10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2017

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  ☒    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  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of October 26, 2017, 499,158,848 shares of Class A Common Stock, par value $0.001 per share, were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  

PART I—FINANCIAL INFORMATION

     3  

Item 1.

  

Financial Statements

     3  
  

Condensed Consolidated Balance Sheets as of September  30, 2017 (Unaudited) and December 31, 2016

     3  
  

Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)

     4  
  

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)

     5  
  

Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)

     6  
  

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)

     7  
  

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8  

Item 2.

  

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

     88  

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     173  

Item 4.

  

Controls and Procedures

     174  

PART II—OTHER INFORMATION

     174  

Item 1.

  

Legal Proceedings

     174  

Item 1A.

  

Risk Factors

     174  

Item 6.

  

Exhibits

     175  

Signatures

     176  

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in millions, except per share amounts)

 

     September 30,
2017
    December 31,
2016
 
     (Unaudited)        

Assets

    

Investments:

    

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

   $ 62,552     $ 60,572  

Equity securities available-for-sale, at fair value

     765     632

Commercial mortgage loans

     6,268       6,111  

Restricted commercial mortgage loans related to securitization entities

     111     129

Policy loans

     1,818       1,742  

Other invested assets

     1,590       2,071  

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

     —         312
  

 

 

   

 

 

 

Total investments

     73,104       71,569  

Cash and cash equivalents

     2,836       2,784  

Accrued investment income

     639     659

Deferred acquisition costs

     2,342       3,571  

Intangible assets and goodwill

     315     348

Reinsurance recoverable

     17,553       17,755  

Other assets

     552     673

Deferred tax asset

     24     —    

Separate account assets

     7,264       7,299  
  

 

 

   

 

 

 

Total assets

   $ 104,629     $ 104,658  
  

 

 

   

 

 

 

Liabilities and equity

    

Liabilities:

    

Future policy benefits

   $ 38,022     $ 37,063  

Policyholder account balances

     24,531       25,662  

Liability for policy and contract claims

     9,384       9,256  

Unearned premiums

     3,512       3,378  

Other liabilities ($1 of other liabilities are related to securitization entities in each period)

     2,002       2,916  

Borrowings related to securitization entities ($12 are carried at fair value in each period)

     59     74

Non-recourse funding obligations

     310     310

Long-term borrowings

     4,224       4,180  

Deferred tax liability

     234     53

Separate account liabilities

     7,264       7,299  
  

 

 

   

 

 

 

Total liabilities

     89,542       90,191  
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 588 million and 587 million shares issued as of September 30, 2017 and December 31, 2016, respectively; 499 million and 498 million shares outstanding as of September 30, 2017 and December 31, 2016, respectively

     1     1

Additional paid-in capital

     11,973       11,962  
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

    

Net unrealized investment gains (losses):

    

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

     1,098       1,253  

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

     10     9
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,108       1,262  
  

 

 

   

 

 

 

Derivatives qualifying as hedges

     2,052       2,085  

Foreign currency translation and other adjustments

     (125     (253
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     3,035       3,094  

Retained earnings

     760     287

Treasury stock, at cost (88 million shares as of September 30, 2017 and December 31, 2016)

     (2,700     (2,700
  

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     13,069       12,644  

Noncontrolling interests

     2,018       1,823  
  

 

 

   

 

 

 

Total equity

     15,087       14,467  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 104,629     $ 104,658  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Amounts in millions, except per share amounts)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2017     2016     2017     2016  

Revenues:

        

Premiums

   $ 1,135     $ 1,108     $ 3,382     $ 3,029  

Net investment income

     797     805     2,388       2,373  

Net investment gains (losses)

     85     20     220     31

Policy fees and other income

     198     217     619     738
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,215       2,150       6,609       6,171  
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,344       1,662       3,796       3,715  

Interest credited

     164     173     494     523

Acquisition and operating expenses, net of deferrals

     265     269     775     990

Amortization of deferred acquisition costs and intangibles

     83     94     316     305

Interest expense

     73     77     209     262
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     1,929       2,275       5,590       5,795  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     286     (125     1,019       376

Provision for income taxes

     102     222     348     355
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     184     (347     671     21

Income (loss) from discontinued operations, net of taxes

     (9     15     (9     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     175     (332     662     (4

Less: net income attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 107     $ (380   $ 464     $ (155
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.23     $ (0.79   $ 0.95     $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.23     $ (0.79   $ 0.94     $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.21     $ (0.76   $ 0.93     $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.21     $ (0.76   $ 0.93     $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     499.1       498.3       498.9       498.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     501.6       498.3       501.2       498.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

        

Total other-than-temporary impairments

   $ (1   $ (2   $ (4   $ (35

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

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (1     (2     (4     (35

Other investments gains (losses)

     86     22     224     66
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment gains (losses)

   $ 85     $ 20     $ 220     $ 31  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

     Three months
ended
September 30,
    Nine months
ended
September 30,
 
     2017     2016     2017     2016  

Net income (loss)

   $ 175     $ (332   $ 662     $ (4

Other comprehensive income (loss), net of taxes:

        

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

     (89     72     (173     1,624  

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

     —         5     1     6

Derivatives qualifying as hedges

     (12     54     (33     448

Foreign currency translation and other adjustments

     81     (1     261     223
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (20     130     56     2,301  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     155     (202     718     2,297  

Less: comprehensive income attributable to noncontrolling interests

     108     64     313     260
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 47     $ (266   $ 405     $ 2,037  
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

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, 2016

  $ 1     $ 11,962     $ 3,094     $ 287     $ (2,700   $ 12,644     $ 1,823     $ 14,467  

Cumulative effect of change in accounting, net of taxes

    —         —         —         9     —         9     —         9

Repurchase of subsidiary shares

    —         —         —         —         —         —         (31     (31

Comprehensive income (loss):

               

Net income

    —         —         —         464     —         464     198     662

Other comprehensive income (loss) net of taxes

    —         —         (59     —         —         (59     115     56
           

 

 

   

 

 

   

 

 

 

Total comprehensive income

              405     313     718

Dividends to noncontrolling interests

    —         —         —         —         —         —         (92     (92

Stock-based compensation expense and exercises and other

    —         11     —         —         —         11     5     16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2017

  $ 1     $ 11,973     $ 3,035     $ 760     $ (2,700   $ 13,069     $ 2,018     $ 15,087  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2015

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

Return of capital to noncontrolling interests

    —         —         —         —         —         —         (70     (70

Comprehensive income:

               

Net income (loss)

    —         —         —         (155     —         (155     151     (4

Other comprehensive income, net of taxes

    —         —         2,192       —         —         2,192       109     2,301  
           

 

 

   

 

 

   

 

 

 

Total comprehensive income

              2,037       260     2,297  

Dividends to noncontrolling interests

    —         —         —         —         —         —         (126     (126

Stock-based compensation expense and exercises and other

    —         10     —         —         —         10     1     11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2016

  $ 1     $ 11,959     $ 5,202     $ 409     $ (2,700   $ 14,871     $ 1,878     $ 16,749  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Nine months
ended
September 30,
 
     2017     2016  

Cash flows from operating activities:

    

Net income (loss)

   $ 662     $ (4

Less loss from discontinued operations, net of taxes

     9     25

Adjustments to reconcile net income (loss) to net cash from operating activities:

    

Gain on sale of business

     —         (26

Amortization of fixed maturity securities discounts and premiums and limited partnerships

     (107     (112

Net investment gains

     (220     (31

Charges assessed to policyholders

     (534     (574

Acquisition costs deferred

     (67     (124

Amortization of deferred acquisition costs and intangibles

     316     305

Deferred income taxes

     234     173

Trading securities, held-for-sale investments and derivative instruments

     716     759

Stock-based compensation expense

     29     25

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     (21     (258

Insurance reserves

     1,202       691

Current tax liabilities

     (27     44

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

     (260     905
  

 

 

   

 

 

 

Net cash from operating activities

     1,932       1,798  
  

 

 

   

 

 

 

Cash flows used by investing activities:

    

Proceeds from maturities and repayments of investments:

    

Fixed maturity securities

     3,396       2,646  

Commercial mortgage loans

     454     555

Restricted commercial mortgage loans related to securitization entities

     18     27

Proceeds from sales of investments:

    

Fixed maturity and equity securities

     3,269       4,064  

Purchases and originations of investments:

    

Fixed maturity and equity securities

     (6,709     (8,758

Commercial mortgage loans

     (608     (405

Other invested assets, net

     (521     (138

Policy loans, net

     28     (80

Proceeds from sale of businesses, net of cash transferred

     —         39

Payments for business purchased, net of cash acquired

     (5     —    
  

 

 

   

 

 

 

Net cash used by investing activities

     (678     (2,050
  

 

 

   

 

 

 

Cash flows used by financing activities:

    

Deposits to universal life and investment contracts

     902     1,028  

Withdrawals from universal life and investment contracts

     (2,003     (1,463

Redemption of non-recourse funding obligations

     —         (1,620

Repayment and repurchase of long-term debt

     —         (362

Repayment of borrowings related to securitization entities

     (16     (37

Repurchase of subsidiary shares

     (31     —    

Return of capital to noncontrolling interests

     —         (70

Dividends paid to noncontrolling interests

     (92     (126

Other, net

     (30     (49
  

 

 

   

 

 

 

Net cash used by financing activities

     (1,270     (2,699
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     68     36
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     52     (2,915

Cash and cash equivalents at beginning of period

     2,784       5,993  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 2,836     $ 3,078  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

Genworth Holdings, Inc. (“Genworth Holdings”) (formerly known as Genworth Financial, Inc.) was incorporated in Delaware in 2003 in preparation for an initial public offering (“IPO”) of Genworth’s 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.

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. At a special meeting held on March 7, 2017, Genworth’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

The transaction remains subject to closing conditions, including the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions. Both parties are engaging with the relevant regulators regarding the applications and the pending transaction.

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 unaudited 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.

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

    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 have not been actively sold but we continue to service our existing blocks of business. 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.

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.

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 2016 Annual Report on Form 10-K. Certain prior year amounts have been reclassified to conform to the current year presentation.

(2) Accounting Changes

Accounting Pronouncements Recently Adopted

On January 1, 2017, we adopted 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, classifications of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this new accounting guidance on a modified retrospective basis and recorded a previously disallowed deferred tax asset of $9 million with a corresponding increase to cumulative effect of change in accounting within retained earnings at adoption.

On January 1, 2017, we adopted 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. We did not have any significant impact from this guidance on our consolidated financial statements.

On January 1, 2017, we adopted 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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(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. This guidance is consistent with our previous accounting practices and, accordingly, did not have any impact on our consolidated financial statements.

On January 1, 2017, we adopted 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. This guidance is consistent with our previous accounting for derivative contract novations and, accordingly, did not have any impact on our consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In August 2017, the Financial Accounting Standards Board (“the FASB”) issued new guidance intended to enable entities to better portray the economics of their derivative risk management activities in the financial statements and enhance the transparency and understandability of hedge results. In certain situations, the amendments also simplify the application of hedge accounting. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating adopting this new guidance early and the impact it may have on our consolidated financial statements.

In May 2017, the FASB issued new guidance to clarify when to account for a change to share-based compensation as a modification. The new guidance requires modification accounting only if there are changes to the fair value, vesting conditions or classification, as a liability or equity, of the share-based compensation. The guidance is effective, prospectively, for us on January 1, 2018, accordingly, the guidance will not have any impact at adoption.

In March 2017, the FASB issued new guidance shortening the amortization period for the premium component of callable debt securities purchased at a premium. The guidance requires the premium to be amortized to the earliest call date. This change does not apply to securities held at a discount. The guidance is currently effective for us on January 1, 2019, with early adoption permitted. We are in process of evaluating the impact the guidance may have on our consolidated financial statements.

In February 2017, the FASB issued new guidance to clarify the accounting for gains and losses from the derecognition of nonfinancial assets and accounting for partial sales of nonfinancial assets. The new guidance clarifies when transferring ownership interests in a consolidated subsidiary holding nonfinancial assets is within scope. It also states that the reporting entity should identify each distinct nonfinancial asset and derecognize when a counterparty obtains control, and clarifies the accounting for partial sales. The new guidance is currently effective for us on January 1, 2018. We do not expect any significant impacts from this guidance on our consolidated financial statements.

In January 2017, the FASB issued new guidance simplifying the test for goodwill impairment. The new guidance states goodwill impairment is equal to the difference between the carrying value and fair value of the reporting unit up to the amount of recorded goodwill. The new guidance is currently effective for us on January 1, 2020, with early adoption permitted for testing dates after January 1, 2017. We do not expect any significant impacts from this new guidance on our consolidated financial statements.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In October 2016, the FASB issued new guidance related to the income tax effects of intra-entity transfers of assets other than inventory. The new guidance states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is currently effective for us on January 1, 2018. We are still in process of evaluating the impact the guidance may have on our consolidated financial statements, including any cumulative effect adjustment that will be recorded directly to retained earnings as of the beginning of the period of adoption.

In January 2016, the FASB issued new accounting guidance related to the recognition and measurement of financial assets and financial liabilities. Changes to the current financial instruments accounting primarily affects equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. Under the new guidance, equity investments with readily determinable fair value, except those accounted for under the equity method of accounting, will be measured at fair value with changes in fair value recognized in net income (loss). As of September 30, 2017, we have approximately $45 million of cumulative unrealized gains related to equity securities included in accumulated other comprehensive income as well as approximately $25 million of gains related to limited partnership investments currently recorded at cost, that will be reclassed to cumulative effect of change in accounting within retained earnings upon adoption of this new accounting guidance. The new guidance also clarifies that the need for a valuation allowance on a deferred tax asset related to available-for-sale securities should be evaluated in combination with other deferred tax assets. This new guidance will be effective for us on January 1, 2018. We are still in process of evaluating the full impact the guidance may have on our consolidated financial statements.

 

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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
September 30,
    Nine months
ended
September 30,
 

(Amounts in millions, except per share amounts)

   2017     2016     2017     2016  

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

     499.1       498.3       498.9       498.3  

Potentially dilutive securities:

        

Stock options, restricted stock units and stock appreciation rights

     2.5       —         2.3       —    
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     501.6       498.3       501.2       498.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations:

        

Income (loss) from continuing operations

   $ 184     $ (347   $ 671     $ 21  

Less: income from continuing operations attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 116     $ (395   $ 473     $ (130
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share

   $ 0.23     $ (0.79   $ 0.95     $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share

   $ 0.23     $ (0.79   $ 0.94     $ (0.26
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from discontinued operations:

        

Income (loss) from discontinued operations, net of taxes

   $ (9   $ 15     $ (9   $ (25

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

   $ (9   $ 15     $ (9   $ (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share

   $ (0.02   $ 0.03     $ (0.02   $ (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share

   $ (0.02   $ 0.03     $ (0.02   $ (0.05
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss):

        

Income (loss) from continuing operations

   $ 184     $ (347   $ 671     $ 21  

Income (loss) from discontinued operations, net of taxes

     (9     15     (9     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     175     (332     662     (4

Less: net income attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 107     $ (380   $ 464     $ (155
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share

   $ 0.21     $ (0.76   $ 0.93     $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per share

   $ 0.21     $ (0.76   $ 0.93     $ (0.31
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million and 1.8 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three months and nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million and 500.1 million, respectively.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(4) Investments

(a) Net Investment Income

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

 

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

(Amounts in millions)

   2017     2016     2017     2016  

Fixed maturity securities—taxable

   $ 640     $ 655     $ 1,930       1,930  

Fixed maturity securities—non-taxable

     3     3     9     9

Commercial mortgage loans

     78     79     231     237

Restricted commercial mortgage loans related to securitization entities

     3     3     7     8

Equity securities

     9     8     26     20

Other invested assets

     39     34     106     105

Restricted other invested assets related to securitization entities

     —         —         1     3

Policy loans

     39     38     120     107

Cash, cash equivalents and short-term investments

     10     5     26     16
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     821     825     2,456       2,435  

Expenses and fees

     (24     (20     (68     (62
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 797     $ 805     $ 2,388     $ 2,373  
  

 

 

   

 

 

   

 

 

   

 

 

 

(b) Net Investment Gains (Losses)

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

 

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

(Amounts in millions)

   2017     2016     2017     2016  

Available-for-sale securities:

        

Realized gains

   $ 40     $ 39     $ 177     $ 205  

Realized losses

     (10     (24     (55     (75
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     30     15     122     130
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (1     (2     (4     (35

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

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (1     (2     (4     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     —         (4     1     40

Commercial mortgage loans

     1     (1     3     1

Net gains (losses) related to securitization entities

     1     2     5     (51

Derivative instruments (1)

     54     10     93     (52

Contingent consideration adjustment

     —         —         —         (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 85     $ 20     $ 220     $ 31  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended September 30, 2017 and 2016 was $286 million and $293 million, respectively, which was approximately 97% and 95%, respectively, of book value. The aggregate fair value of securities sold at a loss during the nine months ended September 30, 2017 and 2016 was $1,390 million and $833 million, respectively, which was approximately 96% and 93%, respectively, of book value.

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

 

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

(Amounts in millions)

   2017     2016     2017     2016  

Beginning balance

   $ 38     $ 62     $ 42     $ 64  

Additions:

        

Other-than-temporary impairments not previously recognized

     —         —         —         1

Reductions:

        

Securities sold, paid down or disposed

     (5     (8     (9     (11
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 33     $ 54     $ 33     $ 54  
  

 

 

   

 

 

   

 

 

   

 

 

 

(c) Unrealized Investment Gains and Losses

Net unrealized gains and losses on available-for-sale investment securities reflected as a separate component of accumulated other comprehensive income (loss) were as follows as of the dates indicated:

 

(Amounts in millions)

   September 30, 2017     December 31, 2016  

Net unrealized gains (losses) on investment securities:

    

Fixed maturity securities

   $ 4,878     $ 3,656  

Equity securities

     49     12
  

 

 

   

 

 

 

Subtotal (1)

     4,927       3,668  

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

     (3,134     (1,611

Income taxes, net

     (619     (711
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     1,174       1,346  

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

     66     84
  

 

 

   

 

 

 

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

   $ 1,108     $ 1,262  
  

 

 

   

 

 

 

 

(1) Excludes foreign exchange.

 

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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 periods indicated:

 

     As of or for the
three months
ended
September 30,
 

(Amounts in millions)

   2017     2016  

Beginning balance

   $ 1,180     $ 2,789  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     (10     228

Adjustment to deferred acquisition costs

     (1     (17

Adjustment to present value of future profits

     (3     3

Adjustment to sales inducements

     —         (6

Adjustment to benefit reserves

     (92     (81

Provision for income taxes

     36     (41
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (70     86

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

     (19     (9
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (89     77

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

     (17     6
  

 

 

   

 

 

 

Ending balance

   $ 1,108     $ 2,860  
  

 

 

   

 

 

 

 

     As of or for the
nine months
ended
September 30,
 

(Amounts in millions)

   2017     2016  

Beginning balance

   $ 1,262     $ 1,254  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     1,377       3,584  

Adjustment to deferred acquisition costs

     (1,047     (291

Adjustment to present value of future profits

     (36     (26

Adjustment to sales inducements

     (11     (46

Adjustment to benefit reserves

     (429     (612

Provision for income taxes

     51     (917
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     (95     1,692  

Reclassification adjustments to net investment (gains) losses, net of taxes of $41 and $33

     (77     (62
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     (172     1,630  

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

     (18     24
  

 

 

   

 

 

 

Ending balance

   $ 1,108     $ 2,860  
  

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of September 30, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

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

Fixed maturity securities:

           

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

  $ 4,893     $ 784     $ —       $ (7   $ —       $ 5,670  

State and political subdivisions

    2,639       247     —         (26     —         2,860  

Non-U.S. government

    2,143       107     —         (24     —         2,226  

U.S. corporate:

           

Utilities

    4,382       556     —         (15     —         4,923  

Energy

    2,243       207     —         (10     —         2,440  

Finance and insurance

    6,051       547     —         (11     —         6,587  

Consumer—non-cyclical

    4,330       508     —         (10     —         4,828  

Technology and communications

    2,558       193     —         (11     —         2,740  

Industrial

    1,247       102     —         (3     —         1,346  

Capital goods

    2,067       263     —         (9     —         2,321  

Consumer—cyclical

    1,506       111     —         (6     —         1,611  

Transportation

    1,188       124     —         (6     —         1,306  

Other

    358     24     —         (2     —         380
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    25,930       2,635       —         (83     —         28,482  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    1,022       45     —         (5     —         1,062  

Energy

    1,330       140     —         (7     —         1,463  

Finance and insurance

    2,524       177     —         (5     —         2,696  

Consumer—non-cyclical

    692     27     —         (3     —         716

Technology and communications

    945     71     —         (2     —         1,014  

Industrial

    979     81     —         (2     —         1,058  

Capital goods

    556     33     —         (2     —         587

Consumer—cyclical

    518     10     —         (1     —         527

Transportation

    650     71     —         (3     —         718

Other

    2,594       193     —         (5     —         2,782  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,810       848     —         (35     —         12,623  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    3,950       255     14     (10     —         4,209  

Commercial mortgage-backed

    3,346       105     2     (39     —         3,414  

Other asset-backed

    3,052       20     1     (5     —         3,068  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,763       5,001       17     (229     —         62,552  

Equity securities

    720     59     —         (14     —         765
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 58,483     $ 5,060     $ 17     $ (243   $ —       $ 63,317  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

As of December 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

  $ 5,439     $ 647     $ —       $ (50   $ —       $ 6,036  

State and political subdivisions

    2,515       182     —         (50     —         2,647  

Non-U.S. government

    2,024       101     —         (18     —         2,107  

U.S. corporate:

           

Utilities

    4,137       454     —         (41     —         4,550  

Energy

    2,167       157     —         (24     —         2,300  

Finance and insurance

    5,719       424     —         (46     —         6,097  

Consumer—non-cyclical

    4,335       433     —         (34     —         4,734  

Technology and communications

    2,473       157     —         (32     —         2,598  

Industrial

    1,161       76     —         (14     —         1,223  

Capital goods

    2,043       228     —         (13     —         2,258  

Consumer—cyclical

    1,455       92     —         (17     —         1,530  

Transportation

    1,121       86     —         (17     —         1,190  

Other

    332     17     —         (1     —         348
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    24,943       2,124       —         (239     —         26,828  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    940     40     —         (11     —         969

Energy

    1,234       109     —         (12     —         1,331  

Finance and insurance

    2,413       134     —         (9     —         2,538  

Consumer—non-cyclical

    711     17     —         (14     —         714

Technology and communications

    953     44     —         (10     —         987

Industrial

    928     39     —         (9     —         958

Capital goods

    518     21     —         (4     —         535

Consumer—cyclical

    434     10     —         (2     —         442

Transportation

    619     65     —         (7     —         677

Other

    2,967       190     —         (13     —         3,144  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,717       669     —         (91     —         12,295  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,122       259     10     (12     —         4,379  

Commercial mortgage-backed

    3,084       98     3     (56     —         3,129  

Other asset-backed

    3,170       15     1     (35     —         3,151  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,014       4,095       14     (551     —         60,572  

Equity securities

    628     31     —         (27     —         632
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 57,642     $ 4,126     $ 14     $ (578   $ —       $ 61,204  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the gross unrealized losses and fair values of our investment securities, aggregated by investment type and length of time that individual investment securities have been in a continuous unrealized loss position, as of September 30, 2017:

 

    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

  $ 283     $ (6     22   $ 31     $ (1 )       4   $ 314     $ (7 )       26

State and political subdivisions

    213     (5     45     230     (21 )       23     443     (26 )       68

Non-U.S. government

    922     (23     36     24     (1 )       14     946     (24 )       50

U.S. corporate

    2,335       (47     333     766     (36 )       106     3,101       (83 )       439

Non-U.S. corporate

    1,562       (22     222     261     (13 )       36     1,823       (35 )       258

Residential mortgage-backed

    656     (9     80     33     (1 )       28     689     (10 )       108

Commercial mortgage-backed

    837     (25     120     201     (14 )       30     1,038       (39 )       150

Other asset-backed

    736     (4     131     173     (1 )       40     909     (5 )       171
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    7,544       (141     989     1,719       (88 )       281     9,263       (229 )       1,270  

Equity securities

    82     (5     142     111     (9 )       89     193     (14 )       231
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,626     $ (146     1,131     $ 1,830     $ (97 )      370   $ 9,456     $ (243 )      1,501  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 7,544     $ (141     989   $ 1,719     $ (88     281   $ 9,263     $ (229 )      1,270  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    7,544       (141     989     1,719       (88 )       281     9,263       (229 )       1,270  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    79     (4     139     111     (9 )       89     190     (13 )       228

20%-50% Below cost

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    82     (5     142     111     (9 )       89     193     (14 )       231
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,626     $ (146     1,131     $ 1,830     $ (97 )      370   $ 9,456     $ (243 )      1,501  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 7,437     $ (139     984   $ 1,656     $ (90 )      287   $ 9,093     $ (229     1,271  

Below investment grade

    189     (7     147     174     (7 )       83     363     (14 )       230
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 7,626     $ (146     1,131     $ 1,830     $ (97 )      370   $ 9,456     $ (243 )      1,501  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


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 September 30, 2017:

 

    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

  $ 468     $ (10     69   $ 104     $ (5     17   $ 572     $ (15     86

Energy

    123     (1     22     146     (9     16     269     (10     38

Finance and insurance

    542     (7     75     154     (4     21     696     (11     96

Consumer—non-cyclical

    325     (7     50     84     (3     12     409     (10     62

Technology and communications

    208     (4     30     127     (7     19     335     (11     49

Industrial

    55     (1     12     56     (2     8     111     (3     20

Capital goods

    274     (8     31     8     (1     2     282     (9     33

Consumer—cyclical

    127     (2     18     70     (4     9     197     (6     27

Transportation

    190     (5     24     17     (1     2     207     (6     26

Other

    23     (2     2     —         —         —         23     (2     2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    2,335       (47     333     766     (36     106     3,101       (83     439
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    227     (4     31     19     (1     2     246     (5     33

Energy

    142     (3     21     69     (4     11     211     (7     32

Finance and insurance

    324     (3     49     50     (2     9     374     (5     58

Consumer—non-cyclical

    131     (2     16     34     (1     4     165     (3     20

Technology and communications

    80     (1     17     12     (1     2     92     (2     19

Industrial

    67     (1     10     11     (1     2     78     (2     12

Capital goods

    34     (1     6     34     (1     3     68     (2     9

Consumer—cyclical

    101     (1     15     —         —         —         101     (1     15

Transportation

    61     (1     13     32     (2     3     93     (3     16

Other

    395     (5     44     —         —         —         395     (5     44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    1,562       (22     222     261     (13     36     1,823       (35     258
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 3,897     $ (69     555   $ 1,027     $ (49     142   $ 4,924     $ (118     697
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 increase in interest rates, 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 2% as of September 30, 2017.

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

Of the $88 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “A” and approximately

 

19


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

92% of the unrealized losses were related to investment grade securities as of September 30, 2017. These unrealized losses were predominantly attributable to corporate securities including 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 September 30, 2017. As of September 30, 2017, the company did not have any fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following 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, 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

                 

Fixed maturity securities:

                 

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

  $ 1,074     $ (50     37   $ —       $ —         —       $ 1,074     $ (50 )       37

State and political subdivisions

    644     (32     109     142     (18 )       12     786     (50 )       121

Non-U.S. government

    497     (18     51     —         —         —         497     (18 )       51

U.S. corporate

    5,221       (190     711     662     (49 )       94     5,883       (239 )       805

Non-U.S. corporate

    2,257       (66     330     408     (25 )       57     2,665       (91 )       387

Residential mortgage-backed

    725     (11     100     58     (1 )       35     783     (12 )       135

Commercial mortgage-backed

    1,091       (55     168     25     (1 )       9     1,116       (56 )       177

Other asset-backed

    1,069       (13     184     328     (22 )       68     1,397       (35 )       252
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    12,578       (435     1,690       1,623       (116 )       275     14,201       (551 )       1,965  

Equity securities

    119     (9     182     114     (18 )       47     233     (27 )       229
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697     $ (444     1,872     $ 1,737     $ (134 )       322   $ 14,434     $ (578 )      2,194  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 12,578     $ (435     1,690     $ 1,543     $ (90 )       267   $ 14,121     $ (525 )      1,957  

20%-50% Below cost

    —         —         —         80     (26 )       8     80     (26 )       8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    12,578       (435     1,690       1,623       (116 )       275     14,201       (551 )       1,965  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    118     (8     167     101     (14 )       38     219     (22 )       205

20%-50% Below cost

    1     (1     15     13     (4 )       9     14     (5 )       24
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    119     (9     182     114     (18 )       47     233     (27 )       229
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697     $ (444     1,872     $ 1,737     $ (134 )      322   $ 14,434     $ (578 )      2,194  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 12,339     $ (432     1,657     $ 1,354     $ (108 )      250   $ 13,693     $ (540 )      1,907  

Below investment grade

    358     (12     215     383     (26 )       72     741     (38 )       287
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 12,697     $ (444     1,872     $ 1,737     $ (134 )      322   $ 14,434     $ (578 )      2,194  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


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, 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

  $ 855     $ (39     130   $ 21     $ (2     5   $ 876      $ (41     135

Energy

    190     (5     30     276     (19     38     466      (24     68

Finance and insurance

    1,438       (38     177     113     (8     15     1,551        (46     192

Consumer—non-cyclical

    921     (34     117     —         —         —         921      (34     117

Technology and communications

    507     (22     70     126     (10     17     633      (32     87

Industrial

    226     (7     38     77     (7     10     303      (14     48

Capital goods

    322     (12     50     6     (1     1     328      (13     51

Consumer—cyclical

    431     (16     56     26     (1     6     457      (17     62

Transportation

    302     (16     41     17     (1     2     319      (17     43

Other

    29     (1     2     —         —         —         29      (1     2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    5,221       (190     711     662     (49     94     5,883        (239     805
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Non-U.S. corporate:

                  

Utilities

    240     (10     32     14     (1     1     254      (11     33

Energy

    105     (3     18     91     (9     16     196      (12     34

Finance and insurance

    474     (8     79     71     (1     16     545      (9     95

Consumer—non-cyclical

    308     (14     30     —         —         —         308      (14     30

Technology and communications

    232     (9     34     28     (1     2     260      (10     36

Industrial

    165     (5     21     91     (4     10     256      (9     31

Capital goods

    104     (2     14     28     (2     2     132      (4     16

Consumer—cyclical

    90     (2     17     —         —         —         90      (2     17

Transportation

    106     (5     16     25     (2     2     131      (7     18

Other

    433     (8     69     60     (5     8     493      (13     77
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    2,257       (66     330     408     (25     57     2,665        (91     387
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 7,478     $ (256     1,041     $ 1,070     $ (74     151   $ 8,548      $ (330     1,192  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

21


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of September 30, 2017 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

   $ 1,943      $ 1,966  

Due after one year through five years

     10,901        11,333  

Due after five years through ten years

     12,363        12,933  

Due after ten years

     22,208        25,629  
  

 

 

    

 

 

 

Subtotal

     47,415        51,861  

Residential mortgage-backed

     3,950        4,209  

Commercial mortgage-backed

     3,346        3,414  

Other asset-backed

     3,052        3,068  
  

 

 

    

 

 

 

Total

   $ 57,763      $ 62,552  
  

 

 

    

 

 

 

As of September 30, 2017, $12,426 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of September 30, 2017, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 23%, 15% 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 September 30, 2017, 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.

 

22


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     September 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Property type:

        

Retail

   $ 2,220       35   $ 2,178       36

Industrial

     1,608       26     1,533       25

Office

     1,465       23     1,430       23

Apartments

     489     8     455     7

Mixed use

     222     4     245     4

Other

     277     4     284     5
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,281       100     6,125       100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     (3       (2  

Allowance for losses

     (10       (12  
  

 

 

     

 

 

   

Total

   $ 6,268       $ 6,111    
  

 

 

     

 

 

   

 

     September 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying
value
    % of
total
    Carrying
value
    % of
total
 

Geographic region:

        

South Atlantic

   $ 1,620       26   $ 1,546       25

Pacific

     1,600       26     1,567       27

Middle Atlantic

     904     14     915     15

Mountain

     556     9     554     9

West North Central

     441     7     435     7

East North Central

     386     6     388     6

West South Central

     327     5     311     5

New England

     237     4     206     3

East South Central

     210     3     203     3
  

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

     6,281       100     6,125       100
    

 

 

     

 

 

 

Unamortized balance of loan origination fees and costs

     (3       (2  

Allowance for losses

     (10       (12  
  

 

 

     

 

 

   

Total

   $ 6,268       $ 6,111    
  

 

 

     

 

 

   

 

23


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     September 30, 2017  

(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

   $ —       $ —       $ —       $ —       $ 2,220     $ 2,220  

Industrial

     —         —         —         —         1,608       1,608  

Office

     6     —         —         6     1,459       1,465  

Apartments

     —         —         —         —         489     489

Mixed use

     —         —         —         —         222     222

Other

     —         —         —         —         277     277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 6     $ —       $ —       $ 6     $ 6,275     $ 6,281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 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

   $ —       $ —       $ —       $ —       $ 2,178     $ 2,178  

Industrial

     1     —         12     13     1,520       1,533  

Office

     —         —         —         —         1,430       1,430  

Apartments

     —         —         —         —         455     455

Mixed use

     —         —         —         —         245     245

Other

     —         —         —         —         284     284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 1     $ —       $ 12     $ 13     $ 6,112     $ 6,125  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2017 and December 31, 2016, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. As of September 30, 2017, we had one commercial mortgage loan past due for less than 90 days on non-accrual status due to the borrower filing for bankruptcy in September 2017. We did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of December 31, 2016.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of September 30, 2017, none of our commercial mortgage loans were greater than 90 days past due.

During the nine months ended September 30, 2017 and the year ended December 31, 2016, we modified or extended 7 and 16 commercial mortgage loans, respectively, with a total carrying value of $19 million and $85 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, except during the year ended December 31, 2016, one loan with a carrying value $1 million at the time of modification was considered a troubled debt restructuring. This loan was sold in the fourth quarter of 2016.

 

24


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

(Amounts in millions)

       2017              2016              2017             2016      

Allowance for credit losses:

          

Beginning balance

   $ 10      $ 13      $ 12     $ 15  

Charge-offs

     —          —          —         (4

Recoveries

     —          —          —         —    

Provision

     —          —          (2     2
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance

   $ 10      $ 13      $ 10     $ 13  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending allowance for individually impaired loans

   $ —        $ —        $ —       $ —    
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 10      $ 13      $ 10     $ 13  
  

 

 

    

 

 

    

 

 

   

 

 

 

Recorded investment:

          

Ending balance

   $ 6,281      $ 6,032      $ 6,281     $ 6,032  
  

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ —        $ 17      $ —       $ 17  
  

 

 

    

 

 

    

 

 

   

 

 

 

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

   $ 6,281      $ 6,015      $ 6,281     $ 6,015  
  

 

 

    

 

 

    

 

 

   

 

 

 

As of September 30, 2017, we had no individually impaired commercial mortgage loans. As of September 30, 2016, we had individually impaired commercial mortgage loans included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $7 million, charge-offs of $2 million and an average recorded investment of $3 million. As of December 31, 2016, we had one individually impaired loan within the industrial property type with a recorded investment of $12 million, an unpaid principal balance of $15 million and charge-offs of $3 million.

In evaluating the credit quality of commercial mortgage loans, we assess the performance of the underlying loans using both quantitative and qualitative criteria. Certain risks associated with commercial mortgage loans can be evaluated by reviewing both the loan-to-value and debt service coverage ratio to understand both the probability of the borrower not being able to make the necessary loan payments as well as the ability to sell the underlying property for an amount that would enable us to recover our unpaid principal balance in the event of default by the borrower. The average loan-to-value ratio is based on our most recent estimate of the fair value for the underlying property which is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A lower loan-to-value indicates that our loan value is more likely to be recovered in the event of default by the borrower if the property was sold. The debt service coverage ratio is based on “normalized” annual 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.

 

25


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     September 30, 2017  

(Amounts in millions)

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

Property type:

            

Retail

   $ 933     $ 499     $ 788     $ —       $ —       $ 2,220  

Industrial

     747     356     503     2     —         1,608  

Office

     583     393     473     14     2       1,465  

Apartments

     236     105     143     5     —         489

Mixed use

     101     59     62     —         —         222

Other

     68     29     180     —         —         277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,668     $ 1,441     $ 2,149     $ 21     $ 2     $ 6,281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     43     23     34     —       —       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.65       1.85       1.60       0.63       1.04       2.10  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included a loan with a recorded investment of $2 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 103%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

 

     December 31, 2016  

(Amounts in millions)

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

Property type:

            

Retail

   $ 743     $ 511     $ 913     $ 11     $ —       $ 2,178  

Industrial

     605     430     484     14     —         1,533  

Office

     431     310     656     26     7       1,430  

Apartments

     188     89     173     5     —         455

Mixed use

     67     87     91     —         —         245

Other

     60     30     194     —         —         284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 2,094     $ 1,457     $ 2,511     $ 56     $ 7     $ 6,125  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     34     24     41     1     —       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

     2.20       1.88       1.61       0.80       (0.07 )       1.87  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included a loan with a recorded investment of $7 million in good standing, where the borrower continued to make timely payments, with a loan-to-value of 105%. We evaluated this loan on an individual basis and as it is in good standing, the current recorded investment is expected to be recoverable.

 

26


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     September 30, 2017  

(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

   $ 43     $ 242     $ 298     $ 999     $ 638     $ 2,220  

Industrial

     24     63     180     679     662     1,608  

Office

     72     67     151     521     654     1,465  

Apartments

     —         20     75     193     201     489

Mixed use

     2     4     26     86     104     222

Other

     1     149     15     72     40     277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 142     $ 545     $ 745     $ 2,550     $ 2,299     $ 6,281  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     2     9     12     40     37     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     57     60     58     57     41     52
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 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

   $ 67     $ 204     $ 425     $ 899     $ 583     $ 2,178  

Industrial

     71     113     236     599     514     1,533  

Office

     91     117     172     609     441     1,430  

Apartments

     19     22     44     217     153     455

Mixed use

     2     9     19     128     87     245

Other

     1     148     60     55     20     284
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 251     $ 613     $ 956     $ 2,507     $ 1,798     $ 6,125  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     4     10     16     41     29     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     61     60     59     58     45     55
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of September 30, 2017 and December 31, 2016, we did not have any floating rate commercial mortgage loans.

(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 previously had consolidated securitization entities that held certain investments that were recorded as restricted other invested assets related to securitization entities. The consolidated securitization entities held certain investments as trading securities whereby the changes in fair value were recorded in current period

 

27


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

income (loss). The trading securities comprised asset-backed securities, including highly rated bonds that were primarily backed by credit card receivables. In 2017, these trading securities were sold as we repositioned these assets in connection with the maturity of the associated liabilities.

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs when the equity group lacks 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 September 30, 2017 and December 31, 2016, the total carrying value of these investments was $208 million and $178 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 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.

 

28


Table of Contents

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
  September 30,
2017 (5)
    December 31,
2016
    Balance
sheet classification
    September 30,
2017 (5)
    December 31,
2016
 

Derivatives designated as hedges

           

Cash flow hedges:

           

Interest rate swaps

  Other invested
assets
  $ 70     $ 237       Other liabilities     $ 39     $ 203  

Foreign currency swaps

  Other invested
assets
    2       4     Other liabilities       —         —    
   

 

 

   

 

 

     

 

 

   

 

 

 

Total cash flow hedges

      72       241       39       203
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives designated as hedges

      72       241       39       203
   

 

 

   

 

 

     

 

 

   

 

 

 

Derivatives not designated as hedges

           

Interest rate swaps

  Other invested
assets
    —         359     Other liabilities       —         146

Foreign currency swaps

  Other invested
assets
    10       —         Other liabilities       —         5

Credit default swaps related to securitization entities

  Restricted other

invested assets

    —         —         Other liabilities       —         1

Equity index options

  Other
invested assets
    81       72     Other liabilities       —         —    

Financial futures

  Other
invested assets
    —         —         Other liabilities       —         —    

Equity return swaps

  Other
invested assets
    —         1     Other liabilities       2       1

Other foreign currency contracts

  Other invested
assets
    98       35     Other liabilities       23       27

GMWB embedded derivatives

  Reinsurance

recoverable(1)

    14       16    

Policyholder

account balances(2)

 

 

    257       303

Fixed index annuity embedded derivatives

  Other assets     —         —        

Policyholder

account balances(3)

 

 

    394       344

Indexed universal life embedded derivatives

  Reinsurance

recoverable

    —         —        

Policyholder

account balances(4)

 

 

    14       11
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives not designated as hedges

      203       483       690       838
   

 

 

   

 

 

     

 

 

   

 

 

 

Total derivatives

    $ 275     $ 724       $ 729     $ 1,041  
   

 

 

   

 

 

     

 

 

   

 

 

 

 

(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.
(5) In the third quarter of 2017, recent central clearing parties rule changes impacted our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract. The change reduced the value of our derivative assets and derivative liabilities by $509 million and $274 million, respectively, in the third quarter of 2017.

 

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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,
2016
     Additions      Maturities/
terminations
    September 30,
2017
 

Derivatives designated as hedges

             

Cash flow hedges:

             

Interest rate swaps

     Notional      $ 11,570      $ —        $ (306   $ 11,264  

Foreign currency swaps

     Notional        22      —          —         22
     

 

 

    

 

 

    

 

 

   

 

 

 

Total cash flow hedges

        11,592        —          (306     11,286  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives designated as hedges

        11,592        —          (306     11,286  
     

 

 

    

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedges

             

Interest rate swaps

     Notional        4,679        —          —         4,679  

Foreign currency swaps

     Notional        201      95      (14     282

Credit default swaps

     Notional        39      —          —         39

Credit default swaps related to securitization entities

     Notional        312      —          (200     112

Equity index options

     Notional        2,396        1,584        (1,484     2,496  

Financial futures

     Notional        1,398        4,300        (4,376     1,322  

Equity return swaps

     Notional        165      186      (258     93

Other foreign currency contracts

     Notional        3,130        2,163        (691     4,602  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives not designated as hedges

        12,320        8,328        (7,023     13,625  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives

      $ 23,912      $ 8,328      $ (7,329   $ 24,911  
     

 

 

    

 

 

    

 

 

   

 

 

 

 

(Number of policies)

   Measurement      December 31,
2016
     Additions      Maturities/
terminations
    September 30,
2017
 

Derivatives not designated as hedges

             

GMWB embedded derivatives

     Policies        33,238        —          (2,127     31,111  

Fixed index annuity embedded derivatives

     Policies        17,549        —          (367     17,182  

Indexed universal life embedded derivatives

     Policies        1,074        1      (66     1,009  

Cash Flow Hedges

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2017:

 

(Amounts in millions)

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

Interest rate swaps hedging assets

   $ 17     $ 34       
Net investment
income
 
 
   $ —         
Net investment
gains (losses)
 
 

Foreign currency swaps

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

 

 

   

 

 

       

 

 

    

Total

   $ 16     $ 34         $ —       
  

 

 

   

 

 

       

 

 

    

 

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

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the three months ended September 30, 2016:

 

(Amounts in millions)

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

Interest rate swaps hedging assets

   $ 115     $ 27       
Net investment
income
 
 
   $ 2       
Net investment
gains (losses)
 
 

Interest rate swaps hedging liabilities

     (2     —         
Interest
expense
 
 
     —         
Net investment
gains (losses)
 
 

Foreign currency swaps

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

 

 

   

 

 

       

 

 

    

Total

   $ 112     $ 27         $ 2     
  

 

 

   

 

 

       

 

 

    

 

(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 information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2017:

 

(Amounts in millions)

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

Interest rate swaps hedging assets

   $ 50     $ 95       
Net investment
income
 
 
   $ —         
Net investment
gains (losses)
 
 

Interest rate swaps hedging assets

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

Interest rate swaps hedging liabilities

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

Foreign currency swaps

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

 

 

   

 

 

       

 

 

    

Total

   $ 46     $ 97         $ —       
  

 

 

   

 

 

       

 

 

    

 

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

The following table provides information about the pre-tax income (loss) effects of cash flow hedges for the nine months ended September 30, 2016:

 

(Amounts in millions)

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

Interest rate swaps hedging assets

   $ 839     $ 80       
Net investment
income
 
 
   $ 13       
Net investment
gains (losses)
 
 

Interest rate swaps hedging assets

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

Interest rate swaps hedging liabilities

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

Inflation indexed swaps

     (5     2     
Net investment
income
 
 
     —         
Net investment
gains (losses)
 
 

Inflation indexed swaps

     —         7     
Net investment
gains (losses)
 
 
     —         
Net investment
gains (losses)
 
 

Foreign currency swaps

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

 

 

   

 

 

       

 

 

    

Total

   $ 780     $ 90         $ 13     
  

 

 

   

 

 

       

 

 

    

 

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

 

     Three months
ended
September 30,
 

(Amounts in millions)

   2017     2016  

Derivatives qualifying as effective accounting hedges as of July 1

   $ 2,064     $ 2,439  

Current period increases (decreases) in fair value, net of deferred taxes of $(6) and $(40)

     10     72

Reclassification to net (income), net of deferred taxes of $12 and $9

     (22     (18
  

 

 

   

 

 

 

Derivatives qualifying as effective accounting hedges as of September 30

   $ 2,052     $ 2,493  
  

 

 

   

 

 

 

 

     Nine months
ended
September 30,
 

(Amounts in millions)

   2017     2016  

Derivatives qualifying as effective accounting hedges as of January 1

   $ 2,085     $ 2,045  

Current period increases (decreases) in fair value, net of deferred taxes of $(17) and $(273)

     29     507

Reclassification to net (income), net of deferred taxes of $35 and $31

     (62     (59
  

 

 

   

 

 

 

Derivatives qualifying as effective accounting hedges as of September 30

   $ 2,052     $ 2,493  
  

 

 

   

 

 

 

The total of derivatives designated as cash flow hedges of $2,052 million, net of taxes, recorded in stockholders’ equity as of September 30, 2017 is expected to be reclassified to net income (loss) in the future, concurrently with and primarily offsetting changes in interest expense and interest income on floating rate instruments and interest income on future fixed rate bond purchases. Of this amount, $95 million, net of taxes, is expected to be reclassified to net income (loss) in the next 12 months. Actual amounts may vary from this amount as a result of market conditions. All forecasted transactions associated with qualifying cash flow hedges are expected to occur by 2057. During the nine months ended September 30, 2017, there was approximately $2 million reclassified to net income (loss) in connection with forecasted transactions that were no longer considered probable of occurring.

Derivatives Not Designated As Hedges

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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 (loss) for the effects of derivatives not designated as hedges for the periods indicated:

 

     Three months
ended
September 30,
   

Classification of gain (loss)
recognized

in net income (loss)

(Amounts in millions)

   2017     2016    

Interest rate swaps

   $ 1     $ (1   Net investment gains (losses)

Credit default swaps related to securitization entities

     2     2   Net investment gains (losses)

Equity index options

     16     9   Net investment gains (losses)

Financial futures

     (17     (35   Net investment gains (losses)

Equity return swaps

     (5     (9   Net investment gains (losses)

Other foreign currency contracts

     40     (2   Net investment gains (losses)

Foreign currency swaps

     8     (1   Net investment gains (losses)

GMWB embedded derivatives

     30     60   Net investment gains (losses)

Fixed index annuity embedded derivatives

     (21     (16   Net investment gains (losses)

Indexed universal life embedded derivatives

     2     3   Net investment gains (losses)
  

 

 

   

 

 

   

Total derivatives not designated as hedges

   $ 56     $ 10    
  

 

 

   

 

 

   

 

     Nine months
ended
September 30,
   

Classification of gain (loss)
recognized

in net income (loss)

(Amounts in millions)

   2017     2016    

Interest rate swaps

   $ 2     $ 7     Net investment gains (losses)

Interest rate swaps related to securitization entities

     —         (10   Net investment gains (losses)

Credit default swaps related to securitization entities

     6     16   Net investment gains (losses)

Equity index options

     42     5   Net investment gains (losses)

Financial futures

     (25     (9   Net investment gains (losses)

Equity return swaps

     (19     (2   Net investment gains (losses)

Other foreign currency contracts

     66     (6   Net investment gains (losses)

Foreign currency swaps

     13     6   Net investment gains (losses)

GMWB embedded derivatives

     64     (58   Net investment gains (losses)

Fixed index annuity embedded derivatives

     (57     (22   Net investment gains (losses)

Indexed universal life embedded derivatives

     5     6   Net investment gains (losses)
  

 

 

   

 

 

   

Total derivatives not designated as hedges

   $ 97     $ (67  
  

 

 

   

 

 

   

Derivative Counterparty Credit Risk

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     September 30, 2017     December 31, 2016  

(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

   $ 262     $ 66     $ 196     $ 724     $ 387     $ 337  

Gross amounts offset in the balance sheet

     —         —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amounts presented in the balance sheet

     262       66       196     724       387       337

Gross amounts not offset in the balance sheet:

            

Financial instruments (3)

     (24 )       (24 )       —         (172 )       (172 )       —    

Collateral received

     (164 )       —         (164     (467 )       —         (467

Collateral pledged

     —         (301 )       301     —         (557 )       557

Over collateralization

     8       259       (251     1       344       (343
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net amount

   $ 82     $ —       $ 82     $ 86     $ 2     $ 84  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Included $1 million and $16 million of accruals on derivatives classified as other assets and does not include amounts related to embedded derivatives as of September 30, 2017 and December 31, 2016, respectively.
(2) Included $2 million and $5 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 September 30, 2017 and December 31, 2016, 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. If downgrade provisions had been triggered as a result of downgrades of our counterparties, we could have claimed up to $82 million and $86 million as of September 30, 2017 and December 31, 2016, respectively, or have been required to disburse up to $2 million as of December 31, 2016. There were no amounts that we would have been required to disburse as of September 30, 2017 . 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 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

 

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Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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:

 

     September 30, 2017      December 31, 2016  

(Amounts in millions)

   Notional
value
     Assets      Liabilities      Notional
value
     Assets      Liabilities  

Investment grade

                 

Matures in less than one year

   $ 39      $ —        $ —        $ —        $ —        $ —    

Matures after one year through five years

     —          —          —          39      —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps on single name reference entities

   $ 39      $ —        $ —        $ 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:

 

     September 30, 2017      December 31, 2016  

(Amounts in millions)

   Notional
value
     Assets      Liabilities      Notional
value
     Assets      Liabilities  

Customized credit default swap index tranches related to securitization entities:

                 

Portion backing third-party borrowings maturing 2017 (1)

   $ 12      $ —        $ —        $ 12      $ —        $ —    

Portion backing our interest maturing 2017 (2)

     100      —             300      —          1
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total customized credit default swap index tranches related to securitization entities

     112      —          —          312      —          1
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total credit default swaps on index tranches

   $ 112      $ —        $ —        $ 312      $ —        $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Original notional value was $39 million.
(2) Original notional value was $300 million.

(6) Fair Value of Financial Instruments

Assets and liabilities that are reflected in the accompanying unaudited condensed consolidated financial statements at fair value are not included in the following disclosure of fair value. Such items include cash and

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

cash equivalents, short-term investments, 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 limited partnerships accounted for under the cost method. 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 third-party broker provided prices (“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.

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

 

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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:

 

     September 30, 2017  
     Notional
amount
    Carrying
amount
     Fair value  

(Amounts in millions)

        Total      Level 1      Level 2      Level 3  

Assets:

                

Commercial mortgage loans

   $ (1)    $ 6,268      $ 6,550      $ —        $ —        $ 6,550  

Restricted commercial mortgage loans

        (1)      111      122      —          —          122

Other invested assets

        (1)      217      243      —          —          243

Liabilities:

                

Long-term borrowings

        (1)      4,224        3,742        —          3,583        159

Non-recourse funding obligations

        (1)      310      195      —          —          195

Borrowings related to securitization entities

        (1)      47      48      —          48      —    

Investment contracts

        (1)      15,163        15,705        —          5      15,700  

Other firm commitments:

                

Commitments to fund limited partnerships

     319       —          —          —          —          —    

Ordinary course of business lending commitments

     61       —          —          —          —          —    

 

     December 31, 2016  
     Notional
amount
    Carrying
amount
     Fair value  

(Amounts in millions)

        Total      Level 1      Level 2      Level 3  

Assets:

                

Commercial mortgage loans

   $ (1)    $ 6,111      $ 6,247      $ —        $ —        $ 6,247  

Restricted commercial mortgage loans

        (1)      129      141      —          —          141

Other invested assets

        (1)      459      473      —          352      121

Liabilities:

                

Long-term borrowings

        (1)      4,180        3,582        —          3,440        142

Non-recourse funding obligations

        (1)      310      186      —          —          186

Borrowings related to securitization entities

        (1)      62      65      —          65      —    

Investment contracts

        (1)      16,437        16,993        —          5      16,988  

Other firm commitments:

                

Commitments to fund limited partnerships

     201       —          —          —          —          —    

Ordinary course of business lending commitments

     73       —          —          —          —          —    

 

(1) These financial instruments do not have notional amounts.

Recurring Fair Value Measurements

We have fixed maturity, short-term investments, equity and trading securities, derivatives, embedded derivatives, securities held as collateral, separate account assets and certain other financial instruments, which are

 

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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, short-term investments, equity and trading securities

The fair value of fixed maturity, short-term investments, equity and trading securities are estimated primarily based on information derived from third-party pricing services (“pricing services”), internal models and/or 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.

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

 

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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 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.

Level 1 measurements

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

 

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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.

Level 2 measurements

Fixed maturity securities

 

    Third-party pricing services: In estimating the fair value of fixed maturity securities, approximately 91% 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 September 30, 2017:

 

(Amounts in millions)

   Fair value     

Primary methodologies

  

Significant inputs

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

   $ 5,669      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

   $ 2,816      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

   $ 2,210      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

   $ 25,290      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

   $ 10,711      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

   $ 4,123      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

   $ 3,392      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

   $ 2,843      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 state and political subdivisions, 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 $7 million, $16 million, $865 million and $461 million, respectively, as of September 30, 2017. 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.

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.

Short-term Investments

Short-term investments primarily include commercial paper and other highly liquid debt instruments and are classified as Level 2. We determine fair value after considering prices obtained by third-party pricing services.

Level 3 measurements

Fixed maturity securities

 

    Internal models: A portion of our U.S. government, agencies and government-sponsored enterprises, U.S. corporate, non-U.S. corporate, residential 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 $3,521 million as of September 30, 2017.

 

   

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

 

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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 $628 million as of September 30, 2017.

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 previously held trading securities related to securitization entities that were classified as restricted other invested assets and were carried at fair value. The trading securities represented asset-backed securities. In 2017, these trading securities were sold as we repositioned these assets in connection with the maturity of the associated liabilities. The valuation for trading securities was determined using a market approach and/or an income approach depending on the availability of information. For certain highly rated asset-backed securities, there was observable market information for transactions of the same or similar instruments, which was provided to us by a third-party pricing service and was classified as Level 2. For certain securities that are not actively traded, we determined fair value after considering third-party broker provided prices or discounted expected cash flows using current yields for similar securities and classified these valuations as Level 3.

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 September 30, 2017 and December 31, 2016, the impact of non-performance risk resulted in a lower fair value of our GMWB liabilities of $65 million and $73 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 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.

 

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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 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.

 

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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.

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.

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.

 

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(Unaudited)

 

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.

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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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:

 

     September 30, 2017  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Assets

           

Investments:

           

Fixed maturity securities:

           

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

   $ 5,670      $ —        $ 5,669      $ 1  

State and political subdivisions

     2,860        —          2,823        37

Non-U.S. government

     2,226        —          2,226        —    

U.S. corporate:

           

Utilities

     4,923        —          4,261        662

Energy

     2,440        —          2,282        158

Finance and insurance

     6,587        —          5,917        670

Consumer—non-cyclical

     4,828        —          4,701        127

Technology and communications

     2,740        —          2,688        52

Industrial

     1,346        —          1,299        47

Capital goods

     2,321        —          2,203        118

Consumer—cyclical

     1,611        —          1,349        262

Transportation

     1,306        —          1,245        61

Other

     380      —          210      170
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. corporate

     28,482        —          26,155        2,327  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-U.S. corporate:

           

Utilities

     1,062        —          703      359

Energy

     1,463        —          1,286        177

Finance and insurance

     2,696        —          2,527        169

Consumer—non-cyclical

     716      —          587      129

Technology and communications

     1,014        —          985      29

Industrial

     1,058        —          919      139

Capital goods

     587      —          437      150

Consumer—cyclical

     527      —          458      69

Transportation

     718      —          537      181

Other

     2,782        —          2,733        49
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-U.S. corporate

     12,623        —          11,172        1,451  
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential mortgage-backed

     4,209        —          4,123        86

Commercial mortgage-backed

     3,414        —          3,392        22

Other asset-backed

     3,068        —          2,843        225
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     62,552        —          58,403        4,149  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

     765      644      77      44
  

 

 

    

 

 

    

 

 

    

 

 

 

Other invested assets:

           

Derivative assets:

           

Interest rate swaps

     70      —          70      —    

Foreign currency swaps

     12      —          12      —    

Equity index options

     81      —          —          81

Other foreign currency contracts

     98      —          98      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     261      —          180      81
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities lending collateral

     237      —          237      —    

Short-term investments

     787      —          787      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other invested assets

     1,285        —          1,204        81
  

 

 

    

 

 

    

 

 

    

 

 

 

Reinsurance recoverable (1)

     14      —          —          14

Separate account assets

     7,264        7,264        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 71,880      $ 7,908      $ 59,684      $ 4,288  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 2016  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Assets

           

Investments:

           

Fixed maturity securities:

           

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

   $ 6,036      $ —        $ 6,034      $ 2  

State and political subdivisions

     2,647        —          2,610        37

Non-U.S. government

     2,107        —          2,107        —    

U.S. corporate:

           

Utilities

     4,550        —          3,974        576

Energy

     2,300        —          2,090        210

Finance and insurance

     6,097        —          5,311        786

Consumer—non-cyclical

     4,734        —          4,613        121

Technology and communications

     2,598        —          2,544        54

Industrial

     1,223        —          1,175        48

Capital goods

     2,258        —          2,106        152

Consumer—cyclical

     1,530        —          1,272        258

Transportation

     1,190        —          1,051        139

Other

     348      —          205      143
  

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. corporate

     26,828        —          24,341        2,487  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-U.S. corporate:

           

Utilities

     969      —          583      386

Energy

     1,331        —          1,125        206

Finance and insurance

     2,538        —          2,356        182

Consumer—non-cyclical

     714      —          575      139

Technology and communications

     987      —          920      67

Industrial

     958      —          849      109

Capital goods

     535      —          366      169

Consumer—cyclical

     442      —          373      69

Transportation

     677      —          496      181

Other

     3,144        —          3,119        25
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-U.S. corporate

     12,295        —          10,762        1,533  
  

 

 

    

 

 

    

 

 

    

 

 

 

Residential mortgage-backed

     4,379        —          4,336        43

Commercial mortgage-backed

     3,129        —          3,075        54

Other asset-backed

     3,151        —          3,006        145
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     60,572        —          56,271        4,301  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

     632      551      34      47
  

 

 

    

 

 

    

 

 

    

 

 

 

Other invested assets:

           

Trading securities

     259      —          259      —    

Derivative assets:

           

Interest rate swaps

     596      —          596      —    

Foreign currency swaps

     4      —          4      —    

Equity index options

     72      —          —          72

Equity return swaps

     1      —          1      —    

Other foreign currency contracts

     35      —          32      3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative assets

     708      —          633      75
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities lending collateral

     534      —          534      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other invested assets

     1,501        —          1,426        75
  

 

 

    

 

 

    

 

 

    

 

 

 

Restricted other invested assets related to securitization entities

     312      —          181      131

Reinsurance recoverable (1)

     16      —          —          16

Separate account assets

     7,299        7,299        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 70,332      $ 7,850      $ 57,912      $ 4,570  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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:

 

(Amounts in millions)

  Beginning
balance

as of
July 1,
2017
    Total realized and
unrealized gains
(losses)
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3 (1)
    Transfer
out of
Level 3 (1)
    Ending
balance

as of
September 30,
2017
    Total
gains
(losses)
included

in net
income
(loss)

attributable
to assets
still held
 
    Included
in net
income
(loss)
    Included
in OCI
                 

Fixed maturity securities:

                     

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

  $ 1     $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ 1     $ —    

State and political subdivisions

    37     1     (1     —         —         —         —         —         —         37     1

U.S. corporate:

                     

Utilities

    638     —         —         26     —         —         (2     —         —         662     —    

Energy

    160     —         —         —         —         —         (2     —         —         158     —    

Finance and insurance

    861     3     (52     22     (14     —         (157     8       (1 )       670     2

Consumer—non-cyclical

    122     —         1     4     —         —         —         —         —         127     —    

Technology and communications

    58     1     (3     —         —         —         (1     —         (3 )       52     1

Industrial

    61     —         —         —         —         —         —         —         (14 )       47     —    

Capital goods

    118     1     —         —         —         —         (1     —         —         118     1

Consumer—cyclical

    266     —         —         —         —         —         (2     —         (2 )       262     —    

Transportation

    100     16     (10     —         —         —         (45     —         —         61     —    

Other

    176     —         —         —         (4     —         (2     —         —         170     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    2,560       21     (64     52     (18     —         (212     8       (20 )       2,327       4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                     

Utilities

    359     —         —         —         —         —         —         —         —         359     —    

Energy

    177     —         1     —         —         —         (1     —         —         177     —    

Finance and insurance

    172     1     1     —         —         —         (5     —         —         169     —    

Consumer—non-cyclical

    129     —         —         —         —         —         —         —         —         129     —    

Technology and communications

    48     1     1     —         (21     —         —         —         —         29     —    

Industrial

    112     —         —         13     —         —         —         14       —         139     —    

Capital goods

    149     —         1     —         —         —         —         —         —         150     —    

Consumer—cyclical

    67     —         —         —         —         —         —         2       —         69     —    

Transportation

    190     —         1     —         —         —         (10     —         —         181     —    

Other

    41     (2     1     —         (2     —         —         11       —         49     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    1,444       —         6     13     (23     —         (16     27       —         1,451       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    73     —         —         22     —         —         (1     —         (8 )       86     —    

Commercial mortgage-backed

    52     (1     (2     14     —         —         —         —         (41 )       22     —    

Other asset-backed

    150     (1     1     52     —         —         (5     44       (16 )       225     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    4,317       20     (60     153     (41     —         (234     79       (85 )       4,149       5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    48     —         —         —         (1     —         —         —         (3 )       44     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

                     

Derivative assets:

                     

Equity index options

    81     16     —         15     —         —         (31     —         —         81     13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

    81     16     —         15     —         —         (31     —         —         81     13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

    81     16     —         15     —         —         (31     —         —         81     13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reinsurance recoverable (2)

    15     (1     —         —         —         —         —         —         —         14     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 4,461     $ 35     $ (60   $ 168     $ (42   $ —       $ (265   $ 79     $ (88 )    $ 4,288     $ 17  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

52


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(Amounts in millions)

  Beginning
balance

as of
July 1,
2016
    Total realized and
unrealized gains
(losses)
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3 (1)
    Transfer
out of
Level 3 (1)
    Ending
balance

as of
September 30,
2016
    Total gains
(losses)
included in
net income
(loss)

attributable
to assets
still held
 
    Included
in net
income
(loss)
    Included
in OCI
                 

Fixed maturity securities:

                     

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

  $ 2     $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ 2     $ —    

State and political subdivisions

    36     1     —         —         —         —         —         —         (1 )       36     1

U.S. corporate:

                     

Utilities

    552     1     4     54     (6     —         (1     1       (43 )       562     —    

Energy

    208     —         3     —         —         —         (8     —         (1 )       202     —    

Finance and insurance

    775     4     14     27     (5     —         (32     37       —         820     5

Consumer—non-cyclical

    102     —         1     5     (5     —         —         —         —         103     —    

Technology and communications

    40     1     —         12     —         —         —         —         —         53     1

Industrial

    78     —         —         —         —         —         —         —         —         78     —    

Capital goods

    135     —         1     —         —         —         —         —         —         136     1

Consumer—cyclical

    254     —         —         19     (5     —         (1     1       (3 )       265     —    

Transportation

    129     —         1     —         —         —         (6     —         —         124     —    

Other

    147     —         —         —         —         —         (1     16       —         162     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    2,420       6     24     117     (21     —         (49     55       (47 )       2,505       7
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                     

Utilities

    331     —         1     52     (5     —         —         —         (10 )       369     —    

Energy

    234     —         9     8     (9     —         (17     —         —         225     —    

Finance and insurance

    201     —         3     11     (1     —         —         —         —         214     —    

Consumer—non-cyclical

    168     2     (1     3     (3     —         (37     12       —         144     —    

Technology and communications

    80     —         1     2     (2     —         —         —         —         81     —    

Industrial

    95     —         2     17     (17     —         —         15       —         112     —    

Capital goods

    212     1     (2     —         —         —         (5     —         (33 )       173     1

Consumer—cyclical

    71     —         —         —         —         —         —         —         —         71     —    

Transportation

    186     1     (1     —         —         —         (14     1       —         173     —    

Other

    29     (2     2     —         (12     —         —         10       —         27     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    1,607       2     14     93     (49     —         (73     38       (43 )       1,589       (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    96     —         —         —         (45     —         (8     5       (11 )       37     —    

Commercial mortgage-backed

    33     —         (3     —         —         —         —         —         (2 )       28     —    

Other asset-backed

    198     (6     7     —         (5     —         (5     25       (64 )       150     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    4,392       3     42     210     (120     —         (135     123       (168 )       4,347       1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    44     —         —         2     —         —         —         —         —         46     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

                     

Derivative assets:

                     

Equity index options

    57     9     —         15     —         —         (20     —         —         61     —    

Other foreign currency contracts

    1     —         —         —         —         —         —         —         —         1     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

    58     9     —         15     —         —         (20     —         —         62     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

    58     9     —         15     —         —         (20     —         —         62     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted other invested assets related to securitization entities

    131     —         —         —         —         —         —         —         —         131     —    

Reinsurance recoverable (2)

    26     (3     —         —         —         1     —         —         —         24     (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 4,651     $ 9     $ 42     $ 227     $ (120   $ 1     $ (155   $ 123     $ (168 )    $ 4,610     $ (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

53


Table of Contents

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:

 

(Amounts in millions)

  Beginning
balance as
of

January 1,
2017
    Total realized and
unrealized gains
(losses)
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3 (1)
    Transfer
out of
Level 3 (1)
    Ending
balance as of

September 30,
2017
    Total
gains
(losses)
included in
net income
(loss)
attributable

to assets
still held
 
    Included
in net
income
(loss)
    Included
in OCI
                 

Fixed maturity securities:

                     

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

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

State and political subdivisions

    37     2     (2     —         —         —         —         —         —         37     2

U.S. corporate:

                     

Utilities

    576     —         20     70     —         —         (4     30       (30 )       662     —    

Energy

    210     (1     6     —         (10     —         (32     1       (16 )       158     (1

Finance and insurance

    786     11     (1     75     (31     —         (163     8       (15 )       670     10

Consumer—non-cyclical

    121     —         2     4     —         —         —         —         —         127     —    

Technology and

                     

communications

    54     2     3     14     —         —         (1     —         (20 )       52     2

Industrial

    48     —         —         13     —         —         —         —         (14 )       47     —    

Capital goods

    152     1     3     —         —         —         (1     —         (37 )       118     1

Consumer—cyclical

    258     —         9     2     —         —         (5     —         (2 )       262     —    

Transportation

    139     17     (5     —         —         —         (48     —         (42 )       61     1

Other

    143     —         1     —         (4     —         (7     37       —         170     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    2,487       30     38     178     (45     —         (261     76       (176 )       2,327       13
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                     

Utilities

    386     —         5     30     —         —         —         —         (62 )       359     —    

Energy

    206     —         6     —         (1     —         (1     —         (33 )       177     —    

Finance and insurance

    182     4     9     4     —         —         (30     —         —         169     2

Consumer—non-cyclical

    139     —         2     —         —         —         (12     —         —         129     —    

Technology and

                     

communications

    67     1     1     —         (21     —         (19     —         —         29     —    

Industrial

    109     —         3     13     —         —         —         14       —         139     —    

Capital goods

    169     —         3     —         —         —         (15     —         (7 )       150     —    

Consumer—cyclical

    69     —         —         —         —         —         (2     2       —         69     —    

Transportation

    181     —         4     6     —         —         (10     11       (11 )       181     —    

Other

    25     (2     2     15     (2     —         —         11       —         49     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    1,533       3     35     68     (24     —         (89     38       (113 )       1,451       2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    43     —         1     26     —         —         (2     26       (8 )       86     —    

Commercial mortgage-backed

    54     (2     4     23     (9     —         —         —         (48 )       22     —    

Other asset-backed

    145     (8     11     116     (35     —         (12     58       (50 )       225     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    4,301       25     87     411     (113     —         (365     198       (395 )       4,149       17
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    47     —         —         1     (1     —         —         —         (3 )       44     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

                     

Derivative assets:

                     

Equity index options

    72     42     —         36     —         —         (69     —         —         81     21

Other foreign currency contracts

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

    75     39     —         36     —         —         (69     —         —         81     19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

    75     39     —         36     —         —         (69     —         —         81     19
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted other invested assets related to securitization entities

    131     —         —         —         (131     —         —         —         —         —         —    

Reinsurance recoverable (2)

    16     (3     —         —         —         1     —         —         —         14     (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 4,570     $ 61     $ 87     $ 448     $ (245   $ 1     $ (434   $ 198     $ (398 )    $ 4,288     $ 33  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

54


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

    Beginning
balance as
of

January 1,
2016
    Total realized and
unrealized gains
(losses)
                            Transfer
into
Level 3 (1)
    Transfer
out of
Level 3 (1)
    Ending
balance as of

September 30,
2016
    Total
gains
(losses)
included in
net income
(loss)
attributable

to assets
still held
 

(Amounts in millions)

    Included
in net
income
(loss)
    Included
in OCI
    Purchases     Sales     Issuances     Settlements          

Fixed maturity securities:

                     

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

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

State and political subdivisions

    35     2     (1     7     —         —         —         —         (7 )       36     2

U.S. corporate:

                     

Utilities

    449     1     28     101     (6     —         (9     68       (70 )       562     —    

Energy

    253     —         (1     —         —         —         (10     7       (47 )       202     —    

Finance and insurance

    715     12     58     54     (14     —         (59     72       (18 )       820     11

Consumer—non-cyclical

    109     —         7     5     (18     —         —         —         —         103     —    

Technology and communications

    35     2     4     12     —         —         —         —         —         53     2

Industrial

    61     —         5     —         —         —         —         12       —         78     —    

Capital goods

    180     1     6     —         (10     —         —         —         (41 )       136     1

Consumer—cyclical

    239     4     9     44     (5     —         (42     19       (3 )       265     —    

Transportation

    106     1     9     17     —         —         (14     5       —         124     1

Other

    182     1     1     —         —         —         (5     16       (33 )       162     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    2,329       22     126     233     (53     —         (139     199       (212 )       2,505       16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                     

Utilities

    287     —         9     62     (5     —         —         26       (10 )       369     —    

Energy

    252     —         33     8     (11     —         (31     —         (26 )       225     —    

Finance and insurance

    191     2     11     11     (1     —         —         —         —         214     2

Consumer—non-cyclical

    169     2     9     3     (3     —         (48     12       —         144     —    

Technology and communications

    62     —         6     18     (5     —         —         —         —         81     —    

Industrial

    84     —         7     17     (20     —         —         24       —         112     —    

Capital goods

    213     1     7     —         —         —         (15     —         (33 )       173     1

Consumer—cyclical

    71     —         2     —         —         —         (2     —         —         71     —    

Transportation

    144     1     3     —         —         —         (14     39       —         173     —    

Other

    72     (2     4     —         (12     —         (7     10       (38 )       27     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    1,545       4     91     119     (57     —         (117     111       (107 )       1,589       1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    116     —         2     51     (45     —         (13     13       (87 )       37     —    

Commercial mortgage-backed

    10     —         1     23     —         —         (4     —         (2 )       28     —    

Other asset-backed

    1,142       (16     3     12     (25     —         (19     66       (1,013 )       150     (16
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    5,180       12     222     445     (180     —         (293     389       (1,428 )       4,347       3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

    38     —         —         8     —         —         —         —         —         46     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other invested assets:

                     

Derivative assets:

                     

Credit default swaps

    1     —         —         —         —         —         (1     —         —         —         —    

Equity index options

    30     5     —         51     —         —         (25     —         —         61     (4

Other foreign currency contracts

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative assets

    34     3     —         52     —         —         (27     —         —         62     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other invested assets

    34     3     —         52     —         —         (27     —         —         62     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Restricted other invested assets related to securitization entities

    232     (55     —         —         —         —         (46     —         —         131     9

Reinsurance recoverable (2)

    17     5     —         —         —         2     —         —         —         24     5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 assets

  $ 5,501     $ (35   $ 222     $ 505     $ (180   $ 2     $ (366   $ 389     $ (1,428   $ 4,610     $ 11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

 

55


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the gains and losses included in net income (loss) 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 periods indicated:

 

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

(Amounts in millions)

   2017      2016     2017      2016  

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

          

Net investment income

   $ 7      $ 11     $ 22      $ (33

Net investment gains (losses)

     28      (2     39      (2
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 35      $ 9     $ 61      $ (35
  

 

 

    

 

 

   

 

 

    

 

 

 

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

          

Net investment income

   $ 5      $ 9     $ 18      $ 23  

Net investment gains (losses)

     12      (11     15      (12
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 17      $ (2   $ 33      $ 11  
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

56


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents a summary of the significant unobservable inputs used for certain asset fair value measurements that are based on internal models and classified as Level 3 as of September 30, 2017:

 

(Amounts in millions)

  Valuation
technique
     Fair value      Unobservable
input
     Range      Weighted-
average
 

Fixed maturity securities:

             

U.S. corporate:

             

Utilities

    Internal models      $ 647        Credit spreads        73bps - 379bps        135bps  

Energy

    Internal models        86      Credit spreads        80bps - 193bps        142bps  

Finance and insurance

    Internal models        629      Credit spreads        70bps - 354bps        180bps  

Consumer—non-cyclical

    Internal models        127      Credit spreads        88bps - 247bps        132bps  

Technology and communications

    Internal models        52      Credit spreads        60bps - 353bps        299bps  

Industrial

    Internal models        20      Credit spreads        90bps - 207bps        162bps  

Capital goods

    Internal models        118      Credit spreads        90bps - 247bps        140bps  

Consumer—cyclical

    Internal models        236      Credit spreads        56bps - 210bps        129bps  

Transportation

    Internal models        54      Credit spreads        56bps - 123bps        89bps  

Other

    Internal models        161      Credit spreads        64bps - 135bps        75bps  
    

 

 

          

Total U.S. corporate

    Internal models      $ 2,130        Credit spreads        56bps - 379bps        146bps  
    

 

 

          

Non-U.S. corporate:

             

Utilities

    Internal models      $ 358        Credit spreads        77bps - 158bps        116bps  

Energy

    Internal models        146      Credit spreads        90bps - 169bps        116bps  

Finance and insurance

    Internal models        160      Credit spreads        69bps - 179bps        107bps  

Consumer—non-cyclical

    Internal models        118      Credit spreads        56bps - 191bps        112bps  

Technology and communications

    Internal models        29      Credit spreads        123bps - 222bps        171bps  

Industrial

    Internal models        130      Credit spreads        109bps - 247bps        146bps  

Capital goods

    Internal models        121      Credit spreads        88bps - 145bps        112bps  

Consumer—cyclical

    Internal models        69      Credit spreads        87bps - 169bps        112bps  

Transportation

    Internal models        161      Credit spreads        78bps - 210bps        115bps  

Other

    Internal models        49      Credit spreads        101bps - 233bps        181bps  
    

 

 

          

Total non-U.S. corporate

    Internal models      $ 1,341        Credit spreads        56bps - 247bps        120bps  
    

 

 

          

Derivative assets:

             

Equity index options

   
Discounted
cash flows
 
 
   $ 81       
Equity index
volatility
 
 
     6% - 27%        18
    

 

 

          

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.

 

57


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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:

 

     September 30, 2017  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Liabilities

           

Policyholder account balances:

           

GMWB embedded derivatives (1)

   $ 257      $ —        $ —        $ 257  

Fixed index annuity embedded derivatives

     394      —          —          394

Indexed universal life embedded derivatives

     14      —          —          14
  

 

 

    

 

 

    

 

 

    

 

 

 

Total policyholder account balances

     665      —          —          665
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate swaps

     39      —          39      —    

Equity return swaps

     2      —          2      —    

Other foreign currency contracts

     23      —          23      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     64      —          64      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings related to securitization entities

     12      —          —          12
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 741      $ —        $ 64      $ 677  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     December 31, 2016  

(Amounts in millions)

   Total      Level 1      Level 2      Level 3  

Liabilities

           

Policyholder account balances:

           

GMWB embedded derivatives (1)

   $ 303      $ —        $ —        $ 303  

Fixed index annuity embedded derivatives

     344      —          —          344

Indexed universal life embedded derivatives

     11      —          —          11
  

 

 

    

 

 

    

 

 

    

 

 

 

Total policyholder account balances

     658      —          —          658
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative liabilities:

           

Interest rate swaps

     349      —          349      —    

Foreign currency swaps

     5      —          5      —    

Credit default swaps related to securitization entities

     1      —          1      —    

Equity return swaps

     1      —          1      —    

Other foreign currency contracts

     27      —          27      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total derivative liabilities

     383      —          383      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Borrowings related to securitization entities

     12      —          —          12
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 1,053      $ —        $ 383      $ 670  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

58


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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
July 1,
2017
   

 

Total realized and
unrealized (gains)
losses

    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance as of
September 30,
2017
    Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

    Included
in net
(income)
loss
    Included
in OCI
                 

Policyholder account balances:

                     

GMWB embedded derivatives (1)

  $ 281     $ (31   $ —       $ —       $ —       $ 7     $ —       $ —       $ —       $ 257     $ (31

Fixed index annuity embedded derivatives

    376     21     —         —         —         —         (3     —         —         394     21

Indexed universal life embedded derivatives

    13     (2     —         —         —         3     —         —         —         14     (2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

    670     (12     —         —         —         10     (3     —         —         665     (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings related to securitization entities

    12     —         —         —         —         —         —         —         —         12     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 liabilities

  $ 682     $ (12   $ —       $ —       $ —       $ 10     $ (3   $ —       $ —       $ 677     $ (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

(Amounts in millions)

  Beginning
balance
as of
July 1,
2016
   

 

Total realized and
unrealized (gains)
losses

    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance as of
September 30,
2016
    Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 
    Included in
net
(income)
loss
    Included
in OCI
                 

Policyholder account balances:

                     

GMWB embedded derivatives (1)

  $ 494     $ (63   $ —       $ —       $ —       $ 8     $ —       $ —       $ —       $ 439     $ (59

Fixed index annuity embedded derivatives

    351     16     —         —         —         —         (3     —         —         364     16

Indexed universal life embedded derivatives

    13     (3     —         —         —         3     —         —         —         13     (3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

    858     (50     —         —         —         11     (3     —         —         816     (46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings related to securitization entities

    11     —         —         —         —         —         —         —         —         11     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 liabilities

  $ 869     $ (50   $ —       $ —       $ —       $ 11     $ (3   $ —       $ —       $ 827     $ (46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

59


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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,
2017
    Total realized and
unrealized (gains)
losses
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance as of
September 30,
2017
    Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

    Included
in net
(income)
loss
    Included
in OCI
                 

Policyholder account balances:

                     

GMWB embedded derivatives (1)

  $ 303     $ (67   $ —       $ —       $ —       $ 21     $ —       $ —       $ —       $ 257     $ (64

Fixed index annuity embedded derivatives

    344     57     —         —         —         —         (7     —         —         394     57

Indexed universal life embedded derivatives

    11     (5     —         —         —         8     —         —         —         14     (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

    658     (15     —         —         —         29     (7     —         —         665     (12
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings related to securitization entities

    12     1     —         —         —         —         (1     —         —         12     1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 liabilities

  $ 670     $ (14   $ —       $ —       $ —       $ 29     $ (8   $ —       $ —       $ 677     $ (11
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

    Beginning
balance as
of
January 1,
2016
    Total realized and
unrealized (gains)
losses
    Purchases     Sales     Issuances     Settlements     Transfer
into
Level 3
    Transfer
out of
Level 3
    Ending
balance as of
September 30,
2016
    Total
(gains)
losses
included in
net
(income)
loss
attributable
to liabilities
still held
 

(Amounts in millions)

    Included
in net
(income)
loss
    Included
in OCI
                 

Policyholder account balances:

                     

GMWB embedded derivatives (1)

  $ 352     $ 63     $ —       $ —       $ —       $ 24     $ —       $ —       $ —       $ 439     $ 72  

Fixed index annuity embedded derivatives

    342     22     —         —         —         10     (10     —         —         364     22

Indexed universal life embedded derivatives

    10     (6     —         —         —         9     —         —         —         13     (6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total policyholder account balances

    704     79     —         —         —         43     (10     —         —         816     88
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
Derivative liabilities:                      

Credit default swaps related to securitization entities

    14     (13     —         —         —         —         2     —         (3     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative liabilities

    14     (13     —         —         —         —         2     —         (3     —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Borrowings related to securitization entities

    81     (65     —         —         —         —         (5     —         —         11     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 liabilities

  $ 799     $ 1     $ —       $ —       $ —       $ 43     $ (13   $ —       $ (3   $ 827     $ 88  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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)

 

The following table presents the gains and losses included in net (income) loss 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 periods indicated:

 

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

(Amounts in millions)

     2017          2016          2017          2016    

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

           

Net investment income

   $ —        $ —        $ —        $ —    

Net investment (gains) losses

     (12      (50      (14      1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (12    $ (50    $ (14    $ 1  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

           

Net investment income

   $ —        $ —        $ —        $ —    

Net investment (gains) losses

     (12      (46      (11      88
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (12    $ (46    $ (11    $ 88  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 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) loss” in the tables presented above.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents a summary of the significant unobservable inputs used for certain liability fair value measurements that are based on internal models and classified as Level 3 as of September 30, 2017:

 

(Amounts in millions)

   Valuation
technique
     Fair
value
     Unobservable input      Range     Weighted-
average
 

Policyholder account balances:

             
          
Withdrawal
utilization rate
 
 
     40% - 84%       65%  
           Lapse rate        —  % - 8%       4%  
          

Non-performance
risk (credit
spreads)
 
 
 
     26bps - 83bps       66bp

GMWB embedded derivatives (1)

    
Stochastic cash
flow model
 
 
     $257       
Equity index
volatility
 
 
     13% - 24%       20%  

Fixed index annuity embedded derivatives

    
Option budget
method
 
 
     $394       
Expected future
interest credited
 
 
     —  % - 2%       1%  

Indexed universal life embedded derivatives

    
Option budget
method
 
 
     $14       
Expected future
interest credited
 
 
     3% - 8%       5%  

 

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

(7) Deferred Acquisition Costs

The following table presents the activity impacting deferred acquisition costs (“DAC”) for the dates indicated:

 

     As of or for the nine months
ended September 30,
 

(Amounts in millions)

       2017              2016      

Unamortized beginning balance

   $ 4,241      $ 4,569  

Impact of foreign currency translation

     12      8

Costs deferred

     67      124

Amortization, net of interest accretion

     (261      (257
  

 

 

    

 

 

 

Unamortized ending balance

     4,059        4,444  

Accumulated effect of net unrealized investment (gains) losses

     (1,717      (462
  

 

 

    

 

 

 

Ending balance

   $ 2,342      $ 3,982  
  

 

 

    

 

 

 

We regularly review DAC to determine if it is recoverable from future income. In 2017 and 2016, we performed loss recognition testing and determined that we had premium deficiencies in our fixed immediate annuity products. As of June 30, 2016, we wrote off the entire DAC balance for our fixed immediate annuity products of $14 million through amortization. In addition, as a result of our fixed immediate annuity loss recognition testing as of September 30, 2017 and 2016, we increased our future policy benefit reserves and recognized expenses of $31 million and $24 million, respectively. The premium deficiency test results were primarily driven by the low interest rate environment. As of September 30, 2017, we believe all of our other businesses had sufficient future income and therefore the related DAC was recoverable.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In addition, we are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. These “shadow accounting” adjustments result in the recognition of unrealized gains and losses on related insurance assets and liabilities in a manner consistent with the recognition of the unrealized gains and losses on available-for-sale investment securities within the statements of comprehensive income and changes in equity. Changes to net unrealized investment (gains) losses may increase or decrease the ending DAC balance. Similar to a loss recognition event, when the DAC balance is reduced to zero, additional insurance liabilities are established if necessary. Unlike a loss recognition event, based on changes in net unrealized investment (gains) losses, these shadow adjustments may reverse from period to period. As of September 30, 2017, due primarily to the decline in interest rates increasing unrealized investments gains, we reduced the DAC balance of our long-term care insurance business to zero, a cumulative decrease in the accumulated effect of net unrealized investment gains of approximately $1.3 billion out of the total $1.7 billion in the table above, with an offsetting amount recorded in other comprehensive income (loss). In addition, we increased our future policy benefit reserves in our long-term care insurance business by approximately $333 million as of September 30, 2017, with an offsetting amount recorded in other comprehensive income (loss). There was no impact to net income (loss).

(8) Liability for Policy and Contract Claims

The following table sets forth changes in our liability for policy and contract claims as of the dates indicated:

 

     As of or for the nine
months ended
September 30,
 

(Amounts in millions)

   2017      2016  

Beginning balance

   $ 9,256      $ 8,095  

Less reinsurance recoverables

     (2,409      (2,122
  

 

 

    

 

 

 

Net beginning balance

     6,847        5,973  
  

 

 

    

 

 

 

Incurred related to insured events of:

     

Current year

     2,748        2,569  

Prior years

     (306      320
  

 

 

    

 

 

 

Total incurred

     2,442        2,889  
  

 

 

    

 

 

 

Paid related to insured events of:

     

Current year

     (755      (727

Prior years

     (1,746      (1,646
  

 

 

    

 

 

 

Total paid

     (2,501      (2,373
  

 

 

    

 

 

 

Interest on liability for policy and contract claims

     223      188

Foreign currency translation

     27      14
  

 

 

    

 

 

 

Net ending balance

     7,038        6,691  

Add reinsurance recoverables

     2,346        2,178  
  

 

 

    

 

 

 

Ending balance

   $ 9,384      $ 8,869  
  

 

 

    

 

 

 

The liability for policy and contract claims represents our current best estimate; however, there may be future adjustments to this estimate and related assumptions. Such adjustments, reflecting any variety of new and

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

adverse trends, could possibly be significant, and result in increases in reserves by an amount that could be material to our results of operations and financial condition and liquidity.

As of the nine months ended September 30, 2017, the favorable development of $306 million related to insured events of prior years was primarily attributable to favorable claim terminations in our long-term care insurance business. Our mortgage insurance businesses also experienced favorable prior year claim development mostly from an improvement in net cures and aging of existing claims, as well as lower delinquencies and an improvement in the estimated claim severity or amount.

(9) 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
September 30,
    Nine months ended
September 30,
 

(Amounts in millions)

   2017     2016     2017     2016  

Pre-tax income (loss)

   $ 286       $ (125     $ 1,019       $ 376    
  

 

 

     

 

 

     

 

 

     

 

 

   

Statutory U.S. federal income tax rate

   $ 100       35.0   $ (44     35.0   $ 357       35.0   $ 132       35.0

Increase (reduction) in rate resulting from:

                

State income tax, net of federal income tax effect

     1     0.1       —         —         (2     (0.2     1     0.2  

Tax favored investments

     6     1.9       1     (0.7     3     0.3       (2     (0.5

Effect of foreign operations

     (6     (2.0     5     (3.9     (14     (1.3     (12     (3.3

Non-deductible expenses

     —         —         (1     0.5       1     0.1       (1     (0.1

Valuation allowance

     —         —         265     (212.9     —         —         240     63.8  

Stock-based compensation

     1     0.5       2     (1.8     3     0.2       5     1.4  

Loss on sale of business

     —         —         —         —         —         —         (1     (0.2

Other, net

     —         —         (6     4.8       —         —         (7     (1.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effective rate

   $ 102       35.5   $ 222       (179.0 )%    $ 348       34.1   $ 355       94.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The effective tax rate for the three and nine months ended September 30, 2017 was impacted by higher tax benefits from lower taxed foreign income. The effective tax rate for the three and nine months ended September 30, 2016 was impacted by a valuation allowance of $265 million recorded on deferred tax assets related to foreign tax credits that we no longer expect to realize. The effective tax rate for the nine months ended September 30, 2016 was also impacted by the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe due to taxable gains supporting the recognition of these deferred tax assets in the prior year.

(10) Segment Information

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 have not been 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,

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

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 (loss) and assets. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders.” We define adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusual non-operating items are also excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

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

We recorded a pre-tax expense of $1 million in both the third and first quarters of 2017 related to restructuring costs as the company continues to evaluate and appropriately size its organizational needs and expenses.

In the third quarter of 2016, we recorded a pre-tax expense of $2 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

In the second quarter of 2016, we completed the sale of our mortgage insurance business in Europe and recorded an additional pre-tax loss of $2 million; we completed the sale of our term life insurance new business platform and recorded a pre-tax gain of $12 million; we settled restricted borrowings related to a securitization entity and recorded a $64 million pre-tax gain related to the early extinguishment of debt; and we recorded a pre-tax expense of $5 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

In the first quarter of 2016, we recorded a pre-tax loss of $7 million and a tax benefit of $27 million related to the planned sale of our mortgage insurance business in Europe; we paid a pre-tax make-whole expense of $20 million 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 pre-tax gain of $4 million; we completed a life block transaction resulting in a pre-tax loss of $9 million in connection with the early extinguishment of non-recourse funding obligations; and we recorded a pre-tax expense of $15 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

There were no infrequent or unusual items excluded from adjusted operating income (loss) during the periods presented other than the following item. We incurred fees during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $18 million for broker, advisor and investment banking fees.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

(Amounts in millions)

   2017      2016      2017      2016  

Revenues:

           

U.S. Mortgage Insurance segment

   $ 194      $ 186      $ 570      $ 537  
  

 

 

    

 

 

    

 

 

    

 

 

 

Canada Mortgage Insurance segment

     220      156      593      463
  

 

 

    

 

 

    

 

 

    

 

 

 

Australia Mortgage Insurance segment

     98      115      317      333
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Life Insurance segment:

           

Long-term care insurance

     1,033        980      3,063        3,051  

Life insurance

     389      418      1,217        953

Fixed annuities

     190      218      605      613
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Life Insurance segment

     1,612        1,616        4,885        4,617  
  

 

 

    

 

 

    

 

 

    

 

 

 

Runoff segment

     90      84      266      218
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate and Other activities

     1      (7      (22      3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 2,215      $ 2,150      $ 6,609      $ 6,171  
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in total revenues for the nine months ended September 30, 2017 was primarily attributable to our U.S. Life Insurance segment driven mostly by a life block transaction in our life insurance business in the first quarter of 2016, under which we initially ceded $326 million of certain term life insurance premiums.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

(Amounts in millions)

     2017         2016         2017         2016    

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

   $ 107     $ (380   $ 464     $ (155

Add: net income attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     175     (332     662     (4

Income (loss) from discontinued operations, net of taxes

     (9     15     (9     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     184     (347     671     21

Less: income from continuing operations attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     116     (395     473     (130

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

        

Net investment (gains) losses, net (1)

     (62     (18     (161     (38

(Gains) losses from sale of businesses

     —         —         —         (3

(Gains) losses on early extinguishment of debt, net

     —         —         —         (48

Losses from life block transactions

     —         —         —         9

Expenses related to restructuring

     1     2     2     22

Fees associated with bond consent solicitation

     —         —         —         18

Taxes on adjustments

     21     6     56     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 76     $ (405   $ 370     $ (179
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For the three months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for net investment (gains) losses attributable to noncontrolling interests of $23 million and $2 million, respectively. For the nine months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of zero and $(15) million, respectively, and adjusted for net investment (gains) losses attributable to noncontrolling interests of $59 million and $8 million, respectively.

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

(Amounts in millions)

      2017           2016          2017          2016    

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

           

U.S. Mortgage Insurance segment

   $ 73      $ 67      $ 237      $ 189  
  

 

 

    

 

 

    

 

 

    

 

 

 

Canada Mortgage Insurance segment

     37      36      114      107
  

 

 

    

 

 

    

 

 

    

 

 

 

Australia Mortgage Insurance segment

     12      14      37      48
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Life Insurance segment:

           

Long-term care insurance

     (5      (270      42      (199

Life insurance

     (9      48      6      110

Fixed annuities

     13      15      43      28
  

 

 

    

 

 

    

 

 

    

 

 

 

U.S. Life Insurance segment

     (1      (207      91      (61
  

 

 

    

 

 

    

 

 

    

 

 

 

Runoff segment

     13      12      38      22

Corporate and Other activities

     (58      (327      (147      (484

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

   $ 76      $ (405    $ 370      $ (179
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

(Amounts in millions)

   September 30,
2017
     December 31,
2016
 

Assets:

     

U.S. Mortgage Insurance segment

   $ 3,015      $ 2,674  

Canada Mortgage Insurance segment

     5,435        4,884  

Australia Mortgage Insurance segment

     2,814        2,619  

U.S. Life Insurance segment

     81,858        81,933  

Runoff segment

     11,149        11,352  

Corporate and Other activities

     358      1,196  
  

 

 

    

 

 

 

Total assets

   $ 104,629      $ 104,658  
  

 

 

    

 

 

 

(11) 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, product administration, additional premium charges for premiums paid on a periodic basis, denial or delay of benefits, charging excessive or impermissible fees on

 

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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, post-closing obligations associated with previous dispositions 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 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 IPO 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 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 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. The parties engaged in settlement discussions. On March 21, 2017 in connection with those discussions, we reached an agreement in principle to settle the action, subject to the execution of a stipulation and agreement of settlement that provides a full release of all defendants in connection with the allegations made in the lawsuit, and for a settlement payment to the class of $20 million, inclusive of all plaintiffs’ attorneys fees and expenses and settlement costs, and subject further to the approval of the court. Subsequently, the parties executed a stipulation and agreement of settlement. 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. On June 21, 2017, plaintiffs filed the stipulation and agreement of settlement and motion for preliminary approval with the court. On July 28, 2017, the court held a preliminary approval hearing, preliminarily approved the settlement, and set November 15, 2017 for a final approval hearing.

 

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In January 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its former chief financial officer and current and former 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 was 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 current and former 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 was 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 IPO 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 moved to dismiss the consolidated action on May 27, 2016. Thereafter, plaintiffs filed a substantially similar second amended complaint which we moved to dismiss on September 16, 2016. The motion is fully briefed and awaiting disposition by the court.

In October 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, its current chief financial officer, its former chief financial officer and current and former members of its board of directors were named in a shareholder derivative suit filed by Esther Chopp in the Court of Chancery of the State of Delaware. The case is captioned Chopp v. McInerney, et al. The complaint alleges that Genworth’s board of directors wrongfully refused plaintiff’s demand to commence litigation on behalf of Genworth and asserts claims for breaches of fiduciary duties, waste, contribution and indemnification, and unjust enrichment concerning Genworth’s long-term care insurance reserves and concerning Genworth’s Australian mortgage insurance business, including our plans for an IPO of the business, and seeks unspecified damages, costs, attorneys’ fees and such equitable relief as the court may deem proper. We filed a motion to dismiss on November 14, 2016.

In December 2016, Genworth Financial, Inc., its current chief executive officer, its former chief executive officer, two former chief financial officers, and two of its insurance subsidiaries were named as defendants in a putative class action lawsuit captioned Leifer, et al v. Genworth Financial, Inc., et al, in the United States District Court for the Eastern District of Virginia, Richmond Division. Plaintiffs allege that the defendants’ financial disclosures and alleged misrepresentations concerning Genworth’s long-term care insurance reserves caused harm to current and former long-term care insurance policyholders and seek unspecified damages, declaratory and injunctive relief, attorneys’ fees, costs and pre-judgment and post-judgment interest. We filed a motion to dismiss on March 27, 2017. Plaintiffs filed an amended complaint on April 10, 2017. We filed a motion to dismiss on May 22, 2017. On June 20, 2017, plaintiffs filed a notice of voluntary dismissal without prejudice. On June 26, 2017, the court so ordered the notice of withdrawal of first amended complaint and of voluntary dismissal without prejudice against all defendants.

In January 2017, two putative stockholder class action lawsuits, captioned Rice v. Genworth Financial Incorporated, et al, and James v. Genworth Financial, Inc. et al, were filed in the United States District Court for the Eastern District of Virginia, Richmond Division, against Genworth and its board of directors. A third putative stockholder class action lawsuit captioned Rosenfeld Family Trust v. Genworth Financial, Inc. et al, was filed in

 

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the United States District Court for the District of Delaware against Genworth and its board of directors. In February 2017, a fourth putative class action lawsuit captioned Chopp v. Genworth Financial, Inc. et al, was filed in the United States District Court for the District of Delaware against Genworth and its board of directors and a fifth putative class action lawsuit captioned Ratliff v. Genworth Financial, Inc. et al, was filed in the United States District Court for the Eastern District of Virginia, Richmond Division, against Genworth and its board of directors. The complaints in all five actions allege, among other things, that the preliminary proxy statement filed by Genworth with the SEC on December 21, 2016 contains false and/or materially misleading statements and/or omits material information. The complaints assert claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, and seek equitable relief, including declaratory and injunctive relief, and an award of attorneys’ fees and expenses. On February 2, 2017, the plaintiff in Rice filed a motion for a preliminary injunction to enjoin the transaction described in the preliminary proxy. On February 10, 2017, defendants filed an opposition to the preliminary injunction motion in the Rice action. Also on February 10, 2017, the plaintiff in Rosenfeld Family Trust filed a motion for a preliminary injunction to enjoin the transaction described in the preliminary proxy. On February 14, 2017, defendants filed a motion to transfer the Rosenfeld Family Trust action to the Eastern District of Virginia. On February 15, 2017, defendants filed a motion to transfer the Chopp action to the Eastern District of Virginia. On February 21, 2017, the parties to the Eastern District of Virginia actions (Rice, James and Ratliff) reached an agreement in principle to resolve the pending preliminary injunction motion in the Eastern District of Virginia through additional disclosure prior to the March 7, 2017 stockholder vote on the proposed merger transaction. On February 22, 2017, the plaintiffs in the Eastern District of Virginia withdrew their preliminary injunction motion in consideration of the agreed disclosures to be filed in a Form 8-K by February 24, 2017. Also on February 22, 2017, the court in the District of Delaware suspended briefing on the motion for preliminary injunction in the Rosenfeld Family Trust action and entered an order transferring the Rosenfeld Family Trust and Chopp actions to the Eastern District of Virginia. On February 23, 2017, the court in the Eastern District of Virginia set the Rosenfeld Family Trust preliminary injunction motion for a hearing on March 1, 2017. On February 26, 2017, defendants filed an opposition to the preliminary injunction motion in the Rosenfeld Family Trust action. On February 27, 2017, the parties in the Rosenfeld Family Trust action reached an agreement in principle to resolve the pending preliminary injunction motion in the Rosenfeld Family Trust action through additional disclosure prior to the March 7, 2017 stockholder vote on the proposed merger transaction, and the plaintiff in the Rosenfeld Family Trust action withdrew its preliminary injunction motion in consideration of the agreed disclosures as filed in a Form 8-K on February 28, 2017. On March 6, 2017, the court in the Eastern District of Virginia entered an order setting a schedule for proceedings to appoint a lead plaintiff and lead counsel for the purported class action. On March 7, 2017, the court in the Eastern District of Virginia consolidated the Rice, James, Ratliff, Rosenfeld Family Trust, and Chopp actions. On July 5, 2017, the court in the Eastern District of Virginia heard oral argument on the motion to appoint a lead plaintiff and lead counsel. On August 25, 2017, the court in the Eastern District of Virginia entered an order appointing the plaintiffs Alexander Rice and Brian James as lead plaintiffs and their counsel as lead counsel.

In April 2017, one of our insurance subsidiaries, Genworth Life and Annuity Insurance Company (“GLAIC”) was named as a defendant in a putative class action lawsuit captioned Avazian, et al v. Genworth Life and Annuity Insurance Company, et al, in the United States District Court for the Central District of California. Plaintiff alleges breach of contract and breach of the covenant of good faith and fair dealing based upon GLAIC’s termination of plaintiff’s life insurance policy for nonpayment of premium. Plaintiff alleges that the termination for nonpayment of premium failed to comply with certain notice requirements of the California Insurance Code and seeks certification as a California class action on behalf of all insureds and beneficiaries of life insurance policies issued or delivered by GLAIC in California before January 1, 2013 who lost either their coverage or their ability to make a claim because of the termination of their policies by GLAIC for nonpayment of premium, and further seeks unspecified damages, pre-judgment and post-judgment interest, punitive damages,

 

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fees, costs and such other relief as the court deems just and proper. On June 23, 2017, we filed a motion to dismiss the complaint. On July 10, 2017, the plaintiff filed a notice of voluntary dismissal without prejudice. On July 12, 2017, the court ordered that this action and all claims therein, are dismissed in their entirety without prejudice. In August 2017, plaintiff re-filed a similar putative class action lawsuit, along with another plaintiff, Michael Torres, captioned Avazian, et al v. Genworth Life and Annuity Insurance Company, et al, in the Superior Court for the State of California, County of Los Angeles, naming GLAIC as a defendant. Plaintiffs allege similar causes of action as the previously dismissed lawsuit, and have added a claim for alleged violation of California Business and Professions Code. On August 31, 2017, we filed notice of the removal of this matter to the United States District Court for the Central District of California and on October 6, 2017, filed a motion to dismiss the complaint. We intend to vigorously defend the 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 September 30, 2017, we were committed to fund $319 million in limited partnership investments, $40 million in U.S. commercial mortgage loan investments and $21 million in private placement investments.

(12) Changes in Accumulated Other Comprehensive Income

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 July 1, 2017

   $ 1,180     $ 2,064     $ (149   $ 3,095  

OCI before reclassifications

     (70 )       10       81     21

Amounts reclassified from (to) OCI

     (19 )       (22 )       —         (41
  

 

 

   

 

 

   

 

 

   

 

 

 

Current period OCI

     (89 )       (12 )       81     (20
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2017 before noncontrolling interests

     1,091       2,052       (68     3,075  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: change in OCI attributable to noncontrolling interests

     (17 )       —         57     40
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2017

   $ 1,108     $ 2,052     $ (125   $ 3,035  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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(Amounts in millions)

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

Balances as of July 1, 2016

   $ 2,789     $ 2,439     $ (140   $ 5,088  

OCI before reclassifications

     86       72       (1     157

Amounts reclassified from (to) OCI

     (9 )       (18 )       —         (27
  

 

 

   

 

 

   

 

 

   

 

 

 

Current period OCI

     77       54       (1     130
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2016 before noncontrolling interests

     2,866       2,493       (141     5,218  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: change in OCI attributable to noncontrolling interests

     6       —         10     16
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2016

   $ 2,860     $ 2,493     $ (151   $ 5,202  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net of adjustments to DAC, 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, 2017

   $ 1,262     $ 2,085     $ (253   $ 3,094  

OCI before reclassifications

     (95 )       29       261     195

Amounts reclassified from (to) OCI

     (77 )       (62 )       —         (139
  

 

 

   

 

 

   

 

 

   

 

 

 

Current period OCI

     (172 )       (33 )       261     56
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2017 before noncontrolling interests

     1,090       2,052       8     3,150  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: change in OCI attributable to noncontrolling interests

     (18 )       —         133     115
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2017

   $ 1,108     $ 2,052     $ (125   $ 3,035  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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(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

     1,692       507       223     2,422  

Amounts reclassified from (to) OCI

     (62 )       (59 )       —         (121
  

 

 

   

 

 

   

 

 

   

 

 

 

Current period OCI

     1,630       448       223     2,301  
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2016 before noncontrolling interests

     2,884       2,493       (66     5,311  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: change in OCI attributable to noncontrolling interests

     24       —         85     109
  

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of September 30, 2016

   $ 2,860     $ 2,493     $ (151   $ 5,202  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Net of adjustments to DAC, 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 $5 million, respectively, net of taxes of $1 million and $2 million, respectively, related to a net unrecognized postretirement benefit obligation as of September 30, 2017 and 2016. The amount also includes taxes of $28 million and $37 million, respectively, related to foreign currency translation adjustments as of September 30, 2017 and 2016.

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
September 30,
    Nine months ended
September 30,
   

(Amounts in millions)

    2017       2016       2017       2016     

Net unrealized investment (gains) losses:

          

Unrealized (gains) losses on investments (1)

   $ (29   $ (13   $ (118   $ (95   Net investment (gains) losses

Provision for income taxes

     10     4     41     33   Provision for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ (19   $ (9   $ (77   $ (62  
  

 

 

   

 

 

   

 

 

   

 

 

   

Derivatives qualifying as hedges:

          

Interest rate swaps hedging assets

   $ (34   $ (27   $ (95   $ (80   Net investment income

Interest rate swaps hedging assets

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

Inflation indexed swaps

     —         —         —         (2   Net investment income

Inflation indexed swaps

     —         —         —         (7   Net investment (gains) losses

Provision for income taxes

     12     9     35     31   Provision for income taxes
  

 

 

   

 

 

   

 

 

   

 

 

   

Total

   $ (22   $ (18   $ (62   $ (59  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

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

 

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(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 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 presents the condensed consolidating balance sheet information as of September 30, 2017 and December 31, 2016, the condensed consolidating income statement information and the condensed consolidating comprehensive income statement information for the three and nine months ended September 30, 2017 and 2016 and the condensed consolidating cash flows statement information for the nine months ended September 30, 2017 and 2016.

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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The following table presents the condensed consolidating balance sheet information as of September 30, 2017:

 

(Amounts in millions)

  Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Assets

         

Investments:

         

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

  $ —       $ —       $ 62,752     $ (200   $ 62,552  

Equity securities available-for-sale, at fair value

    —         —         765     —         765

Commercial mortgage loans

    —         —         6,268       —         6,268  

Restricted commercial mortgage loans related to securitization entities

    —         —         111     —         111

Policy loans

    —         —         1,818       —         1,818  

Other invested assets

    —         75     1,517       (2     1,590  

Investments in subsidiaries

    13,191       12,459       —         (25,650     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    13,191       12,534       73,231       (25,852     73,104  

Cash and cash equivalents

    —         754     2,082       —         2,836  

Accrued investment income

    —         —         639     —         639

Deferred acquisition costs

    —         —         2,342       —         2,342  

Intangible assets and goodwill

    —         —         315     —         315

Reinsurance recoverable

    —         —         17,553       —         17,553  

Other assets

    —         90     470     (8     552

Intercompany notes receivable

    —         161     33     (194     —    

Deferred tax assets

    —         —         24     —         24

Separate account assets

    —         —         7,264       —         7,264  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 13,191     $ 13,539     $ 103,953     $ (26,054   $ 104,629  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

         

Liabilities:

         

Future policy benefits

  $ —       $ —       $ 38,022     $ —       $ 38,022  

Policyholder account balances

    —         —         24,531       —         24,531  

Liability for policy and contract claims

    —         —         9,384       —         9,384  

Unearned premiums

    —         —         3,512       —         3,512  

Other liabilities

    8     163     1,842       (11     2,002  

Intercompany notes payable

    145     232     17     (394     —    

Borrowings related to securitization entities

    —         —         59     —         59

Non-recourse funding obligations

    —         —         310     —         310

Long-term borrowings

    —         3,722       502     —         4,224  

Deferred tax liability

    (31     (862     1,127       —         234

Separate account liabilities

    —         —         7,264       —         7,264  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    122     3,255       86,570       (405     89,542  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity:

         

Common stock

    1     —         3     (3     1

Additional paid-in capital

    11,973       9,096       18,381       (27,477     11,973  

Accumulated other comprehensive income (loss)

    3,035       3,040       3,057       (6,097     3,035  

Retained earnings

    760     (1,852     (6,376     8,228       760

Treasury stock, at cost

    (2,700     —         —         —         (2,700
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

    13,069       10,284       15,065       (25,349     13,069  

Noncontrolling interests

    —         —         2,318       (300     2,018  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    13,069       10,284       17,383       (25,649     15,087  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 13,191     $ 13,539     $ 103,953     $ (26,054   $ 104,629  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 2016:

 

(Amounts in millions)

  Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Assets

         

Investments:

         

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

  $ —       $ —       $ 60,772     $ (200   $ 60,572  

Equity securities available-for-sale, at fair value

    —         —         632     —         632

Commercial mortgage loans

    —         —         6,111       —         6,111  

Restricted commercial mortgage loans related to securitization entities

    —         —         129     —         129

Policy loans

    —         —         1,742       —         1,742  

Other invested assets

    —         105     1,966       —         2,071  

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

    —         —         312     —         312

Investments in subsidiaries

    12,730       12,308       —         (25,038     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total investments

    12,730       12,413       71,664       (25,238     71,569  

Cash and cash equivalents

    —         998     1,786       —         2,784  

Accrued investment income

    —         —         663     (4     659

Deferred acquisition costs

    —         —         3,571       —         3,571  

Intangible assets and goodwill

    —         —         348     —         348

Reinsurance recoverable

    —         —         17,755       —         17,755  

Other assets

    9     134     530     —         673

Intercompany notes receivable

    —         84     67     (151     —    

Deferred tax assets

    28     —         (28     —         —    

Separate account assets

    —         —         7,299       —         7,299  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 12,767     $ 13,629     $ 103,655     $ (25,393   $ 104,658  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities and equity

         

Liabilities:

         

Future policy benefits

  $ —       $ —       $ 37,063     $ —       $ 37,063  

Policyholder account balances

    —         —         25,662       —         25,662  

Liability for policy and contract claims

    —         —         9,256       —         9,256  

Unearned premiums

    —         —         3,378       —         3,378  

Other liabilities

    39     301     2,581       (5     2,916  

Intercompany notes payable

    84     267     —         (351     —    

Borrowings related to securitization entities

    —         —         74     —         74

Non-recourse funding obligations

    —         —         310     —         310

Long-term borrowings

    —         3,716       464     —         4,180  

Deferred tax liability

    —         (816     869     —         53

Separate account liabilities

    —         —         7,299       —         7,299  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    123     3,468       86,956       (356     90,191  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity:

         

Common stock

    1     —         —         —         1

Additional paid-in capital

    11,962       9,097       20,252       (29,349     11,962  

Accumulated other comprehensive income (loss)

    3,094       3,135       3,116       (6,251     3,094  

Retained earnings

    287     (2,071     (8,792     10,863       287

Treasury stock, at cost

    (2,700     —         —         —         (2,700
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

    12,644       10,161       14,576       (24,737     12,644  

Noncontrolling interests

    —         —         2,123       (300     1,823  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

    12,644       10,161       16,699       (25,037     14,467  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and equity

  $ 12,767     $ 13,629     $ 103,655     $ (25,393   $ 104,658  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 September 30, 2017:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Premiums

   $ —       $ —       $ 1,135     $ —       $ 1,135  

Net investment income

     (1     2     800     (4     797

Net investment gains (losses)

     —         (4     89     —         85

Policy fees and other income

     —         4     195     (1     198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     (1     2     2,219       (5     2,215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

          

Benefits and other changes in policy reserves

     —         —         1,344       —         1,344  

Interest credited

     —         —         164     —         164

Acquisition and operating expenses, net of deferrals

     20     (2     247     —         265

Amortization of deferred acquisition costs and intangibles

     —         —         83     —         83

Interest expense

     —         66     12     (5     73
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     20     64     1,850       (5     1,929  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (21     (62     369     —         286

Provision (benefit) for income taxes

     (5     (21     128     —         102

Equity in income of subsidiaries

     123     71     —         (194     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     107     30     241     (194     184

Income (loss) from discontinued operations, net of taxes

     —         4     (13     —         (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     107     34     228     (194     175

Less: net income attributable to noncontrolling interests

     —         —         68     —         68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 107     $ 34     $ 160     $ (194   $ 107  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

79


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 September 30, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Premiums

   $ —       $ —       $ 1,108     $ —       $ 1,108  

Net investment income

     (2     1     810     (4     805

Net investment gains (losses)

     —         (1     21     —         20

Policy fees and other income

     —         —         217     —         217
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     (2     —         2,156       (4     2,150  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

          

Benefits and other changes in policy reserves

     —         —         1,662       —         1,662  

Interest credited

     —         —         173     —         173

Acquisition and operating expenses, net of deferrals

     13     —         256     —         269

Amortization of deferred acquisition costs and intangibles

     —         —         94     —         94

Interest expense

     —         69     12     (4     77
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     13     69     2,197       (4     2,275  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations before income taxes and equity in loss of subsidiaries

     (15     (69     (41     —         (125

Provision (benefit) for income taxes

     (4     155     71     —         222

Equity in loss of subsidiaries

     (369     (207     —         576     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations

     (380     (431     (112     576     (347

Income from discontinued operations, net of taxes

     —         11     4     —         15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (380     (420     (108     576     (332

Less: net income attributable to noncontrolling interests

     —         —         48     —         48
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (380   $ (420   $ (156   $ 576     $ (380
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

80


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 nine months ended September 30, 2017:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Premiums

   $ —       $ —       $ 3,382     $ —       $ 3,382  

Net investment income

     (3     5     2,397       (11     2,388  

Net investment gains (losses)

     —         (12     232     —         220

Policy fees and other income

     —         3     617     (1     619
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     (3     (4     6,628       (12     6,609  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

          

Benefits and other changes in policy reserves

     —         —         3,796       —         3,796  

Interest credited

     —         —         494     —         494

Acquisition and operating expenses, net of deferrals

     48     (2     729     —         775

Amortization of deferred acquisition costs and intangibles

     —         —         316     —         316

Interest expense

     —         187     34     (12     209
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     48     185     5,369       (12     5,590  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (51     (189     1,259       —         1,019  

Provision (benefit) for income taxes

     (9     (65     422     —         348

Equity in income of subsidiaries

     506     339     —         (845     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     464     215     837     (845     671

Income (loss) from discontinued operations, net of taxes

     —         4     (13     —         (9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     464     219     824     (845     662

Less: net income attributable to noncontrolling interests

     —         —         198     —         198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 464     $ 219     $ 626     $ (845   $ 464  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

81


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 nine months ended September 30, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Revenues:

          

Premiums

   $ —       $ —       $ 3,029     $ —       $ 3,029  

Net investment income

     (3     1     2,386       (11     2,373  

Net investment gains (losses)

     —         (14     45     —         31

Policy fees and other income

     —         (6     745     (1     738
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     (3     (19     6,205       (12     6,171  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

          

Benefits and other changes in policy reserves

     —         —         3,715       —         3,715  

Interest credited

     —         —         523     —         523

Acquisition and operating expenses, net of deferrals

     118     38     834     —         990

Amortization of deferred acquisition costs and intangibles

     —         —         305     —         305

Interest expense

     1     210     63     (12     262
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     119     248     5,440       (12     5,795  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (122     (267     765     —         376

Provision (benefit) for income taxes

     (31     88     298     —         355

Equity in income (loss) of subsidiaries

     (62     78     —         (16     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     (153     (277     467     (16     21

Loss from discontinued operations, net of taxes

     (2     (7     (16     —         (25
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (155     (284     451     (16     (4

Less: net income attributable to noncontrolling interests

     —         —         151     —         151
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (155   $ (284   $ 300     $ (16   $ (155
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

82


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 September 30, 2017:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 107     $ 34     $ 228     $ (194   $ 175  

Other comprehensive income (loss), net of taxes:

          

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

     (72     (71     (89     143     (89

Derivatives qualifying as hedges

     (12     (12     (12     24     (12

Foreign currency translation and other adjustments

     24     12     80     (35     81
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (60     (71     (21     132     (20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     47     (37     207     (62     155

Less: comprehensive income attributable to noncontrolling interests

     —         —         108     —         108
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 47     $ (37   $ 99     $ (62   $ 47  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the condensed consolidating comprehensive income statement information for the three months ended September 30, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Net loss

   $ (380   $ (420   $ (108   $ 576     $ (332

Other comprehensive income (loss), net of taxes:

          

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

     66     63     73     (130     72

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

     5     4     4     (8     5

Derivatives qualifying as hedges

     54     54     57     (111     54

Foreign currency translation and other adjustments

     (11     (3     —         13     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     114     118     134     (236     130
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     (266     (302     26     340     (202

Less: comprehensive income attributable to noncontrolling interests

     —         —         64     —         64
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ (266   $ (302   $ (38   $ 340     $ (266
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

83


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 nine months ended September 30, 2017:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 464     $ 219     $ 824     $ (845   $ 662  

Other comprehensive income (loss), net of taxes:

          

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

     (155     (172     (173     327     (173

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

     1     1     1     (2     1

Derivatives qualifying as hedges

     (33     (33     (32     65     (33

Foreign currency translation and other adjustments

     128     109     260     (236     261
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     (59     (95     56     154     56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     405     124     880     (691     718

Less: comprehensive income attributable to noncontrolling interests

     —         —         313     —         313
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 405     $ 124     $ 567     $ (691   $ 405  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents the condensed consolidating comprehensive income statement information for the nine months ended September 30, 2016:

 

(Amounts in millions)

   Parent
Guarantor
    Issuer     All Other
Subsidiaries
     Eliminations     Consolidated  

Net income (loss)

   $ (155   $ (284   $ 451      $ (16   $ (4

Other comprehensive income (loss), net of taxes:

           

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

     1,600       1,555       1,625        (3,156     1,624  

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

     6     5     6      (11     6

Derivatives qualifying as hedges

     448     447     481      (928     448

Foreign currency translation and other adjustments

     138     65     224      (204     223
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other comprehensive income (loss)

     2,192       2,072       2,336        (4,299     2,301  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

     2,037       1,788       2,787        (4,315     2,297  

Less: comprehensive income attributable to noncontrolling interests

     —         —         260      —         260
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ 2,037     $ 1,788     $ 2,527      $ (4,315   $ 2,037  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating cash flows statement information for the nine months ended September 30, 2017:

 

(Amounts in millions)

  Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

         

Net income

  $ 464     $ 219     $ 824     $ (845   $ 662  

Less loss from discontinued operations, net of taxes

    —         (4     13     —         9

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

         

Equity in income from subsidiaries

    (506     (339     —         845     —    

Dividends from subsidiaries

    —         119     (119     —         —    

Amortization of fixed maturity securities discounts and premiums and limited partnerships

    —         4     (111     —         (107

Net investment (gains) losses

    —         12     (232     —         (220

Charges assessed to policyholders

    —         —         (534     —         (534

Acquisition costs deferred

    —         —         (67     —         (67

Amortization of deferred acquisition costs and intangibles

    —         —         316     —         316

Deferred income taxes

    6     (47     275     —         234

Trading securities, held-for-sale investments and derivative instruments

    —         (46     762     —         716

Stock-based compensation expense

    23     —         6     —         29

Change in certain assets and liabilities:

         

Accrued investment income and other assets

    2     (2     (25     4     (21

Insurance reserves

    —         —         1,202       —         1,202  

Current tax liabilities

    (6     (75     54     —         (27

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

    (29     34     (259     (6     (260
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

    (46     (125     2,105       (2     1,932  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used by investing activities:

         

Proceeds from maturities and repayments of investments:

         

Fixed maturity securities

    —         —         3,396       —         3,396  

Commercial mortgage loans

    —         —         454     —         454

Restricted commercial mortgage loans related to securitization entities

    —         —         18     —         18

Proceeds from sales of investments:

         

Fixed maturity and equity securities

    —         —         3,269       —         3,269  

Purchases and originations of investments:

         

Fixed maturity and equity securities

    —         —         (6,709     —         (6,709

Commercial mortgage loans

    —         —         (608     —         (608

Other invested assets, net

    —         25     (548     2     (521

Policy loans, net

    —         —         28     —         28

Intercompany notes receivable

    —         (77     34     43     —    

Capital contributions to subsidiaries

    (7     —         7     —         —    

Payments for business purchased, net of cash acquired

    (7     —         2     —         (5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

    (14     (52     (657     45     (678
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used by financing activities:

         

Deposits to universal life and investment contracts

    —         —         902     —         902

Withdrawals from universal life and investment contracts

    —         —         (2,003     —         (2,003

Repayment of borrowings related to securitization entities

    —         —         (16     —         (16

Repurchase of subsidiary shares

    —         —         (31     —         (31

Dividends paid to noncontrolling interests

    —         —         (92     —         (92

Proceeds from intercompany notes payable

    61     (35     17     (43     —    

Other, net

    (1     (32     3     —         (30
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

    60     (67     (1,220     (43     (1,270
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —         —         68     —         68
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    —         (244     296     —         52

Cash and cash equivalents at beginning of period

    —         998     1,786       —         2,784  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ —       $ 754     $ 2,082     $ —       $ 2,836  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The following table presents the condensed consolidating cash flows statement information for the nine months ended September 30, 2016:

 

(Amounts in millions)

  Parent
Guarantor
    Issuer     All Other
Subsidiaries
    Eliminations     Consolidated  

Cash flows from operating activities:

         

Net income (loss)

  $ (155   $ (284   $ 451     $ (16   $ (4

Less loss from discontinued operations, net of taxes

    2     7     16     —         25

Adjustments to reconcile net income (loss) to net cash from operating activities:

         

Equity in (income) loss from subsidiaries

    62     (78     —         16     —    

Dividends from subsidiaries

    —         250     (250     —         —    

(Gain) loss on sale of businesses

    —         1     (27     —         (26

Amortization of fixed maturity securities discounts and premiums and limited partnerships

    —         3     (115     —         (112

Net investment (gains) losses

    —         14     (45     —         (31

Charges assessed to policyholders

    —         —         (574     —         (574

Acquisition costs deferred

    —         —         (124     —         (124

Amortization of deferred acquisition costs and intangibles

    —         —         305     —         305

Deferred income taxes

    8     304     (139     —         173

Trading securities, held-for-sale investments and derivative instruments

    —         5     754     —         759

Stock-based compensation expense

    18     —         7     —         25

Change in certain assets and liabilities:

         

Accrued investment income and other assets

    (3     (4     (246     (5     (258

Insurance reserves

    —         —         691     —         691

Current tax liabilities

    11     (4     37     —         44

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

    (1     (22     928     —         905
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from operating activities

    (58     192     1,669       (5     1,798  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used by investing activities:

         

Proceeds from maturities and repayments of investments:

         

Fixed maturity securities

    —         150     2,496       —         2,646  

Commercial mortgage loans

    —         —         555     —         555

Restricted commercial mortgage loans related to securitization entities

    —         —         27     —         27

Proceeds from sales of investments:

         

Fixed maturity and equity securities

    —         —         4,064       —         4,064  

Purchases and originations of investments:

         

Fixed maturity and equity securities

    —         —         (8,758     —         (8,758

Commercial mortgage loans

    —         —         (405     —         (405

Other invested assets, net

    —         —         (143     5     (138

Policy loans, net

    —         —         (80     —         (80

Intercompany notes receivable

    —         (58     (18     76     —    

Proceeds from sale of businesses, net of cash transferred

    —         1     38     —         39
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by investing activities

    —         93     (2,224     81     (2,050
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flows used by financing activities:

         

Deposits to universal life and investment contracts

    —         —         1,028       —         1,028  

Withdrawals from universal life and investment contracts

    —         —         (1,463     —         (1,463

Redemption of non-recourse funding obligations

    —         —         (1,620     —         (1,620

Repayment and repurchase of long-term debt

    —         (326     (36     —         (362

Repayment of borrowings related to securitization entities

    —         —         (37     —         (37

Return of capital to noncontrolling interests

    —         —         (70     —         (70

Dividends paid to noncontrolling interests

    —         —         (126     —         (126

Proceeds from intercompany notes payable

    58     18     —         (76     —    

Other, net

    —         (36     (13     —         (49
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used by financing activities

    58     (344     (2,337     (76     (2,699
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —         —         36     —         36
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

    —         (59     (2,856     —         (2,915

Cash and cash equivalents at beginning of period

    —         1,124       4,869       —         5,993  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

  $ —       $ 1,065     $ 2,013     $ —       $ 3,078  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 statutory results as of December 31, 2016, in accordance with applicable dividend restrictions, our subsidiaries could pay dividends of approximately $220 million to us in 2017 without obtaining regulatory approval, and the remaining net assets are considered restricted. While the $220 million is unrestricted, we do not expect our insurance subsidiaries to pay dividends to us in 2017 at this level as they need to retain capital for growth and to meet capital requirements and desired thresholds. As of September 30, 2017, Genworth Financial’s and Genworth Holdings’ subsidiaries had restricted net assets of $13.0 billion and $12.2 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 2016 Annual Report on Form 10-K. References herein to “Genworth,” the “Company,” “we” or “our” in are, unless the context otherwise requires, to Genworth Financial, Inc. on a consolidated basis.

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. Examples of forward-looking statements include statements we make relating to the China Oceanwide transaction. 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 from those in the forward-looking statements due to global political, economic, business, competitive, market, regulatory and other factors and risks, including, but not limited to, the following:

 

    risks related to the proposed transaction with China Oceanwide Holdings Group Co., Ltd. (“China Oceanwide”) including: our inability to complete the transaction in a timely manner or at all; the parties’ inability to obtain regulatory approvals, including from the Committee on Foreign Investment in the United States (“CFIUS”), or the possibility that such regulatory approvals may further delay the transaction or will not be received prior to November 30, 2017 (and either or both of the parties may not be willing to further waive their end date termination rights beyond November 30, 2017) or that materially burdensome or adverse regulatory conditions may be imposed or undesirable measures may be required in connection with any such regulatory approvals, including any mitigation approaches that may be necessary to obtain CFIUS approval (including conditions or measures that either or both of the parties may be unwilling to accept or undertake, as applicable); existing and potential legal proceedings may be instituted against us in connection with the transaction that may delay the transaction, make it more costly or ultimately preclude it; the risk that the proposed transaction disrupts our current plans and operations as a result of the consummation of the transaction; certain restrictions during the pendency of the transaction that may impact our ability to pursue certain business opportunities or strategic transactions; continued availability of capital and financing to us before, or in the absence of, the consummation of the transaction; further rating agency actions and downgrades in our debt or financial strength ratings; changes in applicable laws or regulations; our ability to recognize the anticipated benefits of the transaction; the amount of the costs, fees, expenses and other charges related to the transaction; the risks related to diverting management’s attention from our ongoing business operations; the merger agreement may be terminated in circumstances that would require us to pay China Oceanwide a fee; our ability to attract, recruit, retain and motivate current and prospective employees may be adversely affected; and disruptions and uncertainty relating to the transaction, whether or not it is completed, may harm our relationships with our employees, customers, distributors, vendors or other business partners, and may result in a negative impact on our business;

 

   

strategic risks in the event the proposed transaction with China Oceanwide is not consummated including: our inability to successfully execute alternative strategic plans to effectively address our current business challenges (including with respect to the restructuring of our U.S. life insurance businesses, debt obligations, including our debt maturing in May 2018, cost savings, ratings and capital); our ability to continue to sell long-term care insurance policies; our inability to attract buyers for any businesses or other assets we may seek to sell, or securities we may seek to issue, in each case, in a timely manner and on anticipated terms; failure to obtain any required regulatory, stockholder and/or noteholder approvals or consents for such alternative strategic plans, or our challenges changing or

 

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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; 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: risks related to the impact of our annual review of assumptions and methodologies related to our margin reviews in the fourth quarter of 2017, including risks that additional information obtained in finalizing our margin review in the fourth quarter of 2017 or other changes to assumptions or methodologies materially affect the impact on margins; 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, including reviews we expect to carry out in the fourth quarter of 2017); 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); adverse impact on our results of operations, including our loss ratio as a result of our annual review of the premium earnings pattern for our mortgage insurance business in Australia (which we expect to carry out in the fourth quarter of 2017); 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 (particularly given the historically low interest rate environment) have adversely impacted, and may continue to materially adversely impact, our business and profitability; 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 (including changes to tax laws and regulations); litigation and regulatory investigations or other actions; 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; adverse change in regulatory requirements, including risk-based capital; changes in regulations adversely affecting our international operations; inability to 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; 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 the ability to obtain financing under a credit facility); 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

 

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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; the design and effectiveness of our disclosure controls and procedures and internal control over financial reporting may not prevent all errors, misstatements or misrepresentations; 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), including to offset any impact on our margins in connection with our margin reviews in the fourth quarter of 2017; our inability to reflect future premium increases and other management actions in our margin calculation as anticipated, including in connection with our margin reviews in the fourth quarter of 2017; failure to sufficiently increase new sales for our long-term care insurance products; our 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 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.

 

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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 but we continue to service our existing blocks of business. Our non-strategic products primarily include our variable annuity, variable life insurance, institutional, corporate-owned life insurance and other accident and health insurance products. Institutional products consist of: funding agreements, funding agreements backing notes (“FABNs”) and guaranteed investment contracts (“GICs”).

In 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.

Strategic Update

We continue to focus on improving business performance, addressing financial leverage 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.

China Oceanwide Transaction

On October 21, 2016, Genworth Financial entered into an agreement and plan of merger (the “Merger Agreement”) with Asia Pacific Global Capital Co., Ltd. (“the Parent”), a limited liability company incorporated in the People’s Republic of China, and Asia Pacific Global Capital USA Corporation (“Merger Sub”), a Delaware corporation and an indirect, wholly-owned subsidiary of the Parent. Subject to the terms and conditions of the Merger Agreement, including the satisfaction or waiver of certain conditions, Merger Sub would merge with and into Genworth Financial with Genworth Financial surviving the merger as an indirect, wholly-owned subsidiary of the Parent. The Parent is a newly formed subsidiary of China Oceanwide Holdings Group Co., Ltd. (together with its affiliates, “China Oceanwide”). China Oceanwide has agreed to acquire all of our outstanding common stock for a total transaction value of approximately $2.7 billion, or $5.43 per share in cash. The agreement concluded our previously announced strategic review process, which we had undertaken over the previous two years. At a special meeting held on March 7, 2017, Genworth Financial’s stockholders voted on and approved a proposal to adopt the Merger Agreement.

 

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Genworth Financial and China Oceanwide continue to work towards satisfying the closing conditions of their proposed transaction as soon as possible. To date, we have announced approvals from the Virginia State Corporation Commission Bureau of Insurance, the North Carolina Department of Insurance, the South Carolina Department of Insurance and the Vermont Insurance Division. However, on October 2, 2017, Genworth Financial and China Oceanwide withdrew their joint voluntary notice to CFIUS, with an intent to refile with additional mitigation approaches. Both parties are actively engaged in developing these approaches, including the potential involvement of a U.S. third-party service provider, and anticipate refiling a new joint notice with CFIUS as soon as the terms of the additional mitigation approaches are determined. Genworth Financial and China Oceanwide are fully committed to developing an acceptable solution with CFIUS; however, there can be no assurance that CFIUS will ultimately agree to clear the transaction between Genworth Financial and China Oceanwide on terms acceptable to the parties or at all. In addition to approval and clearance by CFIUS, the closing of the proposed transaction remains subject to the receipt of required regulatory approvals in the U.S., China, and other international jurisdictions and other closing conditions. Genworth Financial and China Oceanwide also continue to be actively engaged with the other relevant regulators regarding the pending applications.

On August 21, 2017, Genworth Financial, the Parent and Merger Sub entered into a Waiver and Agreement pursuant to which Genworth Financial and the Parent each agreed to, among other things, waive until November 30, 2017 its right to terminate the Merger Agreement and abandon the merger in accordance with the terms of the Merger Agreement due to a failure of the merger to have been completed on or before August 31, 2017. Genworth Financial and China Oceanwide are also discussing an additional waiver of each party’s right to terminate the Merger Agreement beyond the November 30, 2017 deadline. If we are unable to reach an agreement as to a further extension of the deadline or are unable to satisfy the closing conditions by the applicable deadline, then either party may terminate the Merger Agreement. Genworth Financial and China Oceanwide remain committed to satisfying the closing conditions under the Merger Agreement as soon as possible.

As part of the transaction, China Oceanwide committed in the Merger Agreement to contribute $600 million of cash to Genworth Financial to address our debt maturing in May 2018, on or before its maturity, as well as $525 million of cash to our U.S. life insurance businesses. This contribution is in addition to $175 million of cash previously committed by Genworth Holdings to our U.S. life insurance businesses to pursue their restructuring as described below. These contributions, in addition to addressing the 2018 debt maturity, are intended to increase the likelihood of obtaining regulatory approvals for the China Oceanwide transaction as well as help achieve our strategic objectives of improving Genworth’s overall financial strength and flexibility and supporting the restructuring of our U.S. life insurance businesses, as described further below. Due to the delay in the timing of the closing of the transaction, we are currently reviewing potential refinancing options, which may include secured indebtedness, to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed in a timely manner or at all. We could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed. In the absence of the transaction with China Oceanwide or a refinancing alternative, we believe we would need to pursue asset sales to address our debt maturities, including potential sales of our mortgage insurance businesses in Canada and/or Australia. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event a transaction with China Oceanwide cannot be completed.

If the China Oceanwide transaction is completed, we will be a standalone subsidiary of China Oceanwide and our senior management team will continue to lead the business from our current headquarters in Richmond, Virginia. Likewise, we intend to maintain our existing portfolio of businesses, including our mortgage insurance businesses in Australia and Canada. Our day-to-day operations are not expected to change as a result of this transaction.

Restructuring of U.S. Life Insurance Businesses

In February 2016, we announced that one of our strategic objectives was to separate, then isolate, through a series of internal transactions, our long-term care insurance business from our other U.S. life insurance

 

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businesses. We continued to pursue this plan in connection with the China Oceanwide transaction, with some differences from our previously announced restructuring plan. Our goal under the plan has been to align substantially all of our non-New York in-force life insurance and annuity business under Genworth Life and Annuity Insurance Company (“GLAIC”), our Virginia domiciled life insurance company, and substantially all of our non-New York long-term care insurance business under Genworth Life Insurance Company (“GLIC”), our Delaware domiciled life insurance company. As part of this strategic objective, effective April 1, 2017, GLAIC assumed risk on a coinsurance basis for certain blocks of term life insurance, universal life insurance and single premium whole life insurance from GLIC. Effective July 1, 2017, GLIC recaptured certain single premium deferred annuity products previously ceded to GLAIC. In addition, effective July 1, 2017, GLAIC assumed risk on a modified coinsurance basis for certain blocks of fixed annuities, including those single premium deferred annuity products recaptured by GLIC, and certain corporate-owned life insurance policies from GLIC. As a result, there was an adverse impact on GLIC’s risk-based capital ratio of approximately 15 points in the third quarter of 2017. However, the internal transactions had no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) as the financial impact of the intercompany reinsurance was eliminated in consolidation. These transactions complete our goal to align substantially all of our non-New York in-force life insurance and annuity business under GLAIC and substantially all of our non-New York long-term care insurance business under GLIC. All of these transactions were also required under the Merger Agreement with China Oceanwide. The reinsurance treaties effective July 1, 2017 include provisions that require us to unwind or void these treaties in the event the merger transaction with China Oceanwide is terminated.

In addition, based on China Oceanwide’s $525 million capital commitment under the Merger Agreement, together with the $175 million of cash previously committed by Genworth Holdings, a Genworth holding company would seek, in connection with the completion of the China Oceanwide transaction, the purchase of GLAIC from GLIC at fair market value. Together with the internal reinsurance transactions completed in April 2017 and July 2017, finalization of the GLAIC sale, if completed, would isolate our non-New York long-term care insurance business from our other non-New York U.S. life insurance businesses and achieve this strategic objective, and regulatory approval to do so is a condition to the closing of the China Oceanwide transaction. China Oceanwide has no future obligation and has expressed no intention to contribute additional capital to support our legacy long-term care insurance business.

Separating and isolating our long-term care insurance business has been an important strategic objective, because we believe it would:

 

    help to isolate the downside risk from our long-term care insurance business that is putting downward pressure on the ratings of Genworth Holdings and our other subsidiaries,

 

    allow any future dividends from GLAIC to be paid directly to the holding company, which increases Genworth Holdings’ liquidity and ability to repay and/or refinance its indebtedness, and

 

    give a clearer picture of the necessity for the long-term care insurance rate actions that we are working towards today.

Strategic Alternatives

If the China Oceanwide transaction is not completed, we will continue to explore strategic alternatives and financing options to address our ongoing challenges, including our May 2018 debt maturity and other debt service obligations. Prior to the announcement of the China Oceanwide transaction, we previously disclosed that after discussions with regulators, we believed as a first step, we might only be able to distribute a portion of GLAIC from GLIC. As a result of the recent performance of our long-term care and life insurance businesses and the charges we recorded in the third and fourth quarters of 2016, absent the China Oceanwide transaction and any alternative commitment of external capital, we believe there would be: considerable doubt as to the feasibility and timing of achieving a partial unstacking of GLAIC in the foreseeable future, if at all; increased pressure on

 

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and potential downgrades of our financial strength ratings, particularly for our mortgage insurance businesses, which could affect our ability to maintain our market share of the U.S. mortgage insurance industry; limitation on our ability to continue to write new long-term care insurance policies; and other limitations on our holding company liquidity and ability to service and/or refinance our holding company debt. In the absence of the China Oceanwide transaction and/or a refinancing alternative, which we can neither predict nor guarantee, we believe we would need to pursue asset sales to address these challenges, including potential sales of our mortgage insurance businesses in Canada and/or Australia. Asset sales or changes to our financial projections, including changes that anticipate planned asset sales, may negatively impact our ability to realize certain foreign tax credits or other deferred tax assets and have a resulting material adverse effect on our results of operation. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event a transaction with China Oceanwide cannot be completed.

Ongoing Priorities

Stabilizing our long-term care insurance business continues to be our long-term goal. We will continue to execute against this objective primarily through our multi-year long-term care insurance rate action plan. Increasing premiums and/or benefit modifications on our legacy long-term care insurance policies are critical to our ability to increase the capital levels needed to support the business. In addition, reducing debt will remain a high priority. We believe that increased financial support and our strengthened financial foundation resulting from the China Oceanwide transaction would provide us with more options to manage our debt maturities and reduce overall indebtedness, which in turn is intended to improve our credit and ratings profile over time. Finally, we also believe that the completion of the China Oceanwide transaction would allow us to place greater focus on the future of our long-term care and mortgage insurance businesses while continuing to service our existing policyholders.

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 September 30, 2017 Compared to Three Months Ended September 30, 2016

 

    We had net income available to Genworth Financial, Inc.’s common stockholders of $107 million during the three months ended September 30, 2017 and a net loss available to Genworth Financial, Inc.’s common stockholders of $380 million during the three months ended September 30, 2016.

 

    In our long-term care insurance business, our adjusted operating loss available to Genworth Financial, Inc.’s common stockholders was lower for the three months ended September 30, 2017 largely from an increase of $283 million in claim reserves, net of reinsurance, in the prior year as a result of our annual claims assumption review. As a result of this review, we updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves. This increase was partially offset by higher severity on new claims in the current year. The current year also included $8 million of higher premiums and reduced benefits from in-force rate actions approved and implemented.

 

    During the third quarter of 2016, we recorded a valuation allowance of $265 million on deferred tax assets in Corporate and Other activities. In light of the prior year’s financial projections, which included the projected impact to current and future earnings associated with higher expected claim costs in our long-term care insurance business as a result of our annual claim reserves review in the third quarter of 2016 and sustained low interest rates, we recorded a valuation allowance related to foreign tax credits that we no longer expect to realize. The financial projections did not include any benefits or aspects of the announced transaction with China Oceanwide nor did they assume any charges associated with tax attribute limitations that would occur with a change in ownership.

 

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Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

    We had net income available to Genworth Financial, Inc.’s common stockholders of $464 million during the nine months ended September 30, 2017 and a net loss available to Genworth Financial, Inc.’s common stockholders of $155 million during the nine months ended September 30, 2016.

 

    Benefits and other changes in policy reserves decreased across our mortgage insurance businesses, particularly in our U.S. Mortgage Insurance and Canada Mortgage Insurance segments, which decreased pre-tax by $45 million and $39 million, respectively. These decreases were largely attributable to the favorable developments in our loss ratios discussed below.

 

    The loss ratios in our U.S. Mortgage Insurance and Canada Mortgage Insurance segments were 13% and 11%, respectively, for the nine months ended September 30, 2017. The loss ratio in our U.S. Mortgage Insurance segment was driven mostly by improvements in the net benefit from cures and aging of existing delinquencies and an increase in earned premiums in the current year. A continued decline in new flow delinquencies, net of cures, mostly from overall improving regional macroeconomic conditions, along with a lower average reserve per delinquency benefited the loss ratio in our Canada Mortgage Insurance segment.

 

    On March 1, 2017, the Pennsylvania Commonwealth Court approved petitions to liquidate Penn Treaty Network America Insurance Company and American Network Insurance Company (“Penn Treaty”) due to financial difficulties that could not be resolved through rehabilitation. As a result of the plan of Penn Treaty liquidation, our long-term care insurance business recorded net guaranty fund assessments of $14 million in the first quarter of 2017.

 

    In our long-term care insurance business, the adjusted operating loss available to Genworth Financial, Inc.’s common stockholders for the nine months ended September 30, 2016 was largely from an increase of $283 million in claim reserves, net of reinsurance, as discussed above. The current year included higher incremental premiums and reduced benefits of $18 million from in-force rate actions approved and implemented. Our long-term care insurance results were also favorably impacted by seasonally higher claim terminations during the first half of 2017.

 

    During the nine months ended September 30, 2016, we recorded a valuation allowance of $265 million on deferred tax assets in Corporate and Other activities, as discussed above.

 

    During the nine months ended September 30, 2016, we recorded a $45 million expense related to the 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 prior year related to other pending litigation.

 

    During the nine months ended September 30, 2016, we recorded $14 million related to restructuring costs as part of an expense reduction plan as we evaluated and appropriately sized 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.

Significant Developments

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

Dispositions

 

   

Completed sale of a life insurance block. In January 2016, GLAIC, our indirect wholly-owned subsidiary, entered into a reinsurance agreement to coinsure certain term life insurance business with Protective Life Insurance Company as part of a life block transaction. This transaction generated capital in excess of $150 million in aggregate to Genworth, including tax benefits of approximately

 

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$175 million to the holding company that were settled in July 2016, which is committed to be used in executing the restructuring plan for our U.S. life insurance businesses.

 

    Completed sale of our mortgage insurance business in Europe. On May 9, 2016, we completed the sale of our European mortgage insurance business to AmTrust Financial Services, Inc. for $55 million and received net proceeds of approximately $50 million. During the nine months ended September 30, 2016, we recorded an after-tax gain of $18 million related to the sale of our mortgage insurance business in Europe.

 

    Sale of our lifestyle protection business. During the three months ended September 30, 2017, we recorded an additional loss of $9 million associated with the sale of our lifestyle protection insurance business primarily related to an adjustment of certain claims previously included in discontinued operations and tax items. We retained liabilities for certain claims, taxes 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. During the three and nine months ended September 30, 2016, we recorded a gain of $15 million and a loss of $25 million related to the sale of our lifestyle protection insurance business, respectively.

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 older generation blocks of business in order to bring those blocks closer to a break-even point over time and reduce the strain on earnings and capital. We are also requesting premium rate increases on newer blocks of business, as needed, some of which may be significant, to help bring their loss ratios back towards their original pricing. For all of these rate action filings, we received 75 filing approvals from 32 states during the nine months ended September 30, 2017, representing a weighted-average increase of 27% on approximately $457 million in annualized in-force premiums. We also submitted 131 new filings in 39 states during the nine months ended September 30, 2017 on approximately $828 million in annualized in-force premiums.

 

    Restructuring and business alignment. The internal reinsurance transactions completed in April 2017 and July 2017, as discussed above, complete our goal to align substantially all of our in-force life insurance and annuity business under GLAIC and substantially all of our long-term care insurance business under GLIC.

 

    Suspension of sales of our traditional life insurance and fixed annuity products. As part of our initiative announced on February 4, 2016 to restructure our U.S. life insurance businesses, we decided to suspend sales of our traditional life insurance and fixed annuity products on March 7, 2016 given the continued impact of ratings and recent sales levels of these products. This action, along with reducing expense levels in our U.S. life insurance businesses resulted in approximately $50 million of annualized pre-tax cash expense savings.

Liquidity and Capital Resources

 

    Genworth MI Canada Inc. (“Genworth Canada”) New Credit Facility. On September 29, 2017, Genworth Canada, our majority-owned subsidiary, entered into a CAD$200 million syndicated senior unsecured revolving credit facility, which matures on September 29, 2022. Any borrowings under Genworth Canada’s credit facility will bear interest at a rate per annum equal to, at the option of Genworth Canada, either a fixed rate or a variable rate pursuant to the terms of the credit agreement. The credit facility includes customary representations, warranties, covenants, terms and conditions. This syndicated credit facility replaced an existing CAD$100 million senior unsecured revolving credit facility which was cancelled on September 29, 2017. As of September 30, 2017, there was no amount outstanding under Genworth Canada’s credit facility and all of the covenants were fully met.

 

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    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 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. During the three months ended March 31, 2016, 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.

 

    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, 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.

Financial Strength Ratings

Ratings with respect to the financial strength of operating subsidiaries are an important factor in establishing the competitive position of insurance companies. Ratings are important to maintaining public confidence in us and our ability to market our products. Rating organizations review the financial performance and condition of most insurers and provide opinions regarding financial strength, operating performance and ability to meet obligations to policyholders.

As of November 2, 2017, our principal mortgage insurance subsidiaries were rated in terms of financial strength by Standard & Poor’s Financial Services, LLC (“S&P”), Moody’s Investor Service, Inc. (“Moody’s”) and Dominion Bond Rating Service (“DBRS”) as follows:

 

Company

   S&P rating    Moody’s rating    DBRS rating

Genworth Mortgage Insurance Corporation

   BB+ (Marginal)    Ba1 (Questionable)    Not rated

Genworth Financial Mortgage Insurance Company Canada

   A+ (Strong)    Not rated    AA (Superior)

Genworth Financial Mortgage Insurance Pty. Limited (Australia) (1)

   A+ (Strong)    Baa1 (Adequate)    Not rated

 

(1) Also rated “A+” by Fitch Ratings (“Fitch”).

As of November 2, 2017, our principal life insurance subsidiaries were rated in terms of financial strength by S&P, Moody’s and A.M. Best Company, Inc. (“A.M. Best”) as follows:

 

Company

   S&P rating    Moody’s rating    A.M. Best rating

Genworth Life Insurance Company

   B+ (Weak)    B2 (Poor)    B (Fair)

Genworth Life and Annuity Insurance Company

   B+ (Weak)    Ba1 (Questionable)    B++ (Good)

Genworth Life Insurance Company of New York

   B+ (Weak)    B2 (Poor)    B (Fair)

The S&P, Moody’s, DBRS and A.M. Best financial strength ratings of our operating companies are not designed to be, and do not serve as, measures of protection or valuation offered to investors. These financial strength ratings should not be relied on with respect to making an investment in our securities.

 

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S&P states that insurers rated “A” (Strong), “BB” (Marginal) or “B” (Weak) have strong, marginal or weak financial security characteristics, respectively. The “A,” “BB” and “B” ranges are the third-, fifth- and sixth-highest of nine financial strength rating ranges assigned by S&P, which range from “AAA” to “R.” A plus (+) or minus (-) shows relative standing within a major rating category. These suffixes are not added to ratings in the “AAA” category or to ratings below the “CCC” category. Accordingly, the “A+,” “BB+” and “B+” ratings are the fifth-, eleventh- and fourteenth-highest of S&P’s 21 ratings categories.

On September 18, 2017, based largely on regulatory approval uncertainty pertaining to the China Oceanwide transaction, S&P revised Genworth Financial and Genworth Holding’s CreditWatch status from developing implications to negative implications. S&P downgraded the financial strength rating of our principal life insurance subsidiaries; GLIC, Genworth Life Insurance Company of New York (“GLICNY”) and GLAIC from BB- (Marginal) to B+ (Weak), and maintained the CreditWatch status of GLIC and GLICNY at negative implications and GLAIC at developing implications. S&P’s rating actions were also based on their negative view of the operating performance of our U.S. Life Insurance segment, the ongoing impact of the low interest rate environment and the further need for premium rate increases in our long-term care insurance business. S&P also affirmed the financial strength rating of Genworth Mortgage Insurance Corporation (“GMICO”) at BB+ (Marginal), however, revised GMICO’s CreditWatch status from developing implications to negative implications. The financial strength ratings of Genworth Financial Mortgage Insurance Company Canada and Genworth Financial Mortgage Insurance Pty. Limited (Australia) were also affirmed at A+ (Strong).

Moody’s states that insurance companies rated “Baa” (Adequate) offer adequate financial security and that insurance companies rated “Ba” (Questionable) or “B” (Poor) offer questionable financial security. The “Baa” (Adequate), “Ba” (Questionable) and “B” (Poor) ranges are the fourth-, fifth- and sixth-highest, respectively, of nine financial strength rating ranges assigned by Moody’s, which range from “Aaa” to “C.” Numeric modifiers are used to refer to the ranking within the group, with 1 being the highest and 3 being the lowest. These modifiers are not added to ratings in the “Aaa” category or to ratings below the “Caa” category. Accordingly, the “Baa1,” “Ba1” and “B2” ratings are the eighth-, eleventh- and fifteenth-highest, respectively, of Moody’s 21 ratings categories.

On October 3, 2017, which followed our recent announcement that we had withdrawn our joint voluntary notice with CFIUS with an intent to refile, Moody’s downgraded the credit ratings of Genworth Holdings senior unsecured debt from Ba3 (Questionable) to B2 (Poor), downgraded the financial strength ratings of GLIC and GLICNY from Ba3 (Questionable) to B2 (Poor) and downgraded GLAIC from Baa2 (Adequate) to Ba1 (Questionable). Moody’s downgrade was based principally upon the uncertain financial flexibility at Genworth Holdings to address upcoming debt maturities, execution risk associated with closing the China Oceanwide transaction and continued risk associated with our long-term care insurance business. On September 13, 2017, Moody’s downgraded the financial strength rating of Genworth Financial Mortgage Insurance Pty. Limited (Australia) from A3 (Good) to Baa1 (Adequate). Moody’s downgrade reflects their risk assessment surrounding the Australian housing market, which in their view, has higher risk and lower demand for domestic lenders’ mortgage insurance products. On March 10, 2017, Moody’s downgraded the financial strength rating of GLIC and GLICNY from Ba2 (Questionable) to Ba3 (Questionable). Moody’s downgrade was principally related to a reduction in our long-term care insurance margins, uncertainty related to future long-term care insurance margins and reliance on significant future rate actions, the approval for which varies by state and can take several years.

DBRS states that long-term obligations rated “AA” are of superior credit quality. The capacity for the payment of financial obligations is considered high and unlikely to be significantly vulnerable to future events. Credit quality differs from “AAA” only to a small degree. On July 21, 2017, DBRS confirmed the financial strength rating of Genworth Financial Mortgage Insurance Company Canada at AA (Superior). The financial strength rating confirmation reflects the company’s market position, insurance portfolio and risk analytics, as well as its capital position relative to the capital required to meet insurance claim obligations.

A.M. Best states that the “B++” (Good) rating is assigned to those companies that have, in its opinion, a good ability to meet their ongoing insurance obligations while “B” (Fair) is assigned to those companies that

 

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have, in its opinion, a fair ability to meet their ongoing insurance obligations. The “B++” (Good) and “B” (Fair) ratings are the fifth- and seventh-highest of 15 ratings assigned by A.M. Best, which range from “A++” to “F.”

We also solicit a rating from Fitch for our Australian mortgage insurance subsidiary. Fitch states that “A” (Strong) rated insurance companies are viewed as possessing strong capacity to meet policyholder and contract obligations. The “A” rating category is the third-highest of nine financial strength rating categories, which range from “AAA” to “C.” The symbol (+) or (-) may be appended to a rating to indicate the relative position of a credit within a rating category. These suffixes are not added to ratings in the “AAA” category or to ratings below the “B” category. Accordingly, the “A+” rating is the fifth-highest of Fitch’s 21 ratings categories.

S&P, Moody’s, DBRS, A.M. Best and Fitch review their ratings periodically and we cannot assure you that we will maintain our current ratings in the future. Other agencies may also rate our company or our insurance subsidiaries on a solicited or an unsolicited basis. We do not provide information to agencies issuing unsolicited ratings and we cannot ensure that any agencies that rate our company or our insurance subsidiaries on an unsolicited basis will continue to do so.

For a discussion of the impacts of the recent rating agency actions on our derivative instruments, see “Item 2—Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Investments and Derivative Instruments.”

For a discussion of the risks associated with ratings actions, see “Item 1A Risk Factors—Recent adverse rating agency actions have resulted in a loss of business and adversely affected our results of operations, financial condition and business and future adverse rating actions could have a further and more significant adverse impact on us” in our 2016 Annual Report on Form 10-K.

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. 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 East Asia, Europe and the Middle East. Slower growth and higher debt levels in China have created more uncertainty for global economies, heightened by S&P’s and Moody’s downgrade of the financial strength rating of China in September 2017 and May 2017, respectively. Although some of our businesses have started to realize benefits in their financial results from improvements in the general macroeconomic environment, particularly our mortgage insurance businesses in the U.S. and Canada, we continue to operate in a challenging economic environment characterized by slow global growth, fluctuating oil and commodity prices and very low interest rates. Interest rates remain at historically low levels despite the fact the U.S. Federal Reserve has raised its benchmark lending rate two times in 2017 and market expectations remain for one additional rate increase during 2017. Additionally, during the third quarter of 2017, the U.S. Federal Reserve announced that it would begin to normalize monetary policy and scale back quantitative easing. Despite the Federal Reserve’s actions, U.S. Treasury yields remained lower throughout the third quarter of 2017 but rose significantly in the last week of September 2017, in response to potential tax reform. However, pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates. The U.S. equity markets increased and credit spreads tightened during the third quarter of 2017. Spreads initially widened when geopolitical issues and natural disasters arose, but quickly tightened driven by both positive economic data and corporate profits. U.S. fixed income markets saw reduced issuances, but demand from foreign and domestic investors continued to support valuations. Global equity markets were generally higher and the economies of the Eurozone countries continue to improve. For a discussion of the risks associated with interest rates, see “Item 1A Risk Factors—Interest rates and changes in rates could materially adversely affect our business and profitability” in our 2016 Annual Report on Form 10-K.

 

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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.

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.”

 

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Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

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

 

     Three months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 1,135     $ 1,108     $ 27       2 %  

Net investment income

     797     805     (8     (1 )% 

Net investment gains (losses)

     85     20     65     NM (1) 

Policy fees and other income

     198     217     (19     (9 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     2,215       2,150       65     3 %  
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,344       1,662       (318     (19 )% 

Interest credited

     164     173     (9     (5 )% 

Acquisition and operating expenses, net of deferrals

     265     269     (4     (1 )% 

Amortization of deferred acquisition costs and intangibles

     83     94     (11     (12 )% 

Interest expense

     73     77     (4     (5 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     1,929       2,275       (346     (15 )% 
  

 

 

   

 

 

   

 

 

   

Income (loss) from continuing operations before income taxes

     286     (125     411     NM (1) 

Provision for income taxes

     102     222     (120     (54 )% 
  

 

 

   

 

 

   

 

 

   

Income (loss) from continuing operations

     184     (347     531     153 % 

Income (loss) from discontinued operations, net of taxes

     (9     15     (24     (160 )% 
  

 

 

   

 

 

   

 

 

   

Net income (loss)

     175     (332     507     153 % 

Less: net income attributable to noncontrolling interests

     68     48     20     42 % 
  

 

 

   

 

 

   

 

 

   

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

   $ 107     $ (380   $ 487       128 % 
  

 

 

   

 

 

   

 

 

   

 

(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 increased $23 million. Our long-term care insurance business increased $31 million largely from $21 million of increased premiums in the current year from in-force rate actions approved and implemented. Our life insurance business decreased $8 million mainly driven by continued runoff of our term life insurance products, including higher lapses primarily from our large 15-year and 20-year term life insurance blocks entering their post-level guaranteed premium rate periods in the current year.

 

    Our Canada Mortgage Insurance segment increased $7 million principally from the seasoning of our larger, more recent in-force blocks of business.

 

    Our U.S. Mortgage Insurance segment increased $6 million mostly attributable to higher average flow insurance in-force, partially offset by lower rates on our mortgage insurance in-force in the current year.

 

    Our Australia Mortgage Insurance segment decreased $10 million largely due to the seasoning of our smaller prior year in-force blocks of business and lower policy cancellations in the current year. The three months ended September 30, 2017 included an increase of $3 million attributable to changes in foreign exchange rates.

 

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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 U.S. Life Insurance segment decreased $21 million mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurance in-force blocks in the current year. The decrease was also driven by an $8 million unfavorable model refinement in the current year.

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 $301 million. Our long-term care insurance business decreased $366 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. The decrease was partially offset by aging and growth of the in-force block, higher severity on new claims and a less favorable impact of $7 million from reduced benefits in the current year related to in-force rate actions approved and implemented. Our life insurance business increased $64 million primarily attributable to a $30 million unfavorable model refinement, unfavorable mortality and higher universal life insurance reserves in the current year reflecting our previously updated assumptions from the fourth quarter of 2016. Our fixed annuities business increased $1 million as $3 million of higher reserves from loss recognition testing in our fixed immediate annuity products were mostly offset by lower interest credited in the current year.

 

    Our Canada Mortgage Insurance segment decreased $12 million largely from lower new delinquencies, net of cures, and from a lower average reserve per delinquency in the current year.

 

    Our Australia Mortgage Insurance segment decreased $8 million largely attributable to lower new delinquencies, net of cures, and from improved aging of existing delinquencies primarily in commodity-dependent regions in the current year.

 

    Our U.S. Mortgage Insurance segment decreased $1 million primarily due to favorable net cures and aging of existing delinquencies, mostly offset by a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies in the prior year that did not recur.

Interest credited. Interest credited represents interest credited on behalf of policyholder and contractholder general account balances. Our U.S. Life Insurance segment decreased $12 million primarily related to our fixed annuities business predominantly from lower average account values 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

 

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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.

 

    Our Australia Mortgage Insurance segment decreased $5 million primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and intangibles as of the second quarter of 2017.

 

    Our Runoff segment decreased $4 million mostly from lower state guaranty fund assessments in the current year.

 

    Our U.S. Mortgage Insurance segment decreased $2 million primarily from lower production costs in the current year.

 

    Corporate and Other activities increased $8 million mainly driven by higher consulting fees in the current year.

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 decreased $19 million driven mostly by our life insurance business principally as a result of a net $15 million favorable model refinement in the current year. The decrease was partially offset by higher amortization in our term universal life insurance product reflecting previously updated lapse assumptions. In the current year, we have also experienced higher lapses and accelerated DAC amortization associated with our large 15-year and 20-year term life insurance blocks entering their post-level guaranteed level premium rate periods.

 

    Our Australia Mortgage Insurance segment increased $6 million principally as a result of a change in the classification of contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as discussed above.

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 $4 million largely driven by a contractual change in our junior subordinated notes related to an interest rate change from fixed to floating rates in the current year.

Provision for income taxes. The effective tax rate was 35.5% for the three months ended September 30, 2017 compared to (179.0)% for the three months ended September 30, 2016. The effective tax rate for the three months ended September 30, 2017 was impacted by higher tax benefits from lower taxed foreign income. The effective tax rate for the three months ended September 30, 2016 was impacted by a valuation allowance of $265 million recorded on deferred tax assets related to foreign tax credits that we no longer expect to realize.

Net income attributable to noncontrolling interests. Net income attributable to noncontrolling interests represents the portion of equity in a subsidiary attributable to third parties.

 

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Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

 

     Nine months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 3,382     $ 3,029     $ 353       12 % 

Net investment income

     2,388       2,373       15     1 %  

Net investment gains (losses)

     220     31     189     NM (1) 

Policy fees and other income

     619     738     (119     (16 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     6,609       6,171       438     7 %  
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     3,796       3,715       81     2 %  

Interest credited

     494     523     (29     (6 )% 

Acquisition and operating expenses, net of deferrals

     775     990     (215     (22 )% 

Amortization of deferred acquisition costs and intangibles

     316     305     11     4 %  

Interest expense

     209     262     (53     (20 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     5,590       5,795       (205     (4 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     1,019       376     643     171 % 

Provision for income taxes

     348     355     (7     (2 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     671     21     650     NM (1) 

Loss from discontinued operations, net of taxes

     (9     (25     16     64 % 
  

 

 

   

 

 

   

 

 

   

Net income (loss)

     662     (4     666     NM (1) 

Less: net income attributable to noncontrolling interests

     198     151     47     31 % 
  

 

 

   

 

 

   

 

 

   

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

   $ 464     $ (155   $ 619       NM (1) 
  

 

 

   

 

 

   

 

 

   

 

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

Premiums

 

    Our U.S. Life Insurance segment increased $325 million. Our long-term care insurance business increased $34 million largely from $71 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations in the current year. Our life insurance business increased $294 million mainly attributable to the impact of a reinsurance treaty under which we initially ceded $326 million of certain term life insurance premiums as part of a life block transaction in the first quarter of 2016, partially offset by the continued runoff of our term life insurance products in the current year.

 

    Our Canada Mortgage Insurance segment increased $26 million principally from the seasoning of our larger, more recent in-force blocks of business.

 

    Our U.S. Mortgage Insurance segment increased $25 million mainly attributable to higher average flow insurance in-force, partially offset by lower rates on our mortgage insurance in-force in the current year. The prior year included the reversal of an accrual for premium refunds related to policy cancellations that did not recur.

 

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    Our Australia Mortgage Insurance segment decreased $18 million predominantly from the seasoning of our smaller prior year in-force blocks of business. The nine months ended September 30, 2017 included an increase of $7 million attributable to changes in foreign exchange rates.

 

    Corporate and Other activities decreased $5 million largely related to the sale of our European mortgage insurance business in May 2016.

Net investment income. 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). 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

 

    Corporate and Other activities decreased $78 million. The prior year included a gain of $64 million from the early extinguishment of debt related to the redemption of a securitization entity and a gain of $11 million attributable to the sale of assets to Pacific Life Insurance Company (“Pac Life”) that did not recur.

 

    Our U.S. Life Insurance segment decreased $38 million mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurance in-force blocks in the current year. The decrease was also related to an $8 million unfavorable model refinement in the current year.

Benefits and other changes in policy reserves

 

    Our U.S. Life Insurance segment increased $179 million. Our long-term care insurance business decreased $292 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. The decrease was also attributable to $68 million of unfavorable adjustments which included refinements to the calculations of reserves in the prior year that did not recur and favorable claim terminations in the current year. These decreases were partially offset by aging and growth of the in-force block, higher severity on new claims, higher incremental reserves of $64 million recorded in connection with an accrual for profits followed by losses and a $38 million less favorable impact from reduced benefits in the current year related to in-force rate actions approved and implemented. Our life insurance business increased $429 million principally related to the impact of a reinsurance treaty under which we initially ceded $331 million of certain term life insurance reserves as part of a life block transaction in the first quarter of 2016. The increase was also attributable to higher universal and term universal life insurance reserves reflecting our previously updated assumptions from the fourth quarter of 2016 and unfavorable mortality in the current year. The current year also included a $30 million unfavorable model refinement. Our fixed annuities business increased $42 million largely attributable to $45 million of lower assumed reinsurance in connection with the recapture of certain life-contingent products by a third party in the prior year that did not recur, partially offset by favorable mortality in the current year.

 

    Our U.S. Mortgage Insurance segment decreased $45 million primarily due to favorable net cures and aging of existing delinquencies and from a $5 million higher favorable reserve adjustment in the current year.

 

    Our Canada Mortgage Insurance segment decreased $39 million largely from lower new delinquencies, net of cures, as well as from a lower average reserve per delinquency and from favorable loss reserve development related to incurred but not reported delinquencies as of December 31, 2016.

 

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    Our Runoff segment decreased $8 million primarily attributable to lower guaranteed minimum death benefits (“GMDB”) reserves in our variable annuity products due to favorable equity market performance in the current year.

 

    Our Australia Mortgage Insurance segment decreased $5 million largely attributable to $6 million of favorable non-reinsurance recoveries on paid claims in the second quarter of 2017 and a higher net benefit from cures and aging of existing delinquencies, partially offset by higher new delinquencies primarily in commodity-dependent regions in the current year. The nine months ended September 30, 2017 included an increase of $3 million attributable to changes in foreign exchange rates.

Interest credited

 

    Our U.S. Life Insurance segment decreased $38 million primarily related to our fixed annuities business predominantly from lower average account values and a decrease in crediting rates in the current year.

 

    Our Runoff segment increased $9 million largely related to higher cash values in our corporate-owned life insurance products in the current year.

Acquisition and operating expenses, net of deferrals

 

    Corporate and Other activities decreased $126 million mainly driven by expenses in the prior year that did not recur. The prior year expenses included $79 million of a litigation settlement and related legal expenses, $20 million of expenses related to the early redemption of debt, $18 million of bond consent fees and a $9 million loss related to the sale of our European mortgage insurance business. These decreases were partially offset by higher consulting fees in the current year.

 

    Our U.S. Life Insurance segment decreased $63 million. Our long-term care insurance business increased $24 million from guaranty fund assessments in connection with the Penn Treaty liquidation in the current year. Our life insurance business decreased $19 million primarily from lower operating expenses attributable to the suspension of sales on March 7, 2016. The decrease was also attributable to $7 million of restructuring charges and expenses of $5 million associated with the life block transaction in the prior year that did not recur. Our fixed annuities business decreased $68 million largely attributable to a $55 million payment in connection with the recapture of certain life-contingent products by a third party in the prior year that did not recur and lower operating expenses as a result of the suspension of sales on March 7, 2016. The prior year included an unfavorable correction of $12 million related to state guaranty funds.

 

    Our Australia Mortgage Insurance segment decreased $17 million primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and intangibles in the second quarter of 2017, as well as lower employee compensation and benefit expenses and a decrease in professional fees in the current year.

 

    Our Runoff segment decreased $7 million largely driven by lower state guaranty fund assessments in the current year.

Amortization of deferred acquisition costs and intangibles

 

    Our Australia Mortgage Insurance segment increased $20 million as a result of a change in the classification of contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as discussed above, and higher contract fees being amortized in the current year.

 

   

Our U.S. Life Insurance segment decreased $10 million. Our long-term care insurance business decreased $8 million principally from a smaller in-force block in the current year as a result of lower

 

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sales. Our life insurance business increased $17 million largely related to a $41 million unfavorable term conversion mortality assumption correction and higher amortization in our term universal life insurance product reflecting previously updated lapse assumptions, partially offset by a net $15 million favorable model refinement and an $11 million refinement related to reinsurance rates in the current year. Our fixed annuities business decreased $19 million predominantly related to the write-off of DAC in connection with loss recognition testing in our fixed immediate annuity products of $14 million in the prior year that did not recur.

 

    Our Runoff segment decreased $5 million primarily related to our variable annuity products principally from favorable equity market performance in the current year.

Interest expense

 

    Our U.S. Life Insurance segment decreased $26 million driven by our life insurance business principally as a result of the life block transaction in the first quarter of 2016 which included the redemption of certain non-recourse funding obligations and the write-off of $9 million of deferred borrowing costs associated with our non-recourse funding obligations as well as the restructuring of a captive reinsurance entity.

 

    Corporate and Other activities decreased $26 million largely driven by a favorable correction of $11 million related to our Tax Matters Agreement liability and a contractual change in our junior subordinated notes related to an interest rate change from fixed to floating rates.

Provision for income taxes. The effective tax rate decreased to 34.1% for the nine months ended September 30, 2017 from 94.5% for the nine months ended September 30, 2016. The effective tax rate for the nine months ended September 30, 2017 was impacted by higher tax benefits from lower taxed foreign income. The effective tax rate for the nine months ended September 30, 2016 was impacted by a valuation allowance of $265 million recorded on deferred tax assets related to foreign tax credits that we no longer expect to realize. The effective tax rate for the nine months ended September 30, 2016 was also impacted by the reversal of a deferred tax valuation allowance related to our mortgage insurance business in Europe due to taxable gains supporting the recognition of these deferred tax assets in the prior year.

Use of non-GAAP measures

Reconciliation of net income (loss) to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders

We use non-GAAP financial measures entitled “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders” and “adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share.” Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share is derived from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. Our chief operating decision maker evaluates segment performance and allocates resources on the basis of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. We define adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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

 

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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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders because, in our opinion, they are not indicative of overall operating trends. Infrequent or unusual non-operating items are also excluded from adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, and measures that are derived from or incorporate adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders, including adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis, 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders have occurred in the past and could, and in some cases will, recur in the future. Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders and adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis are not substitutes for net income (loss) available to Genworth Financial, Inc.’s common stockholders or net income (loss) available to Genworth Financial, Inc.’s common stockholders per share on a basic and diluted basis determined in accordance with U.S. GAAP. In addition, our definition of adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders may differ from the definitions used by other companies.

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

 

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

 

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

(Amounts in millions)

     2017         2016         2017         2016    

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

   $ 107     $ (380   $ 464     $ (155

Add: net income attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     175     (332     662     (4

Income (loss) from discontinued operations, net of taxes

     (9     15     (9     (25
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     184     (347     671     21

Less: income from continuing operations attributable to noncontrolling interests

     68     48     198     151
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     116     (395     473     (130

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

        

Net investment (gains) losses, net (1)

     (62     (18     (161     (38

(Gains) losses on sale of businesses

     —         —         —         (3

(Gains) losses on early extinguishment of debt, net

     —         —         —         (48

Losses from life block transactions

     —         —         —         9

Expenses related to restructuring

     1     2     2     22

Fees associated with bond consent solicitation

     —         —         —         18

Taxes on adjustments

     21     6     56     (9
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 76     $ (405   $ 370     $ (179
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For the three months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for net investment (gains) losses attributable to noncontrolling interests of $23 million and $2 million, respectively. For the nine months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of zero and $(15) million, respectively, and adjusted for net investment (gains) losses attributable to noncontrolling interests of $59 million and $8 million, respectively.

We recorded a pre-tax expense of $1 million in both the third and first quarters of 2017 related to restructuring costs as the company continues to evaluate and appropriately size its organizational needs and expenses.

In the third quarter of 2016, we recorded a pre-tax expense of $2 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

In the second quarter of 2016, we completed the sale of our mortgage insurance business in Europe and recorded an additional pre-tax loss of $2 million; we completed the sale of our term life insurance new business platform and recorded a pre-tax gain of $12 million; we settled restricted borrowings related to a securitization entity and recorded a $64 million pre-tax gain related to the early extinguishment of debt; and we recorded a pre-tax expense of $5 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

 

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In the first quarter of 2016, we recorded a pre-tax loss of $7 million and a tax benefit of $27 million related to the planned sale of our mortgage insurance business in Europe; we paid a pre-tax make-whole expense of $20 million 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 pre-tax gain of $4 million; we completed a life block transaction resulting in a pre-tax loss of $9 million in connection with the early extinguishment of non-recourse funding obligations; and we recorded a pre-tax expense of $15 million related to restructuring costs as part of an expense reduction plan as the company evaluated and appropriately sized its organizational needs and expenses.

There were no infrequent or unusual items excluded from adjusted operating income (loss) during the periods presented other than the following item. We incurred fees during the first quarter of 2016 related to Genworth Holdings’ bond consent solicitation of $18 million for broker, advisor and investment banking fees.

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
September 30,
    Nine months ended
September 30,
 

(Amounts in millions, except per share amounts)

      2017            2016          2017          2016    

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

          

Basic

   $ 0.23      $ (0.79   $ 0.95      $ (0.26
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.23      $ (0.79   $ 0.94      $ (0.26
  

 

 

    

 

 

   

 

 

    

 

 

 

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

          

Basic

   $ 0.21      $ (0.76   $ 0.93      $ (0.31
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.21      $ (0.76   $ 0.93      $ (0.31
  

 

 

    

 

 

   

 

 

    

 

 

 

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

          

Basic

   $ 0.15      $ (0.81   $ 0.74      $ (0.36
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted

   $ 0.15      $ (0.81   $ 0.74      $ (0.36
  

 

 

    

 

 

   

 

 

    

 

 

 

Weighted-average common shares outstanding:

          

Basic

     499.1        498.3       498.9        498.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Diluted (1)

     501.6        498.3       501.2        498.3  
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Under applicable accounting guidance, companies in a loss position are required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share. Therefore, as a result of our loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2016, we were required to use basic weighted-average common shares outstanding in the calculation of diluted loss per share, as the inclusion of shares for stock options, restricted stock units and stock appreciation rights of 2.2 million and 1.8 million, respectively, would have been antidilutive to the calculation. If we had not incurred a loss from continuing operations available to Genworth Financial, Inc.’s common stockholders for the three and nine months ended September 30, 2016, dilutive potential weighted-average common shares outstanding would have been 500.5 million and 500.1 million, respectively.

 

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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 adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders. See note 10 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for a reconciliation of net income (loss) available to Genworth Financial, Inc.’s common stockholders to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders of our segments and Corporate and Other activities.

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 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 insurance businesses is a measure of the aggregate original loan balance for outstanding insurance policies as of the respective reporting date. Risk in-force for our U.S. mortgage insurance business is based on the coverage percentage applied to the estimated current outstanding loan balance. For risk in-force in our mortgage insurance businesses in Canada and Australia, 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 of 35% that represents the highest expected average per-claim payment for any one underwriting year over the life of our mortgage insurance 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

 

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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 help to enhance the understanding of the operating performance of our businesses.

An assumed tax rate of 35% is utilized in certain adjustments to adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders 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; the effect of seasonal variations; the inventory of unsold homes; loan modification and other servicing efforts; and litigation, among other items. Our results are subject to the performance 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 market penetration and eventual market size is affected in part by actions taken by the GSEs and the U.S. government, including the Federal Housing Administration (“FHA”), the Federal Housing Finance Agency, and the U.S. Congress, 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 decreased during the third quarter of 2017 compared to the third quarter of 2016, primarily due to declines in refinance mortgage originations. The decline in refinance mortgage originations was driven by increases in interest rates. Our flow persistency was 83% during the third quarter of 2017 compared to 77% in the third quarter of 2016, in part due to the increase in interest rates. Our U.S. mortgage insurance estimated market share for the third quarter of 2017 decreased compared to the third quarter of 2016. This decrease in market share was primarily due to competitor pricing, the negative ratings differential relative to our competitors, concerns expressed about Genworth’s financial condition and the proposed transaction with China Oceanwide. The decline was partially offset by business gains from the addition of new customers as well as growth within our existing customer base driven, in part, by competitive pricing and differentiated service levels.

New insurance written decreased 12% during the third quarter of 2017 compared to the third quarter of 2016 due to a decline in our estimated market share. We continue to manage the quality of new business through our underwriting guidelines, which we modify from time to time when circumstances warrant. In the third quarter of 2017, we experienced an increase in the percentage of 97% loan-to-value new insurance written, compared to the third quarter of 2016, as the result of GSE changes in underwriting guidelines for purchase transactions. The percentage of single premium new insurance written increased in the third quarter of 2017 compared to the third quarter of 2016 and the second quarter of 2017, reflecting our selective participation in this market. There was also a higher refinance originations market compared to the second quarter of 2017. Future volumes of these products will vary depending in part on our evaluation of their risk return profile.

 

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Our loss ratio was 20% during the third quarter of 2017 compared to 21% during the third quarter of 2016. In the third quarter of 2016, we made a favorable adjustment of $10 million to our loss reserves. This adjustment favorably impacted the loss ratio during the third quarter of 2016 by six points. Additionally, the 2017 loss ratio declined due to improvements in the net benefit from cures and aging of existing delinquencies and an increase in earned premiums. New delinquencies decreased during the third quarter of 2017 compared to the third quarter of 2016 due to improvements in unemployment rates and housing values and the declining volume of new delinquencies from our 2005 through 2008 book years. Foreclosure starts decreased during the third quarter of 2017 as compared to the third quarter of 2016. Additionally, we have seen a reduction in loans that have been subject to a modification or workout. 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. As of September 30, 2017, we have not experienced any material impact from the recent hurricanes affecting the South Central and Southeast regions of the United States. We will continue to monitor these affected areas and support the measures enacted by the GSEs restricting foreclosure actions and providing other forms of mortgage relief for those dealing with damage in the affected areas.

As of September 30, 2017, 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 12.9:1, compared with a risk-to-capital ratio of approximately 13.1:1 as of June 30, 2017 and approximately 14.5:1 as of December 31, 2016. 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 incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses, changes in the value of affiliated assets and the amount of additional capital that is generated within the business or capital support (if any) that we provide.

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. As of September 30, 2017, we estimate our U.S. mortgage insurance business had available assets of approximately 122% of the required assets under PMIERs compared to approximately 122% as of June 30, 2017 and 115% as of December 31, 2016. As of September 30, 2017, June 30, 2017, and December 31, 2016, the PMIERs sufficiency ratios were in excess of $500 million, $500 million and $350 million, respectively, of available assets above the PMIERs requirements. The increase during the third quarter of 2017 as compared to December 31, 2016 was driven, in part, by positive operating cash flows and the reduction in delinquent loans. This increase was partially offset by growth in new insurance written. The reinsurance transactions covering our 2014 through 2017 book years provided an aggregate of approximately $510 million of PMIERs capital credit as of September 30, 2017. Previously, the GSEs informed us that they expect to review and revise the existing PMIERs financial requirements for all eligible insurers. The GSEs do not anticipate any new PMIERs financial requirements becoming effective before the fourth quarter of 2018. In addition, the GSEs have stated they plan to solicit feedback from eligible insurers on proposed PMIERs revisions and provide at least 180 days written notice prior to the effective date of the new requirements.

As of September 30, 2017, loans modified through the Home Affordable Refinance Program (“HARP”) accounted for approximately $13.2 billion of insurance in-force, with approximately $12.5 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. On August 17, 2017, the U.S. government extended HARP through December 31, 2018. 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.

 

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Segment results of operations

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

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

 

     Three months ended
September 30,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

     2017          2016          2017 vs. 2016    

Revenues:

          

Premiums

   $ 175      $ 169      $ 6       4 %  

Net investment income

     18      16      2     13 % 

Net investment gains (losses)

     —          —          —         —   % 

Policy fees and other income

     1      1      —         —   % 
  

 

 

    

 

 

    

 

 

   

Total revenues

     194      186      8     4 %  
  

 

 

    

 

 

    

 

 

   

Benefits and expenses:

          

Benefits and other changes in policy reserves

     35      36      (1     (3 )% 

Acquisition and operating expenses, net of deferrals

     43      45      (2     (4 )% 

Amortization of deferred acquisition costs and intangibles

     3      3      —         —   % 
  

 

 

    

 

 

    

 

 

   

Total benefits and expenses

     81      84      (3     (4 )% 
  

 

 

    

 

 

    

 

 

   

Income from continuing operations before income taxes

     113      102      11     11 % 

Provision for income taxes

     40      36      4     11 % 
  

 

 

    

 

 

    

 

 

   

Income from continuing operations

     73      66      7     11 % 

Adjustments to income from continuing operations:

          

Net investment (gains) losses

     —          —          —         —   % 

Expenses related to restructuring

     —          1      (1     (100 )% 

Taxes on adjustments

     —          —          —         —   % 
  

 

 

    

 

 

    

 

 

   

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

   $ 73      $ 67      $ 6       9 %  
  

 

 

    

 

 

    

 

 

   

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly due to higher premiums resulting from higher mortgage insurance in-force in the current year.

Revenues

Premiums increased mainly attributable to higher average flow insurance in-force, partially offset by lower rates on our mortgage insurance in-force in the current year.

Net investment income increased primarily from higher average invested assets in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily due to lower new delinquencies and favorable net cures and aging of existing delinquencies, mostly offset by a favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies in the prior year that did not recur.

 

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Acquisition and operating expenses, net of deferrals, decreased primarily from lower operating costs in the current year.

Provision for income taxes. The effective tax rate increased slightly to 35.9% for the three months ended September 30, 2017 from 35.8% for the three months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits related to tax favored investments in relation to pre-tax income, partially offset by state taxes.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

 

     Nine months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

     2017          2016         2017 vs. 2016    

Revenues:

         

Premiums

   $ 514      $ 489     $ 25       5 %  

Net investment income

     53      46     7     15 % 

Net investment gains (losses)

     —          (1     1     (100 )% 

Policy fees and other income

     3      3     —         —   % 
  

 

 

    

 

 

   

 

 

   

Total revenues

     570      537     33     6 %  
  

 

 

    

 

 

   

 

 

   

Benefits and expenses:

         

Benefits and other changes in policy reserves

     67      112     (45     (40 )% 

Acquisition and operating expenses, net of deferrals

     124      125     (1     (1 )% 

Amortization of deferred acquisition costs and intangibles

     10      8     2     25 % 
  

 

 

    

 

 

   

 

 

   

Total benefits and expenses

     201      245     (44     (18 )% 
  

 

 

    

 

 

   

 

 

   

Income from continuing operations before income taxes

     369      292     77     26 % 

Provision for income taxes

     132      104     28     27 % 
  

 

 

    

 

 

   

 

 

   

Income from continuing operations

     237      188     49     26 % 

Adjustments to income from continuing operations:

         

Net investment (gains) losses

     —          1     (1     (100 )% 

Expenses related to restructuring

     —          1     (1     (100 )% 

Taxes on adjustments

     —          (1     1     100 % 
  

 

 

    

 

 

   

 

 

   

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

   $ 237      $ 189     $ 48       25 % 
  

 

 

    

 

 

   

 

 

   

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly attributable to higher premiums resulting from an increase in mortgage insurance in-force in the current year. The increase was also attributable to lower losses from favorable net cures and aging of existing delinquencies in the current year.

 

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Revenues

Premiums increased mainly attributable to higher average flow insurance in-force, partially offset by lower rates on our mortgage insurance in-force in the current year. The prior year included the reversal of an accrual for premium refunds related to policy cancellations that did not recur.

Net investment income increased primarily from higher average invested assets in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily due to favorable net cures and aging of existing delinquencies, lower new delinquencies and from a $5 million higher favorable reserve adjustment in the current year.

Provision for income taxes. The effective tax rate increased slightly to 35.9% for the nine months ended September 30, 2017 from 35.8% for the nine months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits related to tax favored investments in relation to pre-tax income, partially offset by state taxes.

U.S. Mortgage Insurance selected operating performance measures

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

 

     As of September 30,      Increase (decrease) and
percentage change
 

(Amounts in millions)

   2017      2016                    2017 vs. 2016                 

Primary insurance in-force (1)

   $ 148,000      $ 133,700      $ 14,300        11

Risk in-force

     35,900        32,500        3,400        10

 

(1) Primary insurance in-force represents the aggregate original loan balance for outstanding insurance policies and is used to determine premiums. Original loan balances are presented for policies with level renewal premiums. Amortized loan balances are presented for policies with annual, amortizing renewal premiums.

 

     Three months ended
September 30,
     Increase
(decrease) and
percentage
change
    Nine months ended
September 30,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017      2016      2017 vs. 2016     2017      2016      2017 vs. 2016  

New insurance written

   $ 11,300      $ 12,800      $ (1,500     (12 )%    $ 28,700      $ 31,600      $ (2,900     (9 )% 

Net premiums written

     200      193      7     4     561      559      2     —  

Primary insurance in-force and risk in-force

Primary insurance in-force increased largely from $14.8 billion in higher flow insurance in-force, which increased from $131.6 billion as of September 30, 2016 to $146.4 billion as of September 30, 2017 as a result of new insurance written, partially offset by lapses during the current year. The increase in flow insurance in-force was partially offset by a decline of $0.5 billion in bulk insurance in-force, which decreased from $2.1 billion as of September 30, 2016 to $1.6 billion as of September 30, 2017 from cancellations and lapses. In addition, risk in-force increased primarily as a result of higher flow insurance in-force. Flow persistency was 83% and 78% for the nine months ended September 30, 2017 and 2016, respectively.

New insurance written

For the three and nine months ended September 30, 2017, new insurance written decreased due to a decline in our estimated market share.

 

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Net premiums written

Net premiums written for the three months ended September 30, 2017 increased primarily from higher average flow insurance in-force in the current year.

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
September 30,
    Increase (decrease)     Nine months ended
September 30,
    Increase (decrease)  
    2017     2016     2017 vs. 2016     2017     2016     2017 vs. 2016  

Loss ratio

    20     21     (1 )%      13     23     (10 )% 

Expense ratio (net earned premiums)

    26     28     (2 )%      26     27     (1 )% 

Expense ratio (net premiums written)

    23     24     (1 )%      24     24     —  

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 DAC and intangibles.

The loss ratio for the three and nine months ended September 30, 2017 decreased from improvements in net benefit from cures and aging of existing delinquencies and lower new delinquencies in the current year. The decrease in the loss ratio was also driven by higher net earned premiums attributable to higher average flow insurance in-force in the current year. The decrease in the loss ratio for the three months ended September 30, 2017 was mostly offset by a prior year favorable adjustment of $10 million to our loss reserves associated with lower expected claim rates on early stage delinquencies, partially offset by higher claim severity on late stage delinquencies that did not recur. The decrease in the loss ratio for the nine months ended September 30, 2017 was also attributable to a $5 million higher favorable reserve adjustment in the current year, partially offset by the reversal of an accrual for premium refunds related to policy cancellations in the prior year.

The expense ratio (net earned premiums) for the three and nine months ended September 30, 2017 decreased slightly driven by higher net earned premiums in the current year.

The expense ratio (net premiums written) for the three months ended September 30, 2017 decreased slightly from higher net premiums written and lower amortization and production costs in the 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 U.S. mortgage insurance portfolio as of the dates indicated:

 

     September 30,
2017
    December 31,
2016
    September 30,
2016
 

Primary insurance:

      

Insured loans in-force

     730,174       699,841       686,789  

Delinquent loans

     20,508       25,709       25,803  

Percentage of delinquent loans (delinquency rate)

     2.81     3.67     3.76

Flow loan in-force

     712,848       678,168       665,821  

Flow delinquent loans

     19,765       24,631       24,720  

Percentage of flow delinquent loans (delinquency rate)

     2.77     3.63     3.71

Bulk loans in-force

     17,326       21,673       20,968  

Bulk delinquent loans (1)

     743     1,078       1,083  

Percentage of bulk delinquent loans (delinquency rate)

     4.29     4.97     5.17

A minus and sub-prime loans in-force

     19,828       23,063       24,281  

A minus and sub-prime delinquent loans

     4,080       5,252       5,306  

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

     20.58     22.77     21.85

Pool insurance:

      

Insured loans in-force

     5,145       5,742       5,896  

Delinquent loans

     252     325     343

Percentage of delinquent loans (delinquency rate)

     4.90     5.66     5.82

 

(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 631 as of September 30, 2017, 756 as of December 31, 2016 and 778 as of September 30, 2016.

Delinquency and foreclosure levels that developed principally in our 2005 through 2008 book years have declined as the United States has continued to experience improvement in its residential real estate market. We have also seen a further decline in new delinquencies and lower foreclosure starts in the third quarter of 2017 compared to the third quarter of 2016.

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:

 

     September 30, 2017  

(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

     8,268      $ 40      $ 350        11

4 - 11 payments

     5,273        116        228      51

12 payments or more

     6,224        256        306      84
  

 

 

    

 

 

    

 

 

    

Total

     19,765      $ 412      $ 884        47
  

 

 

    

 

 

    

 

 

    

 

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

 

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     December 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

     9,355      $ 49      $ 382        13

4 - 11 payments

     6,364        147        268      55

12 payments or more

     8,912        383        434      88
  

 

 

    

 

 

    

 

 

    

Total

     24,631      $ 579      $ 1,084        53
  

 

 

    

 

 

    

 

 

    

 

(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
September 30, 2017
    Percent of total
reserves as of
September 30, 2017 (1)
    Delinquency rate  
         September 30,
2017
    December 31,
2016
    September 30,
2016
 

By Region:

          

Southeast (2)

     18     21 %      3.28     4.28     4.44

South Central (3)

     15     10       2.63     3.20     3.12

Pacific (4)

     15     8       1.52     2.02     2.08

Northeast (5)

     13     33       4.94     6.72     6.96

North Central (6)

     12     9       2.30     3.00     2.97

Great Lakes (7)

     11     6       2.11     2.70     2.78

New England (8)

     6     6       2.83     3.62     3.70

Mid-Atlantic (9)

     6     5       2.92     3.80     3.84

Plains (10)

     4     2       2.27     2.94     3.09
  

 

 

   

 

 

       

Total

     100     100 %      2.81     3.67     3.76
  

 

 

   

 

 

       

 

(1) Total reserves were $460 million as of September 30, 2017.
(2) Alabama, Arkansas, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee.
(3) Arizona, Colorado, Louisiana, New Mexico, Oklahoma, Texas and Utah.
(4) Alaska, California, Hawaii, Nevada, Oregon and Washington.
(5) New Jersey, New York and Pennsylvania.
(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
September 30, 2017
    Percent of total
reserves as of
September 30, 2017 (1)
    Delinquency rate  
       September 30,
2017
    December 31,
2016
    September 30,
2016
 

By State:

          

California

     8     3 %      1.35     1.56     1.59

Texas

     7     4     2.94     3.33     3.33

Florida

     6     11     3.54     4.89     5.33

New York

     6     17     5.09     6.88     7.12

Illinois

     6     6     2.70     3.45     3.42

Washington

     4     2     1.20     1.79     1.86

Pennsylvania

     4     4     3.59     4.70     4.83

Michigan

     4     1     1.47     1.79     1.91

Ohio

     4     2     2.44     3.30     3.38

North Carolina

     3     2     2.80     3.65     3.79

 

(1) Total reserves were $460 million as of September 30, 2017.

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 September 30, 2017:

 

(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

     6.01     10.3   $ 2,361        1.6   $ 463        1.3

2005

     5.60     10.0       2,206        1.5       531      1.5  

2006

     5.73     15.6       4,018        2.7       942      2.6  

2007

     5.66     33.4       10,423        7.0       2,431        6.8  

2008

     5.20     15.9       8,676        5.9       2,017        5.6  

2009

     4.93     0.6       851      0.6       183      0.5  

2010

     4.68     0.5       1,178        0.8       270      0.8  

2011

     4.54     0.7       1,712        1.2       403      1.1  

2012

     3.84     0.8       4,544        3.1       1,111        3.1  

2013

     4.05     1.7       8,250        5.6       2,041        5.7  

2014

     4.43     3.5       12,556        8.5       3,067        8.6  

2015

     4.12     4.0       23,726        16.0       5,807        16.2  

2016

     3.86     2.7       39,291        26.5       9,545        26.6  

2017

     4.26     0.3       28,197        19.0       7,008        19.6  
    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total portfolio

     4.46     100.0   $ 147,989        100.0   $ 35,819        100.0
    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Total reserves were $460 million as of September 30, 2017.

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 third quarter of 2017, the Canadian dollar strengthened against the U.S. dollar as compared to both the third quarter of 2016 and the second quarter of 2017, which positively impacted the results of our mortgage insurance business in Canada as reported in U.S. dollars. Any future movement in foreign exchange rates could impact future results.

 

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The Canadian gross domestic product is expected to have experienced moderate growth in the third quarter of 2017, although slightly lower than in the second quarter of 2017, reflecting normalization in oil production and strong residential investment. The overnight interest rate in Canada was 1.0% at September 30, 2017 as compared to 0.50% at the end of the second quarter of 2017. Canada’s unemployment rate decreased to 6.2% at the end of the third quarter of 2017 compared to 6.5% at the end of the second quarter of 2017 due in part to a decrease in workforce participation.

National home prices increased in the third quarter of 2017 by approximately 11% compared to the third quarter of 2016 largely driven by strong housing markets in Ontario and British Columbia. The increase was approximately 2% compared to the second quarter of 2017, mostly due to continued strength in the British Columbia market, while Ontario prices remained relatively flat. Home sales in Canada decreased in the third quarter of 2017 by approximately 9% compared to the third quarter of 2016 and 6% compared to the second quarter of 2017. This was largely due to a slowdown in sales in Ontario, particularly in the Greater Toronto Area (“GTA”) following the release of the Ontario Provincial Government’s Fair Housing Plan in April 2017. The plan was designed to temper the real estate market and contained numerous measures, including a non-resident speculation tax that targets affordability in the purchase and rental housing markets in the GTA and surrounding areas.

Our mortgage insurance business in Canada experienced lower losses in the third quarter of 2017 compared to the third quarter of 2016 primarily due to lower new delinquencies, net of cures, resulting from strong or improving regional economic conditions and from a lower average reserve per delinquency in the current year. Our loss ratio in Canada was 14% for the third quarter of 2017 and 11% for the nine months ended September 30, 2017. Given the loss ratio performance thus far in 2017 and the economic forecast for the balance of the year, we expect our full year 2017 loss ratio to be lower than our full year 2016 loss ratio of 22%.

On October 3, 2016, the Minister of Finance announced changes intended to reinforce the Canadian housing finance system. These changes primarily included more restrictive qualification guidelines on homebuyers seeking mortgage insurance and new requirements on insured mortgage loans using bulk or other discretionary low loan-to-value mortgage insurance that previously only applied to high loan-to-value insured mortgages. These changes in regulatory requirements have resulted in a smaller flow mortgage insurance market and lower demand for bulk insurance.

In the third quarter of 2017, flow new insurance written volumes decreased in our mortgage insurance business in Canada compared to the third quarter of 2016 primarily due to a smaller flow mortgage insurance market size as a result of the aforementioned regulatory changes in the fourth quarter of 2016. However, earned premiums were higher in the third quarter of 2017 compared to the third quarter of 2016 from seasoning of our larger, more recent blocks of business and price increases in recent years.

Bulk new insurance written levels were lower in the third quarter of 2017 compared to the third quarter of 2016 primarily due to lower demand as a result of regulatory changes that took effect in 2016 and a substantial increase in bulk insurance premium rates on mortgage applications received after December 31, 2016 in response to higher regulatory capital requirements. New insurance written from bulk mortgage insurance varies from period to period based on a number of factors, including the amount of bulk mortgages lenders seek to insure, the competitiveness of our pricing and our risk appetite for such mortgage insurance. Effective July 1, 2016, bulk mortgage insurance is only available on mortgages used in the Canada Mortgage and Housing Corporation securitization programs and is prohibited on mortgages used in private securitizations after a phase-in period. In addition, effective November 30, 2016, additional regulatory changes were implemented that prohibit insuring bulk refinances and most investor mortgages. While there was a one-time increase in bulk insurance volumes in the first quarter of 2017 primarily due to the closing of several large bulk insurance transactions on applications received in the fourth quarter of 2016, we anticipate a decrease for the full year 2017 as a result of the aforementioned changes.

 

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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 the Office of the Superintendent of Financial Institutions (“OSFI”). On January 1, 2017, the capital advisory titled “Capital Requirements for Federally Regulated Mortgage Insurers” became effective. The advisory provides a new standard framework for determining the capital requirements for residential mortgage insurance companies. Under this new regulatory capital framework, the holding target of 220% was recalibrated to the updated OSFI Supervisory MCT Target and PRMHIA requirement of 150%. As of September 30, 2017, our MCT ratio under the new framework was approximately 165%, which was above the supervisory target.

The new framework released by OSFI in December 2016 is more risk sensitive and incorporates additional risk attributes, including credit score, remaining amortization and outstanding loan balance. The advisory includes supplementary capital requirements on new business in areas where home prices are high relative to borrower incomes upon origination. As a result of these higher regulatory capital requirements, our mortgage insurance business in Canada implemented an increase in premium rates of approximately 20% on flow new business effective March 17, 2017. Similarly, the business also increased its premium rates for bulk insurance.

On October 17, 2017, OSFI released the final version of Guideline B-20 “Residential Mortgage Underwriting Practices and Procedures,” which applies to all federally-regulated financial institutions that are engaged in residential mortgage underwriting and/or the acquisition of residential mortgage loan assets in Canada. The guideline takes effect January 1, 2018, and will require enhanced underwriting practices for all uninsured mortgages, including the application of a qualifying stress test. The B-20 Guideline does not directly impact the regulatory requirements for our mortgage insurance business in Canada, as it is governed by OSFI’s Guideline B-21 “Residential Mortgage Insurance Underwriting Practices and Procedures.” We believe the Guideline will not have a material impact on the high loan-to-value market in Canada. However, it is still too early to determine the potential impact this Guideline will have on the Canadian mortgage and housing market.

 

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Segment results of operations

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

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

 

     Three months
ended
September 30,
    Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 131     $ 124     $ 7       6 %  

Net investment income

     33     33     —         —  

Net investment gains (losses)

     55     —         55     NM (1) 

Policy fees and other income

     1     (1     2     200
  

 

 

   

 

 

   

 

 

   

Total revenues

     220     156     64     41
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     18     30     (12     (40 )% 

Acquisition and operating expenses, net of deferrals

     20     21     (1     (5 )% 

Amortization of deferred acquisition costs and intangibles

     11     10     1     10

Interest expense

     4     5     (1     (20 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     53     66     (13     (20 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     167     90     77     86

Provision for income taxes

     55     24     31     129
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     112     66     46     70

Less: income from continuing operations attributable to noncontrolling interests

     54     30     24     80
  

 

 

   

 

 

   

 

 

   

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

     58     36     22     61

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

        

Net investment (gains) losses, net (2)

     (32     —         (32     NM (1) 

Expenses related to restructuring

     1     —         1     NM (1) 

Taxes on adjustments

     10     —         10     NM (1) 
  

 

 

   

 

 

   

 

 

   

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

   $ 37     $ 36     $ 1       3 %  
  

 

 

   

 

 

   

 

 

   

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.
(2) For the three months ended September 30, 2017, net investment (gains) losses were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $23 million.

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly driven by lower losses and higher premiums, mostly offset by lower tax benefits in the current year.

Revenues

Premiums increased principally from the seasoning of our larger, more recent in-force blocks of business.

 

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Net investment gains in the current year were primarily driven by derivative gains on interest rate swaps, foreign currency forward contracts and cross currency interest rate swaps.

Benefits and expenses

Benefits and other changes in policy reserves decreased largely from lower new delinquencies, net of cures, and from a lower average reserve per delinquency in the current year.

Provision for income taxes. The effective tax rate increased to 32.9% for the three months ended September 30, 2017 from 26.7% for the three months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

 

     Nine months
ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 383     $ 357     $ 26       7 %  

Net investment income

     96     94     2     2 %  

Net investment gains (losses)

     113     12     101     NM (1) 

Policy fees and other income

     1     —         1     NM (1) 
  

 

 

   

 

 

   

 

 

   

Total revenues

     593     463     130     28
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     42     81     (39     (48 )% 

Acquisition and operating expenses, net of deferrals

     57     58     (1     (2 )% 

Amortization of deferred acquisition costs and intangibles

     32     29     3     10

Interest expense

     13     13     —        
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     144     181     (37     (20 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     449     282     167     59

Provision for income taxes

     147     76     71     93
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     302     206     96     47 % 

Less: income from continuing operations attributable to noncontrolling interests

     146     94     52     55
  

 

 

   

 

 

   

 

 

   

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

     156     112     44     39

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

        

Net investment (gains) losses, net (2)

     (65     (7     (58     NM (1) 

Expenses related to restructuring

     1     —         1     NM (1) 

Taxes on adjustments

     22     2     20     NM (1) 
  

 

 

   

 

 

   

 

 

   

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

   $ 114     $ 107     $ 7       7 %  
  

 

 

   

 

 

   

 

 

   

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.
(2) For the nine months ended September 30, 2017 and 2016, net investment gains (losses) were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $48 million and $5 million, respectively.

 

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased mainly driven by lower losses and higher premiums, partially offset by lower tax benefits in the current year.

Revenues

Premiums increased primarily from the seasoning of our larger, more recent in-force blocks of business.

Net investment gains in the current year were primarily driven by derivative gains on interest rate swaps, foreign currency forward contracts and cross currency interest rate swaps, as well as foreign exchange gains on the sale of non-functional currency investment securities.

Benefits and expenses

Benefits and other changes in policy reserves decreased largely from lower new delinquencies, net of cures, as well as from a lower average reserve per delinquency and from favorable loss reserve development related to incurred but not reported delinquencies as of December 31, 2016.

Provision for income taxes. The effective tax rate increased to 32.7% for the nine months ended September 30, 2017 from 27.1% for the nine months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year.

Canada Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our Canada Mortgage Insurance segment as of or for the dates indicated:

 

     As of September 30,      Increase (decrease)
and
percentage change
 

(Amounts in millions)

   2017      2016      2017 vs. 2016  

Primary insurance in-force

   $ 390,700      $ 347,300      $ 43,400        12

Risk in-force

     136,700        121,500        15,200        13

 

     Three months ended
September 30,
     Increase
(decrease) and
percentage
change
    Nine months ended
September 30,
     Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017      2016      2017 vs. 2016     2017      2016      2017 vs. 2016  

New insurance written

   $ 5,000      $ 10,400      $ (5,400     (52 )%    $ 19,800      $ 40,200      $ (20,400     (51 )% 

Net premiums written

     156      172      (16     (9 )%      378      447      (69     (15 )% 

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 and nine months ended September 30, 2017 and 2016, 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 increases of $19.2 billion and $6.7 billion, respectively, attributable to changes in foreign exchange rates.

 

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New insurance written

New insurance written decreased for the three and nine months ended September 30, 2017 primarily as a result of lower bulk mortgage insurance activity and flow new insurance written. For the three and nine months ended September 30, 2017, bulk mortgage insurance activity decreased by $4.5 billion and $18.6 billion, respectively, driven by increased demand in the prior year preceding regulatory changes that became effective on July 1, 2016 and from lower demand in the current year due to a higher average premium rate as a result of higher regulatory capital requirements and additional regulatory changes that became effective on November 30, 2016. Flow new insurance written decreased $900 million and $1.8 billion for the three and nine months ended September 30, 2017, respectively, primarily due to a smaller market size resulting from regulatory changes effective October 17, 2016. New insurance written for the three and nine months ended September 30, 2017 included increases of $100 million and $400 million, respectively, 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 September 30, 2017, our unearned premium reserves were $1,713 million, compared to $1,628 million as of September 30, 2016. The change in unearned premium reserves included an increase of $84 million attributable to changes in foreign exchange rates.

Net premiums written decreased for the three and nine months ended September 30, 2017 primarily from lower bulk mortgage insurance activity and lower flow volume due to regulatory changes, partially offset by premium rate increases.

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
September 30,
    Increase
(decrease)
    Nine months
ended
September 30,
    Increase
(decrease)
 
     2017     2016     2017 vs. 2016     2017     2016     2017 vs. 2016  

Loss ratio

     14     24 %      (10 )%      11     23     (12 )% 

Expense ratio (net earned premiums)

     23     24     (1 )%      23     24     (1 )% 

Expense ratio (net premiums written)

     20     18     2     23     19     4

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 DAC and intangibles.

The loss ratio decreased for the three and nine months ended September 30, 2017 primarily from a decrease in the number of new flow delinquencies, net of cures, and from a lower average reserve per delinquency as a result of improvement in oil-producing regions, home price appreciation, particularly in Ontario, and overall improving regional macroeconomic conditions in the current year.

The expense ratio (net earned premiums) decreased for the three and nine months ended September 30, 2017 primarily attributable to higher premiums from the seasoning of our larger, more recent in-force blocks of business.

 

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The expense ratio (net premiums written) increased for the three and nine months ended September 30, 2017 primarily attributable to 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 Canada mortgage insurance portfolio as of the dates indicated:

 

    September 30, 2017     December 31, 2016     September 30, 2016  

Primary insured loans in-force

    2,098,771       2,029,400       2,006,484  

Delinquent loans

    1,759       2,070       2,027  

Percentage of delinquent loans (delinquency rate)

    0.08     0.10     0.10

Flow loans in-force

    1,434,662       1,394,067       1,379,020  

Flow delinquent loans

    1,434       1,693       1,715  

Percentage of flow delinquent loans (delinquency rate)

    0.10     0.12     0.12

Bulk loans in-force

    664,109       635,333       627,464  

Bulk delinquent loans

    325     377     312

Percentage of bulk delinquent loans (delinquency rate)

    0.05     0.06     0.05

Flow mortgage loans in-force increased from new policies written and bulk mortgage loans in-force increased from new bulk activity. The number of delinquent loans of our flow mortgage insurance decreased primarily from regional housing market improvement, particularly in oil-producing regions in the current year.

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
September 30, 2017
    Delinquency rate  
       September 30,
2017
    December 31,
2016
    September 30,
2016
 

By province and territory:

        

Ontario

     47     0.03     0.04     0.04

Alberta

     16     0.18     0.22     0.22

British Columbia

     15     0.05     0.06     0.07

Quebec

     13     0.12     0.15     0.15

Saskatchewan

     3     0.25     0.28     0.27

Nova Scotia

     2     0.16     0.18     0.20

Manitoba

     2     0.09     0.07     0.08

New Brunswick

     1     0.15     0.19     0.15

All other

     1     0.16     0.17     0.14
  

 

 

       

Total

     100     0.08     0.10     0.10
  

 

 

       

Delinquency rates decreased slightly reflecting improvement primarily in Alberta and Quebec due to improving macroeconomic conditions in those regions in the current year.

As a part of enhanced lender reporting, we receive updated outstanding loans in-force in Canada from almost all of our customers. Based on the data provided by lenders, the delinquency rate as of September 30, 2017 was 0.18%, reflecting a lower number of outstanding loans and related policies in-force compared to our reported policies in-force.

 

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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 third quarter of 2017, the Australian dollar strengthened against the U.S. dollar as compared to both the third quarter of 2016 and the second quarter of 2017, which favorably impacted the results of our mortgage insurance business in Australia as reported in U.S. dollars. Any future movement in foreign exchange rates could impact future results.

The Australian gross domestic product is expected to have had moderate growth in the third quarter of 2017, supported by sustained low interest rates and an ongoing rise in resource exports. The cash rate remained flat at 1.50% in the third quarter of 2017. The September 2017 unemployment rate improved slightly to 5.5% from 5.6% at the end of the second quarter of 2017.

Home prices in Australia continued to appreciate in the third quarter of 2017, with September 30, 2017 home values approximately 9% higher than a year ago and approximately 1% higher than at the end of the second quarter of 2017. The Sydney and Melbourne housing markets continue to be the major driver with annual home price growth of approximately 11% and 12%, respectively, as of the end of the third quarter of 2017.

Our mortgage insurance business in Australia had lower losses in the third quarter of 2017 compared to the third quarter of 2016 due to lower new delinquencies net of cures, as well as improved aging of existing delinquencies, primarily in commodity-dependent regions. The loss ratio in Australia for the three months ended September 30, 2017 was 37%. We expect continued regional loss pressures and lower expected earned premiums to drive our loss ratio higher for the full year 2017 as compared to the full year 2016 loss ratio of 34%. In addition, during the fourth quarter of 2017, our mortgage insurance business in Australia will complete its annual review of its premium earnings pattern. The outcome of this review could impact our results of operations, including our loss ratio.

In the third quarter of 2017, our mortgage insurance business in Australia experienced a decrease in new insurance written volumes compared to the third quarter of 2016 and the second quarter of 2017 due to lower market penetration from a change in customer mix, as well as the Australian Prudential Regulation Authority’s (“APRA”) continued focus on lending standards, investment lending and serviceability.

Gross premiums written in the third quarter of 2017 were lower compared to the third quarter of 2016 primarily driven by a decrease in flow volumes, particularly from a reduction in high loan-to-value mortgage origination volume resulting from regulatory measures to slow the growth in investment lending and limit the flow of new interest-only lending.

In November 2016, we entered into a new contract with our largest customer, effective January 1, 2017, with a term of three years. During the first three quarters of 2017, this customer represented 39% of our new insurance written. The contract with another large customer was set to expire in November 2017 but was recently extended through November 2018 under similar terms. This customer represented 12% of our new insurance written during the first three quarters of 2017. The contract with our former second largest customer was terminated by the customer effective April 8, 2017.

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 as the framework to ensure that our Australia group of companies as a whole, and each regulated entity, are independently capitalized to meet regulatory requirements. As of September 30, 2017, the estimated PCA ratio of

 

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our mortgage insurance business in Australia was approximately 184%, representing an increase from 181% as of June 30, 2017, largely resulting from lower production volumes, portfolio seasoning and cancellations, partially offset by dividends paid and share repurchase activity in the third quarter of 2017.

In March 2017, APRA announced changes to reinforce sound mortgage lending practices, focusing on slowing investor growth and limiting the flow of new interest-only lending. These changes could impact future new insurance written volumes in our Australian mortgage insurance business.

Segment results of operations

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

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

 

     Three months
ended

September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 78     $ 88     $ (10     (11 )% 

Net investment income

     19     23     (4     (17 )% 

Net investment gains (losses)

     1     4     (3     (75 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     98     115     (17     (15 )% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     29     37     (8     (22 )% 

Acquisition and operating expenses, net of deferrals

     18     23     (5     (22 )% 

Amortization of deferred acquisition costs and intangibles

     10     4     6     150 % 

Interest expense

     3     2     1     50 % 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     60     66     (6     (9 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     38     49     (11     (22 )% 

Provision for income taxes

     12     16     (4     (25 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     26     33     (7     (21 )% 

Less: income from continuing operations attributable to noncontrolling interests

     14     18     (4     (22 )% 
  

 

 

   

 

 

   

 

 

   

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

     12     15     (3     (20 )% 

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

        

Net investment (gains) losses, net (1)

     (1     (2     1     50 % 

Taxes on adjustments

     1     1     —         —   % 
  

 

 

   

 

 

   

 

 

   

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

   $ 12     $ 14     $ (2     (14 )% 
  

 

 

   

 

 

   

 

 

   

 

(1) For the three months ended September 30, 2016, net investment gains (losses) were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $2 million.

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by lower premiums and investment income, partially offset by lower losses in the current year.

 

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Revenues

Premiums decreased largely due to the seasoning of our smaller prior year in-force blocks of business and lower policy cancellations in the current year. The three months ended September 30, 2017 included an increase of $3 million attributable to changes in foreign exchange rates.

Net investment income decreased primarily from lower yields in the current year.

Net investment gains decreased predominantly from lower net gains from the sale of investment securities, partially offset by impairments in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased largely attributable to lower new delinquencies, net of cures, and from improved aging of existing delinquencies primarily in commodity-dependent regions in the current year.

Acquisition and operating expenses, net of deferrals, decreased primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and intangibles as of the second quarter of 2017.

Amortization of DAC and intangibles increased principally as a result of a change in the classification of contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as discussed above.

Provision for income taxes. The effective tax rate increased to 33.1% for the three months ended September 30, 2017 from 32.2% for the three months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year.

 

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Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

 

     Nine months
ended
September 30,
    Increase
(decrease) and

percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 237     $ 255     $ (18     (7 )% 

Net investment income

     57     72     (15     (21 )% 

Net investment gains (losses)

     23     6     17     NM (1) 
  

 

 

   

 

 

   

 

 

   

Total revenues

     317     333     (16     (5 )% 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     84     89     (5     (6 )% 

Acquisition and operating expenses, net of deferrals

     50     67     (17     (25 )% 

Amortization of deferred acquisition costs and intangibles

     31     11     20     182 % 

Interest expense

     7     8     (1     (13 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     172     175     (3     (2 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     145     158     (13     (8 )% 

Provision for income taxes

     48     51     (3     (6 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     97     107     (10     (9 )% 

Less: income from continuing operations attributable to noncontrolling interests

     52     57     (5     (9 )% 
  

 

 

   

 

 

   

 

 

   

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

     45     50     (5     (10 )% 

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

        

Net investment (gains) losses, net (2)

     (12     (3     (9     NM (1) 

Taxes on adjustments

     4     1     3     NM (1) 
  

 

 

   

 

 

   

 

 

   

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

   $ 37     $ 48     $ (11     (23 )% 
  

 

 

   

 

 

   

 

 

   

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.
(2) For the nine months ended September 30, 2017 and 2016, net investment gains (losses) were adjusted for the portion of net investment gains (losses) attributable to noncontrolling interests of $11 million and $3 million, respectively.

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders decreased primarily driven by lower premiums and investment income, partially offset by lower losses in the current year.

Revenues

Premiums decreased predominantly from the seasoning of our smaller prior year in-force blocks of business. The nine months ended September 30, 2017 included an increase of $7 million attributable to changes in foreign exchange rates.

Net investment income decreased primarily from lower yields and lower average invested assets in the current year.

 

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Net investment gains increased predominantly from higher net gains from the sale of investment securities due to the rebalancing of our portfolio, partially offset by impairments and derivative losses in the current year.

Benefits and expenses

Benefits and other changes in policy reserves decreased largely attributable to $6 million of favorable non-reinsurance recoveries on paid claims in the second quarter of 2017 and a higher net benefit from cures and aging of existing delinquencies, partially offset by higher new delinquencies primarily in commodity-dependent regions in the current year. The nine months ended September 30, 2017 included an increase of $3 million attributable to changes in foreign exchange rates.

Acquisition and operating expenses, net of deferrals, decreased primarily from a change in the classification of contract fees amortization expense, which we began recording to amortization of DAC and intangibles in the second quarter of 2017, as well as lower employee compensation and benefit expenses and a decrease in professional fees in the current year.

Amortization of DAC and intangibles increased as a result of a change in the classification of contract fees amortization expense that was previously recorded to acquisition and operating expenses, net of deferrals, as discussed above, and higher contract fees being amortized in the current year.

Provision for income taxes. The effective tax rate increased to 33.5% for the nine months ended September 30, 2017 from 32.4% for the nine months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to decreased tax benefits from lower taxed foreign income in the current year.

Australia Mortgage Insurance selected operating performance measures

The following tables set forth selected operating performance measures regarding our Australia Mortgage Insurance segment as of or for the dates indicated:

 

     As of September 30,      Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

   2017      2016      2017 vs. 2016  

Primary insurance in-force

   $ 252,200      $ 247,900      $ 4,300        2

Risk in-force

     87,700        86,300        1,400        2

 

     Three months
ended
September 30,
     Increase
(decrease)
and
percentage
change
    Nine months ended
September 30,
     Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

   2017      2016      2017 vs. 2016     2017      2016      2017 vs. 2016  

New insurance written

   $ 4,300      $ 4,600      $ (300     (7 )%    $ 14,100      $ 14,800      $ (700     (5 )% 

Net premiums written

     56      57      (1     (2 )%      168      169      (1     (1 )% 

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” 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 and nine months ended September 30, 2017 and 2016, this factor was

 

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35%. We also 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. In addition, Australia currently provides excess-of-loss reinsurance coverage with one lender. The insurance in-force and risk in-force associated with this reinsurance agreement are excluded from the above metrics as they are insignificant in relation to the rest of the portfolio.

Primary insurance in-force and risk in-force increased primarily from increases of $5.8 billion and $2.0 billion, respectively, from changes in foreign exchange rates.

New insurance written

New insurance written decreased for the three and nine months ended September 30, 2017 mainly attributable to lower market penetration from a change in customer mix, partially offset by higher bulk mortgage insurance written. The three and nine months ended September 30, 2017 included increases of $200 million and $500 million, respectively, 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 September 30, 2017, our unearned premium reserves were $852 million, compared to $922 million as of September 30, 2016. The change in unearned premium reserves included an increase of $19 million attributable to changes in foreign exchange rates.

Net premiums written decreased slightly for the three and nine months ended September 30, 2017 primarily from lower market penetration from a change in customer mix. The three and nine months ended September 30, 2017 included increases of $2 million and $5 million, respectively, 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
September 30,
    Increase (decrease)     Nine months ended
September 30,
    Increase (decrease)  
    2017     2016     2017 vs. 2016     2017     2016     2017 vs. 2016  

Loss ratio

    37 %      42 %      (5 )%      35     35     —  

Expense ratio (net earned premiums)

    37 %      31 %      6 %      35     31     4

Expense ratio (net premiums written)

    51 %      48 %      3 %      49     46     3

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 DAC and intangibles.

The loss ratio decreased for the three months ended September 30, 2017 largely attributable to lower new delinquencies, net of cures, and improved aging of existing delinquencies primarily in commodity-dependent regions in the current year. The loss ratio was flat for the nine months ended September 30, 2017 as higher new delinquencies predominantly in commodity-dependent regions and lower net earned premiums were offset by $6 million of favorable non-reinsurance recoveries on paid claims and higher net benefits from cures and aging of existing delinquencies in the current year.

 

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The expense ratio (net earned premiums) increased for the three months ended September 30, 2017 primarily from lower net earned premiums and for the nine months ended September 30, 2017 primarily from lower net earned premiums and from higher contract fees being amortized in the current year.

The expense ratio (net premiums written) increased for the three and nine months ended September 30, 2017 primarily due to higher contract fees being amortized and 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:

 

     September 30, 2017     December 31, 2016     September 30, 2016  

Primary insured loans in-force

     1,422,501       1,464,139       1,470,302  

Delinquent loans

     7,146       6,731       6,844  

Percentage of delinquent loans (delinquency rate)

     0.50     0.46     0.47

Flow loans in-force

     1,308,998       1,354,616       1,358,286  

Flow delinquent loans

     6,912       6,451       6,574  

Percentage of flow delinquent loans (delinquency rate)

     0.53     0.48     0.48

Bulk loans in-force

     113,503       109,523       112,016  

Bulk delinquent loans

     234     280     270

Percentage of bulk delinquent loans (delinquency rate)

     0.21     0.26     0.24

Flow loans in-force decreased primarily from policy cancellations. Flow delinquent loans increased from higher new delinquencies 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
September 30, 2017
    Delinquency rate  
       September 30,
2017
    December 31,
2016
    September 30,
2016
 

By state and territory:

        

New South Wales

     28     0.31     0.30     0.32

Queensland

     23     0.72     0.66     0.67

Victoria

     23     0.39     0.38     0.39

Western Australia

     12     0.88     0.74     0.69

South Australia

     6     0.65     0.61     0.62

Australian Capital Territory

     3     0.19     0.17     0.20

Tasmania

     2     0.38     0.35     0.37

New Zealand

     2     0.06     0.07     0.10

Northern Territory

     1     0.50     0.36     0.33
  

 

 

       

Total

     100     0.50     0.46     0.47
  

 

 

       

Delinquency rates increased in the current year compared to December 31, 2016 and September 30, 2016 primarily from higher new delinquencies attributable to economic pressures, particularly in commodity-dependent regions.

 

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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. Because these factors are not known in advance, change over time, are difficult to accurately predict and are inherently uncertain, we cannot determine with precision the ultimate amounts we will pay for actual claims or the timing of those payments. We will continue to monitor our experience and assumptions closely and make changes to our assumptions and methodologies, as appropriate, for our U.S. life insurance products. 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.

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. Our liability for policy and contract claims is reviewed quarterly and we conduct a review of our claim reserve assumptions for our long-term care insurance business 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. We performed our annual review of claim reserve assumptions for our long-term care insurance business in the third quarter of 2017. In the fourth quarter of 2017, we will perform assumption reviews for our universal and term universal life insurance products as well as for our other U.S. life insurance products, including our long-term care insurance products, and complete our loss recognition testing.

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. 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 and processes 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 our models and/or assumptions. Any material changes in balances, margins or income trends that may result from these activities will be disclosed accordingly. In addition, we intend to continue to enhance our modeling capabilities of our various businesses, including for our long-term care insurance projections where we migrated to a new modeling system for the majority of our long-term care insurance business in the fourth quarter of 2016. We anticipate migrating substantially all of our retained long-term care insurance business to this new modeling system by the end of 2017. The new modeling system will value and forecast associated liability cash flows and policyholder behavior at a more granular level than our current system.

One of our strategic objectives is to separate, then isolate, through a series of internal transactions, our long-term care insurance business from our other U.S. life insurance businesses. Our goal under the plan has been to align substantially all of our non-New York in-force life insurance and annuity business under GLAIC, our Virginia domiciled life insurance company, and substantially all of our non-New York long-term care insurance business under GLIC, our Delaware domiciled life insurance company. As part of this strategic objective, effective April 1, 2017, GLAIC assumed risk on a coinsurance basis for certain blocks of term life insurance, universal life insurance and single premium whole life insurance from GLIC. Effective July 1, 2017, GLIC recaptured certain single premium deferred annuity products previously ceded to GLAIC. In addition,

 

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effective July 1, 2017, GLAIC assumed risk on a modified coinsurance basis for certain blocks of fixed annuities, including those single premium deferred annuity products recaptured by GLIC, and certain corporate-owned life insurance policies from GLIC. As a result, there was an adverse impact on GLIC’s risk-based capital ratio of approximately 15 points in the third quarter of 2017. However, the internal transactions had no impact on our consolidated results of operations and financial condition prepared in accordance with U.S. GAAP as the financial impact of the intercompany reinsurance was eliminated in consolidation. These transactions complete our goal to align substantially all of our non-New York in-force life insurance and annuity business under GLAIC and substantially all of our non-New York long-term care insurance business under GLIC. All of these transactions were also required under the Merger Agreement with China Oceanwide. The reinsurance treaties effective July 1, 2017 include provisions that require us to unwind or void these treaties in the event the merger transaction with China Oceanwide is terminated.

In addition, a Genworth holding company will pursue the purchase of GLAIC from GLIC at fair market value, subject to applicable regulatory approvals. Together with the internal reinsurance transactions completed in April 2017 and July 2017, finalization of the GLAIC sale, if completed, would isolate our non-New York long-term care insurance business from our other non-New York U.S. life insurance businesses and achieve this strategic objective.

Results of our U.S. life insurance businesses are also impacted by interest rates. The continued low interest rate environment puts pressure on the profitability and returns of these businesses 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 as well as interest rate hedging strategies for a portion of our long-term care insurance product cash flows. Additionally, certain products have implicit and explicit rate guarantees or optionality that are significantly impacted by changes in interest rates. For a further discussion of the impact of interest rates on our U.S. life insurance businesses, see “Item 7A—Quantitative and Qualitative Disclosures About Market Risk” in our 2016 Annual Report on Form 10-K.

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 ratings, product features, pricing and commission levels 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.

Our liability for policy and contract claims is reviewed quarterly and we conduct a detailed review of our claim reserve assumptions for our long-term care insurance business annually typically during the third quarter of each year. During the third quarter of 2017, we reviewed our assumptions and methodologies relating to our claim reserves of our long-term care insurance business but did not make any significant changes to the assumptions or methodologies, other than routine updates to investment returns and benefit utilization rates as we typically do each quarter. These updates in the third quarter of 2017 did not have a significant impact on claim reserve levels. During the third quarter of 2016, we completed our annual review of assumptions and methodologies related to our long-term care insurance claim reserves, which resulted in recording higher claim reserves of $460 million and reinsurance recoverables of $25 million. We updated several assumptions and methodologies primarily impacting claim termination rates, benefit utilization rates and incurred but not reported reserves.

In the fourth quarter of 2016, we performed our loss recognition and cash flow testing. We incorporated the assumption and methodology changes made in the third quarter of 2016 into these tests. These changes had a material negative impact on the margins of our long-term care insurance block, excluding the acquired block. The acquired block has a higher percentage of indemnity policies and was positively affected by the new claim assumptions. As a part of the process, we considered incremental benefits from expected future rate actions that helped mitigate the impact of these changes. As part of the annual testing, we also reviewed assumptions for

 

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incidence and interest rates, among other assumptions. 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 and cash flow testing results. As of December 31, 2016, our loss recognition testing margins for our long-term care insurance business were positive but were significantly reduced from the 2015 levels. In the fourth quarter of 2017, we will perform assumption reviews and complete our loss recognition testing for our long-term care insurance products. We have observed a higher incidence of claim on policies with lifetime, or unlimited, benefits and will consider this as we complete our 2017 loss recognition testing. Our assumptions are sensitive to slight variability in actual experience and small changes in assumptions could result in the margin of our long-term care insurance block, excluding the acquired block to decrease to at/or below zero in future years. To the extent, based on reviews, our margin is negative, we would be required to recognize a loss, by amortizing more DAC and/or establishing additional benefit reserves, the impact of which may be material. In the event a loss is recognized, we would increase reserves to offset such losses that would be recognized in later years. A significant decrease in our loss recognition testing margin, the need to amortize a significant amount of DAC and/or the need to significantly increase reserves could have a material adverse effect on our business, results of operations and financial condition.

As a result of our annual statutory cash flow testing in the fourth quarter of 2016, GLICNY, our insurance subsidiary domiciled in New York, did not require any additional statutory reserves. However, in the second quarter of 2017, the New York Department of Financial Services required GLICNY to record an additional $58 million of statutory long-term care insurance reserves related to cash flow testing. GLICNY now currently expects to record an aggregate of approximately $178 million of additional statutory reserves over the next 15 months.

In connection with the updated assumptions and methodologies that increased claim reserves on existing claims in our 2016 review, we now establish higher claim reserves on new claims, which will decrease earnings in future periods 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. In addition, premiums will decline as policies terminate from mortality and lapses.

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 for the nine months ended September 30, 2017 was 74% compared to 94% for the nine months ended September 30, 2016. The loss ratio for the nine months ended September 30, 2016 reflected the updated assumptions and methodologies from our annual review of claim reserve assumptions completed in the third quarter of 2016.

Our long-term care insurance sales decreased 50% during the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. Sales decreased primarily due to our lower ratings. We expect that our sales will continue to be adversely impacted by our current ratings. Future adverse ratings announcements or actions could negatively impact our sales levels further.

Despite our low sales levels in our long-term care insurance business given our current ratings, we continue to evaluate new products. For example, we previously launched 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. In support of this 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.

 

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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, an increase in our benefit costs as policies with reinsurance coverage exhaust their benefits or terminate and policies which are not covered by reinsurance go on claim.

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 associated benefit reductions on our in-force policies; product refinements; changes to our current product offerings in certain states; new distribution strategies; 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.” We have suspended sales in Hawaii, Massachusetts, New Hampshire and Vermont, and will consider taking similar actions in the future, in other states where we are unable to obtain satisfactory rate increases on in-force policies and/or unable to obtain approval for new products. We will also consider litigation against states that decline actuarially justified rate increases. We are currently in litigation with one state that has refused to approve actuarially justified rate actions. 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. As a result, 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. We previously expected the remaining quarterly income benefits of our in-force rate actions, in aggregate, to be lower in 2017 than the levels we experienced in 2016 as the implementation of certain rate increase approvals were largely completed in the third quarter of 2016. However, during 2017, quarterly income benefits of our in-force rate actions have increased sequentially each quarter. We now expect the 2017 income benefits of the in-force rate actions, in aggregate, to be above those recognized in 2016.

The Pennsylvania Insurance Commissioner (the “Commissioner”) previously placed long-term care insurer Penn Treaty in rehabilitation, an intermediate action before insolvency, and subsequently petitioned a state court to convert the rehabilitation into a liquidation. On November 9, 2016, the state court held a hearing on the Commissioner’s petition to convert the rehabilitation into liquidation with no objections. As of December 31, 2016, the liquidation order had not been entered and as a result, we were unable to estimate when or to what extent Penn Treaty would ultimately be declared insolvent, or the amount of the insolvency and we did not establish an accrual for guaranty fund assessments associated with Penn Treaty as of December 31, 2016. However, on March 1, 2017, the Pennsylvania Commonwealth Court approved petitions to liquidate Penn Treaty due to financial difficulties that could not be resolved through rehabilitation. In the first quarter of 2017, we received guaranty fund assessments related to Penn Treaty and recorded an accrual of $21 million.

Life insurance

Results of our life insurance business are impacted primarily by mortality, persistency, investment yields, expenses, reinsurance and statutory reserve requirements, among other factors. As previously disclosed, we suspended sales of our traditional life insurance products on March 7, 2016.

 

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We review our life assumptions at least annually typically in the third or fourth quarter of each year. As part of our annual review of assumptions in the fourth quarter of 2016, we reviewed our assumptions, including interest rate assumptions, with the benefit of updated experience and comparisons to industry experience, where appropriate. As part of this review, we implemented an updated mortality table for our life insurance products. This updated table improved our mortality rates in younger ages but deteriorated mortality rates in older ages. Mortality levels may deviate each period from historical trends. As a result of the updated assumptions, we recorded $196 million of after-tax charges in our universal and term universal life insurance products in the fourth quarter of 2016 primarily reflecting the mortality experience deterioration in older age populations. We have also experienced a higher mortality trend in 2017 as policies have aged. We will continue to regularly review our mortality as well as all of our other assumptions in light of emerging experience and may be required to make further adjustments to our universal and term universal life insurance reserves in the future, which could also impact our loss recognition testing results. In the fourth quarter of 2017, we will perform assumption reviews and complete our loss recognition testing for our universal and term life insurance products. Any further materially adverse changes to our assumptions, including mortality, may have a materially negative impact on our results of operations, financial condition and business.

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 DAC amortization, 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. In 2017, we have experienced higher lapses and accelerated DAC amortization associated with our large 15-year and 20-year term life insurance blocks entering their post-level guaranteed level premium rate periods. We anticipate this trend will continue, with accompanying higher DAC amortization and lower profitability as larger blocks reach the end of their level premium periods through 2020. As of September 30, 2017, our term life insurance products had a DAC balance of $1.4 billion. 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.

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, and competitor actions. As previously disclosed, we suspended sales of our traditional fixed annuity products on March 7, 2016.

We monitor and change crediting rates on fixed annuities on a regular basis to maintain spreads and targeted returns. However, if interest rates remain at current levels or decrease further, we could see declines in spreads which impact the margins on our products, particularly our fixed immediate annuity products. Beginning in the second quarter of 2016, our loss recognition testing resulted in a premium deficiency on our fixed immediate annuity products driven by the low interest rate environment. Due to the premium deficiency that existed in 2016 and the current low interest rate environment, we continue to monitor our fixed immediate annuity products more frequently than annually and have recorded additional charges in each quarter of 2017. If interest rates remain at the current levels or increase at a slower pace than we assumed, we could incur additional charges in the future. The impacts of future adverse changes in our assumptions would result in the establishment of additional future policy benefit reserves and would be immediately reflected in net income (loss) if our margin for this block is again reduced below zero. Any favorable variation would result in additional margin but no immediate benefit to income (loss), and would result in higher income recognition over the remaining duration of the in-force block.

For fixed indexed annuities, equity market performance and volatility could also 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 September 30, 2017 Compared to Three Months Ended September 30, 2016

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

 

     Three months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 748     $ 725     $ 23       3 %  

Net investment income

     683     695     (12     (2 )% 

Net investment gains (losses)

     27     21     6     29 % 

Policy fees and other income

     154     175     (21     (12 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     1,612       1,616       (4     % 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,255       1,556       (301     (19 )% 

Interest credited

     128     140     (12     (9 )% 

Acquisition and operating expenses, net of deferrals

     149     149     —         % 

Amortization of deferred acquisition costs and intangibles

     50     69     (19     (28 )% 

Interest expense

     3     2     1     50 % 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     1,585       1,916       (331     (17 )% 
  

 

 

   

 

 

   

 

 

   

Income (loss) from continuing operations before income taxes

     27     (300     327     109 % 

Provision (benefit) for income taxes

     10     (106     116     109 % 
  

 

 

   

 

 

   

 

 

   

Income (loss) from continuing operations

     17     (194     211     109 % 

Adjustments to income (loss) from continuing operations:

        

Net investment (gains) losses, net (1)

     (28     (21     (7     (33 )% 

Expenses related to restructuring

     —         1     (1     (100 )% 

Taxes on adjustments

     10     7     3     43 % 
  

 

 

   

 

 

   

 

 

   

Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

   $ (1   $ (207   $ 206       100 % 
  

 

 

   

 

 

   

 

 

   

 

(1)  For the three months ended September 30, 2017, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(1) million.

The following table sets forth adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:

 

     Three months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

     2017         2016       2017 vs. 2016  

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

        

Long-term care insurance

   $ (5   $ (270   $ 265       98 % 

Life insurance

     (9     48     (57     (119 )% 

Fixed annuities

     13     15     (2     (13 )% 
  

 

 

   

 

 

   

 

 

   

Total adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

   $ (1   $ (207   $ 206       100 % 
  

 

 

   

 

 

   

 

 

   

 

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

 

    The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders for our long-term care insurance decreased $265 million predominantly attributable to higher claim reserves of $283 million as a result of the completion of our annual review of our claim reserves conducted during the third quarter of 2016, partially offset by higher severity on new claims in the current year. The current year also included $8 million of higher premiums and reduced benefits from in-force rate actions approved and implemented.

 

    Our life insurance business had an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $9 million in the current year compared to adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $48 million in the prior year. The change was predominantly attributable to a $15 million net unfavorable model refinement, unfavorable mortality and higher lapses in the current year.

 

    Our fixed annuities business decreased $2 million predominantly from lower investment income, partially offset by lower interest credited in the current year. The prior year included an $8 million unfavorable correction related to state guaranty funds that did not recur.

Revenues

Premiums

 

    Our long-term care insurance business increased $31 million largely from $21 million of increased premiums in the current year from in-force rate actions approved and implemented.

 

    Our life insurance business decreased $8 million mainly driven by continued runoff of our term life insurance products, including higher lapses primarily from our large 15-year and 20-year term life insurance blocks entering their post-level guaranteed premium rate periods, partially offset by lower reinsurance ceded 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 and $4 million of lower income related to inflation-driven volatility on U.S. Government Treasury Inflation Protected Securities (“TIPS”) in the current year.

 

    Our life insurance business decreased $4 million primarily due to a less favorable prepayment speed adjustment on structured securities in the current year.

 

    Our fixed annuities business decreased $24 million largely attributable to lower average invested assets in the current year.

Net investment gains (losses). The increase was driven largely by our long-term care insurance business predominantly from higher net gains from the sale of investment securities in the current year.

Policy fees and other income. The decrease was mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurance in-force blocks in the current year. The decrease was also driven by an $8 million unfavorable model refinement in the current year.

Benefits and expenses

Benefits and other changes in policy reserves

 

   

Our long-term care insurance business decreased $366 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher

 

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claim reserves of $435 million, net of reinsurance. The decrease was partially offset by aging and growth of the in-force block, higher severity on new claims and a less favorable impact of $7 million from reduced benefits in the current year related to in-force rate actions approved and implemented.

 

    Our life insurance business increased $64 million primarily attributable to a $30 million unfavorable model refinement, unfavorable mortality and higher universal life insurance reserves in the current year reflecting our previously updated assumptions from the fourth quarter of 2016.

 

    Our fixed annuities business increased $1 million as $3 million of higher reserves from loss recognition testing in our fixed immediate annuity products were mostly offset by lower interest credited in the current year.

Interest credited. Interest credited decreased mostly driven by our fixed annuities business predominantly from lower average account values in the current year.

Acquisition and operating expenses, net of deferrals

 

    Our life insurance business increased $5 million primarily from lower deferrals due to block runoff, partially offset by lower operating expenses in the current year attributable to the suspension of sales on March 7, 2016.

 

    Our fixed annuities business decreased $8 million largely attributable to a $12 million unfavorable correction related to state guaranty funds in the prior year that did not recur.

Amortization of deferred acquisition costs and intangibles. The decrease in amortization of DAC and intangibles was primarily related to our life insurance business principally as a result of a net $15 million favorable model refinement in the current year. The decrease was partially offset by higher amortization in our term universal life insurance product reflecting previously updated lapse assumptions. In the current year, we have also experienced higher lapses and accelerated DAC amortization associated with our large 15-year and 20-year term life insurance blocks entering their post-level guaranteed level premium rate periods.

Provision for income taxes. The effective tax rate was 35.3% for the three months ended September 30, 2017 and 2016.

 

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Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

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

 

     Nine months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Premiums

   $ 2,242     $ 1,917     $ 325       17 % 

Net investment income

     2,058       2,049       9     % 

Net investment gains (losses)

     91     119     (28     (24 )% 

Policy fees and other income

     494     532     (38     (7 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     4,885       4,617       268     6 %  
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     3,582       3,403       179     5 %  

Interest credited

     389     427     (38     (9 )% 

Acquisition and operating expenses, net of deferrals

     450     513     (63     (12 )% 

Amortization of deferred acquisition costs and intangibles

     221     231     (10     (4 )% 

Interest expense

     9     35     (26     (74 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     4,651       4,609       42     1 %  
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     234     8     226     NM (1) 

Provision for income taxes

     83     3     80     NM (1) 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     151     5     146     NM (1) 

Adjustments to income from continuing operations:

        

Net investment (gains) losses, net (2)

     (93     (129     36     28 % 

(Gains) losses from life block transactions

     —         9     (9     (100 )% 

Expenses related to restructuring

     —         19     (19     (100 )% 

(Gains) losses on sale of businesses

     —         (1     1     100 % 

Taxes on adjustments

     33     36     (3     (8 )% 
  

 

 

   

 

 

   

 

 

   

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

   $ 91     $ (61   $ 152       NM (1) 
  

 

 

   

 

 

   

 

 

   

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.
(2)  For the nine months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $(2) million and $(10) million, respectively.

 

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The following table sets forth adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders for the businesses included in our U.S. Life Insurance segment for the periods indicated:

 

     Nine months
ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017      2016     2017 vs. 2016  

Adjusted operating income (loss) available to Genworth Financial, Inc.’s common stockholders:

         

Long-term care insurance

   $ 42      $ (199   $ 241       121

Life insurance

     6      110     (104     (95 )% 

Fixed annuities

     43      28     15     54
  

 

 

    

 

 

   

 

 

   

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

   $ 91      $ (61   $ 152       NM (1) 
  

 

 

    

 

 

   

 

 

   

 

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

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

 

    Our long-term care insurance business had adjusted operating income available to Genworth Financial, Inc.’s common stockholders of $42 million in the current year compared to an adjusted operating loss available to Genworth Financial, Inc.’s common stockholders of $199 million in the prior year. The change was predominantly attributable to higher claim reserves of $283 million as a result of the completion of our annual review of our claim reserves conducted during the third quarter of 2016. The increase was also attributable to $44 million of unfavorable adjustments which included refinements to the calculations of reserves in the prior year that did not recur and higher incremental premiums and reduced benefits of $18 million from in-force rate actions approved and implemented. These increases were partially offset by higher severity on new claims and higher incremental reserves of $42 million recorded in connection with an accrual for profits followed by losses as a result of higher profitability driven by favorable claim terminations in the current year.

 

    Our life insurance business decreased $104 million predominantly from a $20 million net unfavorable term conversion mortality assumption correction, unfavorable mortality and a $15 million net unfavorable model refinement in the current year. The decrease was also attributable to higher reserves in the current year reflecting previously updated assumptions from the fourth quarter of 2016. These decreases were partially offset by lower financing costs in the current year.

 

    Our fixed annuities business increased $15 million predominantly from an $8 million unfavorable correction related to state guaranty funds and a $7 million net unfavorable impact from the recapture of certain life-contingent products by a third-party in the prior year that did not recur.

Revenues

Premiums

 

    Our long-term care insurance business increased $34 million largely from $71 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations in the current year.

 

    Our life insurance business increased $294 million mainly attributable to the impact of a reinsurance treaty under which we initially ceded $326 million of certain term life insurance premiums as part of a life block transaction in the first quarter of 2016, partially offset by the continued runoff of our term life insurance products in the current year.

 

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Net investment income

 

    Our long-term care insurance business increased $68 million largely from higher average invested assets due to growth of our in-force block, partially offset by lower yields in the current year.

 

    Our fixed annuities business decreased $56 million largely due to lower average invested assets in the current year.

Net investment gains (losses)

 

    Net investment gains in our long-term care insurance business decreased $90 million primarily related to net gains of $130 million from the sale of TIPS in the prior year that did not recur and lower derivative gains in the current year.

 

    Net investment gains in our life insurance business increased $10 million largely from higher net gains from the sale of investment securities and lower impairments in the current year.

 

    Our fixed annuities business had net investment gains of $6 million in the current year compared to net investment losses of $46 million in the prior year. Net investment gains in the current year resulted from derivative gains and net gains from the sale of investment securities, partially offset by losses on embedded derivatives related to our fixed indexed annuities. Net investment losses in the prior year related to impairments, losses on embedded derivatives related to our fixed indexed annuities and net losses from the sale of investment securities, partially offset by derivative gains.

Policy fees and other income. The decrease was mostly attributable to our life insurance business primarily as a result of suspending sales of these products on March 7, 2016 and a decline in our term universal and universal life insurance in-force blocks in the current year. The decrease was also related to an $8 million unfavorable model refinement in the current year.

Benefits and expenses

Benefits and other changes in policy reserves

 

    Our long-term care insurance business decreased $292 million principally from the completion of our annual review of our claim reserves conducted during the third quarter of 2016 which resulted in higher claim reserves of $435 million, net of reinsurance. The decrease was also attributable to $68 million of unfavorable adjustments which included refinements to the calculations of reserves in the prior year that did not recur and favorable claim terminations in the current year. These decreases were partially offset by aging and growth of the in-force block, higher severity on new claims, higher incremental reserves of $64 million recorded in connection with an accrual for profits followed by losses and a $38 million less favorable impact from reduced benefits in the current year related to in-force rate actions approved and implemented.

 

    Our life insurance business increased $429 million principally related to the impact of a reinsurance treaty under which we initially ceded $331 million of certain term life insurance reserves as part of a life block transaction in the first quarter of 2016. The increase was also attributable to higher universal and term universal life insurance reserves reflecting our previously updated assumptions from the fourth quarter of 2016 and unfavorable mortality in the current year. The current year also included a $30 million unfavorable model refinement.

 

    Our fixed annuities business increased $42 million largely attributable to $45 million of lower assumed reinsurance in connection with the recapture of certain life-contingent products by a third party in the prior year that did not recur, partially offset by favorable mortality in the current year.

Interest credited. Interest credited decreased driven mostly by our fixed annuities business predominantly from lower average account values and a decrease in crediting rates in the current year.

 

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Acquisition and operating expenses, net of deferrals

 

    Our long-term care insurance business increased $24 million from guaranty fund assessments in connection with the Penn Treaty liquidation in the current year.

 

    Our life insurance business decreased $19 million primarily from lower operating expenses attributable to the suspension of sales on March 7, 2016. The decrease was also attributable to $7 million of restructuring charges and expenses of $5 million associated with the life block transaction in the prior year that did not recur.

 

    Our fixed annuities business decreased $68 million largely attributable to a $55 million payment in connection with the recapture of certain life-contingent products by a third party in the prior year that did not recur and lower operating expenses as a result of the suspension of sales on March 7, 2016. The prior year included an unfavorable correction of $12 million related to state guaranty funds.

Amortization of deferred acquisition costs and intangibles

 

    Our long-term care insurance business decreased $8 million principally from a smaller in-force block in the current year as a result of lower sales.

 

    Our life insurance business increased $17 million largely related to a $41 million unfavorable term conversion mortality assumption correction and higher amortization in our term universal life insurance product reflecting previously updated lapse assumptions, partially offset by a net $15 million favorable model refinement and an $11 million refinement related to reinsurance rates in the current year.

 

    Our fixed annuities business decreased $19 million predominantly related to the write-off of DAC in connection with loss recognition testing in our fixed immediate annuity products of $14 million in the prior year that did not recur.

Interest expense. Interest expense decreased driven by our life insurance business principally as a result of the life block transaction in the first quarter of 2016 which included the redemption of certain non-recourse funding obligations and the write-off of $9 million of deferred borrowing costs associated with our non-recourse funding obligations as well as the restructuring of a captive reinsurance entity.

Provision for income taxes. The effective tax rate was 35.3% for the nine months ended September 30, 2017 and 2016.

 

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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 long-term care insurance business as of or for the dates indicated:

 

     Three months
ended
September 30,
    Increase
(decrease)
and
percentage
change
    Nine months
ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016     2017     2016     2017 vs. 2016  

Net earned premiums:

                

Individual long-term care insurance

   $ 613     $ 591     $ 22       4   $ 1,815     $ 1,792     $ 23       1

Group long-term care insurance

     28       19       9       47     83       72       11       15
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total

   $ 641     $ 610     $ 31       5   $ 1,898     $ 1,864     $ 34       2
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Annualized first-year premiums and deposits:

                

Individual long-term care insurance

   $ 2     $ 2     $ —         —     $ 6     $ 11     $ (5     (45 )% 

Group long-term care insurance

     1       3       (2     (67 )%      3       7       (4     (57 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total

   $ 3     $ 5     $ (2     (40 )%    $ 9     $ 18     $ (9     (50 )% 
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Loss ratio

     79     146     (67 )%        74     94     (20 )%   

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 for the three months ended September 30, 2017 mostly from $21 million of increased premiums in the current year from in-force rate actions approved and implemented. Net earned premiums increased for the nine months ended September 30, 2017 mostly from $71 million of increased premiums in the current year from in-force rate actions approved and implemented, partially offset by policy terminations in the current year.

Annualized first-year premiums and deposits decreased principally from lower sales due to our current ratings.

The loss ratio decreased for the three and nine months ended September 30, 2017 largely related to the decrease in benefits and other changes in reserves and the increase in premiums as discussed above.

 

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Life insurance

The following tables set forth selected operating performance measures regarding our life insurance business as of or for the dates indicated:

 

     Three months
ended
September 30,
     Increase
(decrease)
and
percentage
change
    Nine months
ended
September 30,
     Increase
(decrease)
and
percentage
change
 

(Amounts in millions)

   2017      2016      2017 vs. 2016     2017      2016      2017 vs. 2016  

Term and whole life insurance

                    

Net earned premiums

   $ 107      $ 115      $ (8     (7 )%    $ 344      $ 50      $ 294       NM (1) 

Sales

     —          —          —         —       —          7      (7     (100 )% 

Term universal life insurance

                    

Net deposits

   $ 59      $ 62      $ (3     (5 )%    $ 184      $ 191      $ (7     (4 )% 

Universal life insurance

                    

Net deposits

   $ 81      $ 86      $ (5     (6 )%    $ 250      $ 297      $ (47     (16 )% 

Sales:

                    

Universal life insurance

     1      1      —         —       2      4      (2     (50 )% 

Linked-benefits

     —          —          —         —       —          3      (3     (100 )% 

Total life insurance

                    

Net earned premiums and deposits

   $ 247      $ 263      $ (16     (6 )%    $ 778      $ 538      $ 240       45

Sales:

                    

Term life insurance

     —          —          —         —       —          7      (7     (100 )% 

Universal life insurance

     1      1      —         —       2      4      (2     (50 )% 

Linked-benefits

     —          —          —         —       —          3      (3     (100 )% 

 

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

 

     As of September 30,      Percentage
change
 

(Amounts in millions)

   2017      2016      2017 vs. 2016  

Term and whole life insurance

        

Life insurance in-force, net of reinsurance

   $ 196,872      $ 204,549        (4 )% 

Life insurance in-force before reinsurance

     467,821        494,642        (5 )% 

Term universal life insurance

        

Life insurance in-force, net of reinsurance

   $ 119,442      $ 123,770        (3 )% 

Life insurance in-force before reinsurance

     120,291        124,670        (4 )% 

Universal life insurance

        

Life insurance in-force, net of reinsurance

   $ 37,335      $ 40,237        (7 )% 

Life insurance in-force before reinsurance

     42,726        46,038        (7 )% 

Total life insurance

        

Life insurance in-force, net of reinsurance

   $ 353,649      $ 368,556        (4 )% 

Life insurance in-force before reinsurance

     630,838        665,350        (5 )% 

Term and whole life insurance

Net earned premiums decreased during the three months ended September 30, 2017 primarily from continued runoff of our term life insurance products, including higher lapses primarily from our large 15-year and 20-year term life insurance blocks entering their post-level guaranteed premium rate periods, partially offset by lower reinsurance ceded in the current year.

Net earned premiums increased during the nine months ended September 30, 2017 primarily related to the impact of a reinsurance treaty under which we initially ceded $326 million of certain term life insurance

 

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premiums as part of a life block transaction in the first quarter of 2016, partially offset by the continued runoff of our term life insurance products in the current year.

Sales of our term life insurance products decreased from the suspension of sales of our traditional life insurance products on March 7, 2016. While we no longer solicit sales of these products, we continue to service our existing block of business.

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 of our universal life insurance products decreased from the suspension of sales of our traditional life insurance products on March 7, 2016. While we no longer solicit sales of these products, we continue to service our existing block of business.

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

(Amounts in millions)

         2017                 2016                 2017                 2016        

Single Premium Deferred Annuities

        

Account value, beginning of period

   $ 11,321     $ 12,191     $ 11,806     $ 12,480  

Deposits

     3     3     7     175

Surrenders, benefits and product charges

     (383     (270     (1,031     (879
  

 

 

   

 

 

   

 

 

   

 

 

 

Net flows

     (380     (267     (1,024     (704

Interest credited and investment performance

     79     86     238     234
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value, end of period

   $ 11,020     $ 12,010     $ 11,020     $ 12,010  
  

 

 

   

 

 

   

 

 

   

 

 

 

Single Premium Immediate Annuities

        

Account value, beginning of period

   $ 4,752     $ 5,198     $ 4,853     $ 5,180  

Premiums and deposits

     24     25     64     75

Surrenders, benefits and product charges

     (151     (173     (474     (572
  

 

 

   

 

 

   

 

 

   

 

 

 

Net flows

     (127     (148     (410     (497

Interest credited

     52     56     159     173

Effect of accumulated net unrealized investment gains (losses)

     9     23     84     273
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value, end of period

   $ 4,686     $ 5,129     $ 4,686     $ 5,129  
  

 

 

   

 

 

   

 

 

   

 

 

 

Structured Settlements

        

Account value, net of reinsurance, beginning of period

   $ 1,055     $ 1,061     $ 1,061     $ 1,066  

Surrenders, benefits and product charges

     (17     (11     (51     (44
  

 

 

   

 

 

   

 

 

   

 

 

 

Net flows

     (17     (11     (51     (44

Interest credited

     14     14     42     42
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value, net of reinsurance, end of period

   $ 1,052     $ 1,064     $ 1,052     $ 1,064  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums from fixed annuities

   $ —       $ —       $ —       $ 3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits from fixed annuities

   $ 27     $ 28     $ 71     $ 247  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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We no longer solicit sales of our traditional fixed annuity products; however, we continue to service our existing block of business.

Single Premium Deferred Annuities

Account value of our single premium deferred annuities decreased as surrenders and benefits outpaced interest credited. Deposits decreased primarily related to the suspension of 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 interest credited, net unrealized investment gains and premiums. Sales decreased predominantly related to the suspension of sales of our traditional fixed annuity products on March 7, 2016.

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 September 30, 2017 Compared to Three Months Ended September 30, 2016

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:

 

     Three months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

   2017     2016     2017 vs. 2016  

Revenues:

        

Net investment income

   $ 40     $ 37     $ 3       8 %  

Net investment gains (losses)

     9     4     5     125 % 

Policy fees and other income

     41     43     (2     (5 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     90     84     6     7 %  
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     5     2     3     150 % 

Interest credited

     36     33     3     9 %  

Acquisition and operating expenses, net of deferrals

     16     20     (4     (20 )% 

Amortization of deferred acquisition costs and intangibles

     7     7     —         —   % 

Interest expense

     —         1     (1     (100 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     64     63     1     2 %  
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     26     21     5     24 % 

Provision for income taxes

     8     6     2     33 % 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     18     15     3     20 % 

Adjustments to income from continuing operations:

        

Net investment (gains) losses, net (1)

     (8     (4     (4     (100 )% 

Taxes on adjustments

     3     1     2     200 % 
  

 

 

   

 

 

   

 

 

   

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

   $ 13     $ 12     $ 1       8 %  
  

 

 

   

 

 

   

 

 

   

 

(1) For the three months ended September 30, 2017, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $1 million.

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased slightly as lower operating expenses were mostly offset by higher tax expenses in the current year.

Revenues

Net investment gains increased predominantly from higher derivative gains and lower net losses from the sale of investment securities, partially offset by lower gains on embedded derivatives associated with our variable annuity products with guaranteed minimum withdrawal benefits (“GMWBs”) in the current year.

Benefits and expenses

Acquisition and operating expenses, net of deferrals, decreased mostly from lower state guaranty fund assessments in the current year.

 

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Provision for income taxes. The effective tax rate increased to 30.7% for the three months ended September 30, 2017 from 29.1% for the three months ended September 30, 2016. The increase in the effective tax rate is primarily attributable to changes in tax favored investments in relation to pre-tax results in the current year compared to the prior year.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following table sets forth the results of operations relating to our Runoff segment for the periods indicated:

 

     Nine months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

       2017             2016         2017 vs. 2016  

Revenues:

        

Net investment income

   $ 119     $ 108     $ 11       10 % 

Net investment gains (losses)

     24     (17     41     NM (1) 

Policy fees and other income

     123     127     (4     (3 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     266     218     48     22 % 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     18     26     (8     (31 )% 

Interest credited

     105     96     9     9 %  

Acquisition and operating expenses, net of deferrals

     47     54     (7     (13 )% 

Amortization of deferred acquisition costs and intangibles

     20     25     (5     (20 )% 

Interest expense

     1     1     —         —   % 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     191     202     (11     (5 )% 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income taxes

     75     16     59     NM (1) 

Provision for income taxes

     23     2     21     NM (1) 
  

 

 

   

 

 

   

 

 

   

Income from continuing operations

     52     14     38     NM (1) 

Adjustments to income from continuing operations:

        

Net investment (gains) losses, net (2)

     (22     12     (34     NM (1) 

Taxes on adjustments

     8     (4     12     NM (1) 
  

 

 

   

 

 

   

 

 

   

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

   $ 38     $ 22     $ 16       73 % 
  

 

 

   

 

 

   

 

 

   

 

(1) We define “NM” as not meaningful for increases or decreases greater than 200%.
(2) For the nine months ended September 30, 2017 and 2016, net investment (gains) losses were adjusted for DAC and other intangible amortization and certain benefit reserves of $2 million and $(5) million, respectively.

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

Adjusted operating income available to Genworth Financial, Inc.’s common stockholders increased primarily driven by favorable equity market performance in the current year.

Revenues

Net investment income increased mainly driven by higher policy loan income in our corporate-owned life insurance products in the current year.

 

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Net investment gains in the current year were primarily related to gains on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by derivative losses. Net investment losses in the prior year were largely related to losses on embedded derivatives associated with our variable annuity products with GMWBs, partially offset by net gains from the sale of investment securities and derivative gains.

Benefits and expenses

Benefits and other changes in policy reserves decreased primarily attributable to lower GMDB reserves in our variable annuity products due to favorable equity market performance in the current year.

Interest credited increased largely related to higher cash values in our corporate-owned life insurance products in the current year.

Acquisition and operating expenses, net of deferrals, decreased largely driven by lower state guaranty fund assessments in the current year.

Amortization of DAC and intangibles decreased related to our variable annuity products principally from favorable equity market performance in the current year.

Provision for income taxes. The effective tax rate increased to 30.4% for the nine months ended September 30, 2017 from 12.1% for the nine months ended September 30, 2016. The increase in the effective tax rate was primarily attributable to tax favored investments in relation to pre-tax results in the current year compared to the prior year.

 

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

(Amounts in millions)

       2017             2016         2017     2016  

Variable Annuities—Income Distribution Series (1)

        

Account value, beginning of period

   $ 4,526     $ 4,849     $ 4,581     $ 4,942  

Deposits

     5     6     13     17

Surrenders, benefits and product charges

     (132     (151     (425     (431
  

 

 

   

 

 

   

 

 

   

 

 

 

Net flows

     (127     (145     (412     (414

Interest credited and investment performance

     98     90     328     266
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value, end of period

   $ 4,497     $ 4,794     $ 4,497     $ 4,794  
  

 

 

   

 

 

   

 

 

   

 

 

 

Traditional Variable Annuities

        

Account value, net of reinsurance, beginning of period

   $ 1,149     $ 1,177     $ 1,167     $ 1,241  

Deposits

     2     2     6     6

Surrenders, benefits and product charges

     (52     (47     (162     (154
  

 

 

   

 

 

   

 

 

   

 

 

 

Net flows

     (50     (45     (156     (148

Interest credited and investment performance

     41     49     129     88
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value, net of reinsurance, end of period

   $ 1,140     $ 1,181     $ 1,140     $ 1,181  
  

 

 

   

 

 

   

 

 

   

 

 

 

Variable Life Insurance

        

Account value, beginning of period

   $ 295     $ 283     $ 283     $ 291  

Deposits

     1     1     5     5

Surrenders, benefits and product charges

     (10     (7     (27     (24
  

 

 

   

 

 

   

 

 

   

 

 

 

Net flows

     (9     (6     (22     (19

Interest credited and investment performance

     10     8     35     13
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value, end of period

   $ 296     $ 285     $ 296     $ 285  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 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.

We no longer solicit sales of our variable annuity or variable life insurance products; however, we continue to service our existing blocks of business and accept additional deposits on existing contracts and policies.

Variable Annuities—Income Distribution Series

Account value related to our Income Distribution Series products decreased compared to June 30, 2017 and December 31, 2016 primarily related to surrenders outpacing favorable equity market performance.

Traditional Variable Annuities

In our traditional variable annuities, the decrease in account values compared to June 30, 2017 and December 31, 2016 was primarily the result of surrenders outpacing favorable equity market performance.

 

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

(Amounts in millions)

   2017     2016     2017     2016  

GICs, FABNs and Funding Agreements

        

Account value, beginning of period

   $ 460     $ 561     $ 560     $ 410  

Deposits

     —         —         —         150

Surrenders and benefits

     (102     (2     (206     (4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net flows

     (102     (2     (206     146

Interest credited

     2     2     6     5
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value, end of period

   $ 360     $ 561     $ 360     $ 561  
  

 

 

   

 

 

   

 

 

   

 

 

 

Account value related to our institutional products decreased compared to June 30, 2017 and December 31, 2016 mainly attributable to scheduled maturities of certain products in the current year. Deposits in the prior year related to funding agreements for asset-liability management and yield enhancement.

Corporate and Other Activities

Results of operations

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:

 

     Three months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

     2017         2016       2017 vs. 2016  

Revenues:

        

Premiums

   $ 3     $ 2     $ 1       50 % 

Net investment income

     4     1     3     NM (1) 

Net investment gains (losses)

     (7     (9     2     22 % 

Policy fees and other income

     1     (1     2     200 % 
  

 

 

   

 

 

   

 

 

   

Total revenues

     1     (7     8     114 % 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     2     1     1     100 % 

Acquisition and operating expenses, net of deferrals

     19     11     8     73 % 

Amortization of deferred acquisition costs and intangibles

     2     1     1     100 % 

Interest expense

     63     67     (4     (6 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     86     80     6     8 %  
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations before income taxes

     (85     (87     2     2 %  

Provision (benefit) for income taxes

     (23     246     (269     (109 )% 
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations

     (62     (333     271     81 % 

Adjustments to loss from continuing operations:

        

Net investment (gains) losses

     7     9     (2     (22 )% 

Taxes on adjustments

     (3     (3     —         —   % 
  

 

 

   

 

 

   

 

 

   

Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

   $ (58   $ (327   $ 269       82 % 
  

 

 

   

 

 

   

 

 

   

 

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

 

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Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders decreased primarily related to tax charges of $265 million in the prior year that did not recur and lower interest expense in the current year, partially offset by unfavorable tax charges related to prior period tax returns recorded in the third quarter of 2017.

Revenues

Net investment income increased primarily related to higher yields in the current year.

The decrease in net investment losses was primarily related to lower losses from derivatives in the current year.

Benefits and expenses

Acquisition and operating expenses, net of deferrals, increased mainly driven by higher consulting fees in the current year.

Interest expense decreased largely driven by a contractual change in our junior subordinated notes related to an interest rate change from fixed to floating rates in the current year.

The income tax benefit in the current year was principally from lower taxed foreign income. The income tax provision in the prior year was largely attributable to a valuation allowance of $265 million recorded on deferred tax assets that did not recur.

 

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Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following table sets forth the results of operations relating to Corporate and Other activities for the periods indicated:

 

     Nine months ended
September 30,
    Increase
(decrease) and
percentage
change
 

(Amounts in millions)

     2017         2016       2017 vs. 2016  

Revenues:

        

Premiums

   $ 6     $ 11     $ (5     (45 )% 

Net investment income

     5     4     1     25 % 

Net investment gains (losses)

     (31     (88     57     65 % 

Policy fees and other income

     (2     76     (78     (103 )% 
  

 

 

   

 

 

   

 

 

   

Total revenues

     (22     3     (25     NM (1) 
  

 

 

   

 

 

   

 

 

   

Benefits and expenses:

        

Benefits and other changes in policy reserves

     3     4     (1     (25 )% 

Acquisition and operating expenses, net of deferrals

     47     173     (126     (73 )% 

Amortization of deferred acquisition costs and intangibles

     2     1     1     100 % 

Interest expense

     179     205     (26     (13 )% 
  

 

 

   

 

 

   

 

 

   

Total benefits and expenses

     231     383     (152     (40 )% 
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations before income taxes

     (253     (380     127     33 % 

Provision (benefit) for income taxes

     (85     119     (204     (171 )% 
  

 

 

   

 

 

   

 

 

   

Loss from continuing operations

     (168     (499     331     66 % 

Adjustments to loss from continuing operations:

        

Net investment (gains) losses

     31     88     (57     (65 )% 

(Gains) losses on sale of businesses

     —         (2     2     100 % 

(Gains) losses on early extinguishment of debt

     —         (48     48     100 % 

Expenses related to restructuring

     1     2     (1     (50 )% 

Fees associated with bond consent solicitation

     —         18     (18     (100 )% 

Taxes on adjustments

     (11     (43     32     74 % 
  

 

 

   

 

 

   

 

 

   

Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

   $ (147   $ (484   $ 337       70 % 
  

 

 

   

 

 

   

 

 

   

 

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

Adjusted operating loss available to Genworth Financial, Inc.’s common stockholders

The adjusted operating loss available to Genworth Financial, Inc.’s common stockholders decreased primarily related to tax charges of $265 million in the prior year that did not recur and lower operating and interest expense in the current year.

Revenues

Premiums decreased largely related to the sale of our European mortgage insurance business in May 2016.

The decrease in net investment losses was primarily related to a $64 million loss from the write-off of our residual interest in certain policy loan securitization entities in the prior year that did not recur and from lower derivative losses in the current year. These decreases were partially offset by net losses from the sale of investment securities in the current year compared to net gains in the prior year.

 

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Policy fees and other income in the prior year included a gain of $64 million from the early extinguishment of debt related to the redemption of a securitization entity and a gain of $11 million attributable to the sale of assets to Pac Life that did not recur.

Benefits and expenses

Acquisition and operating expenses, net of deferrals, decreased mainly driven by expenses in the prior year that did not recur. The prior year expenses included $79 million of a litigation settlement and related legal expenses, $20 million of expenses related to the early redemption of debt, $18 million of bond consent fees and a $9 million loss related to the sale of our European mortgage insurance business. These decreases were partially offset by higher consulting fees in the current year.

Interest expense decreased largely driven by a favorable correction of $11 million related to our Tax Matters Agreement liability and a contractual change in our junior subordinated notes related to an interest rate change from fixed to floating rates.

The income tax benefit in the current year was principally from lower taxed foreign income. The income tax provision in the prior year was largely attributable to a valuation allowance of $265 million recorded on deferred tax assets that did not recur.

Investments and Derivative Instruments

Trends and conditions

Investments—credit and investment markets

During the third quarter of 2017, the U.S. Federal Reserve announced that it would begin to normalize monetary policy and scale back quantitative easing. Interest rates remain at historically low levels despite the fact the U.S. Federal Reserve has raised its benchmark lending rate two times in 2017 and market expectations remain for one additional rate increase during 2017. Despite the Federal Reserve’s actions, U.S. Treasury yields remained lower throughout the third quarter of 2017 but rose significantly in the last week of September 2017, in response to potential tax reform. However, pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates. The U.S. equity markets increased and credit spreads tightened during the third quarter of 2017. Spreads initially widened when geopolitical issues and natural disasters arose, but quickly tightened driven by both positive economic data and corporate profits. U.S. fixed income markets saw reduced issuances, but demand from foreign and domestic investors continued to support valuations. Global equity markets were generally higher and the economies of the Eurozone countries continue to improve.

As of September 30, 2017, our fixed maturities securities portfolio, which was 96% investment grade, comprised 86% of our total investment portfolio. Our $3.9 billion energy portfolio was predominantly investment grade and our metals and mining sector holdings were less than 1% of our total cash, cash equivalents and invested assets as of September 30, 2017. 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 in our derivatives portfolio arising from our counterparties’ right to terminate their bilateral over-the-counter (“OTC”) derivatives transactions with us following the downgrades of our life insurance subsidiaries by S&P in September 2017 and by Moody’s in October 2017. We notified our counterparties of the downgrades 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 (“CME”). Although some counterparties have indicated

 

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that they reserve their rights to take action against us, only one counterparty has done so. During October 2017, this counterparty terminated approximately $800 million notional with us, which we have re-hedged using financial futures. We also continue to discuss the downgrades with the other counterparties.

As of September 30, 2017, $14.2 billion notional of our derivatives portfolio 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 September 30, 2017, we posted initial margin of $314 million to our clearing agents, which represented approximately $77 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 and may be more easily terminated for other reasons. As of September 30, 2017, $5.9 billion notional of our derivatives portfolio was in bilateral OTC derivatives transactions pursuant to which we have posted aggregate independent amounts of $261 million and are holding collateral from counterparties in the amount of $187 million. We have notional of $3.7 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 is limited.

Investment results

The following tables set 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 September 30,     Increase (decrease)  

(Amounts in millions)

   2017     2016     2017 vs. 2016  
         Yield             Amount             Yield             Amount             Yield             Amount      

Fixed maturity securities—taxable

     4.5   $ 640       4.6   $ 655       (0.1 )%    $ (15

Fixed maturity securities—non-taxable

     3.7     3     3.7     3     —       —    

Commercial mortgage loans

     5.0     78     5.2     79     (0.2 )%      (1

Restricted commercial mortgage loans related to securitization entities

     10.5     3     7.4     3     3.1     —    

Equity securities

     5.1     9     5.8     8     (0.7 )%      1

Other invested assets

     61.6     39     24.7     34     36.9     5

Policy loans

     8.6     39     8.7     38     (0.1 )%      1

Cash, cash equivalents and short-term investments

     1.1     10     0.6     5     0.5     5
    

 

 

     

 

 

     

 

 

 

Gross investment income before expenses and fees

     4.7     821     4.7     825     —       (4

Expenses and fees

     (0.2 )%      (24     (0.1 )%      (20     (0.1 )%      (4
    

 

 

     

 

 

     

 

 

 

Net investment income

     4.5   $ 797       4.6   $ 805       (0.1 )%    $ (8
    

 

 

     

 

 

     

 

 

 

Average invested assets and cash

     $ 70,400       $ 69,825       $ 575  
    

 

 

     

 

 

     

 

 

 

 

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     Nine months ended September 30,     Increase (decrease)  
     2017     2016     2017 vs. 2016  

(Amounts in millions)

       Yield             Amount             Yield             Amount             Yield             Amount      

Fixed maturity securities—taxable

     4.5   $ 1,930       4.6   $ 1,930       (0.1 )%    $ —    

Fixed maturity securities—non-taxable

     3.7     9     3.6     9     0.1     —    

Commercial mortgage loans

     5.0     231     5.2     237     (0.2 )%      (6

Restricted commercial mortgage loans related to securitization entities

     7.8     7     7.2     8     0.6     (1

Equity securities

     5.1     26     5.7     20     (0.6 )%      6

Other invested assets

     45.7     106     24.0     105     21.7     1

Restricted other invested assets related to securitization entities

     1.1     1     1.1     3     —       (2

Policy loans

     9.0     120     8.6     107     0.4     13

Cash, cash equivalents and short-term investments

     1.0     26     0.5     16     0.5     10
    

 

 

     

 

 

     

 

 

 

Gross investment income before expenses and fees

     4.7     2,456       4.6     2,435       0.1     21

Expenses and fees

     (0.2 )%      (68     (0.1 )%      (62     (0.1 )%      (6
    

 

 

     

 

 

     

 

 

 

Net investment income

     4.5   $ 2,388       4.5   $ 2,373       —     $ 15  
    

 

 

     

 

 

     

 

 

 

Average invested assets and cash

     $ 70,018       $ 69,837       $ 181  
    

 

 

     

 

 

     

 

 

 

Yields are based on net investment income as reported under U.S. GAAP and are consistent with how the company measures its 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.

For the three months ended September 30, 2017, annualized weighted-average investment yields decreased primarily attributable to lower investment income on higher average invested assets. Net investment income included $7 million of lower favorable prepayment speed adjustments on structured securities and $4 million of lower bond call and prepayment income as compared to the prior year.

 

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

 

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

(Amounts in millions)

   2017     2016     2017     2016  

Available-for-sale securities:

        

Realized gains

   $ 40     $ 39     $ 177     $ 205  

Realized losses

     (10     (24     (55     (75
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     30     15     122     130
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (1     (2     (4     (35

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

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (1     (2     (4     (35
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     —         (4     1     40

Commercial mortgage loans

     1     (1     3     1

Net gains (losses) related to securitization entities

     1     2     5     (51

Derivative instruments

     54     10     93     (52

Contingent consideration adjustment

     —         —         —         (2
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 85     $ 20     $ 220     $ 31  
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

 

    We recorded $1 million of lower net other-than-temporary impairments during the three months ended September 30, 2017. The total impairments of $1 million and $2 million recorded during the three months ended September 30, 2017 and September 30, 2016, respectively, related to equity securities.

 

    Net investment gains related to derivatives of $54 million during the three months ended September 30, 2017 were primarily associated with various hedging programs that support our Canada Mortgage Insurance segment and hedging programs for our runoff variable annuity products. These gains were partially offset by losses related to hedging programs for our fixed indexed annuity products and derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries.

Net investment gains related to derivatives of $10 million during the three months ended September 30, 2016 were primarily associated with hedging programs for our runoff variable annuity products and gains related to hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business due to a decrease in long-term interest rates. These gains were partially offset by losses in derivatives used to hedge foreign currency risk associated with assets held and expected dividend payments from certain foreign subsidiaries.

 

    We recorded $15 million of higher net gains related to the sale of available-for-sale securities during the three months ended September 30, 2017. We also recorded $4 million of lower losses during the three months ended September 30, 2017 related to trading securities primarily from a decline in our trading portfolio in the current year.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

 

    We recorded $31 million of lower net other-than-temporary impairments during the nine months ended September 30, 2017. Of the total impairments recorded during the nine months ended September 30, 2017 and 2016, $1 million and $24 million, respectively, related to corporate securities, $1 million and $3 million, respectively, related to limited partnerships, and $2 million in each period related to equity securities. During the nine months ended September 30, 2016, we also recorded impairments of $4 million related to commercial mortgage loans.

 

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    Net investment gains related to derivatives of $93 million during the nine months ended September 30, 2017 were primarily associated with various hedging programs that support our Canada Mortgage Insurance segment and hedging programs for our runoff variable annuity products. These gains were partially offset by losses related to derivatives used to hedge foreign currency risk associated with expected dividend payments from certain foreign subsidiaries and losses from hedging programs for our fixed indexed annuity products.

Net investment losses related to derivatives of $52 million during the nine months ended September 30, 2016 were primarily associated with hedging programs for our runoff variable annuity products. We also had losses associated with hedging programs for our fixed indexed annuity products. These losses were partially offset by gains related to hedge ineffectiveness from our cash flow hedge programs for our long-term care insurance business.

 

    We recorded $8 million of lower net gains related to the sale of available-for-sale securities during the nine months ended September 30, 2017. We also recorded $39 million of lower net gains related to trading securities during the nine months ended September 30, 2017 principally from a decline in our trading portfolio in the current year. We recorded $5 million of gains during the nine months ended September 30, 2017 compared to $51 million of losses related to securitization entities during the nine months ended September 30, 2016 primarily related to a $64 million loss from the write-off of our residual interest in certain policy loan securitization entities in the prior year that did not recur.

Investment portfolio

The following table sets forth our cash, cash equivalents and invested assets as of the dates indicated:

 

     September 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying value      % of total     Carrying value      % of total  

Fixed maturity securities, available-for-sale:

          

Public

   $ 45,882        61   $ 45,131        61

Private

     16,670        22     15,441        21

Equity securities, available-for-sale

     765      1     632      1

Commercial mortgage loans

     6,268        8     6,111        8

Restricted commercial mortgage loans related to securitization entities

     111      —         129      —    

Policy loans

     1,818        2     1,742        2

Other invested assets

     1,590        2     2,071        3

Restricted other invested assets related to securitization entities

     —          —         312      —    

Cash and cash equivalents

     2,836        4     2,784        4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total cash, cash equivalents and invested assets

   $ 75,940        100   $ 74,353        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 September 30, 2017, approximately 7% of our investment holdings recorded at fair value were 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 September 30, 2017, the amortized cost or cost, gross unrealized gains (losses) and fair value of our fixed maturity and equity securities classified as available-for-sale were as follows:

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

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

Fixed maturity securities:

           

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

  $ 4,893     $ 784     $ —       $ (7   $ —       $ 5,670  

State and political subdivisions

    2,639       247     —         (26     —         2,860  

Non-U.S. government (1)

    2,143       107     —         (24     —         2,226  

U.S. corporate:

           

Utilities

    4,382       556     —         (15     —         4,923  

Energy

    2,243       207     —         (10     —         2,440  

Finance and insurance

    6,051       547     —         (11     —         6,587  

Consumer—non-cyclical

    4,330       508     —         (10     —         4,828  

Technology and communications

    2,558       193     —         (11     —         2,740  

Industrial

    1,247       102     —         (3     —         1,346  

Capital goods

    2,067       263     —         (9     —         2,321  

Consumer—cyclical

    1,506       111     —         (6     —         1,611  

Transportation

    1,188       124     —         (6     —         1,306  

Other

    358     24     —         (2     —         380
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate (1)

    25,930       2,635       —         (83     —         28,482  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    1,022       45     —         (5     —         1,062  

Energy

    1,330       140     —         (7     —         1,463  

Finance and insurance

    2,524       177     —         (5     —         2,696  

Consumer—non-cyclical

    692     27     —         (3     —         716

Technology and communications

    945     71     —         (2     —         1,014  

Industrial

    979     81     —         (2     —         1,058  

Capital goods

    556     33     —         (2     —         587

Consumer—cyclical

    518     10     —         (1     —         527

Transportation

    650     71     —         (3     —         718

Other

    2,594       193     —         (5     —         2,782  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate (1)

    11,810       848     —         (35     —         12,623  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed (2)

    3,950       255     14     (10     —         4,209  

Commercial mortgage-backed

    3,346       105     2     (39     —         3,414  

Other asset-backed (2)

    3,052       20     1     (5     —         3,068  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,763       5,001       17     (229     —         62,552  

Equity securities

    720     59     —         (14     —         765
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 58,483     $ 5,060     $ 17     $ (243   $ —       $ 63,317  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Fair value included European periphery exposure of $523 million in Ireland, $266 million in Spain, $116 million in Italy and $38 million in Portugal.
(2) Fair value included $38 million collateralized by Alt-A residential mortgage loans and $27 million collateralized by sub-prime residential mortgage loans.

 

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As of December 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

  $ 5,439     $ 647     $ —       $ (50   $ —       $ 6,036  

State and political subdivisions

    2,515       182     —         (50     —         2,647  

Non-U.S. government (1)

    2,024       101     —         (18     —         2,107  

U.S. corporate:

           

Utilities

    4,137       454     —         (41     —         4,550  

Energy

    2,167       157     —         (24     —         2,300  

Finance and insurance

    5,719       424     —         (46     —         6,097  

Consumer—non-cyclical

    4,335       433     —         (34     —         4,734  

Technology and communications

    2,473       157     —         (32     —         2,598  

Industrial

    1,161       76     —         (14     —         1,223  

Capital goods

    2,043       228     —         (13     —         2,258  

Consumer—cyclical

    1,455       92     —         (17     —         1,530  

Transportation

    1,121       86     —         (17     —         1,190  

Other

    332     17     —         (1     —         348
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate (1)

    24,943       2,124       —         (239     —         26,828  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    940     40     —         (11     —         969

Energy

    1,234       109     —         (12     —         1,331  

Finance and insurance

    2,413       134     —         (9     —         2,538  

Consumer—non-cyclical

    711     17     —         (14     —         714

Technology and communications

    953     44     —         (10     —         987

Industrial

    928     39     —         (9     —         958

Capital goods

    518     21     —         (4     —         535

Consumer—cyclical

    434     10     —         (2     —         442

Transportation

    619     65     —         (7     —         677

Other

    2,967       190     —         (13     —         3,144  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate (1)

    11,717       669     —         (91     —         12,295  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed (2)

    4,122       259     10     (12     —         4,379  

Commercial mortgage-backed

    3,084       98     3     (56     —         3,129  

Other asset-backed (2)

    3,170       15     1     (35     —         3,151  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    57,014       4,095       14     (551     —         60,572  

Equity securities

    628     31     —         (27     —         632
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 57,642     $ 4,126     $ 14     $ (578   $ —       $ 61,204  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Fair value included European periphery exposure of $447 million in Ireland, $231 million in Spain, $95 million in Italy and $16 million in Portugal.
(2) Fair value included $43 million collateralized by Alt-A residential mortgage loans and $26 million collateralized by sub-prime residential mortgage loans.

Fixed maturity securities increased $2.0 billion, compared to December 31, 2016, principally from higher net unrealized gains attributable to a decrease in treasury yields as well as changes in foreign exchange rates from the weakening of the U.S. dollar in the current year.

 

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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 diversify our U.S. corporate fixed maturity securities with European bonds denominated in U.S. dollars. During the nine months ended September 30, 2017, our exposure to the peripheral European countries increased by $154 million to $943 million with unrealized gains of $72 million. Our exposure as of September 30, 2017 was diversified with direct exposure to local economies of $199 million, indirect exposure through debt issued by subsidiaries outside of the European periphery of $141 million and exposure to multinational companies where the majority of revenues come from outside of the country of domicile of $603 million.

Commercial mortgage loans

The following tables set forth additional information regarding our commercial mortgage loans as of the dates indicated:

 

     September 30, 2017  

(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

   $ 457        266      28 %    $ —          —    

2005

     428      128      41 %      6      1

2006

     392      101      47 %      —          —    

2007

     314      81      49 %      —          —    

2008

     131      25      51 %      —          —    

2009

     —          —          —   %      —          —    

2010

     77      15      42 %      —          —    

2011

     208      47      43 %      —          —    

2012

     564      85      45 %      —          —    

2013

     740      132      49 %      —          —    

2014

     848      141      54 %      —          —    

2015

     913      142      62 %      —          —    

2016

     605      100      61 %      —          —    

2017

     604      108      68 %      —          —    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

   $ 6,281        1,371        52 %    $ 6        1
  

 

 

    

 

 

      

 

 

    

 

 

 

 

(1) Represents weighted-average loan-to-value as of September 30, 2017.

 

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     December 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

             

2004 and prior

   $ 521        304      31 %    $ —          —    

2005

     469      135      43 %      —          —    

2006

     434      105      52 %      15      1

2007

     452      126      54 %      1      1

2008

     135      25      54 %      —          —    

2009

     —          —          —   %      —          —    

2010

     89      17      48 %      —          —    

2011

     215      47      47 %      —          —    

2012

     588      88      52 %      —          —    

2013

     781      136      54 %      —          —    

2014

     892      147      61 %      —          —    

2015

     932      143      65 %      —          —    

2016

     617      100      69 %      —          —    
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

   $ 6,125        1,373        55 %    $ 16        2
  

 

 

    

 

 

      

 

 

    

 

 

 

 

(1) Represents weighted-average loan-to-value as of December 31, 2016.

Other invested assets

The following table sets forth the carrying values of our other invested assets as of the dates indicated:

 

     September 30, 2017     December 31, 2016  

(Amounts in millions)

   Carrying value      % of total     Carrying value      % of total  

Short-term investments

   $ 787        49   $ 352        17

Derivatives

     261      16     708      34

Limited partnerships

     244      15     199      10

Securities lending collateral

     237      15     534      25

Trading securities

     —          —         259      13

Other investments

     61      5     19      1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other invested assets

   $ 1,590        100   $ 2,071        100
  

 

 

    

 

 

   

 

 

    

 

 

 

Derivatives decreased primarily attributable to recent central clearing parties rule changes impacting our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract. Securities lending collateral decreased driven by market demand. Our investments in trading securities decreased from higher net sales. Short-term investments increased principally from higher net purchases in our Australia Mortgage Insurance and U.S. Life Insurance segments in the current year.

 

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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,
2016
     Additions      Maturities/
terminations
    September 30,
2017
 

Derivatives designated as hedges

             

Cash flow hedges:

             

Interest rate swaps

     Notional      $ 11,570      $ —        $ (306   $ 11,264  

Foreign currency swaps

     Notional        22      —          —         22
     

 

 

    

 

 

    

 

 

   

 

 

 

Total cash flow hedges

        11,592        —          (306     11,286  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives designated as hedges

        11,592        —          (306     11,286  
     

 

 

    

 

 

    

 

 

   

 

 

 

Derivatives not designated as hedges

             

Interest rate swaps

     Notional        4,679        —          —         4,679  

Foreign currency swaps

     Notional        201      95      (14     282

Credit default swaps

     Notional        39      —          —         39

Credit default swaps related to securitization entities

     Notional        312      —          (200     112

Equity index options

     Notional        2,396        1,584        (1,484     2,496  

Financial futures

     Notional        1,398        4,300        (4,376     1,322  

Equity return swaps

     Notional        165      186      (258     93

Other foreign currency contracts

     Notional        3,130        2,163        (691     4,602  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives not designated as hedges

        12,320        8,328        (7,023     13,625  
     

 

 

    

 

 

    

 

 

   

 

 

 

Total derivatives

      $ 23,912      $ 8,328      $ (7,329   $ 24,911  
     

 

 

    

 

 

    

 

 

   

 

 

 

(Number of policies)

   Measurement      December 31,
2016
     Additions      Maturities/
terminations
    September 30,
2017
 

Derivatives not designated as hedges

             

GMWB embedded derivatives

     Policies        33,238        —          (2,127     31,111  

Fixed index annuity embedded derivatives

     Policies        17,549        —          (367     17,182  

Indexed universal life embedded derivatives

     Policies        1,074        1      (66     1,009  

The $1.0 billion increase in the notional value of derivatives was attributable to an increase in our non-qualified foreign currency interest rate swaps related to a non-qualified derivative strategy to mitigate interest rate risk associated with our regulatory capital position.

The number of policies related to our GMWB embedded derivatives decreased as variable annuity products are no longer being offered.

 

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Consolidated Balance Sheets

Total assets. Total assets decreased $29 million from $104,658 million as of December 31, 2016 to $104,629 million as of September 30, 2017.

 

    Cash and cash equivalents and invested assets increased $1,587 million primarily from an increase of $1,980 million in fixed maturity securities and an increase of $157 million in commercial mortgage loans. The increase in fixed maturity securities was predominantly related to a decrease in treasury yields and from the weakening of the U.S. dollar compared to the balance sheet rate at December 31, 2016. The increase in equity securities was primarily related to higher unrealized gains on preferred securities and from purchases mostly in our Canada and Australia mortgage insurance businesses. These increases were partially offset by a decrease of $481 million in other invested assets mostly related to derivative assets, securities lending and trading securities. The decrease in derivative assets was principally driven by recent central clearing parties rule changes impacting our accounting treatment for variation margin pertaining to cleared swap positions, which was previously considered cash collateral and is now treated as daily settlements of the derivative contract. The change reduced the value of our derivative assets by $509 million in the third quarter of 2017. The increase was also partially offset by a decrease of $312 million in restricted other invested assets related to securitization entities driven mostly by proceeds from sales and maturities, as we reposition these assets in connection with the maturity of the associated liabilities.

 

    DAC decreased $1,229 million predominantly related to our long-term care insurance business. We are required to analyze the impacts from net unrealized investment gains and losses on our available-for-sale investment securities backing insurance liabilities, as if those unrealized investment gains and losses were realized. As of September 30, 2017, due primarily to the decline in interest rates increasing unrealized investments gains, we reduced the DAC balance of our long-term care insurance business to zero, a cumulative decrease in the accumulated effect of net unrealized investment (gains) losses of approximately $1.3 billion, with an offsetting amount recorded in other comprehensive income (loss). The decrease was also attributable to lower deferrals driven mostly by lower production in our U.S. Life Insurance segment in the current year. See note 7 in our unaudited condensed consolidated financial statements under “Item 1—Financial Statements” for additional information related to DAC.

 

    Reinsurance recoverable decreased $202 million mainly attributable to the runoff of our structured settlement products ceded to Union Fidelity Life Insurance Company, an affiliate of our former parent, GE.

 

    Other assets decreased $121 million principally from lower derivative collateral receivable primarily due to the change described above within other invested assets related to variation margin.

Total liabilities. Total liabilities decreased $649 million from $90,191 million as of December 31, 2016 to $89,542 million as of September 30, 2017.

 

    Future policy benefits increased $959 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. In addition, as discussed above, due primarily to the decline in interest rates increasing unrealized investments gains, we reduced the DAC balance of our long-term care insurance business to zero and established additional reserves of $333 million, with an offsetting amount recorded in other comprehensive income (loss).

 

    Policyholder account balances decreased $1,131 million largely as a result of surrenders and benefits in our fixed annuities business and from scheduled maturities of certain institutional products in the current year.

 

   

Other liabilities decreased $914 million largely driven by lower securities lending liabilities and derivative counterparty collateral as a result of changes in the interest rate environment, along with

 

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lower derivative liabilities primarily from the change described above within other invested assets related to variation margin, which reduced our derivative liabilities by $274 million. The decrease was also attributable to lower tax liabilities principally related to our Tax Matters Agreement liability in the current year. These decreases were partially offset by an increase in amounts due to broker mostly related to unsettled trade activity in the current year.

Total equity. Total equity increased $620 million from $14,467 million as of December 31, 2016 to $15,087 million as of September 30, 2017.

 

    We reported net income available to Genworth Financial, Inc.’s common stockholders of $464 million during the nine months ended September 30, 2017.

 

    Foreign currency translation and other adjustments increased $128 million principally from the weakening of the U.S. dollar compared to the currencies in Canada and Australia in the current year.

 

    Noncontrolling interests increased $195 million predominantly related to net income attributable to noncontrolling interest of $198 million and foreign currency translation adjustments of $133 million, partially offset by dividends to noncontrolling interests of $92 million and from the repurchase of shares of $31 million 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 nine months ended September 30:

 

(Amounts in millions)

   2017      2016  

Net cash from operating activities

   $ 1,932      $ 1,798  

Net cash used by investing activities

     (678      (2,050

Net cash used by financing activities

     (1,270      (2,699
  

 

 

    

 

 

 

Net decrease in cash before foreign exchange effect

   $ (16    $ (2,951
  

 

 

    

 

 

 

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 other capital transactions.

We had higher cash inflows from operating activities during the current year mainly attributable to higher net sales of trading securities as well as higher amounts paid in the prior year related to a reinsurance agreement in our life insurance business that did not recur. These amounts were partially offset by cash outflows in the current year compared to cash inflows in the prior year as a result of the change in collateral related to derivative positions.

 

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We had lower cash outflows from investing activities primarily from lower purchases and higher maturities of fixed maturity securities in the current year. These amounts were partially offset by lower sales of fixed maturity securities as well as higher net purchases of short-term investments primarily from the decision to manage the interest rate risk and reposition our portfolios, particularly in our Australian mortgage insurance business in the current year.

We had lower cash outflows from financing activities during the current year primarily from prior year transactions that did not recur, consisting of the redemption of $1,620 million of non-recourse funding obligations and the repayment and repurchase of $326 million of Genworth Holdings’ senior notes, partially offset by higher net withdrawals from our investment contracts 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.

We previously had a repurchase program in which we sold an investment security at a specified price and agreed to repurchase that security at another specified price at a later date. In 2017 we repaid $75 million, the entire amount due at maturity related to these repurchase agreements.

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 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 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.

 

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Genworth Holdings had $754 million and $998 million of cash and cash equivalents, which included approximately $52 million and $85 million of restricted assets, comprised primarily of cash and cash equivalents, as of September 30, 2017 and December 31, 2016, respectively. Genworth Holdings also held $75 million and $100 million in U.S. government securities as of September 30, 2017 and December 31, 2016, respectively.

During the nine months ended September 30, 2017 and 2016, we received common stock dividends from our international subsidiaries of $119 million and $250 million, respectively. Dividends in 2017 included $16 million from our participation in the share buyback programs in Genworth Mortgage Insurance Australia Limited (“Genworth Australia”) and Genworth Canada, as discussed below. Dividends in 2016 included $76 million for our portion of the AUD$202 million capital reduction in Genworth Australia in the second quarter of 2016.

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 us, 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. Products having liabilities with longer durations, such as certain life insurance and long-term care insurance policies, are matched with investments having similar duration such as long-term fixed maturity securities and commercial mortgage loans. Shorter-term 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 September 30, 2017, our total cash, cash equivalents and invested assets were $75.9 billion. Our investments in privately placed fixed maturity securities, commercial mortgage loans, policy loans, limited partnership investments and select mortgage-backed and asset-backed securities are relatively illiquid. These asset classes represented approximately 33% of the carrying value of our total cash, cash equivalents and invested assets as of September 30, 2017.

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. The reinsurance transactions covering our 2014 through 2017 book years provided an aggregate of approximately $510 million of PMIERs capital credit as of September 30, 2017. Our U.S. mortgage insurance business may execute future capital transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements given the dynamic nature of asset valuations and requirement changes over time. These future capital transactions could include additional reinsurance transactions and contributions of holding company cash.

 

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In August 2017, Genworth Australia announced its intention to commence an on-market share buy-back program for shares up to a maximum aggregate amount of AUD$100 million. The total number of shares to be purchased by Genworth Australia under the program depends on business and market conditions, the prevailing share price, market volumes and other considerations. Pursuant to the program, in August 2017 and September 2017, Genworth Australia repurchased approximately 15.1 million of its shares for AUD$45 million. As the majority shareholder, we participated in on-market sales transactions during the buy-back period to maintain our ownership position of approximately 52.0% and received $18 million in cash. Of the $18 million of cash proceeds received, $4 million was paid as a dividend to Genworth Holdings in the third quarter of 2017 and we expect the remaining amount of $14 million to be paid to Genworth Holdings as a dividend in the fourth quarter of 2017.

In May 2017, 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 through May 4, 2018, up to an aggregate of approximately 4.6 million of its issued and outstanding common shares. In August 2017 and September 2017, Genworth Canada repurchased approximately 1.1 million of its shares for CAD$40 million through the NCIB. We participated in the NCIB in order to maintain our ownership position at its current level of approximately 57.1% and received $18 million in cash. Of the $18 million of cash proceeds received, $12 million was paid as dividends to Genworth Holdings in the third quarter of 2017 and $6 million was retained by GMICO.

Capital resources and financing activities

On September 29, 2017, Genworth Canada, our majority-owned subsidiary, entered into a CAD$200 million syndicated senior unsecured revolving credit facility, which matures on September 29, 2022. Any borrowings under Genworth Canada’s credit facility will bear interest at a rate per annum equal to, at the option of Genworth Canada, either a fixed rate or a variable rate pursuant to the terms of the credit agreement. The credit facility includes customary representations, warranties, covenants, terms and conditions. This syndicated credit facility replaced an existing CAD$100 million senior unsecured revolving credit facility which was cancelled on September 29, 2017. As of September 30, 2017, there was no amount outstanding under Genworth Canada’s credit facility and all of the covenants were fully met.

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 if necessary, sales of assets, as described below, 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 September 30, 2017, Genworth Holdings was above this target due in part to intercompany tax payments of approximately $300 million received from its subsidiaries in 2016. Subject to the completion of the China Oceanwide transaction, China Oceanwide has committed in the Merger Agreement to contribute $600 million of cash to us to address our debt maturing in May 2018, on or before its maturity. We will continue to evaluate our target level of liquidity as circumstances warrant and may move above or below the target for a period of time given 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. We are currently reviewing potential refinancing options, which may include secured indebtedness, to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed in a timely manner or at all. We could also utilize holding company cash and/or pursue potential asset sales to address upcoming debt maturities in the event the transaction with China Oceanwide cannot be completed. In the absence of the transaction with China Oceanwide or a refinancing alternative, we believe we would need to pursue asset sales to address our debt maturities, including potential sales of our mortgage insurance businesses in

 

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Canada and/or Australia. We are also evaluating options to insulate our U.S. mortgage insurance business from additional ratings pressure, including a potential partial sale, in the event the transaction with China Oceanwide cannot be completed. 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 2016 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 2016 Annual Report on Form 10-K filed on February 27, 2017.

Securitization Entities

There were no off-balance sheet securitization transactions during the nine months ended September 30, 2017 or 2016.

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. Except as disclosed below, there were no other material changes in our market risks since December 31, 2016.

Interest rates remain at historically low levels despite the fact the U.S. Federal Reserve has raised its benchmark lending rate two times in 2017 and market expectations remain for an additional rate increase during 2017. Despite the Federal Reserve’s actions, U.S. Treasury yields were lower throughout the third quarter of 2017 but rose significantly in the last week of September 2017, in response to potential tax reform. However, pro-growth stimulus policies are still uncertain and weaker inflation data has investors more cautious on the direction of longer term interest rates. 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.

We are exposed to foreign currency exchange risks associated with fluctuations in foreign currency exchange rates against the U.S. dollar resulting from our international operations and non-U.S.-denominated securities. Our primary international operations are located in Canada and Australia. The assets and liabilities of our international operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date, while revenues and expenses of our international operations are translated into U.S. dollars at the average rates of exchange during the period of the transaction. In general, the weakening of the U.S. dollar results in higher levels of reported assets, liabilities, revenues and net income (loss). As of September 30, 2017, the U.S. dollar weakened against the currencies in Canada and Australia compared to the balance sheet rate as of December 31, 2016. In the third quarter of 2017, the U.S. dollar weakened against the currencies in Canada and Australia compared to the average rate in the third quarter of 2016. 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.

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of September 30, 2017, 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 September 30, 2017.

Changes in Internal Control Over Financial Reporting During the Quarter Ended September 30, 2017

During the three months ended September 30, 2017, 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.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

See note 11 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 2016 Annual Report on Form 10-K, which together 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 filing as of September 30, 2017.

 

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Item 6. Exhibits

 

Number

  

Description

    2.1    Waiver and Agreement, dated as of August  21, 2017, among Genworth Financial, Inc., Asia Pacific Global Capital Co., Ltd., and Asia Pacific Global Capital USA Corporation (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on August 21, 2017)
  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

 

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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: November 3, 2017    
  By:  

/S/    Matthew D. Farney         

   

Matthew D. Farney

Vice President and Controller

(Principal Accounting Officer)

 

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