10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2016

OR

 

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

For the transition period from                      to                     

Commission file number 001-32195

 

 

 

 

LOGO

GENWORTH FINANCIAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   80-0873306

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

6620 West Broad Street

Richmond, Virginia

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

(804) 281-6000

(Registrant’s Telephone Number, Including Area Code)

 

 

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

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

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

 

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

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

As of July 27, 2016, 498,336,235 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 June  30, 2016 (Unaudited) and December 31, 2015

     3   

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015 (Unaudited)

     4   

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 (Unaudited)

     5   

Condensed Consolidated Statements of Changes in Equity for the six months ended June 30, 2016 and 2015 (Unaudited)

     6   

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (Unaudited)

     7   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      94   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      177   

Item 4.

  Controls and Procedures      179   

PART II—OTHER INFORMATION

     179   

Item 1.

  Legal Proceedings      179   

Item 1A.

  Risk Factors      179   

Item 6.

  Exhibits      180   

Signatures

     181   

 

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)

 

     June 30,
2016
    December 31,
2015
 
     (Unaudited)        

Assets

    

Investments:

    

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

   $ 62,828     $ 58,197  

Equity securities available-for-sale, at fair value

     481       310  

Commercial mortgage loans

     6,121       6,170  

Restricted commercial mortgage loans related to securitization entities

     141       161  

Policy loans

     1,754       1,568  

Other invested assets

     2,510       2,309  

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

     312       413  
  

 

 

   

 

 

 

Total investments

     74,147       69,128  

Cash and cash equivalents

     3,457       5,965  

Accrued investment income

     601       653  

Deferred acquisition costs

     4,046       4,398  

Intangible assets and goodwill

     267       357  

Reinsurance recoverable

     17,564       17,245  

Other assets

     640       520  

Deferred tax asset

     —          155  

Separate account assets

     7,484       7,883  

Assets held for sale

     —          127  
  

 

 

   

 

 

 

Total assets

   $ 108,206     $ 106,431  
  

 

 

   

 

 

 

Liabilities and equity

    

Liabilities:

    

Future policy benefits

   $ 37,154     $ 36,475  

Policyholder account balances

     26,182       26,209  

Liability for policy and contract claims

     8,289       8,095  

Unearned premiums

     3,412       3,308  

Other liabilities ($4 and $46 of other liabilities are related to securitization entities)

     3,197       3,004  

Borrowings related to securitization entities ($11 and $81 are at fair value)

     85       179  

Non-recourse funding obligations

     310       1,920  

Long-term borrowings

     4,191       4,570  

Deferred tax liability

     893       24  

Separate account liabilities

     7,484       7,883  

Liabilities held for sale

     —          127  
  

 

 

   

 

 

 

Total liabilities

     91,197       91,794  
  

 

 

   

 

 

 

Commitments and contingencies

    

Equity:

    

Class A common stock, $0.001 par value; 1.5 billion shares authorized; 587 million and 586 million shares issued as of June 30, 2016 and December 31, 2015, respectively; 498 million shares outstanding as of June 30, 2016 and December 31, 2015

     1       1  

Additional paid-in capital

     11,955       11,949  
  

 

 

   

 

 

 

Accumulated other comprehensive income (loss):

    

Net unrealized investment gains (losses):

    

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

     2,770       1,236  

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

     19       18  
  

 

 

   

 

 

 

Net unrealized investment gains (losses)

     2,789       1,254  
  

 

 

   

 

 

 

Derivatives qualifying as hedges

     2,439       2,045  

Foreign currency translation and other adjustments

     (140     (289
  

 

 

   

 

 

 

Total accumulated other comprehensive income (loss)

     5,088       3,010  

Retained earnings

     789       564  

Treasury stock, at cost (88 million shares as of June 30, 2016 and December 31, 2015)

     (2,700     (2,700
  

 

 

   

 

 

 

Total Genworth Financial, Inc.’s stockholders’ equity

     15,133       12,824  

Noncontrolling interests

     1,876       1,813  
  

 

 

   

 

 

 

Total equity

     17,009       14,637  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 108,206     $ 106,431  
  

 

 

   

 

 

 

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
June 30,
    Six months ended
June 30,
 
       2016         2015       2016     2015  

Revenues:

        

Premiums

   $ 1,127     $ 1,134     $ 1,921     $ 2,277  

Net investment income

     779       793       1,568       1,574  

Net investment gains (losses)

     30       8       11       (8

Policy fees and other income

     300       222       521       449  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     2,236       2,157       4,021       4,292  
  

 

 

   

 

 

   

 

 

   

 

 

 

Benefits and expenses:

        

Benefits and other changes in policy reserves

     1,193       1,232       2,053       2,424  

Interest credited

     173       181       350       361  

Acquisition and operating expenses, net of deferrals

     327       295       721       562  

Amortization of deferred acquisition costs and intangibles

     112       101       211       196  

Interest expense

     80       103       185       210  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     1,885       1,912       3,520       3,753  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     351       245       501       539  

Provision for income taxes

     110       70       133       161  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     241       175       368       378  

Loss from discontinued operations, net of taxes

     (21     (314     (40     (313
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     220       (139     328       65  

Less: net income attributable to noncontrolling interests

     48       54       103       104  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 172     $ (193   $ 225     $ (39
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.39     $ 0.24     $ 0.53     $ 0.55  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.39     $ 0.24     $ 0.53     $ 0.55  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic

   $ 0.35     $ (0.39   $ 0.45     $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.34     $ (0.39   $ 0.45     $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic

     498.5       497.4       498.3       497.2  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     500.4       499.3       499.9       499.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Supplemental disclosures:

        

Total other-than-temporary impairments

   $ (22   $ —        $ (33   $ (3

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

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (22     —          (33     (3

Other investments gains (losses)

     52       8       44       (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net investment gains (losses)

   $ 30     $ 8     $ 11     $ (8
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in millions)

(Unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2016      2015     2016      2015  

Net income (loss)

   $ 220      $ (139   $ 328      $ 65  

Other comprehensive income (loss), net of taxes:

          

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

     745        (1,138     1,552        (815

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

     5        (2     1        —     

Derivatives qualifying as hedges

     137        (334     394        (157

Foreign currency translation and other adjustments

     8        53       224        (317
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss)

     895        (1,421     2,171        (1,289
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

     1,115        (1,560     2,499        (1,224

Less: comprehensive income (loss) attributable to noncontrolling interests

     40        40       196        (24
  

 

 

    

 

 

   

 

 

    

 

 

 

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

   $ 1,075       $ (1,600   $ 2,303      $ (1,200
  

 

 

    

 

 

   

 

 

    

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Amounts in millions)

(Unaudited)

 

    Common
stock
    Additional
paid-in
capital
    Accumulated
other
comprehensive
income (loss)
    Retained
earnings
    Treasury
stock, at
cost
    Total
Genworth
Financial,
Inc.’s
stockholders’
equity
    Noncontrolling
interests
    Total
equity
 

Balances as of December 31, 2015

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

 

 

 

Return of capital to noncontrolling interests

    —          —          —          —          —          —          (70     (70

Comprehensive income (loss):

               

Net income

    —          —          —          225       —          225       103       328  

Other comprehensive income (loss), net of taxes

    —          —          2,078       —          —          2,078       93       2,171  
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              2,303       196       2,499  

Dividends to noncontrolling interests

    —          —          —          —          —          —          (64     (64

Stock-based compensation expense and exercises and other

    —          6       —          —          —          6       1       7  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of June 30, 2016

  $ 1     $ 11,955     $ 5,088     $ 789     $ (2,700   $ 15,133     $ 1,876     $ 17,009  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of December 31, 2014

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

 

 

 

Additional sale of subsidiary shares to noncontrolling interests

    —          (65     24       —          —          (41     267       226  

Repurchase of subsidiary shares

    —          —          —          —          —          —          (17     (17

Comprehensive income (loss):

               

Net income (loss)

    —          —          —          (39     —          (39     104       65  

Other comprehensive income (loss), net of taxes

    —          —          (1,161     —          —          (1,161     (128     (1,289
           

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

              (1,200     (24     (1,224

Dividends to noncontrolling interests

    —          —          —          —          —          —          (66     (66

Stock-based compensation expense and exercises and other

    —          8       —          —          —          8       3       11  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances as of June 30, 2015

  $ 1     $ 11,940     $ 3,309     $ 1,140     $ (2,700   $ 13,690     $ 2,037     $ 15,727  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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Table of Contents

GENWORTH FINANCIAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in millions)

(Unaudited)

 

     Six months ended
June 30,
 
     2016     2015  

Cash flows from operating activities:

    

Net income

   $ 328     $ 65  

Less loss from discontinued operations, net of taxes

     40       313  

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

    

Gain on sale of businesses

     (26     —     

Amortization of fixed maturity securities discounts and premiums and limited partnerships

     (67     (49

Net investment losses (gains)

     (11     8  

Charges assessed to policyholders

     (384     (393

Acquisition costs deferred

     (91     (155

Amortization of deferred acquisition costs and intangibles

     211       196  

Deferred income taxes

     4       103  

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

     743       (193

Stock-based compensation expense

     16       8  

Change in certain assets and liabilities:

    

Accrued investment income and other assets

     (186     (51

Insurance reserves

     332       866  

Current tax liabilities

     56       (91

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

     101       (97

Cash from operating activities—held for sale

     —          (19
  

 

 

   

 

 

 

Net cash from operating activities

     1,066       511  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from maturities and repayments of investments:

    

Fixed maturity securities

     1,680       2,395  

Commercial mortgage loans

     364       436  

Restricted commercial mortgage loans related to securitization entities

     20       21  

Proceeds from sales of investments:

    

Fixed maturity and equity securities

     2,772       821  

Purchases and originations of investments:

    

Fixed maturity and equity securities

     (5,685     (4,397

Commercial mortgage loans

     (317     (514

Other invested assets, net

     (67     (39

Policy loans, net

     (90     3  

Proceeds from sale of businesses, net of cash transferred

     39       —     

Cash from investing activities—held for sale

     —          13  
  

 

 

   

 

 

 

Net cash from investing activities

     (1,284     (1,261
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Deposits to universal life and investment contracts

     810       1,142  

Withdrawals from universal life and investment contracts

     (1,021     (1,079

Redemption of non-recourse funding obligations

     (1,620     (30

Repayment and repurchase of long-term debt

     (362     —     

Repayment of borrowings related to securitization entities

     (30     (19

Proceeds from sale of subsidiary shares to noncontrolling interests

     —          226  

Repurchase of subsidiary shares

     —          (17

Return of capital to noncontrolling interests

     (70     —     

Dividends paid to noncontrolling interests

     (64     (66

Other, net

     9       9  

Cash from financing activities—held for sale

     —          (39
  

 

 

   

 

 

 

Net cash from financing activities

     (2,348     127  
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents (includes $— and $(3) related to businesses held for sale)

     30       (41
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (2,536     (664

Cash and cash equivalents at beginning of period

     5,993       4,918  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

     3,457       4,254  

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

     —          154  
  

 

 

   

 

 

 

Cash and cash equivalents of continuing operations at end of period

   $ 3,457     $ 4,100  
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Formation of Genworth and Basis of Presentation

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

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.

 

    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 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.

On May 9, 2016, Genworth Mortgage Insurance Corporation (“GMICO”), our wholly-owned indirect subsidiary, completed the sale of our European mortgage insurance business. As the held-for-sale criteria were

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

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

(2) Accounting Changes

Accounting Pronouncement Recently Adopted

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

Accounting Pronouncements Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued new guidance related to accounting for credit losses on financial instruments. The guidance requires that entities recognize an allowance equal to its estimate of lifetime expected credit losses and applies to most debt instruments not measured at fair value, which would primarily include our commercial mortgage loans and reinsurance receivables. The new guidance retains most of the existing impairment guidance for available-for-sale debt securities but amends the presentation of credit losses to be presented as an allowance as opposed to a write-down and permits the reversal of credit losses when reassessing changes in the credit losses each reporting period. The new guidance is effective for us on January 1, 2020, with early adoption permitted beginning January 1, 2019. Upon adoption, a cumulative effect adjustment in retained earnings as of the beginning of the year of adoption will be recorded. We are in the process of determining the impact from this guidance on our consolidated financial statements.

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

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

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

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

 

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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
June 30,
    Six months ended
June 30,
 

(Amounts in millions, except per share amounts)

      2016           2015        2016     2015  

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

     498.5       497.4       498.3       497.2  

Potentially dilutive securities:

        

Stock options, restricted stock units and stock appreciation rights

     1.9       1.9       1.6       1.9  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     500.4       499.3       499.9       499.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations:

        

Income from continuing operations

   $ 241     $ 175     $ 368     $ 378  

Less: income from continuing operations attributable to noncontrolling interests

     48       54       103       104  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 193     $ 121     $ 265     $ 274  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

   $ 0.39     $ 0.24     $ 0.53     $ 0.55  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

   $ 0.39     $ 0.24     $ 0.53     $ 0.55  
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations:

        

Loss from discontinued operations, net of taxes

   $ (21   $ (314   $ (40   $ (313

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

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of taxes, available to Genworth Financial, Inc.’s common stockholders

   $ (21   $ (314   $ (40   $ (313
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

   $ (0.04   $ (0.63   $ (0.08   $ (0.63
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

   $ (0.04   $ (0.63   $ (0.08   $ (0.63
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss):

        

Income from continuing operations

   $ 241     $ 175     $ 368     $ 378  

Loss from discontinued operations, net of taxes

     (21     (314     (40     (313
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     220       (139     328       65  

Less: net income attributable to noncontrolling interests

     48       54       103       104  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 172     $ (193   $ 225     $ (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic per common share

   $ 0.35     $ (0.39   $ 0.45     $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted per common share

   $ 0.34     $ (0.39   $ 0.45     $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
June 30,
    Six months ended
June 30,
 

(Amounts in millions)

       2016             2015             2016             2015      

Fixed maturity securities—taxable

   $ 634     $ 645     $ 1,275     $ 1,277  

Fixed maturity securities—non-taxable

     3       3       6       6  

Commercial mortgage loans

     77       83       158       168  

Restricted commercial mortgage loans related to securitization entities

     3       3       5       7  

Equity securities

     7       4       12       8  

Other invested assets

     33       37       71       77  

Restricted other invested assets related to securitization entities

     1       1       3       2  

Policy loans

     34       35       69       68  

Cash, cash equivalents and short-term investments

     6       4       11       7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross investment income before expenses and fees

     798       815       1,610       1,620  

Expenses and fees

     (19     (22     (42     (46
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 779     $ 793     $ 1,568     $ 1,574  
  

 

 

   

 

 

   

 

 

   

 

 

 

(b) Net Investment Gains (Losses)

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 

(Amounts in millions)

       2016             2015             2016             2015      

Available-for-sale securities:

        

Realized gains

   $ 150     $ 20     $ 166     $ 35  

Realized losses

     (28     (6     (51     (18
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     122       14       115       17  
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairments:

        

Total other-than-temporary impairments

     (22     —          (33     (3

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

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other-than-temporary impairments

     (22     —          (33     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

     16       (16     44       (10

Commercial mortgage loans

     1       2       2       4  

Net gains (losses) related to securitization entities

     (61     2       (53     10  

Derivative instruments (1)

     (24     6       (62     (26

Other

     (2     —          (2     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment gains (losses)

   $ 30     $ 8     $ 11     $ (8
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

12


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

We generally intend to hold securities in unrealized loss positions until they recover. However, from time to time, our intent on an individual security may change, based upon market or other unforeseen developments. In such instances, we sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield and liquidity requirements. If a loss is recognized from a sale subsequent to a balance sheet date due to these unexpected developments, the loss is recognized in the period in which we determined that we have the intent to sell the securities or it is more likely than not that we will be required to sell the securities prior to recovery. The aggregate fair value of securities sold at a loss during the three months ended June 30, 2016 and 2015 was $300 million and $144 million, respectively, which was approximately 92% and 96%, respectively, of book value. The aggregate fair value of securities sold at a loss during the six months ended June 30, 2016 and 2015 was $540 million and $284 million, respectively, which was approximately 92% and 94%, 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
June 30,
    As of or for the
six months ended
June 30,
 

(Amounts in millions)

     2016           2015          2016         2015    

Beginning balance

  $ 63     $ 78     $ 64     $ 83  

Additions:

       

Other-than-temporary impairments not previously recognized

    1       —          1       —     

Reductions:

       

Securities sold, paid down or disposed

    (2     (3     (3     (8
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 62     $ 75     $ 62     $ 75  
 

 

 

   

 

 

   

 

 

   

 

 

 

(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)

  June 30, 2016     December 31, 2015  

Net unrealized gains (losses) on investment securities:

   

Fixed maturity securities

  $ 6,419     $ 3,140  

Equity securities

    (15     (10
 

 

 

   

 

 

 

Subtotal

    6,404       3,130  

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

    (1,944     (1,070

Income taxes, net

    (1,558     (711
 

 

 

   

 

 

 

Net unrealized investment gains (losses)

    2,902       1,349  

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

    113       95  
 

 

 

   

 

 

 

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

  $ 2,789     $ 1,254  
 

 

 

   

 

 

 

 

13


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     As of or for the
three months ended
June 30,
 

(Amounts in millions)

   2016     2015  

Beginning balance

   $ 2,057     $ 2,748  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     1,760       (2,406

Adjustment to deferred acquisition costs

     (132     168  

Adjustment to present value of future profits

     5       70  

Adjustment to sales inducements

     (21     18  

Adjustment to benefit reserves

     (357     411  

Provision for income taxes

     (440     608  
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     815       (1,131

Reclassification adjustments to net investment (gains) losses, net of taxes of $35 and $5

     (65     (9
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     750       (1,140

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

     18       (20
  

 

 

   

 

 

 

Ending balance

   $ 2,789     $ 1,628  
  

 

 

   

 

 

 

 

     As of or for the
six months ended
June 30,
 

(Amounts in millions)

   2016     2015  

Beginning balance

   $ 1,254     $ 2,453  

Unrealized gains (losses) arising during the period:

    

Unrealized gains (losses) on investment securities

     3,356       (1,463

Adjustment to deferred acquisition costs

     (274     70  

Adjustment to present value of future profits

     (29     50  

Adjustment to sales inducements

     (40     3  

Adjustment to benefit reserves

     (531     88  

Provision for income taxes

     (876     446  
  

 

 

   

 

 

 

Change in unrealized gains (losses) on investment securities

     1,606       (806

Reclassification adjustments to net investment (gains) losses, net of taxes of $29 and $5

     (53     (9
  

 

 

   

 

 

 

Change in net unrealized investment gains (losses)

     1,553       (815

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

     18       10  
  

 

 

   

 

 

 

Ending balance

   $ 2,789     $ 1,628  
  

 

 

   

 

 

 

 

14


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(d) Fixed Maturity and Equity Securities

As of June 30, 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

  $ 5,485     $ 1,321     $ —        $ —        $ —        $ 6,806  

State and political subdivisions

    2,395       371       —          (15     —          2,751  

Non-U.S. government

    1,947       167       —          (1     —          2,113  

U.S. corporate:

           

Utilities

    3,941       677       —          (2     —          4,616  

Energy

    2,156       153       —          (43     —          2,266  

Finance and insurance

    5,609       592       19       (14     —          6,206  

Consumer—non-cyclical

    4,035       655       —          (1     —          4,689  

Technology and communications

    2,333       237       —          (13     —          2,557  

Industrial

    1,152       105       —          (8     —          1,249  

Capital goods

    1,870       317       —          (1     —          2,186  

Consumer—cyclical

    1,495       151       —          (4     —          1,642  

Transportation

    1,077       134       —          (1     —          1,210  

Other

    336       27       —          —          —          363  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    24,004       3,048       19       (87     —          26,984  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    909       60       —          (4     —          965  

Energy

    1,282       110       —          (30     —          1,362  

Finance and insurance

    2,399       181       —          (2     —          2,578  

Consumer—non-cyclical

    770       52       —          (2     —          820  

Technology and communications

    979       74       —          (3     —          1,050  

Industrial

    946       55       —          (16     —          985  

Capital goods

    547       34       —          (1     —          580  

Consumer—cyclical

    514       14       —          —          —          528  

Transportation

    604       81       —          (5     —          680  

Other

    3,004       291       —          (10     —          3,285  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,954       952       —          (73     —          12,833  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,602       448       9       (4     —          5,055  

Commercial mortgage-backed

    2,790       189       2       (2     —          2,979  

Other asset-backed

    3,324       23       1       (41     —          3,307  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    56,501       6,519       31       (223     —          62,828  

Equity securities

    504       19       —          (42     —          481  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

  $ 57,005     $ 6,538     $ 31     $ (265   $ —        $ 63,309  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

          Gross unrealized gains     Gross unrealized losses        

(Amounts in millions)

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

Fixed maturity securities:

           

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

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

State and political subdivisions

    2,287       181       —          (30     —          2,438  

Non-U.S. government

    1,910       110       —          (5     —          2,015  

U.S. corporate:

           

Utilities

    3,355       364       —          (26     —          3,693  

Energy

    2,560       103       —          (162     —          2,501  

Finance and insurance

    5,268       392       15       (43     —          5,632  

Consumer—non-cyclical

    3,755       371       —          (30     —          4,096  

Technology and communications

    2,108       123       —          (38     —          2,193  

Industrial

    1,164       53       —          (44     —          1,173  

Capital goods

    1,774       188       —          (12     —          1,950  

Consumer—cyclical

    1,602       95       —          (22     —          1,675  

Transportation

    1,023       75       —          (12     —          1,086  

Other

    385       22       —          (5     —          402  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

           

Utilities

    815       37       —          (9     —          843  

Energy

    1,700       64       —          (78     —          1,686  

Finance and insurance

    2,327       152       2       (8     —          2,473  

Consumer—non-cyclical

    746       24       —          (18     —          752  

Technology and communications

    978       36       —          (26     —          988  

Industrial

    1,063       19       —          (96     —          986  

Capital goods

    602       19       —          (17     —          604  

Consumer—cyclical

    522       8       —          (4     —          526  

Transportation

    559       52       —          (6     —          605  

Other

    2,574       187       —          (25     —          2,736  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    11,886       598       2       (287     —          12,199  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Residential mortgage-backed

    4,777       330       11       (17     —          5,101  

Commercial mortgage-backed

    2,492       84       3       (20     —          2,559  

Other asset-backed

    3,328       11       1       (59     —          3,281  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

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

Equity securities

    325       8       —          (23     —          310  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total available-for-sale securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

16


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

                 

State and political subdivisions

  $ 40     $ (1     6     $ 144     $ (14     12     $ 184     $ (15     18  

Non-U.S. government

    —          —          —          10       (1     10       10       (1     10  

U.S. corporate

    630       (22     93       1,080       (65     159       1,710       (87     252  

Non-U.S. corporate

    352       (8     49       752       (65     112       1,104       (73     161  

Residential mortgage-backed

    118       (1     24       99       (3     36       217       (4     60  

Commercial mortgage-backed

    107       (1     15       94       (1     25       201       (2     40  

Other asset-backed

    842       (12     164       393       (29     79       1,235       (41     243  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

    2,089       (45     351       2,572       (178     433       4,661       (223     784  

Equity securities

    80       (6     198       124       (36     44       204       (42     242  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,169     $ (51     549     $ 2,696     $ (214     477     $ 4,865     $ (265     1,026  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

  $ 2,082     $ (42     349     $ 2,400     $ (108     411     $ 4,482     $ (150     760  

20%-50% Below cost

    7       (3     2       172       (70     22       179       (73     24  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

    2,089       (45     351       2,572       (178     433       4,661       (223     784  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    76       (5     181       32       (3     12       108       (8     193  

20%-50% Below cost

    4       (1     17       92       (33     32       96       (34     49  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    80       (6     198       124       (36     44       204       (42     242  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,169     $ (51     549     $ 2,696     $ (214     477     $ 4,865     $ (265     1,026  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

  $ 1,738     $ (29     306     $ 2,192     $ (142     380     $ 3,930     $ (171     686  

Below investment grade

    431       (22     243       504       (72     97       935       (94     340  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

  $ 2,169     $ (51     549     $ 2,696     $ (214     477     $ 4,865     $ (265     1,026  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

  $ 34     $ (1     9     $ 36     $ (1     5     $ 70     $ (2     14  

Energy

    231       (14     30       382       (29     57       613       (43     87  

Finance and insurance

    158       (1     24       188       (13     23       346       (14     47  

Consumer—non-cyclical

    —          —          —          72       (1     10       72       (1     10  

Technology and communications

    95       (4     13       111       (9     23       206       (13     36  

Industrial

    41       (1     5       137       (7     19       178       (8     24  

Capital goods

    —          —          —          24       (1     4       24       (1     4  

Consumer—cyclical

    71       (1     12       88       (3     14       159       (4     26  

Transportation

    —          —          —          42       (1     4       42       (1     4  

Other

    —          —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

    630       (22     93       1,080       (65     159       1,710       (87     252  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

    —          —          —          26       (4     3       26       (4     3  

Energy

    58       (3     8       177       (27     28       235       (30     36  

Finance and insurance

    188       (1     26       94       (1     19       282       (2     45  

Consumer—non-cyclical

    —          —          —          41       (2     5       41       (2     5  

Technology and communications

    48       (1     4       55       (2     8       103       (3     12  

Industrial

    34       (1     8       141       (15     21       175       (16     29  

Capital goods

    —          —          —          54       (1     7       54       (1     7  

Consumer—cyclical

    —          —          —          —          —          —          —          —          —     

Transportation

    24       (2     3       53       (3     6       77       (5     9  

Other

    —          —          —          111       (10     15       111       (10     15  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

    352       (8     49       752       (65     112       1,104       (73     161  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

  $ 982     $ (30     142     $ 1,832     $ (130     271     $ 2,814     $ (160     413  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As indicated in the tables above, the majority of the securities in a continuous unrealized loss position for less than 12 months were investment grade and less than 20% below cost. These unrealized losses were primarily attributable to increased market volatility, mostly concentrated in our corporate securities. For securities that have been in a continuous unrealized loss position for less than 12 months, the average fair value percentage below cost was approximately 2% as of June 30, 2016.

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

Of the $108 million of unrealized losses on fixed maturity securities in a continuous unrealized loss for 12 months or more that were less than 20% below cost, the weighted-average rating was “BBB-” and approximately 65% of the unrealized losses were related to investment grade securities as of June 30, 2016. 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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

approximately 4% as of June 30, 2016. See below for additional discussion related to fixed maturity securities that have been in a continuous unrealized loss position for 12 months or more with a fair value that was more than 20% below cost.

The following tables present the concentration of gross unrealized losses and fair values of fixed maturity securities that were more than 20% below cost and in a continuous unrealized loss position for 12 months or more by asset class as of June 30, 2016:

 

    Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

State and political subdivisions

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

U.S. corporate:

               

Energy

    13       (4     1       1       —          —          —          —     

Finance and insurance

    10       (5     2       1       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    23       (9     3       2       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

               

Utilities

    11       (4     2       1       —          —          —          —     

Energy

    23       (8     3       3       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    34       (12     5       4       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Structured securities:

               

Other asset-backed

    43       (18     7       4       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    43       (18     7       4       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 109     $ (42     16     11     $ —        $ —          —       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Below Investment Grade  
    20% to 50%     Greater than 50%  

(Dollar amounts in millions)

  Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
    Fair
value
    Gross
unrealized
losses
    % of total
gross
unrealized
losses
    Number of
securities
 

Fixed maturity securities:

               

U.S. corporate:

               

Energy

  $ 11     $ (5     2     3     $ —        $ —          —       —     

Finance and insurance

    7       (3     1       1       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total U.S. corporate

    18       (8     3       4       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

               

Energy

    29       (10     4       3       —          —          —          —     

Industrial

    9       (4     1       3       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-U.S. corporate

    38       (14     5       6       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Structured securities:

               

Other asset-backed

    7       (6     2       1       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total structured securities

    7       (6     2       1       —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 63     $ (28     10     11     $ —        $ —          —       —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

U.S. corporate

As indicated above, $17 million of gross unrealized losses were related to U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for U.S. corporate fixed maturity securities, $9 million, or 53%, related to the energy sector and $8 million, or 47%, related to the finance and insurance sector. Ongoing low oil prices and market volatility adversely impacted the fair value of these securities.

We expect that our investments in U.S. corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in U.S. corporate securities may perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of U.S. corporate securities in the future.

Non-U.S. corporate

As indicated above, $26 million of gross unrealized losses were related to non-U.S. corporate fixed maturity securities that have been in an unrealized loss position for more than 12 months and were more than 20% below cost. Of the total unrealized losses for non-U.S. corporate fixed maturity securities, $18 million, or 69%, related to the energy sector. Ongoing low oil prices have adversely impacted the fair value of these securities.

We expect that our investments in non-U.S. corporate securities will continue to perform in accordance with our expectations about the amount and timing of estimated cash flows. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in non-U.S. corporate securities may perform worse than current expectations. Such events may lead us to recognize write-downs within our portfolio of non-U.S. corporate securities in the future.

Structured Securities

Of the $24 million of unrealized losses related to structured securities that have been in an unrealized loss position for 12 months or more and were more than 20% below cost, none related to other-than-temporarily impaired securities where the unrealized losses represented the portion of the other-than-temporary impairment recognized in OCI. The extent and duration of the unrealized loss position on our structured securities was primarily due to credit spreads that have widened since acquisition. Additionally, the fair value of certain structured securities has been impacted from high risk premiums being incorporated into the valuation as a result of the amount of potential losses that may be absorbed by the security in the event of additional deterioration in the U.S. economy.

While we consider the length of time each security had been in an unrealized loss position, the extent of the unrealized loss position and any significant declines in fair value subsequent to the balance sheet date in our evaluation of impairment for each of these individual securities, the primary factor in our evaluation of impairment is the expected performance for each of these securities. Our evaluation of expected performance is based on the historical performance of the associated securitization trust as well as the historical performance of

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

the underlying collateral. Our examination of the historical performance of the securitization trust included consideration of the following factors for each class of securities issued by the trust: (i) the payment history, including failure to make scheduled payments; (ii) current payment status; (iii) current and historical outstanding balances; (iv) current levels of subordination and losses incurred to date; and (v) characteristics of the underlying collateral. Our examination of the historical performance of the underlying collateral included: (i) historical default rates, delinquency rates, voluntary and involuntary prepayments and severity of losses, including recent trends in this information; (ii) current payment status; (iii) loan to collateral value ratios, as applicable; (iv) vintage; and (v) other underlying characteristics such as current financial condition.

We use our assessment of the historical performance of both the securitization trust and the underlying collateral for each security, along with third-party sources, when available, to develop our best estimate of cash flows expected to be collected. These estimates reflect projections for future delinquencies, prepayments, defaults and losses for the assets that collateralize the securitization trust and are used to determine the expected cash flows for our security, based on the payment structure of the trust. Our projection of expected cash flows is primarily based on the expected performance of the underlying assets that collateralize the securitization trust and is not directly impacted by the rating of our security. While we consider the rating of the security as an indicator of the financial condition of the issuer, this factor does not have a significant impact on our expected cash flows for each security. In limited circumstances, our expected cash flows include expected payments from reliable financial guarantors where we believe the financial guarantor will have sufficient assets to pay claims under the financial guarantee when the cash flows from the securitization trust are not sufficient to make scheduled payments. We then discount the expected cash flows using the effective yield of each security to determine the present value of expected cash flows.

Based on this evaluation, the present value of expected cash flows was greater than or equal to the amortized cost for each security. Accordingly, we determined that the unrealized losses on each of our structured securities represented temporary impairments as of June 30, 2016.

Despite the considerable analysis and rigor employed on our structured securities, it is reasonably possible that the underlying collateral of these investments may perform worse than current market expectations. Such events may lead to adverse changes in cash flows on our holdings of structured securities and future write-downs within our portfolio of structured securities.

 

21


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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

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

Description of Securities

                 

Fixed maturity securities:

                 

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

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

State and political subdivisions

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

Non-U.S. government

    366       (5     49       —          —          —          366       (5     49  

U.S. corporate

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

Non-U.S. corporate

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

Residential mortgage-backed

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

Commercial mortgage-backed

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

Other asset-backed

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, fixed maturity securities

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

Equity securities

    153       (23     64       —          —          —          153       (23     64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—fixed maturity securities:

                 

<20% Below cost

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

20%-50% Below cost

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

>50% Below cost

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total fixed maturity securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% Below cost—equity securities:

                 

<20% Below cost

    133       (18     56       —          —          —          133       (18     56  

20%-50% Below cost

    20       (5     8       —          —          —          20       (5     8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    153       (23     64       —          —          —          153       (23     64  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investment grade

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

Below investment grade

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for securities in an unrealized loss position

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

    Less than 12 months     12 months or more     Total  

(Dollar amounts in millions)

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

Description of Securities

                 

U.S. corporate:

                 

Utilities

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

Energy

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

Finance and insurance

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

Consumer—non-cyclical

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

Technology and communications

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

Industrial

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

Capital goods

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

Consumer—cyclical

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

Transportation

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

Other

    84       (5     8       —          —          —          84       (5     8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, U.S. corporate securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-U.S. corporate:

                 

Utilities

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

Energy

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

Finance and insurance

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

Consumer—non-cyclical

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

Technology and communications

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

Industrial

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

Capital goods

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

Consumer—cyclical

    155       (4     20       —          —          —          155       (4     20  

Transportation

    147       (6     17       —          —          —          147       (6     17  

Other

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal, non-U.S. corporate securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total for corporate securities in an unrealized loss position

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The scheduled maturity distribution of fixed maturity securities as of June 30, 2016 is set forth below. Actual maturities may differ from contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

(Amounts in millions)

   Amortized
cost or
cost
     Fair
value
 

Due one year or less

   $ 1,827      $ 1,851  

Due after one year through five years

     10,429        11,024  

Due after five years through ten years

     11,969        12,708  

Due after ten years

     21,560        25,904  
  

 

 

    

 

 

 

Subtotal

     45,785        51,487  

Residential mortgage-backed

     4,602        5,055  

Commercial mortgage-backed

     2,790        2,979  

Other asset-backed

     3,324        3,307  
  

 

 

    

 

 

 

Total

   $ 56,501      $ 62,828  
  

 

 

    

 

 

 

As of June 30, 2016, $9,489 million of our investments (excluding mortgage-backed and asset-backed securities) were subject to certain call provisions.

As of June 30, 2016, securities issued by finance and insurance, utilities and consumer—non-cyclical industry groups represented approximately 22%, 14% and 14%, 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 June 30, 2016, we did not hold any fixed maturity securities in any single issuer, other than securities issued or guaranteed by the U.S. government, which exceeded 10% of stockholders’ equity.

(e) Commercial Mortgage Loans

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

 

24


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     June 30, 2016     December 31, 2015  

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Property type:

          

Retail

   $ 2,132        35   $ 2,116        34

Industrial

     1,563        25       1,562        25  

Office

     1,479        24       1,516        24  

Apartments

     441        7       465        8  

Mixed use

     232        4       234        4  

Other

     289        5       294        5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,136        100     6,187        100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (2        (2   

Allowance for losses

     (13        (15   
  

 

 

      

 

 

    

Total

   $ 6,121        $ 6,170     
  

 

 

      

 

 

    

 

     June 30, 2016     December 31, 2015  

(Amounts in millions)

   Carrying
value
     % of
total
    Carrying
value
     % of
total
 

Geographic region:

          

Pacific

   $ 1,563        26   $ 1,581        26

South Atlantic

     1,522        25       1,574        25  

Middle Atlantic

     894        15       890        14  

Mountain

     562        9       585        10  

West North Central

     450        7       416        7  

East North Central

     377        6       386        6  

West South Central

     309        5       294        5  

New England

     266        4       268        4  

East South Central

     193        3       193        3  
  

 

 

    

 

 

   

 

 

    

 

 

 

Subtotal

     6,136        100     6,187        100
     

 

 

      

 

 

 

Unamortized balance of loan origination fees and costs

     (2        (2   

Allowance for losses

     (13        (15   
  

 

 

      

 

 

    

Total

   $ 6,121        $ 6,170     
  

 

 

      

 

 

    

 

25


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     June 30, 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

   $ 8     $ —        $ —        $ 8     $ 2,124     $ 2,132  

Industrial

     —          —          13       13       1,550       1,563  

Office

     5       —          5       10       1,469       1,479  

Apartments

     —          —          —          —          441       441  

Mixed use

     —          —          —          —          232       232  

Other

     —          —          —          —          289       289  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 13     $ —        $ 18     $ 31     $ 6,105     $ 6,136  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2015  

(Amounts in millions)

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

Property type:

            

Retail

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

Industrial

     —          —          —          —          1,562       1,562  

Office

     6       —          5       11       1,505       1,516  

Apartments

     —          —          —          —          465       465  

Mixed use

     —          —          —          —          234       234  

Other

     —          —          —          —          294       294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total commercial mortgage loans

     —       —       —       —       100     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2016 and December 31, 2015, we had no commercial mortgage loans that were past due for more than 90 days and still accruing interest. We also did not have any commercial mortgage loans that were past due for less than 90 days on non-accrual status as of June 30, 2016 and December 31, 2015.

We evaluate the impairment of commercial mortgage loans on an individual loan basis. As of June 30, 2016, our commercial mortgage loans greater than 90 days past due included loans with appraised values in excess of the recorded investment and the current recorded investment of the loans was expected to be recoverable.

During the six months ended June 30, 2016 and the year ended December 31, 2015, we modified or extended 7 and 21 commercial mortgage loans, respectively, with a total carrying value of $56 million and $110 million, respectively. All of these modifications or extensions were based on current market interest rates, did not result in any forgiveness in the outstanding principal amount owed by the borrower, but one loan with a carrying value $1 million was considered a troubled debt restructuring.

 

26


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

     Three months ended
June 30,
    Six months ended
June 30,
 

(Amounts in millions)

     2016         2015       2016     2015  

Allowance for credit losses:

        

Beginning balance

   $ 15     $ 20     $ 15     $ 22  

Charge-offs

     (4     —          (4     (3

Provision

     2       (2     2       (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13     $ 18     $ 13     $ 18  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance for individually impaired loans

   $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 13     $ 18     $ 13     $ 18  
  

 

 

   

 

 

   

 

 

   

 

 

 

Recorded investment:

        

Ending balance

   $ 6,136     $ 6,194     $ 6,136     $ 6,194  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance of individually impaired loans

   $ 23     $ 18     $ 23     $ 18  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 6,113     $ 6,176     $ 6,113     $ 6,176  
  

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2016, we had an individually impaired commercial mortgage loan included within the retail property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the second quarter of 2016.

As of June 30, 2016 and December 31, 2015, we had an individually impaired commercial mortgage loan included within the office property type with a recorded investment of $5 million, an unpaid principal balance of $6 million and charge-offs of $1 million, which were recorded in the third quarter of 2015.

As of December 31, 2015, we had an individually impaired commercial mortgage loan included within the industrial property type with a recorded investment of $14 million, an unpaid principal balance of $15 million and charge-offs of $1 million, which were recorded in the first quarter of 2014. As of December 31, 2015, this loan had interest income of $1 million. In the second quarter of 2016, we recorded additional charge-offs of $2 million related to this loan. As of June 30, 2016, the individually impaired loan within the industrial property type had a recorded investment of $13 million, an unpaid principal balance of $16 million and total 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

 

27


Table of Contents

GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

based on “normalized” annual net operating income of the property compared to the payments required under the terms of the loan. Normalization allows for the removal of annual one-time events such as capital expenditures, prepaid or late real estate tax payments or non-recurring third-party fees (such as legal, consulting or contract fees). This ratio is evaluated at least annually and updated more frequently if necessary to better indicate risk associated with the loan. A higher debt service coverage ratio indicates the borrower is less likely to default on the loan. The debt service coverage ratio should not be used without considering other factors associated with the borrower, such as the borrower’s liquidity or access to other resources that may result in our expectation that the borrower will continue to make the future scheduled payments.

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

 

    June 30, 2016  

(Amounts in millions)

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

Property type:

           

Retail

  $ 755     $ 417     $ 877     $ 82     $ 1      $ 2,132  

Industrial

    578       448       470       63       4        1,563  

Office

    458       290       651       66       14        1,479  

Apartments

    176       63       192       10       —          441  

Mixed use

    56       43       130       3       —          232  

Other

    61       61       167       —         —          289  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

  $ 2,084     $ 1,322     $ 2,487     $ 224     $ 19      $ 6,136  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

    34     22     40     4     —       100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

    2.17       1.82       1.57       1.07       0.30        1.80  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Included $19 million of loans in good standing, where borrowers continued to make timely payments, with a total weighted-average loan-to-value of 121%.

 

    December 31, 2015  

(Amounts in millions)

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

Property type:

           

Retail

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

Industrial

    515       478       499       65       5        1,562  

Office

    493       341       580       83       19        1,516  

Apartments

    196       66       182       21       —          465  

Mixed use

    56       48       124       3       3        234  

Other

    54       55       185       —         —          294  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

    34     23     38     4     1     100
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average debt service coverage ratio

    2.13       1.82       1.57       1.12       0.55        1.79  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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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:

 

     June 30, 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

   $ 72     $ 223     $ 449     $ 881     $ 507     $ 2,132  

Industrial

     81       179       203       698       402       1,563  

Office

     70       99       201       760       349       1,479  

Apartments

     4       37       69       200       131       441  

Mixed use

     3       11       28       131       59       232  

Other

     10       57       134       59       29       289  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

   $ 240     $ 606     $ 1,084     $ 2,729     $ 1,477     $ 6,136  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     4     10     18     44     24     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     72     63     61     57     43     56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     December 31, 2015  

(Amounts in millions)

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

Property type:

            

Retail

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

Industrial

     94       181       208       672       407       1,562  

Office

     85       114       265       699       346       1,509  

Apartments

     6       41       74       199       145       465  

Mixed use

     3       11       28       135       57       234  

Other

     —         58       146       60       30       294  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recorded investment

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

% of total

     4     10     19     43     24     100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average loan-to-value

     74     64     58     58     43     56
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2016, we did not have any floating rate commercial mortgage loans. As of December 31, 2015, we had floating rate commercial mortgage loans of $7 million.

(f) Restricted Commercial Mortgage Loans Related To Securitization Entities

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

(g) Restricted Other Invested Assets Related To Securitization Entities

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

In June 2016, we amended and exercised a clean-up call on our consolidated securitization entity writing off our residual interest and settling the outstanding debt of $70 million. As a result of this transaction, we recorded $64 million of realized investment losses related to the write-off of our residual interest in those entities and a $64 million gain related to the early extinguishment of debt which was included in other income. There was no impact to net income.

In addition, the policy loan securitization entities in which we previously held a residual interest were not required to be consolidated in our balance sheets. In June 2016, we repurchased $134 million of policy loans from those entities. The policy loans are now included in our consolidated balance sheet.

(h) Limited Partnerships or Similar Entities

Investments in partnerships or similar entities are generally considered VIEs due to the equity group’s lack of sufficient financial control. Generally, these investments are limited partner or non-managing member equity investments in a widely held fund that is sponsored and managed by a reputable asset manager. We are not the primary beneficiary of any VIE investment in a limited partnership or similar entity. As of June 30, 2016 and December 31, 2015, the total carrying value of these investments was $181 million and $165 million, respectively. Our maximum exposure to loss is equal to the outstanding carrying value and future funding commitments. We have not contributed, and do not plan to contribute, any additional financial or other support outside of what is contractually obligated.

(5) Derivative Instruments

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

 

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GENWORTH FINANCIAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

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

 

   

Derivative assets

    

Derivative liabilities

 
         Fair value           Fair value  

(Amounts in millions)

 

Balance sheet
classification

   June 30,
2016
    December 31,
2015
    

Balance sheet
classification

   June 30,
2016
     December 31,
2015
 

Derivatives designated as hedges

               

Cash flow hedges:

               

Interest rate swaps

  Other invested assets    $ 628     $ 629      Other liabilities    $ 87      $ 37  

Inflation indexed swaps

  Other invested assets      —          —         Other liabilities      —           33  

Foreign currency swaps

  Other invested assets      7       8      Other liabilities      —           —     
    

 

 

   

 

 

       

 

 

    

 

 

 

Total cash flow hedges

       635       637           87        70  
    

 

 

   

 

 

       

 

 

    

 

 

 

Total derivatives designated as hedges

       635       637           87        70  
    

 

 

   

 

 

       

 

 

    

 

 

 

Derivatives not designated as hedges

               

Interest rate swaps

  Other invested assets      562       425      Other liabilities      337        183  

Interest rate swaps related to securitization entities

  Restricted other invested assets      —          —         Other liabilities      —           30  

Foreign currency swaps

  Other invested assets      —          —         Other liabilities      19        27  

Credit default swaps

  Other invested assets      —          1      Other liabilities      —           —     

Credit default swaps related to securitization entities

  Restricted other invested assets      —          —         Other liabilities      3        14  

Equity index options

  Other invested assets      57       30      Other liabilities      —           —     

Financial futures

  Other invested assets      —          —         Other liabilities      —           —     

Equity return swaps

  Other invested assets      9       2      Other liabilities      —           1  

Other foreign currency contracts

  Other invested assets      6       17      Other liabilities      33        34  

GMWB