 2016:

 

(Amounts in millions)

   Average
rate
    Percent of total
reserves
(1)
    Primary
insurance
in-force
     Percent
of total
    Primary
risk
in-force
     Percent
of total
 

Policy Year

              

2004 and prior

     6.04     11.9   $ 3,714         3.0   $ 833         2.6

2005

     5.65     11.7        3,310         2.7        898         2.9   

2006

     5.84     17.2        5,498         4.4        1,431         4.6   

2007

     5.74     37.1        14,236         11.5        3,588         11.4   

2008

     5.28     16.8        12,181         9.8        3,089         9.8   

2009

     4.95     0.6        1,679         1.4        393         1.2   

2010

     4.69     0.7        2,121         1.7        534         1.7   

2011

     4.53     0.6        3,020         2.4        781         2.5   

2012

     3.83     0.6        7,749         6.2        2,032         6.5   

2013

     4.01     1.0        13,719         11.1        3,548         11.3   

2014

     4.40     1.4        19,256         15.5        4,886         15.5   

2015

     4.10     0.4        30,277         24.4        7,603         24.2   

2016

     4.12           7,336         5.9        1,838         5.8   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total portfolio

     4.73     100.0   $ 124,096         100.0   $ 31,454         100.0
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)  Total reserves were $768 million as of March 31, 2016.

 

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Canada Mortgage Insurance segment

Trends and conditions

Results of our mortgage insurance business in Canada are affected primarily by changes in the regulatory environment, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates. During the first quarter of 2016, the U.S. dollar strengthened against the Canadian dollar as compared with first quarter of 2015, which negatively impacted the results of our mortgage insurance business in Canada as reported in U.S. dollars. However, we experienced some reversal in this trend near the end of the quarter as the Canadian dollar strengthened. Any future movement in foreign exchange rates could impact future results.

We closely monitor economic conditions across Canada due to the impact adverse changes in economic conditions can have on our results. The Canadian gross domestic product is expected to have experienced growth in the first quarter of 2016. The impact of continued low commodity prices, particularly oil, was more than offset by a strengthening non-resource export market in the first quarter of 2016, driven by weakness in the Canadian dollar. Although low commodities prices, particularly oil, continue to negatively impact economic growth, especially in the provinces of Alberta, Newfoundland and Labrador and Saskatchewan, Canadian gross domestic product is expected to grow by 1.7% in 2016 in comparison to 1.2% in 2015, and we anticipate growth rates to vary across different provinces. Federal government stimulus is expected to boost growth despite the uncertainty and volatility in the commodities market. We continue to monitor oil prices as part of our portfolio risk management strategy.

The overnight interest rate in Canada remained flat at 0.50% in the first quarter of 2016. With oil prices remaining well below historical averages and shrinking business investment in the energy sector, the low interest rate environment is expected to continue throughout 2016. Despite the continued pressure on oil prices and its impact to oil-producing provinces, Canada’s unemployment rate remained flat at 7.1% at the end of the first quarter of 2016 compared to the end of 2015. Home sales in Canada increased approximately 12% in the first quarter of 2016 compared to the first quarter in 2015 and approximately 2% compared to the fourth quarter of 2015. The national average home price increased modestly as of the end of the first quarter of 2016 compared to the first quarter of 2015 and the fourth quarter of 2015. New construction and activity in the resale market were strong in British Columbia and Ontario, while there were declines in housing activity in the oil-producing provinces. In 2016, the ending national average home price is expected to increase modestly compared to the end of 2015 and resales are expected to increase from 2015 levels but at a lower rate compared to the increase experienced in the first quarter of 2016. The Canadian housing market is expected to continue to experience significant regional variations with weakness in the oil-producing regions offset by strong housing markets in British Columbia and Ontario.

New delinquencies and the average reserve per delinquency in our mortgage insurance business in Canada increased in the first quarter of 2016 compared to the first quarter of 2015 primarily due to ongoing economic pressure in oil-producing regions. As compared to the fourth quarter of 2015, the increase in new delinquencies and average reserve per delinquency were also attributable to seasonality. Our loss ratio in Canada increased 24% for the three months ended March 31, 2016. We expect our loss ratio in Canada to be modestly higher throughout the remainder of 2016 due to the impact of low oil prices.

In the first quarter of 2016, our mortgage insurance business in Canada experienced a modest reduction in new insurance written volumes due to targeted underwriting changes in certain regions and a slowing housing market in oil-producing regions compared to both the first quarter of 2015 and the fourth quarter of 2015. Additionally, the decrease in new insurance written volumes from the fourth quarter of 2015 was also attributable to seasonality. Given this recent experience as well as the economic uncertainties, we expect modestly lower net premiums written from flow mortgage insurance in 2016 compared to 2015. However, given the size of our more recent books and recent price increases, we expect earned premiums to be moderately higher throughout 2016 than in 2015 (excluding impact from foreign exchange movements).

 

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Bulk new insurance written levels were lower in the first quarter of 2016 compared to the first quarter of 2015 due to lower customer demand. In Canada, our new insurance written from bulk mortgage insurance varies from period to period based on a number of factors, including the amount of portfolio mortgages lenders seek to insure, the competitiveness of our pricing and our risk appetite for such mortgage insurance. On June 6, 2015, the Canadian government published draft regulations to limit bulk mortgage insurance to only those mortgages that will be used in Canada Mortgage and Housing Corporation securitization programs and to prohibit the use of government guaranteed insured mortgages in private securitizations. The regulations will become effective on July 1, 2016. Although it is difficult to determine the full impact from this and other regulatory changes, the regulations have resulted in an increase in demand for bulk mortgage insurance in Canada in the second quarter of 2016 and we anticipate a decrease in demand from the July 1 effective date forward. To date, we have seen increased demand for bulk mortgage insurance in advance of this most recent change. Subsequent to the end of the first quarter of 2016, our mortgage insurance business in Canada has insured approximately CAD$22.0 billion of bulk mortgage insurance of high credit quality in the first three weeks in April 2016.

We are subject to regulation under the Protection of Residential Mortgage or Hypothecary Insurance Act (Canada) (“PRMHIA”). Under PRMHIA and the Insurance Companies Act (Canada), our mortgage insurance business in Canada is required to meet a minimum capital test (“MCT”) to support its outstanding mortgage insurance in-force. The MCT ratio is calculated based on a methodology prescribed by OSFI. The Department of Finance in Canada has established a target MCT ratio for our mortgage insurance business in Canada of 175% under PRMHIA. We regularly review our capital levels and, after reviewing stress testing results and consulting with OSFI in 2014, we have established an operating MCT holding target of 220% pending the development of the new capital framework for mortgage insurers, which is targeted for implementation in 2017. The holding target of 220% MCT is designed to provide a prudent capital buffer to allow time to take necessary actions should capital levels be pressured by deteriorating macroeconomic conditions. As of March 31, 2016, our MCT ratio was approximately 234%, which was above the MCT holding target.

As previously disclosed, the Office of the Superintendent of Financial Institutions (“OSFI”) plans to update the regulatory capital framework for loans secured by residential real properties for both federally regulated mortgage insurers and deposit-taking institutions. OSFI will consult with federally regulated financial institutions and other stakeholders before making any changes, initially through a directed consultation with the industry in 2016, followed by broader public consultation later in the year. OSFI expects to have final rules in place no later than 2017. The anticipated changes may impact the regulatory capital requirements for our mortgage insurance business in Canada. We will continue to closely monitor the development of this framework.

 

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Segment results of operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth the results of operations relating to our Canada Mortgage Insurance segment for the periods indicated:

 

     Three months ended
March 31,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016     2015     2016 vs. 2015  

Revenues:

        

Premiums

   $ 111      $ 119      $ (8     (7 )% 

Net investment income

     29        34        (5     (15 )% 

Net investment gains (losses)

     20        (18     38        NM  (1) 

Policy fees and other income

           1        (1     (100 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     160        136        24        18
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     26        25        1        4

Acquisition and operating expenses, net of deferrals

     18        12        6        50

Amortization of deferred acquisition costs and intangibles

     9        9        —         —  

Interest expense

     4        5        (1     (20 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     57        51        6        12
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     103        85        18        21

Provision for income taxes

     29        22        7        32
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     74        63        11        17

Less: net income attributable to noncontrolling interests

     34        29        5        17
  

 

 

   

 

 

   

 

 

   

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

     40        34        6        18

Adjustment to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

        

Net investment (gains) losses, net

     (7     6        (13     NM  (1) 
  

 

 

   

 

 

   

 

 

   

Net operating income

   $ 33      $ 40      $ (7     (18 )% 
  

 

 

   

 

 

   

 

 

   

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating income

Net operating income decreased mainly driven by a $6 million decrease attributable to changes in foreign exchange rates during the three months ended March 31, 2016. The decrease was also attributable to higher taxes and operating expenses in the current year.

Revenues

Premiums decreased driven by a $17 million decrease attributable to changes in foreign exchange rates during the three months ended March 31, 2016. Excluding the effects of foreign exchange, premiums increased $9 million primarily from the seasoning of our larger in-force blocks of business in the current year.

Net investment income decreased from a $5 million decrease attributable to changes in foreign exchange rates in the current year.

 

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Net investment gains in the current year were primarily driven by derivative gains largely from hedging non-functional currency transactions. Net investment losses in the prior year were mainly from derivative losses largely from hedging non-functional currency transactions, partially offset by net gains from the sale of investment securities. The three months ended March 31, 2016 also included a decrease of $2 million attributable to changes in foreign exchange rates.

Benefits and expenses

Benefits and other changes in policy reserves increased due to an increase in change in reserves of $5 million from an increase in the number of new delinquencies, net of cures, and a higher average reserve per delinquency from higher severity in certain regions in the current year. The three months ended March 31, 2016 also included a decrease of $4 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, increased mainly driven by higher stock-based compensation expense from an increase in Genworth Canada’s share price in the current year. The three months ended March 31, 2016 also included a decrease of $2 million attributable to changes in foreign exchange rates.

Provision for income taxes. The effective tax rate increased to 27.8% for three months ended March 31, 2016 from 25.7% for the three months ended March 31, 2015. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income. The three months ended March 31, 2016 included a decrease of $4 million attributable to changes in foreign exchange rates.

Canada Mortgage Insurance selected operating performance measures

The following table sets forth selected operating performance measures regarding our Canada Mortgage Insurance segment as of or for the dates indicated:

 

     As of or for the three
months ended

March 31,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016      2015      2016 vs. 2015  

Primary insurance in-force

   $ 317,400       $ 288,800       $ 28,600         10

Risk in-force

   $ 111,100       $ 101,100       $ 10,000         10

New insurance written

   $ 5,700       $ 8,300       $ (2,600      (31 )% 

Net premiums written

   $ 84       $ 109       $ (25      (23 )% 

Primary insurance in-force and risk in-force

Our mortgage insurance business in Canada currently provides 100% coverage on the majority of the loans we insure in that market. For the purpose of representing our risk in-force, we have computed an “effective” risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor that represents our highest expected average per-claim payment for any one underwriting year over the life of our business in Canada. For the three months ended March 31, 2016 and 2015, this factor was 35%.

Primary insurance in-force and risk in-force increased primarily as a result of flow new insurance written and bulk mortgage insurance activity. Insurance in-force and risk in-force included decreases of $8.3 billion and $2.9 billion, respectively, attributable to changes in foreign exchange rates during the three months ended March 31, 2016.

New insurance written

New insurance written decreased primarily as a result of lower bulk mortgage insurance activity and lower flow new insurance written. The decrease in flow new insurance written was driven by targeted underwriting

 

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changes and a slowing housing market in oil-producing regions in the current year. The three months ended March 31, 2016 included a decrease of $900 million attributable to changes in foreign exchange rates.

Net premiums written

Our mortgage insurance policies in Canada provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of March 31, 2016, our unearned premium reserves were $1,527 million, compared to $1,411 million as of March 31, 2015.

Net premiums written decreased primarily from lower bulk mortgage insurance activity from lower customer demand and lower flow volume from targeted underwriting changes and a slowing housing market in oil-producing regions in the current year. These decreases were partially offset by the price increase on high loan-to-value premiums effective June 1, 2015, which resulted in higher net premiums written. The three months ended March 31, 2016 included a decrease of $13 million attributable to changes in foreign exchange rates.

Loss and expense ratios

The following table sets forth the loss and expense ratios for our Canada Mortgage Insurance segment for the periods indicated:

 

     Three months ended
March 31,
    Increase
(decrease)
 
     2016     2015     2016 vs. 2015  

Loss ratio

     24     22     2

Expense ratio (net earned premiums)

     24     18     6

Expense ratio (net premiums written)

     32     20     12

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our mortgage insurance business in Canada, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.

The loss ratio increased primarily from an increase in the number of new delinquencies, net of cures, and a higher average reserve per delinquency from higher severity in certain regions, partially offset by higher premiums in the current year.

The expense ratio (net earned premiums) increased primarily attributable to higher stock-based compensation expense driven by an increase in Genworth Canada’s share price in the current year, partially offset by higher premiums primarily from the seasoning of our larger in-force blocks of business in the current year.

The expense ratio (net premiums written) increased primarily attributable to higher stock-based compensation expense driven by an increase in Genworth Canada’s share price in the current year and lower net premiums written in the current year.

 

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Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our Canada mortgage insurance portfolio as of the dates indicated:

 

     March 31, 2016     December 31, 2015     March 31, 2015  

Primary insured loans in-force

     1,860,978        1,835,916        1,704,483   

Delinquent loans

     2,034        1,829        1,792   

Percentage of delinquent loans (delinquency rate)

     0.11     0.10     0.11

Flow loans in-force

     1,341,636        1,331,773        1,266,626   

Flow delinquent loans

     1,711        1,550        1,532   

Percentage of flow delinquent loans (delinquency rate)

     0.13     0.12     0.12

Bulk loans in-force

     519,342        504,143        437,857   

Bulk delinquent loans

     323        279        260   

Percentage of bulk delinquent loans (delinquency rate)

     0.06     0.06     0.06

Flow mortgage loans in-force increased from new policies written and bulk mortgage loans in-force increased from bulk activity. The number of delinquent loans increased primarily from ongoing economic pressures in oil producing regions.

As a part of enhanced lender reporting, we receive updated outstanding loans in-force in Canada from most of our customers on a quarter lag. Based on the data provided by lenders, the 2016 delinquency rate as of December 31, 2015 was approximately 0.21%, reflecting a lower number of outstanding loans and related policies in-force compared to our reported policies in-force using the original terms of the loan.

Primary insurance delinquency rates differ by the various provinces and territories of Canada at any one time depending upon economic conditions and cyclical growth patterns. The table below sets forth our primary delinquency rates for the various provinces and territories of Canada by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.

 

     Percent of primary
risk in-force as of
March 31, 2016
    Delinquency rate  
     March 31,
2016
    December 31,
2015
    March 31,
2015
 

By province and territory:

        

Ontario

     47     0.05     0.05     0.05

Alberta

     17        0.16     0.12     0.09

British Columbia

     14        0.06     0.08     0.13

Quebec

     13        0.20     0.19     0.19

Saskatchewan

     3        0.21     0.17     0.15

Nova Scotia

     2        0.20     0.18     0.23

Manitoba

     2        0.10     0.09     0.07

New Brunswick

     1        0.21     0.20     0.22

All other

     1        0.14     0.13     0.12
  

 

 

       

Total

     100     0.11     0.10     0.11
  

 

 

       

Delinquency rates increased slightly primarily drive by more commodity dependent regions such as Alberta and Saskatchewan due to economic pressures related to low commodity prices.

 

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Australia Mortgage Insurance segment

Trends and conditions

Results of our mortgage insurance business in Australia are affected primarily by changes in regulatory environments, employment levels, consumer borrowing behavior, lender mortgage-related strategies, including lender servicing practices, and other economic and housing market influences, including interest rate trends, home price appreciation or depreciation, mortgage origination volume, levels and aging of mortgage delinquencies and movements in foreign currency exchange rates. During the first quarter of 2016, the U.S. dollar strengthened against the Australian dollar as compared with first quarter of 2015, which negatively impacted the results of our mortgage insurance business in Australia as reported in U.S. dollars. However, the average rates were relatively consistent with the prior quarter. Any future movement in foreign exchange rates could impact future results.

In Australia, the overall economy continued to expand during the first quarter of 2016, with anticipated moderate growth in the gross domestic product in the first quarter of 2016, reflecting contributions from tourism and resource exports, offset by weak domestic demand. At the same time, housing activity improved primarily from sustained low interest rates, with the cash rate remaining at 2.0% through the first quarter of 2016. Job creation slowed in the first quarter of 2016 with a minimal addition of jobs reported during the period. The March 2016 unemployment rate fell to 5.7% from 5.8% at the end of 2015.

Home prices in Australia continued to appreciate in the first quarter of 2016, with March 2016 home values approximately 6% higher than a year ago and approximately 2% higher than at the end of 2015. The Sydney and Melbourne housing markets continue to be the major driver with annual home price growth of approximately 7% and 10%, respectively, as of the end of the first quarter of 2016. We expect home price appreciation for 2016 will moderate compared to 2015 levels.

Our mortgage insurance business in Australia had a higher average reserve per delinquency in the first quarter of 2016 compared to the first quarter of 2015 as a result of higher concentration of later stage delinquencies. Compared to the fourth quarter of 2015, delinquencies increased due to seasonality as well as economic pressures primarily in commodity-dependent regions within Queensland and Western Australia. China’s economic slowdown has also impacted mining demand and investments in these areas. In addition, these regions are impacted by changes in commodity prices, which have remained below historical levels. If these regional trends continue, the loss ratio in the aggregate in Australia, which was 26% for the three months ended March 31, 2016, could increase. We will continue to closely monitor these economic conditions and assess their impact on our business.

In Australia, gross written premiums in the first quarter of 2016 were lower compared to the first quarter of 2015 partly due to the termination of a customer relationship with respect to new business effective in the second quarter of 2015. Compared to both the fourth quarter of 2015 and the first quarter of 2015, our mortgage insurance business in Australia experienced a decrease in gross written premiums driven by a reduction in high loan-to-value mortgage origination volume resulting from regulatory changes restricting loans originated for investment properties and high loan-to-value lending as the Australian Prudential Regulation Authority (“APRA”) continues to focus on lending standards, investment lending and serviceability. Our average premium rate in Australia has also been impacted by the tighter lending standards resulting in a shift of our flow new insurance written to lower loan-to-value products that have a lower premium rate and risk. Consequently, we expect high loan-to-value mortgages in proportion to total originations to be lower in 2016 compared to 2015. This will likely result in a decrease in both gross written premiums and earned premiums in 2016 despite the price increase, which was effective in March 2016.

Our mortgage insurance business in Australia evaluates its capital position in relation to the Prescribed Capital Amount (“PCA”) as determined by APRA, utilizing the Internal Capital Adequacy Assessment Process (“ICAAP”) as the framework to ensure that our Australia group of companies as a whole, and each regulated

 

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entity, are independently capitalized to meet regulatory requirements. As of March 31, 2016, the estimated PCA ratio of our mortgage insurance business in Australia was approximately 168% representing an increase from the 159% as of December 31, 2015 as a result of changes to reinsurance programs that were effective in 2016 and from capital releases on the seasoning of in-force business outpacing the capital required for the lower levels of new business. In the first quarter of 2016, Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) announced a plan to execute an AUD$202 million capital reduction initiative in the second quarter of 2016. The plan is designed to return a portion of surplus capital equitably to all of its shareholders and ensure Genworth Australia maintains an efficient capital structure. This capital reduction plan has received APRA approval but is subject to Genworth Australia shareholder approval. As of March 31, 2016, if the plan was approved and executed, our estimated PCA ratio in our mortgage insurance business would have decreased to approximately 155%.

Segment results of operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth the results of operations relating to our Australia Mortgage Insurance segment for the periods indicated:

 

     Three months ended
March 31,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016      2015     2016 vs. 2015  

Revenues:

         

Premiums

   $ 81       $ 89      $ (8     (9 )% 

Net investment income

     24         32        (8     (25 )% 

Net investment gains (losses)

            1        (1     (100 )% 

Policy fees and other income

            (4     4        100
  

 

 

    

 

 

   

 

 

   

Total revenues

     105         118        (13     (11 )% 
  

 

 

    

 

 

   

 

 

   

Benefits and expenses:

         

Benefits and other changes in policy reserves

     21         14        7        50

Acquisition and operating expenses, net of deferrals

     19         22        (3     (14 )% 

Amortization of deferred acquisition costs and intangibles

     3         5        (2     (40 )% 

Interest expense

     3         2        1        50
  

 

 

    

 

 

   

 

 

   

Total benefits and expenses

     46         43        3        7
  

 

 

    

 

 

   

 

 

   

Income from continuing operations before income taxes

     59         75        (16     (21 )% 

Provision for income taxes

     19         24        (5     (21 )% 
  

 

 

    

 

 

   

 

 

   

Income from continuing operations

     40         51        (11     (22 )% 

Less: net income attributable to noncontrolling interests

     21         21        —        
  

 

 

    

 

 

   

 

 

   

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

     19         30        (11     (37 )% 

Adjustment to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

         

Net investment (gains) losses, net

     —          —         —        
  

 

 

    

 

 

   

 

 

   

Net operating income

   $ 19       $ 30      $ (11     (37 )% 
  

 

 

    

 

 

   

 

 

   

Net operating income

Net operating income decreased primarily driven by higher losses and lower net investment income in the current year. The decrease was also from the additional sale of shares of this business in May 2015, which reduced our ownership percentage to 52.0%. The three months ended March 31, 2016 also included a decrease of $3 million attributable to changes in foreign exchange rates.

 

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Revenues

Premiums decreased driven by a $10 million decrease attributable to changes in foreign exchange rates during the three months ended March 31, 2016. Excluding the effects of foreign exchange, premiums increased primarily as a result of the refinements to premium recognition factors made in the third quarter of 2015, partially offset by the seasoning of our prior year in-force blocks of business and a decrease in premiums from a lower loan-to-value mix and flow volume in the current year.

Net investment income decreased primarily from lower average invested assets and a $3 million decrease attributable to changes in foreign exchange rates during the three months ended March 31, 2016.

Policy fees and other income increased primarily due to non-functional currency transactions attributable to remeasurement and repayment of intercompany loans in the prior year that did not recur.

Benefits and expenses

Benefits and other changes in policy reserves increased due to a favorable adjustment of $7 million in the first quarter of 2015 related to the expected recovery of claims paid in prior periods that did not recur. The increase was also attributable to a higher average reserve per delinquency from aging of existing delinquencies primarily in commodity-dependent regions, partially offset by favorable cures in the current year. The three months ended March 31, 2016 included a decrease of $3 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, decreased primarily from a decrease of $2 million attributable to changes in foreign exchange rates during three months ended March 31, 2016.

Provision for income taxes. The effective tax rate increased to 32.7% for the three months ended March 31, 2016 from 30.5% for the three months ended March 31, 2015. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income. The three months ended March 31, 2016 included a decrease of $2 million attributable to changes in foreign exchange rates.

Net income attributable to noncontrolling interests was flat driven by a $3 million decrease attributable to changes in foreign exchange rates during the three months ended March 31, 2016. Excluding the effects of foreign exchange, net income attributable to noncontrolling interests increased primarily related the additional sale of shares of this business in May 2015, which reduced our ownership percentage to 52.0%.

Australia Mortgage Insurance selected operating performance measures

The following table sets forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated:

 

     As of or for the three
months ended

March 31,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016      2015      2016 vs. 2015  

Primary insurance in-force

   $ 246,800       $ 240,900       $ 5,900         2

Risk in-force

   $ 86,000       $ 84,300       $ 1,700         2

New insurance written

   $ 4,400       $ 5,800       $ (1,400      (24 )% 

Net premiums written

   $ 47       $ 87       $ (40      (46 )% 

Primary insurance in-force and risk in-force

Our mortgage insurance business in Australia currently provides 100% coverage on the majority of the loans we insure in those markets. For the purpose of representing our risk in-force, we have computed an “effective”

 

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risk in-force amount, which recognizes that the loss on any particular loan will be reduced by the net proceeds received upon sale of the property. Effective risk in-force has been calculated by applying to insurance in-force a factor that represents our highest expected average per-claim payment for any one underwriting year over the life of our business in Australia. For the three months ended March 31, 2016 and 2015, this factor was 35%. We also we have certain risk share arrangements where we provide pro-rata coverage of certain loans rather than 100% coverage. As a result, for loans with these risk share arrangements, the applicable pro-rata coverage amount provided is used when applying the factor.

Primary insurance in-force and risk in-force increased primarily from flow new insurance written. Insurance in-force and risk in-force also included increases of $1.3 billion and $0.5 billion, respectively, attributable to changes in foreign exchange rates during the three months ended March 31, 2016.

New insurance written

New insurance written decreased mainly attributable to a smaller high loan-to-value originations market primarily driven by a reduction in the amount of risk lenders are willing to take in the current year resulting from regulatory focus on the market, as well as the impact of the termination of a customer relationship with respect to new business in the second quarter of 2015. The three months ended March 31, 2016 included a decrease of $500 million attributable to changes in foreign exchange rates.

Net premiums written

Most of our Australian mortgage insurance policies provide for single premiums at the time that loan proceeds are advanced. We initially record the single premiums to unearned premium reserves and recognize the premiums earned over time in accordance with the expected pattern of risk emergence. As of March 31, 2016, our unearned premium reserves were $976 million, compared to $1,036 million as of March 31, 2015.

Net premiums written decreased primarily from changes in the loan-to-value mix in the current year, as well as the impact of the termination of a customer relationship with respect to new business in the second quarter of 2015. The three months ended March 31, 2016 included a decrease of $6 million attributable to changes in foreign exchange rates.

Loss and expense ratios

The following table sets forth the loss and expense ratios for our Australia Mortgage Insurance segment for the periods indicated:

 

     Three months ended March 31,     Increase (decrease)  
     2016     2015     2016 vs. 2015  

Loss ratio

     26     15     11

Expense ratio (net earned premiums)

     27     30     (3 )% 

Expense ratio (net premiums written)

     47     31     16

The loss ratio is the ratio of incurred losses and loss adjustment expenses to net earned premiums. The expense ratio (net earned premiums) is the ratio of general expenses to net earned premiums. The expense ratio (net premiums written) is the ratio of general expenses to net premiums written. In our mortgage insurance business in Australia, general expenses consist of acquisition and operating expenses, net of deferrals, and amortization of deferred acquisition costs and intangibles.

The loss ratio increased primarily driven by a favorable adjustment of $7 million in the first quarter of 2015 related to the expected recovery of claims paid in prior periods that did not recur. The increase was also attributable to a higher average reserve per delinquency from aging of existing delinquencies primarily in

 

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commodity-dependent regions, partially offset by favorable cures in the current year. The favorable adjustment decreased the loss ratio by nine percentage points for the three months ended March 31, 2015.

The expense ratio (net earned premiums) decreased from higher premiums from refinements to premium recognition factors made in the third quarter of 2015, partially offset by the seasoning of our prior year in-force blocks of business and a decrease in premiums from a lower loan-to-value mix and flow volume in the current year. The decrease was also attributable to lower operating expenses in the current year.

The expense ratio (net premiums written) increased primarily from lower net premiums written in the current year.

Delinquent loans

The following table sets forth the number of loans insured, the number of delinquent loans and the delinquency rate for our Australia mortgage insurance portfolio as of the dates indicated:

 

     March 31, 2016     December 31, 2015     March 31, 2015  

Primary insured loans in-force

     1,479,544        1,478,434        1,498,197   

Delinquent loans

     5,889        5,552        5,378   

Percentage of delinquent loans (delinquency rate)

     0.40     0.38     0.36

Flow loans in-force

     1,366,914        1,364,628        1,382,156   

Flow delinquent loans

     5,633        5,317        5,112   

Percentage of flow delinquent loans (delinquency rate)

     0.41     0.39     0.37

Bulk loans in-force

     112,630        113,806        116,041   

Bulk delinquent loans

     256        235        266   

Percentage of bulk delinquent loans (delinquency rate)

     0.23     0.21     0.23

Flow loans in-force and bulk loans in-force decreased compared to March 31, 2015 from policy cancellations. Flow delinquent loans increased as new delinquencies more than offset cures and paid claims primarily as a result of economic pressures in commodity dependent regions.

Primary insurance delinquency rates differ by the various states and territories of Australia at any one time depending upon economic conditions and cyclical growth patterns. The table below sets forth our primary delinquency rates for the states and territories of Australia by our risk in-force as of the dates indicated. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender.

 

     Percent of primary
risk in-force as of

March 31, 2016
    Delinquency rate  
       March 31,
2016
    December 31,
2015
    March 31,
2015
 

By state and territory:

        

New South Wales

     29     0.29     0.27     0.29

Queensland

     23        0.55     0.53     0.50

Victoria

     23        0.35     0.33     0.32

Western Australia

     11        0.53     0.46     0.37

South Australia

     6        0.52     0.51     0.48

Australian Capital Territory

     3        0.18     0.17     0.13

Tasmania

     2        0.38     0.32     0.28

New Zealand

     2        0.13     0.17     0.27

Northern Territory

     1        0.21     0.17     0.20
  

 

 

       

Total

     100     0.40     0.38     0.36
  

 

 

       

 

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Delinquency rates increased in the current year primarily from higher new delinquencies in Queensland and Western Australia mainly attributable to economic pressures.

U.S. Life Insurance segment

Trends and conditions

Results of our U.S. life insurance businesses depend significantly upon the extent to which our actual future experience is consistent with assumptions and methodologies we have used in calculating our reserves. Many factors can affect the reserves in our U.S. life insurance businesses and because they are not known in advance, changes in assumptions and actual experience over time, are difficult to accurately predict and are inherently uncertain, and we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. We perform loss recognition testing to ensure that the current reserves along with the present value of future gross premiums are sufficient to cover the present value of future expected claims and expense, as well as recover the unamortized portion of DAC and, if any, PVFP. If the loss recognition test indicates a deficiency in the ability to pay all future claims and expenses, including the amortization of DAC and PVFP, a loss is recognized in earnings as an impairment of the DAC and/or PVFP balance and, if the loss is greater than the DAC and/or PVFP balance, by an increase in reserves. In our U.S. life insurance businesses, our liability for policy and contract claims is reviewed quarterly and we conduct a detailed review of our claim reserve assumptions annually typically during the third quarter of each year. Our liability for future policy benefits is reviewed at least annually as a part of our loss recognition testing typically performed in the third or fourth quarter of each year. As part of loss recognition testing, we also review the recoverability of DAC and PVFP at least annually. In addition, we perform cash flow testing separately for each of our U.S. life insurance companies on a statutory accounting basis annually. In 2016, for our U.S. life insurance businesses, we plan to perform our annual review of claims reserve assumptions in the third quarter of 2016 and our loss recognition testing in the fourth quarter of 2016.

We will continue to monitor our experience and assumptions closely and make changes to our assumptions and methodologies, as appropriate. In our assumption review in 2015, we looked at a number of assumptions, including older age mortality in our life insurance products and shock lapse in our term universal life insurance product as well as assumptions in our group long-term care insurance products, for which we did not make any changes at that time. We will review these and other assumptions again in 2016 with the benefit of updated experience and comparisons to industry experience, where appropriate, and we will likely make changes to at least one or more of these or other assumptions with a resulting negative impact. We do not know whether such impact would be material or whether it would be offset by impacts from other assumption changes that may or may not occur. Even small changes in assumptions or small deviations of actual experience from assumptions can have, and in the past have had, material impacts on our DAC amortization, reserve levels, results of operations and financial condition.

In addition, we intend to continue to enhance our modeling capabilities for various of our businesses, including for our long-term care insurance projection assumptions where we are migrating to a new modeling system in 2016 or later. This new modeling system is intended to segregate and refine assumptions based upon healthy and disabled insured lives, as compared to our total insured lives estimate we use today.

Long-term care insurance

Results of our long-term care insurance business are influenced primarily by sales, morbidity, mortality, persistency, investment yields, expenses, ability to achieve rate actions, changes in regulations and reinsurance. Sales of our products are impacted by the relative competitiveness of our current ratings, product features, pricing and commission levels, future actions by rating agencies and the impact of in-force rate actions on distribution and consumer demand. Changes in regulations or government programs, including long-term care insurance rate action legislation, could impact our long-term care insurance business either positively or negatively.

 

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As previously disclosed, we updated our assumptions and methodologies in 2014 primarily impacting claim termination rates and benefit utilization rates, resulting in increases to our long-term care insurance claim reserves. In connection with these updated assumptions and methodologies, we now establish higher claim reserves on new claims, which decreases earnings in the period in which the higher reserves are recorded. Additionally, average claim reserves for new claims are higher as the mix of claims continues to evolve, with an increasing number of policies with higher daily benefit amounts, unlimited benefit pools and higher inflation factors going on claim. Also, we expect growth in new claims as our blocks of business continue to age. Consequently, results of our long-term care insurance business were modest in 2015 and we expect results to continue to be modest in 2016 with some variability period to period. We will continue to regularly review our methodologies and assumptions in light of emerging experience and may be required to make further adjustments to our long-term care insurance claim reserves in the future, which could also impact our loss recognition testing results. Any further materially adverse changes to our claim reserves or changes as a result of loss recognition testing may have a materially negative impact on our results of operations, financial condition and business.

We experience volatility in our loss ratios caused by variances in policy terminations, claim terminations, claim severity and claim counts. Our approved premium rate actions may also cause fluctuations in our loss ratios during the period when reserves are adjusted to reflect policyholders taking reduced benefits or non-forfeiture options within their policy coverage. In addition, we periodically review our reserve assumptions and methodologies based upon developing experience, which may result in changes to claim reserves and loss recognition testing results, causing volatility in our operating results and loss ratios. Our loss ratio was 68% for the three months ended March 31, 2016 compared to 72% for the three months ended March 31, 2015.

Our long-term care insurance sales decreased 36% during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. Sales decreased primarily due to our lower ratings, higher pricing on newer products and certain distributor suspensions driven by recent rating agency actions. Following the adverse rating actions after the announcement of our results for the fourth quarter of 2015, distributors, representing in excess of 20% of our 2015 individual long-term care insurance sales, suspended distribution of our long-term care insurance products. We expect that our sales will continue to be adversely impacted by our current ratings.

In the fourth quarter of 2014, we began filing for regulatory approval of an enhanced product to improve competitiveness, while meeting our targeted returns, by, among other things, reducing premium rates, benefit levels and adjusting other coverage options. As of April 4, 2016, this enhanced product had been filed in 47 states, approved in 45 states and launched in 44 states, with an additional state targeted to be launched in the second half of 2016. In support of this new product, we are investing in targeted distribution and marketing initiatives to increase long-term care insurance sales. In addition, we are evaluating market trends and sales and investing in the development of products and distribution strategies that we believe will help expand the long-term care insurance market over time and meet broader consumer needs.

We also manage risk and capital allocated to our long-term care insurance business through utilization of external reinsurance in the form of coinsurance. We executed external reinsurance agreements to reinsure 20% of all sales of our individual long-term care insurance products that have been introduced since early 2013. External new business reinsurance levels vary and are dependent on a number of factors, including price, availability, risk tolerance and capital levels. Over time, there can be no assurance that affordable, or any, reinsurance will continue to be available. We also have external reinsurance on some older blocks of business which includes a treaty on a yearly renewable term basis on business that was written between 1998 and 2003. This yearly renewable term reinsurance provides coverage for claims on those policies for 15 years after the policy was written. After 15 years, reinsurance coverage ends for policies not on claim, while reinsurance coverage continues for policies on claim until the claim ends. Since 2013, we have seen, and may continue to see through 2018, an increase in benefit costs if and when those policies that are no longer covered under this reinsurance go on claim. In addition, we have a portion of our long-term care insurance business reinsured internally by BLAIC, one of our Bermuda-domiciled captive reinsurance subsidiaries. One of our strategic priorities is to repatriate all of the existing business, including our long-term care insurance business, held in BLAIC. The timing of the

 

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repatriation is expected to occur in 2016. If we implement the repatriation (following receipt of required regulatory approvals), there will be no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. GAAP as the financial impact of this reinsurance eliminates in consolidation, although there is expected to be an adverse impact on Genworth Life Insurance Company’s risk-based capital ratio, depending on the specifics and timing of a transaction.

As a result of ongoing challenges in our long-term care insurance business, we continue pursuing initiatives to improve the risk and profitability profile of our business including: premium rate increases and benefit reductions on our in-force policies; product refinements; changes to our current product offerings in certain states; new distribution strategies; investing in care coordination capabilities and service offerings; refining underwriting requirements; managing expense levels; actively exploring additional reinsurance strategies; executing investment strategies targeting higher returns; enhancing our financial and actuarial analytical capabilities; and considering other actions to improve the performance of the overall business. These efforts include a plan for significant future in-force premium rate increases on issued policies. For an update on rate actions, refer to “—Significant Developments—U.S. Life Insurance.” In the past, we have suspended new sales, and will consider taking similar actions in the future, in states where we are unable to obtain satisfactory rate increases on in-force policies as we did in Massachusetts, New Hampshire and Vermont. The approval process for in-force premium rate increases and the amount and timing of the rate increases approved vary by state. In certain states, the decision to approve or disapprove a rate increase can take several years. Upon approval, insureds are provided with written notice of the increase and increases are generally applied on the insured’s next policy anniversary date. Therefore, the benefits of any rate increase are not fully realized until the implementation cycle is complete and are therefore expected to be realized over time.

Continued low interest rates have also put pressure on the profitability and returns of our long-term care insurance business as higher yielding investments have matured and been replaced with lower-yielding investments. We seek to manage the impact of low interest rates through asset-liability management and interest rate hedging strategies for a portion of our long-term care insurance product cash flows.

Life insurance

Results of our life insurance business are impacted primarily by sales, competitor actions, mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements, among other factors.

On February 4, 2016, because of low sales and our lower ratings, we announced our decision to suspend sales of our traditional life insurance products after the first quarter of 2016. Life insurance sales decreased 47% during the three months ended March 31, 2016 compared to the three months ended March 31, 2015 and decreased 10% in the first quarter of 2016 from the fourth quarter of 2015. The decrease in our sales was predominantly related to our decision to suspend sales, our competitive positioning in the marketplace and distributor suspensions following adverse rating actions.

In 2015 and during the first quarter of 2016, mortality experience was favorable to pricing expectations for our term life insurance products but unfavorable for our universal life insurance products. Mortality levels may deviate each period from historical trends. Between 1999 and 2009, we had a significant increase in term life insurance sales, as compared to 1998 and prior years. As our 15-year term life insurance policies written in 1999 and 2000 transition to their post-level guaranteed premium rate period, we have experienced lower persistency compared to our pricing and valuation assumptions. The blocks of business issued since 2000 vary in size as compared to the 1999 and 2000 blocks of business. Accordingly, in the future, as additional 10-, 15- and 20-year level premium period blocks enter their post-level guaranteed premium rate period, we may experience volatility in amortization of deferred acquisition costs, premiums and mortality experience, which may reduce profitability or create losses in our term life insurance products, in amounts that could be material, if persistency is lower than our original assumptions as it has been on our 10- and 15-year business written in 1999 and 2000. We have also taken actions to mitigate potentially unfavorable impacts through the use of reinsurance, particularly for certain term life insurance policies issued between 2001 and 2004.

 

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A portion of our life insurance reserves are financed through captive reinsurance structures. The financing cost of certain captive reinsurance structures is determined in part by the financial strength ratings of our principal life insurance subsidiaries. As a result of the ratings downgrade of our principal life insurance subsidiaries in February 2016, the cost of financing increased for a portion of our captive-financed reserves by approximately $1 million per quarter. However, in April 2016, we successfully refinanced an existing reinsurance structure, which will improve after-tax earnings by $15 million to $20 million on an annual basis by reducing interest expense.

Prior to execution of the repatriation of business reinsured to BLAIC, we plan to replace term life insurance reinsured with BLAIC with third-party reinsurance, which we expect to negatively impact our results of operations.

Fixed annuities

Results of our fixed annuities business are affected primarily by investment performance, interest rate levels, the slope of the interest rate yield curve, net interest spreads, equity market conditions, mortality, persistency, expense and commission levels, product sales, competitor actions and competitiveness of our offerings.

On February 4, 2016, we announced our decision to suspend sales of our traditional fixed annuity products in the first quarter of 2016. Sales of fixed annuities decreased 48% during the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The decrease was largely as a result of our lower rating, distributor actions and our decision to suspend sales.

We monitor and change crediting rates on fixed annuities on a regular basis to maintain spreads and targeted returns. For fixed indexed annuities, equity market performance and volatility could result in additional gains or losses, although associated hedging activities are expected to partially mitigate these impacts.

 

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Segment results of operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth the results of operations relating to our U.S. Life Insurance segment for the periods indicated:

 

     Three months ended
March 31,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016     2015     2016 vs. 2015  

Revenues:

        

Premiums

   $ 436      $ 778      $ (342     (44 )% 

Net investment income

     684        671        13        2

Net investment gains (losses)

     (16     (4     (12     NM  (1) 

Policy fees and other income

     177        180        (3     (2 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     1,281        1,625        (344     (21 )% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     758        1,091        (333     (31 )% 

Interest credited

     144        150        (6     (4 )% 

Acquisition and operating expenses, net of deferrals

     165        163        2        1

Amortization of deferred acquisition costs and intangibles

     78        73        5        7

Interest expense

     28        25        3        12
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     1,173        1,502        (329     (22 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     108        123        (15     (12 )% 

Provision for income taxes

     39        43        (4     (9 )% 
  

 

 

   

 

 

   

 

 

   

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

     69        80        (11     (14 )% 

Adjustments to income from continuing operations available to Genworth Financial, Inc.’s common stockholders:

        

Net investment (gains) losses, net

     7        1        6        NM  (1) 

(Gains) losses from life block transactions, net

     6        —          6        NM  (1) 

Expenses related to restructuring, net

     9        —          9        NM  (1) 
  

 

 

   

 

 

   

 

 

   

Net operating income

   $ 91      $ 81      $ 10        12
  

 

 

   

 

 

   

 

 

   

 

(1)  We define “NM” as not meaningful for increases or decreases greater than 200%.

The following table sets forth net operating income for the businesses included in our U.S. Life Insurance segment for the periods indicated:

 

     Three months ended
March 31,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016      2015      2016 vs. 2015  

Net operating income:

          

Long-term care insurance

   $ 34       $ 10       $ 24        NM  (1) 

Life insurance

     31         40         (9     (23 )% 

Fixed annuities

     26         31         (5     (16 )% 
  

 

 

    

 

 

    

 

 

   

Total net operating income

   $ 91       $ 81       $ 10        12
  

 

 

    

 

 

    

 

 

   

 

(1)  We define “NM” as not meaningful for increases or decreases greater than 200%.

 

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Net operating income

 

    Our long-term care insurance business increased $24 million largely as a result of higher premiums and reduced benefits of $52 million in the current year from in-force rate actions approved and implemented, partially offset principally by lower terminations, higher severity on new claims and a $4 million unfavorable correction related to the calculation on our in-force rate actions in the current year. The prior year also included net unfavorable adjustments of $7 million reflecting a refinement to a reserve calculation on our acquired block of business, partially offset primarily by a favorable correction related to reinsurance that did not recur.

 

    Our life insurance business decreased $9 million principally from unfavorable mortality in our universal life insurance products and higher term universal life insurance reserves reflecting our updated assumptions from the fourth quarter of 2015.

 

    Our fixed annuities business decreased $5 million primarily related to less favorable mortality in the current year.

Revenues

Premiums

 

    Our long-term care insurance business increased $29 million largely from $31 million of increased premiums in the current year from in-force rate actions approved and implemented.

 

    Our life insurance business decreased $364 million attributable to higher ceded reinsurance in the current year. We initially ceded $326 million of certain term life insurance premiums under a new reinsurance treaty as part of a life block transaction in the current year.

 

    Our fixed annuities business decreased $7 million principally from lower sales of our life-contingent products resulting from the suspension of product offerings in the current year.

Net investment income

 

    Our long-term care insurance business increased $16 million largely from higher average invested assets due to growth of our in-force block, partially offset by lower reinvestment yields in the current year.

 

    Our life insurance business increased $6 million due to higher favorable prepayment speed adjustments in the current year.

 

    Our fixed annuities business decreased $9 million largely due to lower average invested assets and lower gains of $2 million from bond calls and mortgage loan prepayments in the current year.

Net investment gains (losses). The increase in net investment losses was predominantly related to our fixed annuities business principally from derivative losses in the current year compared to derivative gains in the prior year, higher net losses from the sale of investment securities and higher impairments. These increases were partially offset by gains on embedded derivatives related to our fixed indexed annuities in the current year compared to losses in the prior year.

Policy fees and other income. The decrease was primarily attributable to our life insurance business largely related to lower production and a decrease in our term universal and universal life insurance in-force blocks in the current year.

Benefits and expenses

Benefits and other changes in policy reserves

 

   

Our long-term care insurance business increased $10 million principally from aging and growth of the in-force block, lower terminations, higher severity on new claims, a $7 million unfavorable correction

 

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related to a calculation on our in-force rate actions and incremental reserves of $4 million recorded in connection with an accrual for profits followed by losses in the current year. These increases were partially offset by reduced benefits of $52 million in the current year related to in-force rate actions approved and implemented. The prior year also included net unfavorable adjustments of $11 million reflecting a refinement to a reserve calculation on our acquired block of business, partially offset primarily by a favorable correction related to reinsurance.

 

    Our life insurance business decreased $337 million principally related to higher ceded reinsurance in the current year. We initially ceded $331 million of certain term life insurance reserves under a new reinsurance treaty as part of a life block transaction. This decrease was partially offset by unfavorable mortality in our universal life insurance products and higher term universal life insurance reserves reflecting our updated assumptions from the fourth quarter of 2015.

 

    Our fixed annuities business decreased $6 million largely attributable to lower sales of our life-contingent products and lower interest credited, partially offset by less favorable mortality in the current year.

Interest credited. The decrease in interest credited was mainly related to our fixed annuities business driven by a decrease in average account values and lower crediting rates in the current year.

Acquisition and operating expenses, net of deferrals

 

    Our long-term care insurance business was flat as a $3 million restructuring charge and a $3 million write-off of a receivable associated with a disputed reinsurance claim was offset by lower production in the current year.

 

    Our life insurance business was flat as a $5 million restructuring charge was offset by lower production in the current year.

 

    Our fixed annuities business increased $2 million largely attributable to a $4 million restructuring charge, partially offset by lower production in the current year.

Amortization of deferred acquisition costs and intangibles

 

    Our life insurance business increased $3 million largely related to the write-off of $3 million of computer software in connection with a restructuring charge in the current year.

 

    Our fixed annuities business increased $2 million largely attributable to a less favorable unlocking primarily related to lapses in the current year.

Interest expense. Interest expense increased driven by our life insurance business principally from the write-off of $9 million of deferred borrowing costs associated with our non-recourse funding obligations as part of a life block transaction and from the impact of credit rating downgrades which increased the cost of financing term life insurance reserves, partially offset by lower letter of credit fees in the current year.

Provision for income taxes. The effective tax rate was 35.3% for the three months ended March 31, 2016 and 2015.

 

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U.S. Life Insurance selected operating performance measures

Long-term care insurance

The following table sets forth selected operating performance measures regarding our individual and group long-term care insurance products for the periods indicated:

 

     Three months ended
March 31,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016     2015     2016 vs. 2015  

Net earned premiums:

        

Individual long-term care insurance

   $ 591      $ 561      $ 30        5

Group long-term care insurance

     27        28        (1     (4 )% 
  

 

 

   

 

 

   

 

 

   

Total

   $ 618      $ 589      $ 29        5
  

 

 

   

 

 

   

 

 

   

Annualized first-year premiums and deposits:

        

Individual long-term care insurance

   $ 5      $ 10      $ (5     (50 )% 

Group long-term care insurance

     2        1        1        100
  

 

 

   

 

 

   

 

 

   

Annualized first-year premiums and deposits

   $ 7      $ 11      $ (4     (36 )% 
  

 

 

   

 

 

   

 

 

   

Loss ratio

     68     72     (4 )%   

The loss ratio is the ratio of benefits and other changes in reserves less tabular interest on reserves less loss adjustment expenses to net earned premiums.

Net earned premiums increased mainly attributable to $31 million of increased premiums in the current year from in-force rate actions approved and implemented.

Annualized first-year premiums and deposits decreased principally from reduced sales due to higher pricing on newer products and certain distributor suspensions driven by recent rating agency actions.

The loss ratio decreased for the three months ended March 31, 2016 largely attributable to $83 million of higher premiums and reduced benefits in the current year related to in-force rate actions approved and implemented, partially offset by lower terminations, higher severity on new claims, a $7 million unfavorable correction related to a calculation on our in-force rate actions and incremental reserves of $4 million recorded in connection with an accrual for profits followed by losses in the current year. The prior year also included net unfavorable adjustments of $11 million reflecting a refinement to a reserve calculation on our acquired block of business, partially offset primarily by a favorable correction related to reinsurance.

 

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Life insurance

The following table sets forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:

 

     Three months ended
March 31,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016     2015      2016 vs. 2015  

Term and whole life insurance

         

Net earned premiums

   $ (185   $ 179       $ (364     NM  (1) 

Sales

     5        9         (4     (44 )% 

Life insurance in-force, net of reinsurance

     228,958        315,478         (86,520     (27 )% 

Life insurance in-force before reinsurance

     506,572        520,749         (14,177     (3 )% 

Term universal life insurance

         

Net deposits

   $ 64      $ 66       $ (2     (3 )% 

Life insurance in-force, net of reinsurance

     124,265        127,508         (3,243     (3 )% 

Life insurance in-force before reinsurance

     125,189        128,498         (3,309     (3 )% 

Universal life insurance

         

Net deposits

   $ 111      $ 141       $ (30     (21 )% 

Sales:

         

Universal life insurance

     2        4         (2     (50 )% 

Linked-benefits

     2        4         (2     (50 )% 

Life insurance in-force, net of reinsurance

     39,888        41,576         (1,688     (4 )% 

Life insurance in-force before reinsurance

     45,945        48,133         (2,188     (5 )% 

Total life insurance

         

Net earned premiums and deposits

   $ (10   $ 386       $ (396     (103 )% 

Sales:

         

Term life insurance

     5        9         (4     (44 )% 

Universal life insurance

     2        4         (2     (50 )% 

Linked-benefits

     2        4         (2     (50 )% 

Life insurance in-force, net of reinsurance

     393,111        484,562         (91,451     (19 )% 

Life insurance in-force before reinsurance

     677,706        697,380         (19,674     (3 )% 

 

(1)  We define “NM” as not meaningful for increases or decreases greater than 200%.

Term and whole life insurance

Net earned premiums and our life insurance in-force, net of reinsurance, decreased primarily related to higher ceded reinsurance in the current year. We initially ceded $326 million of certain term life insurance premiums under a new reinsurance treaty as part of a life block transaction. Sales of our term life insurance product decreased predominantly related to certain distributor suspensions driven by recent rating agency actions and from our decision to suspend sales of our traditional life insurance products on March 7, 2016.

Term universal life insurance

We no longer solicit sales of term universal life insurance products; however, we continue to service our existing block of business.

Universal life insurance

Net deposits decreased primarily related to changes in our competitive positioning in the marketplace, distributor suspensions following recent adverse rating actions and our decision to suspend sales of our traditional life insurance products on March 7, 2016. Our life insurance in-force decreased primarily from higher lapses of older issued policies and lower deposits in the current year.

 

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Fixed annuities

The following table sets forth selected operating performance measures regarding our fixed annuities as of or for the dates indicated:

 

     As of or for the three
months ended March 31,
 

(Amounts in millions)

   2016     2015  

Single Premium Deferred Annuities

    

Account value, beginning of period

   $ 12,480      $ 12,437   

Deposits

     162        310   

Surrenders, benefits and product charges

     (314     (352
  

 

 

   

 

 

 

Net flows

     (152     (42

Interest credited and investment performance

     69        82   
  

 

 

   

 

 

 

Account value, end of period

   $ 12,397      $ 12,477   
  

 

 

   

 

 

 

Single Premium Immediate Annuities

    

Account value, beginning of period

   $ 5,180      $ 5,763   

Premiums and deposits

     26        40   

Surrenders, benefits and product charges

     (193     (211
  

 

 

   

 

 

 

Net flows

     (167     (171

Interest credited

     59        64   

Effect of accumulated net unrealized investment gains (losses)

     91        69   
  

 

 

   

 

 

 

Account value, end of period

   $ 5,163      $ 5,725   
  

 

 

   

 

 

 

Structured Settlements

    

Account value, net of reinsurance, beginning of period

   $ 1,066      $ 1,078   

Surrenders, benefits and product charges

     (15     (15
  

 

 

   

 

 

 

Net flows

     (15     (15

Interest credited

     14        14   
  

 

 

   

 

 

 

Account value, net of reinsurance, end of period

   $ 1,065      $ 1,077   
  

 

 

   

 

 

 

Total premiums from fixed annuities

   $ 3      $ 10   
  

 

 

   

 

 

 

Total deposits from fixed annuities

   $ 185      $ 340   
  

 

 

   

 

 

 

Single Premium Deferred Annuities

Account value of our single premium deferred annuities decreased as surrenders and benefits outpaced deposits and interest credited. Sales decreased primarily related to suspension of our products by distributors driven by the rating actions and from our decision to suspend sales of our traditional fixed annuity products on March 7, 2016.

Single Premium Immediate Annuities

Account value of our single premium immediate annuities decreased as benefits exceeded net unrealized investment gains, interest credited and premiums and deposits. Sales declined primarily related to suspension of our products by distributors driven by the rating actions and from our decision to suspend sales of our traditional fixed annuity products on March 7, 2016.

Structured Settlements

We no longer solicit sales of structured settlements; however, we continue to service our existing block of business.

 

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Valuation systems and processes

Our U.S. Life Insurance segment will continue to migrate to a new valuation and projection platform for certain lines of business, while we upgrade platforms for other lines of business. For example, we are migrating to a new modeling system in our long-term care insurance business in 2016 or later. The migration and upgrades are part of our ongoing efforts to improve the infrastructure and capabilities of our information systems and our routine assessment and refinement of financial, actuarial, investment and risk management capabilities enterprise wide. These efforts will also provide our U.S. Life Insurance segment with improved platforms to support emerging accounting guidance and ongoing changes in capital regulations. Concurrently, valuation processes and methodologies will be reviewed, and may result in additional refinements to assumptions. Any material changes in balances, margins or income trends that may result from these activities will be disclosed accordingly.

Runoff segment

Trends and conditions

Results of our Runoff segment are affected primarily by investment performance, interest rate levels, net interest spreads, equity market conditions, mortality, policyholder loan activity, policyholder surrenders and scheduled maturities. In addition, the results of our Runoff segment can significantly impact our operating performance, regulatory capital requirements, distributable earnings and liquidity.

We discontinued sales of our individual and group variable annuities in 2011; however, we continue to service our existing blocks of variable annuity business and accept additional deposits on existing contracts. Equity market volatility has caused fluctuations in the results of our variable annuity products and regulatory capital requirements. In the future, equity and interest rate market performance and volatility could result in additional gains or losses in our variable annuity products although associated hedging activities are expected to partially mitigate these impacts. Volatility in the results of our variable annuity products can result in favorable or unfavorable impacts on earnings and statutory capital. In addition to the use of hedging activities to help mitigate impacts related to equity market volatility and interest rate risks, in the future, we may consider reinsurance opportunities to further mitigate volatility in results and manage capital.

The results of our institutional products are impacted by scheduled maturities of the liabilities, credit and interest income performance on assets, as well as liquidity levels. However, we believe our liquidity planning and our asset-liability management will mitigate this risk. While we do not actively sell institutional products, we may periodically issue funding agreements for asset-liability matching purposes.

Several factors may impact the time period for these products to runoff including the specific policy types, economic conditions and management strategies.

 

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Segment results of operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:

 

     Three months ended
March 31,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2016     2015     2016 vs. 2015  

Revenues:

        

Net investment income

   $ 35      $ 31      $ 4        13

Net investment gains (losses)

     (8     (6     (2     (33 )% 

Policy fees and other income

     42        49        (7     (14 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     69        74        (5     (7 )% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     15        7        8        114

Interest credited

     33        30        3        10

Acquisition and operating expenses, net of deferrals

     16        19        (3     (16 )% 

Amortization of deferred acquisition costs and intangibles

     6        5        1        20
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     70        61        9        15
  

 

 

   

 

 

   

 

 

   

Income (loss) from continuing operations before income taxes

     (1     13        (14     (108 )% 

Provision (benefit) for income taxes

     (2     3        (5     (167 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     1        10        (9     (90 )% 

Adjustment to income from continuing operations:

        

Net investment (gains) losses, net

     3        1        2        200
  

 

 

   

 

 

   

 

 

   

Net operating income

   $ 4      $ 11      $ (7     (64 )% 
  

 

 

   

 

 

   

 

 

   

Net operating income

Net operating income decreased primarily driven by lower account values and less favorable equity market performance in our variable annuity products and unfavorable mortality in our corporate-owned life insurance products in the current year.

Revenues

Net investment income increased $4 million driven by increase in policy loan income in our corporate-owned life insurance products and higher gains from limited partnerships in the current year.

Policy fees and other income decreased mainly attributable to lower account values in our variable annuity products in the current year.

Benefits and expenses

Benefits and other changes in policy reserves increased primarily attributable to our variable annuity products from an increase in our GMDB reserves due to less favorable equity market performance and unfavorable mortality in our corporate-owned life insurance products in the current year.

Interest credited increased largely related to higher loan cash values in our corporate-owned life insurance products in the current year.

 

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Acquisition and operating expenses, net of deferrals, decreased largely related to lower commissions as a result of the runoff of our variable annuity products in the current year.

Provision (benefit) for income taxes. The effective tax rate increased to 151.6% for the three months ended March 31, 2016 from 26.0% for the three months ended March 31, 2015. The increase in the effective tax rate is primarily attributable to changes in tax favored investment benefits in relation to pre-tax results in the prior year.

Runoff selected operating performance measures

Variable annuity and variable life insurance products

The following table sets forth selected operating performance measures regarding our variable annuity and variable life insurance products as of or for the dates indicated:

 

     As of or for the three
months ended March 31,
 

(Amounts in millions)

   2016     2015  

Variable Annuities—Income Distribution Series (1)

    

Account value, beginning of period

   $ 4,942      $ 5,666   

Deposits

     6        9   

Surrenders, benefits and product charges

     (139     (190
  

 

 

   

 

 

 

Net flows

     (133     (181

Interest credited and investment performance

     79        110   
  

 

 

   

 

 

 

Account value, end of period

   $ 4,888      $ 5,595   
  

 

 

   

 

 

 

Traditional Variable Annuities

    

Account value, net of reinsurance, beginning of period

   $ 1,241      $ 1,455   

Deposits

     1        2   

Surrenders, benefits and product charges

     (53     (75
  

 

 

   

 

 

 

Net flows

     (52     (73

Interest credited and investment performance

     11        40   
  

 

 

   

 

 

 

Account value, net of reinsurance, end of period

   $ 1,200      $ 1,422   
  

 

 

   

 

 

 

Variable Life Insurance

    

Account value, beginning of period

   $ 291      $ 313   

Deposits

     2        2   

Surrenders, benefits and product charges

     (10     (8
  

 

 

   

 

 

 

Net flows

     (8     (6

Interest credited and investment performance

     —         9   
  

 

 

   

 

 

 

Account value, end of period

   $ 283      $ 316   
  

 

 

   

 

 

 

 

(1)  The Income Distribution Series products are comprised of our deferred and immediate variable annuity products, including those variable annuity products with rider options that provide guaranteed income benefits, including guaranteed minimum withdrawal benefits (“GMWBs”) and certain types of guaranteed annuitization benefits. These products do not include fixed single premium immediate annuities or deferred annuities, which may also serve income distribution needs.

Variable Annuities—Income Distribution Series

Account value related to our Income Distribution Series products decreased primarily related to surrenders outpacing less favorable equity market performance. We no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.

 

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Traditional Variable Annuities

In our traditional variable annuities, the decrease in account value was primarily the result of surrenders outpacing less favorable equity market performance. We no longer solicit sales of our variable annuities; however, we continue to service our existing block of business and accept additional deposits on existing contracts.

Variable Life Insurance

We no longer solicit sales of variable life insurance; however, we continue to service our existing block of business.

Institutional products

The following table sets forth selected operating performance measures regarding our institutional products as of or for the dates indicated:

 

     As of or for the three
months ended March 31,
 

(Amounts in millions)

   2016           2015  

GICs, FABNs and Funding Agreements

        

Account value, beginning of period

   $ 410          $ 493   

Deposits

     150            —    

Surrenders and benefits

     (1         (3
  

 

 

       

 

 

 

Net flows

     149            (3

Interest credited

     2            1   
  

 

 

       

 

 

 

Account value, end of period

   $ 561          $ 491   
  

 

 

       

 

 

 

Account value related to our institutional products increased mainly attributable to higher deposits as a result of issuing funding agreements for asset-liability management and yield enhancement in the current year.

 

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Corporate and Other Activities

Results of operations

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:

 

     Three months ended
March 31,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

     2016         2015       2016 vs. 2015  

Revenues:

        

Premiums

   $ 6      $ 7      $ (1     (14 )% 

Net investment income

     2        (6     8        133

Net investment gains (losses)

     (14     11        (25     NM  (1) 

Policy fees and other income

     1        —         1        NM  (1) 
  

 

 

   

 

 

   

 

 

   

Total revenues

     (5     12        (17     (142 )% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     2        5        (3     (60 )% 

Acquisition and operating expenses, net of deferrals

     137        14        123        NM  (1) 

Amortization of deferred acquisition costs and intangibles

     —         1        (1     (100 )% 

Interest expense

     70        75        (5     (7 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     209        95        114        120
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations before income taxes

     (214     (83     (131     (158 )% 

Benefit for income taxes

     (96     (30     (66     NM  (1) 
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations

     (118     (53     (65     (123 )% 

Adjustments to loss from continuing operations:

        

Net investment (gains) losses, net

     10        (7     17        NM  (1) 

(Gains) losses on sale of businesses, net

     (20     —         (20     NM  (1) 

(Gains) losses on early extinguishment of debt, net

     11        —         11        NM  (1) 

Fees associated with bond consent solicitation, net

     12        —         12        NM  (1) 
  

 

 

   

 

 

   

 

 

   

Net operating loss

   $ (105   $ (60   $ (45     (75 )% 
  

 

 

   

 

 

   

 

 

   

 

(1)  We define “NM” as not meaningful for increases or decreases greater than 200%.

Net operating loss

The net operating loss increased as a result of additional legal fees and expenses of $54 million, partially offset by higher tax benefits and net investment income in the current year.

Revenues

Net investment income increased related to the elimination of affiliate preferred stock dividends of approximately $8 million in the prior year that did not recur.

Net investment losses in the current year were driven by derivative losses and impairments, partially offset by net realized gains on the sale of investment securities. Net investment gains in the prior year resulted from derivative gains and net realized gains on the sale of investment securities.

 

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Benefits and expenses

Benefits and other changes in policy reserves decreased primarily related to our European mortgage insurance business driven by lower new delinquencies and improved aging on our existing delinquencies.

Acquisition and operating expenses, net of deferrals, increased mainly driven by $69 million for the planned settlement of In re Genworth Financial, Inc. Securities Litigation and an additional $10 million of legal fees and expenses related to this litigation. In addition, we paid a make-whole expense of $20 million on the early redemption of Genworth Holdings’ 2016 senior notes in January 2016 and paid broker, advisor and investment banking fees of $18 million associated with Genworth Holdings’ bond consent solicitation in March 2016. The increase was also attributable to an additional estimated loss of $7 million recorded in the first quarter of 2016 related to the planned sale of our mortgage insurance business in Europe and $4 million of additional legal fees in the current year related to other pending litigation. We also had higher net expenses after allocations to our operating segments in the current year.

Interest expense decreased largely driven by the redemption of $298 million of Genworth Holdings’ senior notes in January 2016.

The increase in the income tax benefit in the current year was primarily related to the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe. This increase was partially offset by stock-based compensation and taxes on foreign income in the current year.

Investments and Derivative Instruments

Trends and conditions

Investments—credit and investment markets

U.S. Treasury yields declined sharply in the first quarter of 2016 as slower economic growth in various global economies, foreign exchange rates and negative interest rates across much of Europe and Japan drove investors to U.S. markets. Growth concerns led to further monetary stimulus from global central banks and the U.S. Federal Reserve, which put pressure on interest rates.

Oil and metals prices declined to new lows earlier in the first quarter of 2016 before ending the quarter modestly higher in March 2016. Credit spreads, excluding the energy and metals sectors, closed the first quarter of 2016 relatively unchanged from year end levels; however, commodity exposed credits experienced extreme volatility. By the end of the first quarter of 2016, securities in the energy and metals sectors improved to outperform on the quarter, despite widespread ratings downgrades.

As of March 31, 2016, our fixed maturities securities portfolio, which was 96% investment grade, comprises 79% of our total investment portfolio. Our $3.6 billion energy portfolio was predominantly investment grade and our metals and mining sector holdings were less than 1% of our total investment portfolio as March 31, 2016. While we may see prolonged weakness in oil and other commodity prices that could continue to pressure ratings in those sectors, we believe our energy portfolio is well-diversified and would expect manageable capital impact on our U.S. life insurance subsidiaries.

Derivatives

We actively responded to the risk to our derivatives portfolio arising from our counterparties’ right to terminate their bilateral over-the-counter (“OTC”) derivatives transactions with us following the downgrades of Genworth Holdings and our life insurance subsidiaries by Standard & Poor’s Financial Services, LLC and Moody’s Investors Services Inc. in February 2016. We negotiated with our counterparties to determine whether they would exercise their rights to terminate the transactions, agree to maintain the transactions with us under revised terms or permit us to move the transactions to clearing through the Chicago Mercantile Exchange

 

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(“CME”). No counterparties terminated any of the existing transactions based on the downgrades. We were able to maintain $3.0 billion in bilateral OTC derivatives transactions subject to providing initial margin in an aggregate amount of $209 million. We moved $5.8 billion of bilateral OTC transactions to clearing through the CME.

As a result of the credit rating downgrades in February 2016, the then current ratings of Genworth Holdings and our life insurance subsidiaries reached levels where our counterparties could terminate the transactions under our master swap agreements. However, as of March 31, 2016, we have successfully maintained all of these agreements either on a bilateral or a cleared basis. As of March 31, 2016, $13.6 billion notional of our derivatives portfolio under our master swap agreements was cleared through the CME. The customer swap agreements that govern our cleared derivatives contain provisions that enable our clearing agents to request initial margin in excess of CME requirements. As of March 31, 2016, we posted initial margin of $308 million to our clearing agents, which represented approximately $49 million more than was otherwise required by the clearinghouse. Because our clearing agents serve as guarantors of our obligations to the CME, the customer agreements contain broad termination provisions that are not specifically dependent on ratings. As of March 31, 2016, $4.5 billion notional of our derivatives portfolio was traded under OTC derivatives agreements pursuant to which we have posted aggregate independent amounts of $209 million and are holding collateral from counterparties in the amount of $95 million. We have $1.5 billion in bilateral OTC derivatives where the counterparty has the right to terminate its transactions with us based on our current ratings. Given our current ratings, our ability to enter into new derivatives transactions will be more limited.

Investment results

The following table sets forth information about our investment income, excluding net investment gains (losses), for each component of our investment portfolio for the periods indicated:

 

     Three months ended March 31,     Increase (decrease)  

(Amounts in millions)

   2016     2015     2016 vs. 2015  
     Yield     Amount     Yield     Amount     Yield     Amount  

Fixed maturity securities—taxable

     4.7   $ 641        4.6   $ 632        0.1   $ 9   

Fixed maturity securities—non-taxable

     3.6     3        3.5     3        0.1     —    

Commercial mortgage loans

     5.2     81        5.6     85        (0.4 )%      (4

Restricted commercial mortgage loans related to securitization entities

     5.1     2        8.2     4        (3.1 )%      (2

Equity securities

     5.1     5        6.1     4        (1.0 )%      1   

Other invested assets

     24.6     38        35.4     40        (10.8 )%      (2

Restricted other invested assets related to securitization entities

     2.0     2        1.0     1        1.0     1   

Policy loans

     8.9     35        8.8     33        0.1     2   

Cash, cash equivalents and short-term investments

     0.4     5        0.2     3        0.2     2   
    

 

 

     

 

 

     

 

 

 

Gross investment income before expenses and fees

     4.6     812        4.6     805        —       7   

Expenses and fees

     (0.1 )%      (23     (0.1 )%      (24     —       1   
    

 

 

     

 

 

     

 

 

 

Net investment income

     4.5   $ 789        4.5   $ 781        —     $ 8   
    

 

 

     

 

 

     

 

 

 

Average invested assets and cash

     $ 69,851        $ 69,743        $ 108   
    

 

 

     

 

 

     

 

 

 

Yields are based on net investment income as reported under U.S. GAAP and are consistent with how we measure our investment performance for management purposes. Yields are annualized, for interim periods, and are calculated as net investment income as a percentage of average quarterly asset carrying values except for fixed maturity and equity securities, derivatives and derivative counterparty collateral, which exclude unrealized fair value adjustments, and securities lending activity, which is included in other invested assets and is calculated net of the corresponding securities lending liability.

 

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For the three months ended March 31, 2016, annualized weighted-average investment yields remained constant primarily attributable to $10 million higher favorable prepayment speed adjustment on structured securities and higher average invested assets, partially offset by lower gains of $3 million related to bond calls and mortgage prepayments in the current year. The three months ended March 31, 2016 included a decrease of $8 million attributable to changes in foreign exchange rates.

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

 

     Three months ended
March 31,
 

(Amounts in millions)

   2016      2015  

Available-for-sale securities:

     

Realized gains

   $ 16       $ 15   

Realized losses

     (23      (12
  

 

 

    

 

 

 

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

     (7      3   
  

 

 

    

 

 

 

Impairments:

     

Total other-than-temporary impairments

     (11      (3

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

     —           —     
  

 

 

    

 

 

 

Net other-than-temporary impairments

     (11      (3
  

 

 

    

 

 

 

Trading securities

     28         6   

Commercial mortgage loans

     1         2   

Net gains (losses) related to securitization entities

     8         8   

Derivative instruments

     (38      (32
  

 

 

    

 

 

 

Net investment gains (losses)

   $ (19    $ (16
  

 

 

    

 

 

 

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

 

    We recorded $8 million of higher net other-than-temporary impairments during the three months ended March 31, 2016. Of total impairments of $11 million recorded during the three months ended March 31, 2016, $8 million related to corporate securities and $3 million related to limited partnerships. Impairments of $3 million during the three months ended March 31, 2015 related to commercial mortgage loans.

 

    Net investment losses related to derivatives of $38 million during the three months ended March 31, 2016 were primarily associated with hedging programs for our runoff variable annuity products, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuation. We also had losses associated with derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries and with hedging programs for our fixed indexed annuity products. These losses were partially offset by gains in derivatives used to hedge foreign currency risk associated with assets held and gains related to hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business.

Net investment losses related to derivatives of $32 million during the three months ended March 31, 2015 were primarily associated with losses related to derivatives used to hedge foreign currency risk associated with assets held. In addition, there were GMWB losses, including decreases in the values of instruments used to protect statutory surplus from equity market fluctuation. These losses were partially offset by gains related to derivatives to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.

 

   

We recorded net losses of $7 million related to the sale of available-for-sale securities during the three months ended March 31, 2016 compared to net gains of $3 million during the three months ended

 

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March 31, 2015. We recorded $22 million of higher net gains related to trading securities during the three months ended March 31, 2016 compared to the three months ended March 31, 2015.

Investment portfolio

The following table sets forth our cash, cash equivalents and invested assets as of the dates indicated:

 

     March 31, 2016     December 31, 2015  

(Amounts in millions)

   Carrying value      % of total     Carrying value      % of total  

Fixed maturity securities, available-for-sale:

          

Public

   $ 45,118         59   $ 43,136         58

Private

     15,172         20        15,061         20   

Commercial mortgage loans

     6,179         8        6,170         8   

Other invested assets

     2,923         4        2,309         3   

Policy loans

     1,565         2        1,568         2   

Restricted other invested assets related to securitization entities

     422         1        413         1   

Equity securities, available-for-sale

     431         1        310         —     

Restricted commercial mortgage loans related to securitization entities

     155         —          161         —     

Cash and cash equivalents

     4,043         5        5,965         8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total cash, cash equivalents and invested assets

   $ 76,008         100   $ 75,093         100
  

 

 

    

 

 

   

 

 

    

 

 

 

For a discussion of the change in cash, cash equivalents and invested assets, see the comparison for this line item under “—Consolidated Balance Sheets.” See note 4 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to our investment portfolio.

We hold fixed maturity, equity and trading securities, derivatives, embedded derivatives, securities held as collateral and certain other financial instruments, which are carried at fair value. Fair value is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. As of March 31, 2016, approximately 9% of our investment holdings recorded at fair value was based on significant inputs that were not market observable and were classified as Level 3 measurements. See note 6 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to fair value.

 

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Fixed maturity and equity securities

As of March 31, 2016, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

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

  $ 5,389      $ 1,135      $ —        $ —        $ —        $ 6,524   

State and political subdivisions

    2,272        262        —          (17     —          2,517   

Non-U.S. government (1)

    1,944        138        —          (2     —          2,080   

U.S. corporate:

           

Utilities

    3,752        530        —          (13     —          4,269   

Energy

    2,193        85        —          (114     —          2,164   

Finance and insurance

    5,357        476        10        (28     —          5,815   

Consumer—non-cyclical

    3,838        522        —          (6     —          4,354   

Technology and communications

    2,147        175        —          (22     —          2,300   

Industrial

    1,165        82        —          (22     —          1,225   

Capital goods

    1,801        254        —          (5     —          2,050   

Consumer—cyclical

    1,568        135        —          (11     —          1,692   

Transportation

    1,035        105        —          (8     —          1,132   

Other

    362        29        —          (3     —          388   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate (1)

    23,218        2,393        10        (232     —          25,389   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    1,038        56        —          (10     —          1,084   

Energy

    1,459        48        —          (70     —          1,437   

Finance and insurance

    2,471        154        —          (6     —          2,619   

Consumer—non-cyclical

    735        36        —          (5     —          766   

Technology and communications

    994        59        —          (14     —          1,039   

Industrial

    1,047        32        —          (45     —          1,034   

Capital goods

    594        31        —          (15     —          610   

Consumer—cyclical

    538        10        —          (4     —          544   

Transportation

    561        62        —          (3     —          620   

Other

    2,669        224        —          (17     —          2,876   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate (1)

    12,106        712        —          (189     —          12,629   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed (2)

    4,716        403        9        (6     —          5,122   

Commercial mortgage-backed

    2,588        133        3        (10     (1     2,713   

Other asset-backed (2)

    3,381        12        1        (78     —          3,316   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    55,614        5,188        23        (534     (1     60,290   

Equity securities

    461        12        —          (42     —          431   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 56,075      $ 5,200      $ 23      $ (576   $ (1   $ 60,721   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Fair value included European periphery exposure of $395 million in Ireland, $251 million in Spain, $105 million in Italy and $16 million in Portugal.
(2) Fair value included $49 million collateralized by Alt-A residential mortgage loans and $31 million collateralized by sub-prime residential mortgage loans.

 

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As of December 31, 2015, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

  Amortized
cost or
cost
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Not other-than-
temporarily
impaired
    Other-than-
temporarily
impaired
    Fair
value
 

Fixed maturity securities:

           

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

  $ 5,487      $ 732      $  —        $ (16   $  —        $ 6,203   

State and political subdivisions

    2,287        181        —         (30     —         2,438   

Non-U.S. government (1)

    1,910        110        —         (5     —         2,015   

U.S. corporate:

           

Utilities

    3,355        364        —         (26     —         3,693   

Energy

    2,560        103        —         (162     —         2,501   

Finance and insurance

    5,268        392        15        (43     —         5,632   

Consumer—non-cyclical

    3,755        371        —         (30     —         4,096   

Technology and communications

    2,108        123        —         (38     —         2,193   

Industrial

    1,164        53        —         (44     —         1,173   

Capital goods

    1,774        188        —         (12     —         1,950   

Consumer—cyclical

    1,602        95        —         (22     —         1,675   

Transportation

    1,023        75        —         (12     —         1,086   

Other

    385        22        —         (5     —         402   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate (1)

    22,994        1,786        15        (394     —         24,401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    815        37        —         (9     —         843   

Energy

    1,700        64        —         (78     —         1,686   

Finance and insurance

    2,327        152        2        (8     —         2,473   

Consumer—non-cyclical

    746        24        —         (18     —         752   

Technology and communications

    978        36        —         (26     —         988   

Industrial

    1,063        19        —         (96     —         986   

Capital goods

    602        19        —         (17     —         604   

Consumer—cyclical

    522        8        —         (4     —         526   

Transportation

    559        52        —         (6     —         605   

Other

    2,574        187        —         (25     —         2,736   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate (1)

    11,886        598        2        (287     —         12,199   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed (2)

    4,777        330        11        (17     —         5,101   

Commercial mortgage-backed

    2,492        84        3        (20     —         2,559   

Other asset-backed (2)

    3,328        11        1        (59     —         3,281   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    55,161        3,832        32        (828     —         58,197   

Equity securities

    325        8        —         (23     —         310   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 55,486      $ 3,840      $ 32      $ (851   $  —       $ 58,507   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Fair value included European periphery exposure of $361 million in Ireland, $244 million in Spain, $103 million in Italy and $15 million in Portugal.
(2) Fair value included $69 million collateralized by Alt-A residential mortgage loans and $32 million collateralized by sub-prime residential mortgage loans.

 

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Fixed maturity securities increased $2.1 billion principally from higher net unrealized gains attributable to changes in interest rates as well as changes in foreign exchange rates from the weakening of the U.S. dollar in the current year.

Our exposure in peripheral European countries consists of fixed maturity securities in Portugal, Ireland, Italy and Spain. Investments in these countries are primarily made to support our international businesses and to diversify our U.S. corporate fixed maturity securities with European bonds denominated in U.S. dollars. During the three months ended March 31, 2016, our exposure to the peripheral European countries increased by $44 million to $767 million with unrealized gains of $44 million. Our exposure as of March 31, 2016 was diversified with direct exposure to local economies of $168 million, indirect exposure through debt issued by subsidiaries outside of the European periphery of $100 million and exposure to multinational companies where the majority of revenues come from outside of the country of domicile of $499 million.

Commercial mortgage loans

The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:

 

     March 31, 2016  

(Dollar amounts in millions)

   Total recorded
investment
     Number of
loans
     Loan-to-value (1)     Delinquent
principal balance
     Number of
delinquent
loans
 

Loan Year

             

2005 and prior

   $ 1,116         485         40   $ —          —    

2006

     652         156         50     —          —    

2007

     521         141         58     15         1   

2008

     141         26         56     6         1   

2009

     —          —          —       —          —    

2010

     92         17         48     —          —    

2011

     224         48         49     —          —    

2012

     615         91         54     —          —    

2013

     803         137         58     —          —    

2014

     910         147         65     —          —    

2015

     948         143         67     —          —    

2016

     174         20         67     —          —    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

   $ 6,196         1,411         56   $ 21         2   
  

 

 

    

 

 

      

 

 

    

 

 

 

 

(1)  Represents weighted-average loan-to-value as of March 31, 2016.

 

     December 31, 2015  

(Dollar amounts in millions)

   Total recorded
investment
     Number of
loans
     Loan-to-value (1)     Delinquent
principal balance
     Number of
delinquent
loans
 

Loan Year

             

2004 and prior

   $ 609         361         32   $ —          —    

2005

     542         146         49     5         1   

2006

     709         177         51     1         1   

2007

     540         146         59     6         1   

2008

     145         27         56     —          —    

2009

     —          —          —       —          —    

2010

     93         17         48     —          —    

2011

     226         48         49     —          —    

2012

     626         92         55     —          —    

2013

     822         138         58     —          —    

2014

     935         150         66     —          —    

2015

     940         142         67     —          —    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

   $ 6,187         1,444         56   $ 12         3   
  

 

 

    

 

 

      

 

 

    

 

 

 

 

(1)  Represents weighted-average loan-to-value as of December 31, 2015.

 

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Other invested assets

The following table sets forth the carrying values of our other invested assets as of the dates indicated:

 

     March 31, 2016     December 31, 2015  

(Amounts in millions)

   Carrying value      % of total     Carrying value      % of total  

Derivatives

   $ 1,667         57   $ 1,112         48

Trading securities

     471         16        447         19   

Securities lending collateral

     415         14        347         15   

Limited partnerships

     177         6        188         8   

Short-term investments

     174         6        197         9   

Other investments

     19         1        18         1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other invested assets

   $ 2,923         100   $ 2,309         100
  

 

 

    

 

 

   

 

 

    

 

 

 

Derivatives increased primarily attributable to changes in the long-term interest rate environment in the current year. Securities lending collateral also increased driven by market demand.

Derivatives

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 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,
2015
     Additions      Maturities/
terminations
    March 31,
2016
 

Derivatives designated as hedges

             

Cash flow hedges:

             

Interest rate swaps

     Notional       $ 11,214       $ —        $ (18   $ 11,196   

Inflation indexed swaps

     Notional         571         1         (2     570   

Foreign currency swaps

     Notional         35         —          —         35   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total cash flow hedges

        11,820         1         (20     11,801   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives designated as hedges

        11,820         1         (20     11,801   
     

 

 

    

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedges

             

Interest rate swaps

     Notional         4,932         —          (250     4,682   

Interest rate swaps related to securitization entities

     Notional         67         —          (2     65   

Foreign currency swaps

     Notional         162         17         —         179   

Credit default swaps

     Notional         144         —          —         144   

Credit default swaps related to securitization entities

     Notional         312         —          —         312   

Equity index options

     Notional         1,080         722         (270     1,532   

Financial futures

     Notional         1,331         2,361         (2,187     1,505   

Equity return swaps

     Notional         134         50         (38     146   

Other foreign currency contracts

     Notional         1,656         567         (128     2,095   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives not designated as hedges

        9,818         3,717         (2,875     10,660   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives

      $ 21,638       $ 3,718       $ (2,895   $ 22,461   
     

 

 

    

 

 

    

 

 

   

 

 

 

 

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(Number of policies)

   Measurement    December 31,
2015
     Additions      Maturities/
terminations
    March 31,
2016
 

Derivatives not designated as hedges

             

GMWB embedded derivatives

   Policies      36,146         —          (717     35,429   

Fixed index annuity embedded derivatives

   Policies      17,482         623         (132     17,973   

Indexed universal life embedded derivatives

   Policies      982         131         (12     1,101   

The $0.8 billion increase in the notional value of derivatives was primarily attributable to a notional increase in our non-qualified equity options related to our hedging strategy associated with fixed index annuity insurance products.

The number of policies related to our GMWB embedded derivatives decreased as variable annuity products are no longer being offered. The number of policies related to our fixed index annuity and indexed universal life embedded derivatives increased as a result of product sales in the current year.

Consolidated Balance Sheets

Total assets. Total assets increased $742 million from $106,431 million as of December 31, 2015 to $107,173 million as of March 31, 2016.

 

    Cash, cash equivalents and invested assets increased $915 million primarily from an increase of $2,837 million in invested assets, partially offset by a decrease of $1,922 million in cash and cash equivalents. Our fixed maturity securities increased $2,093 million principally from higher net unrealized investment gains attributable to changes in interest rates as well as from changes in foreign exchange rates from the weakening of the U.S. dollar in the current year. Other invested assets increased $614 million mainly from an increase in derivatives driven by the changes in the long-term interest rate environment in the current year. Cash and cash equivalents decreased primarily from the redemption of non-recourse funding obligations and long-term borrowings in the current year.

 

    Deferred acquisition costs decreased $163 million primarily related to higher net unrealized investment gains in the current year.

 

    Reinsurance recoverable increased $342 million mainly attributable to a new reinsurance agreement with Protective Life to coinsure certain of our term life insurance policies as part of a life block transaction completed in January 2016. As part of this transaction, we recorded a deferred gain of approximately $67 million in the current year.

 

    Deferred tax asset decreased $155 million as a result of an increase in the liabilities related to net unrealized investment gains in the current year.

 

    Separate account assets decreased $259 million mainly driven by surrenders and benefits in the current year.

Total liabilities. Total liabilities decreased $594 million from $91,794 million as of December 31, 2015 to $91,200 million as of March 31, 2016.

 

    Future policy benefits increased $301 million primarily driven by an increase in our long-term care insurance business largely from the aging and growth of the in-force block in the current year.

 

    Other liabilities increased $592 million primarily driven by higher derivative collateral as a result of changes in the long-term interest rate environment in the current year. This increase was partially offset by a decrease of $200 million related to our repurchase program in the current year.

 

    Non-recourse funding obligations decreased $1,610 million as a result of early redemptions of non-recourse funding obligations for River Lake and River Lake II related to a life block transaction completed in the current year.

 

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    Long-term borrowings decreased $338 million attributable to the redemption of $298 million of Genworth Holdings’ 2016 senior notes in January 2016 and the repurchase of $28 million principal of Genworth Holdings’ senior notes with various maturity dates during the three months ended March 31, 2016. The decrease was also related to $43 million of bond consent fees paid as part of Genworth Holdings’ bond consent solicitation. These decreases were partially offset by an increase of $30 million from changes in foreign exchange rates on debt in Canada and Australia.

 

    Deferred tax liability increased $425 million primarily from an increase in net unrealized investment gains and a decrease in deferred tax assets on net operating losses in the current year.

 

    Separate account liabilities decreased $259 million mainly driven by surrenders and benefits in the current year.

Total equity. Total equity increased $1,336 million from $14,637 million as of December 31, 2015 to $15,973 million as of March 31, 2016.

 

    We reported net income available to Genworth Financial, Inc.’s common stockholders of $53 million during the three months ended March 31, 2016.

 

    Accumulated other comprehensive income (loss) increased $1,175 million predominantly attributable to higher net unrealized investment gains of $803 million and derivatives qualifying as hedges of $257 million related to changes in the long-term interest rate environment in the current year. Foreign currency translation also increased $115 million related to the weakening of the U.S. dollar in the current year.

Liquidity and Capital Resources

Liquidity and capital resources represent our overall financial strength and our ability to generate cash flows from our businesses, borrow funds at competitive rates and raise new capital to meet our operating and growth needs.

Genworth and subsidiaries

The following table sets forth our unaudited condensed consolidated cash flows for the three months ended March 31:

 

(Amounts in millions)

   2016      2015  

Net cash from operating activities

   $ 256       $ 624   

Net cash from investing activities

     (255      (366

Net cash from financing activities

     (1,941      35   
  

 

 

    

 

 

 

Net increase (decrease) in cash before foreign exchange effect

   $ (1,940    $ 293   
  

 

 

    

 

 

 

Our principal sources of cash include sales of our products and services, income from our investment portfolio and proceeds from sales of investments. As an insurance business, we typically generate positive cash flows from operating activities, as premiums collected from our insurance products and income received from our investments exceed policy acquisition costs, benefits paid, redemptions and operating expenses. Our cash flows from operating activities are affected by the timing of premiums, fees and investment income received and benefits and expenses paid. Positive cash flows from operating activities are then invested to support the obligations of our insurance and investment products and required capital supporting these products. In analyzing our cash flow, we focus on the change in the amount of cash available and used in investing activities. Changes in cash from financing activities primarily relate to the issuance of, and redemptions and benefit payments on, universal life insurance and investment contracts; the issuance and acquisition of debt and equity securities; the issuance and repayment or repurchase of borrowings and non-recourse funding obligations; and dividends to our stockholders and other capital transactions.

 

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We had lower cash inflows from operating activities during the current year mainly attributable to amounts paid related to a new reinsurance agreement in our life insurance business. We also paid amounts related to the planned settlement of In re Genworth Financial, Inc. Securities Litigation and fees associated with Genworth Holdings’ bond consent solicitation. These increases were partially offset by higher net cash collateral received from counterparties primarily as a result of the change in the derivative positions in the current year.

We had lower cash outflows from investing activities during the current year primarily from net maturities and sales of short-term investments in the current year compared to net purchases in the prior year.

We had cash outflows from financing activities during the current year primarily from the redemption of $1,620 million of non-recourse funding obligations. Genworth Holdings also repaid and repurchased $326 million of its senior notes in the current year.

In the United States and Canada, we engage in certain securities lending transactions for the purpose of enhancing the yield on our investment securities portfolio. We maintain effective control over all loaned securities and, therefore, continue to report such securities as fixed maturity securities on the consolidated balance sheets. We are currently indemnified against counterparty credit risk by the intermediary. See note 7 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to our securities lending program.

We also have a repurchase program in which we sell an investment security at a specified price and agree to repurchase that security at another specified price at a later date. See note 7 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to our repurchase program.

Genworth—holding company

Genworth Financial and Genworth Holdings each acts as a holding company for their respective subsidiaries and do not have any significant operations of their own. Dividends from their respective subsidiaries, payments to them under tax sharing and expense reimbursement arrangements with their subsidiaries and proceeds from borrowings or securities issuances are their principal sources of cash to meet their obligations. Insurance laws and regulations regulate the payment of dividends and other distributions to Genworth Financial and Genworth Holdings by their insurance subsidiaries. We expect dividends paid by the insurance subsidiaries will vary depending on strategic objectives, regulatory requirements and business performance.

The primary uses of funds at Genworth Financial and Genworth Holdings include payment of holding company general operating expenses (including taxes), payment of principal, interest and other expenses on current and any future borrowings, payments under current and any future guarantees (including guarantees of certain subsidiary obligations), payment of amounts owed to GE under the Tax Matters Agreement, payments to subsidiaries (and, in the case of Genworth Holdings, to Genworth Financial) under tax sharing agreements, contributions to subsidiaries, repurchases of debt and equity securities and, in the case of Genworth Holdings, loans, dividends or other distributions to Genworth Financial. In deploying future capital, important current priorities include focusing on our operating businesses so they remain appropriately capitalized, and accelerating progress on reducing overall indebtedness of Genworth Holdings. We may from time to time seek to repurchase or redeem outstanding notes for cash (with cash on hand, proceeds from the issuance of new debt and/or the proceeds from asset or stock sales) in open market purchases, tender offers, privately negotiated transactions or otherwise. We currently seek to reduce our indebtedness over time through repurchases, redemptions and/or repayments at maturity.

Our Board of Directors has suspended the payment of stockholder dividends on our Genworth Financial common stock indefinitely. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board of Directors and will be dependent on many factors including the receipt of

 

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dividends from our operating subsidiaries, our financial condition and operating results, the capital requirements of our subsidiaries, legal requirements, regulatory constraints, our credit and financial strength ratings and such other factors as the Board of Directors deems relevant. In addition, our Board of Directors has suspended repurchases of our Genworth Financial common stock under our stock repurchase program indefinitely. The resumption of our stock repurchase program will be at the discretion of our Board of Directors.

Genworth Holdings had $760 million and $1,124 million of cash and cash equivalents as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, cash and cash equivalents of Genworth Holdings included approximately $80 million of restricted cash. Genworth Holdings did not hold any U.S. government securities as of March 31, 2016 but held $250 million of these securities as of December 31, 2015.

During the three months ended March 31, 2016, we received common stock dividends from our international subsidiaries of $73 million.

The life block transaction completed in January 2016 is expected to generate approximately $175 million of tax benefits to the holding company that are scheduled to be settled in July 2016, which are committed to be used in executing the restructuring plan for our U.S. life insurance businesses.

Regulated insurance subsidiaries

The liquidity requirements of our regulated insurance subsidiaries principally relate to the liabilities associated with their various insurance and investment products, operating costs and expenses, the payment of dividends to their respective parent company, contributions to their subsidiaries, payment of principal and interest on their outstanding debt obligations and income taxes. Liabilities arising from insurance and investment products include the payment of benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans and obligations to redeem funding agreements.

Our insurance subsidiaries have used cash flows from operations and investment activities to fund their liquidity requirements. Our insurance subsidiaries’ principal cash inflows from operating activities are derived from premiums, annuity deposits and insurance and investment product fees and other income, including commissions, cost of insurance, mortality, expense and surrender charges, contract underwriting fees, investment management fees and dividends and distributions from their subsidiaries. The principal cash inflows from investment activities result from repayments of principal, investment income and, as necessary, sales of invested assets.

Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits without forced sales of investments. Product liabilities with longer durations are generally matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term product liabilities are matched with fixed maturity securities that have short- and medium-term fixed maturities. In addition, our insurance subsidiaries hold highly liquid, high quality short-term investment securities and other liquid investment grade fixed maturity securities to fund anticipated operating expenses, surrenders and withdrawals. As of March 31, 2016, our total cash, cash equivalents and invested assets were $76.0 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership interests and select mortgage-backed and asset-backed securities are relatively illiquid and back relatively illiquid liabilities. These asset classes represented approximately 31% of the carrying value of our total cash, cash equivalents and invested assets as of March 31, 2016.

In April 2016, Genworth Canada announced acceptance by the Toronto Stock Exchange of its Notice of Intention to Make a Normal Course Issuer Bid (“NCIB”). Pursuant to the NCIB, Genworth Canada may, if considered advisable, purchase from time to time over the next 12 months, up to an aggregate of approximately 4.6 million of its issued and outstanding common shares. If Genworth Canada decides to repurchase shares through the NCIB, we intend to participate in the NCIB in order to maintain our overall ownership at its current level.

 

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Capital resources and financing activities

In April 2016, Genworth Holdings terminated its $300 million multicurrency revolving credit facility, prior to its September 26, 2016 maturity date. There were no amounts outstanding under the credit facility at the time of termination.

In January 2016, Genworth Holdings redeemed $298 million of its 2016 Notes and paid a make-whole premium of approximately $20 million pre-tax in addition to accrued and unpaid interest.

During the three months ended March 31, 2016, we also repurchased $28 million principal amount of Genworth Holdings’ notes with various maturity dates for a pre-tax gain of $4 million and paid accrued and unpaid interest thereon.

During the three months ended March 31, 2016, in connection with a life block transaction, River Lake redeemed $975 million of its total outstanding floating rate subordinated notes due in 2033 and River Lake II redeemed $645 million of its total outstanding floating rate subordinated notes due in 2035 for a pre-tax loss of $9 million from the write-off of deferred borrowing costs.

We believe existing cash held at Genworth Holdings combined with dividends from operating subsidiaries, payments under tax sharing and expense reimbursement arrangements with subsidiaries, proceeds from borrowings or securities issuances and sales of assets will provide us with sufficient capital flexibility and liquidity to meet our projected future operating and financing requirements. We actively monitor our liquidity position, liquidity generation options and the credit markets given changing market conditions. We target liquidity at Genworth Holdings to maintain a minimum balance of one and one-half times expected annual debt interest payments plus an additional $350 million. As of March 31, 2016, Genworth Holdings was below this target by approximately $50 million as a result of our decision to use cash to repurchase debt, settle the In re Genworth Financial, Inc. Securities Litigation and complete the bond consent solicitation. We will continue to evaluate our target level of liquidity as circumstances warrant and may remain below the target for a period of time given these or future actions and due to the timing of cash inflows and outflows. Additionally, we will continue to evaluate market influences on the valuation of our senior debt, and may consider additional opportunities to repurchase our debt over time. We cannot predict with any certainty the impact to us from any future disruptions in the credit markets or the recent or any further downgrades by one or more of the rating agencies of the financial strength ratings of our insurance company subsidiaries and/or the credit ratings of our holding companies. The availability of additional funding will depend on a variety of factors such as market conditions, regulatory considerations, the general availability of credit, the overall availability of credit to the financial services industry, the level of activity and availability of reinsurance, our credit ratings and credit capacity and the performance of and outlook for our business. For a discussion of certain risks associated with our liquidity, see “Item 1A—Risk Factors—Our internal sources of liquidity may be insufficient to meet our needs and our access to capital may be limited or unavailable. Under such conditions, we may seek additional capital but may be unable to obtain it” in our 2015 Annual Report on Form 10-K.

Contractual obligations and commercial commitments

Except as disclosed above, there have been no material additions or changes to our contractual obligations and commercial commitments as set forth in our 2015 Annual Report on Form 10-K filed on February 26, 2016.

Securitization Entities

There were no off-balance sheet securitization transactions during the three months ended March 31, 2016 or 2015.

 

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New Accounting Standards

For a discussion of recently adopted accounting standards, see note 2 in our consolidated financial statements under “Item 1—Financial Statements.”

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of the loss of fair value resulting from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and equity prices. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying financial instruments are traded. The following is a discussion of our market risk exposures and our risk management practices.

Credit spreads, excluding the energy and metals sectors, closed the first quarter of 2016 relatively unchanged from year end levels; however, commodity exposed credits experienced extreme volatility. In the first quarter of 2016, U.S. Treasury yields declined sharply remaining at historically low levels. See “—Business trends and conditions” and “—Investments and Derivative Instruments” in “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of recent market conditions.

In the first quarter of 2016, the U.S. dollar strengthened against currencies in Canada and the United Kingdom but weakened against currencies in Australia as well as the Euro compared to the first quarter of 2015. However, the U.S. dollar weakened against currencies in Canada, Australia and the United Kingdom as well as the Euro compared to the fourth quarter of 2015. The overall weakening of the U.S. dollar in the first quarter of 2016 generally resulted in higher levels of reported revenues and net income, assets, liabilities and accumulated other comprehensive income (loss) in our U.S. dollar consolidated financial statements. See “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of changes in foreign currency exchange rates.

Except as disclosed above, there were no other material changes in our market risks since December 31, 2015.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2016, an evaluation was conducted under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2016.

Changes in Internal Control Over Financial Reporting During the Quarter Ended March 31, 2016

During the three months ended March 31, 2016, there have not been any changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

See note 10 in our unaudited condensed consolidated financial statements under “Part 1—Item 1—Financial Statements” for a description of material pending litigation and regulatory matters affecting us.

 

Item 1A. Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our 2015 Annual Report on Form 10-K, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. There have been no material changes to the risk factors set forth in the above-referenced filings as of March 31, 2016.

 

Item 6. Exhibits

 

Number

  

Description

    4.1    Supplemental Indenture No. 12, dated as of March 18, 2016, among Genworth Holdings, Inc., Genworth Financial, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, amending the Indenture, dated as of June 15, 2004, between Genworth Financial, Inc. (renamed Genworth Holdings, Inc.) and JPMorgan Chase Bank, N.A. (succeeded by The Bank of New York Mellon Trust Company, N.A.), as Trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on March 22, 2016)
    4.2    Third Supplemental Indenture, dated as of March 18, 2016, among Genworth Holdings, Inc., Genworth Financial, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, amending the Indenture, dated as of November 14, 2006, between Genworth Financial, Inc. (renamed Genworth Holdings, Inc.) and The Bank of New York Mellon Trust Company, N.A., as Trustee (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on March 22, 2016)
  10.1§    Form of Restricted Stock Unit Award Agreement under the 2012 Genworth Financial, Inc. Omnibus Incentive Plan (filed herewith)
  10.2§    Form of 2016-2018 Performance Stock Unit Award Agreement under the 2012 Genworth Financial, Inc. Omnibus Incentive Plan (filed herewith)
  12    Statement of Ratio of Income to Fixed Charges (filed herewith)
  31.1    Certification of Thomas J. McInerney (filed herewith)
  31.2    Certification of Kelly L. Groh (filed herewith)
  32.1    Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code—Thomas J. McInerney (filed herewith)
  32.2   

Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States

Code—Kelly L. Groh (filed herewith)

101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document

 

§ Management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

   

GENWORTH FINANCIAL, INC.

(Registrant)

Date: April 29, 2016      
    By:  

/s/ Matthew D. Farney

     

Matthew D. Farney

Vice President and Controller

(Principal Accounting Officer)

 

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